Executive Summary

Q3 delivered record operating margin of 27.4% and GAAP EPS of $2.81, with enterprise initiatives contributing 140 bps to margin; free cash flow rose 15% to $904M .
EPS beat consensus, while revenue was slightly below: $2.81 vs $2.72* EPS and $4.06B vs $4.09B* revenue; margin outperformance and cash generation offset a mixed demand backdrop .
Guidance narrowed: FY25 GAAP EPS $10.40–$10.50 (midpoint unchanged vs Q2 raise), operating margin still 26–27%, revenue growth 1–3%, tax rate lowered to ~23% from ~24% previously .
Strategic and capital return catalysts: 62nd straight annual dividend increase (7% to $6.44 annualized) and ~$375M in buybacks during Q3; management reiterated confidence in offsetting tariff costs via pricing and supply chain actions .

What Went Well and What Went Wrong

What Went Well
- Margin and execution: “Record operating margin of 27.4 percent…enterprise initiatives contributed 140 basis points” with incremental margins of 65% and strong price/cost management .
- Cash generation: Operating cash flow $1.021B and FCF $904M (110% conversion), supporting ongoing buybacks (~$375M) and dividend growth .
- Auto OEM and Welding strength: Automotive organic +5% with China EV share gains; Welding organic +3% with equipment +6%; both expanded margins (Auto +240 bps to 21.8%; Welding +30 bps to 32.6%) .
What Went Wrong
- Mixed demand and top-line softness vs consensus: Organic +1%; revenue modestly below Street; management cited a “pretty pronounced” August slowdown and choppy orders, especially in T&M/E and semi-related demand .
- Segment pressure pockets: Polymers & Fluids (-1.8% reported; organic -3.1%) and Construction (-1.4% reported; organic -2.3%) declined YoY; T&M/E roughly flat (organic -1.4%) .
- Guidance caution: While FY25 EPS range narrowed, management noted Q4 tax headwind (~10c) and demand uncertainty; revenue trending toward the lower end of guidance ranges .

Financial Results

Headline metrics (periods: oldest → newest)

Metric	Q3 2024	Q2 2025	Q3 2025
Revenue ($USD Billions)	$3.966	$4.053	$4.059
GAAP Diluted EPS ($)	$3.91	$2.58	$2.81
Operating Income ($USD Billions)	$1.052	$1.068	$1.112
Operating Margin (%)	— (YoY +90 bps to 27.4% in Q3’25)	26.3%	27.4%

Notes: Q3’24 EPS benefited from a divestiture-related gain; company provides adjusted comparisons in release .

Q3 2025 vs S&P Global Consensus

Metric	Actual	Consensus	Surprise
Revenue ($USD Billions)	$4.059	$4.088*	-$0.029B
GAAP EPS ($)	$2.81	$2.716*	+$0.094

Values with asterisk (*) are from S&P Global consensus. Values retrieved from S&P Global.

Segment performance – Q3 2025

Segment	Revenue ($M)	Operating Income ($M)	Operating Margin (%)
Automotive OEM	830	182	21.8%
Food Equipment	694	202	29.2%
Test & Measurement and Electronics	698	177	25.4%
Welding	477	156	32.6%
Polymers & Fluids	441	126	28.5%
Construction Products	473	149	31.6%
Specialty Products	452	146	32.3%
Total Company	4,059	1,112	27.4%

KPIs (2025 progression)

KPI	Q1 2025	Q2 2025	Q3 2025
Operating Cash Flow ($M)	$592	$550	$1,021
Free Cash Flow ($M)	$496	$449	$904
FCF to Net Income Conversion (%)	71%	59%	110%
Effective Tax Rate (%)	21.7% (incl. discrete)	24.4%	21.8% (incl. discrete)
Share Repurchases ($M)	375	375	375
Dividend per Share Declared ($)	1.50	1.50	1.61 (annualized $6.44)

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance (Q3)	Change
GAAP EPS	FY 2025	$10.35–$10.55 (raised in Q2)	$10.40–$10.50	Narrowed (midpoint ~flat)
Total Revenue Growth	FY 2025	+1% to +3%	+1% to +3%	Maintained
Organic Growth	FY 2025	0% to +2%	0% to +2%	Maintained
Operating Margin	FY 2025	26%–27%	26%–27%	Maintained
FCF to Net Income	FY 2025	~100%+	~100%	Maintained
Share Repurchases	FY 2025	~$1.5B	~$1.5B	Maintained
Effective Tax Rate	FY 2025	~24%	~23%	Lowered
Dividend	Ongoing	$1.50/qtr prior; $6.00 annual	$1.61/qtr; $6.44 annualized	Raised 7%

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 2025)	Previous Mentions (Q2 2025)	Current Period (Q3 2025)	Trend
Pricing/Tariffs & Supply Chain	“Ongoing pricing actions offset tariff cost impacts”	Pricing actions and supply chain offset tariffs; raised EPS guidance	Price/cost positive for EPS and margins; tariffs “no longer the main event” for costs	Improving management of tariff headwinds
Enterprise Initiatives (EI)	+120 bps margin contribution	+130 bps contribution	+140 bps; record 27.4% margin	Strengthening contribution
Customer-Back Innovation (CBI)	Strategic focus reiterated	Focus on above-market growth via CBI	Auto content gains; Welding growth fueled by CBI	Building impact
Automotive OEM	Start-of-year margin 19.3%	Margin 21.3%; organic +2.4%	Organic +5%; margin 21.8%; China EV gains	Outperforming builds; margin expansion
Test & Measurement/Electronics	Organic -5.4%; mixed capex	Organic -0.7%; capital equipment choppy	Organic -1.4%; sequential margin +260 bps vs Q2; Q4 pick-up expected	Stabilizing; sequential improvement
Construction Products	Organic -7.4%	Organic -6.9%	Organic -2.3%; margin +140 bps YoY	Gradual improvement, margins resilient
Regional Trends	FX headwind; demand uncertain	Modest FX tailwind; demand mixed	APAC +7% organic; China +10% (company-wide); Europe -1%	Asia strength; Europe soft

Management Commentary

“Delivering EPS of $2.81…record operating margin of 27.4 percent, and a 15 percent increase in free cash flow…underscores the…strength of the ITW Business Model” — Christopher O’Herlihy, CEO .
“Enterprise initiatives contributed 140 basis points…pricing and supply chain actions more than covered tariff costs” — Michael Larsen, CFO .
Strategy: make above-market organic growth powered by Customer-Back Innovation “a defining ITW strength”; on track for 2030 goals including 3%+ CBI yield .

Q&A Highlights

Construction margins durability: Management attributed sustained expansion to portfolio quality and disciplined 80/20 execution in attractive submarkets; confident margins can move higher with growth recovery .
Sequential setup: Typical Q4 pattern is modest revenue uptick (T&M seasonality) offset by Construction seasonality; margin down ~50 bps sequentially; tax rate normalization a ~10c EPS headwind vs Q3 .
Auto OEM outlook: Expect continued outperformance of builds by 200–300 bps; margin target low-to-mid 20s by 2026 supported by CBI and EI; China EV penetration driving share gains .
Tariffs/price-cost: Price and supply chain actions offset tariff costs on both dollars and margin; demand impact from tariff uncertainty earlier in the year appears to be fading .
Capital deployment/leverage: ~2x EBITDA leverage, $1.5B buyback (~2% share count reduction) after organic investment and dividend; ample balance sheet capacity for M&A .

Estimates Context

Q3 2025 results vs consensus: EPS $2.81 vs $2.716* (beat), revenue $4.059B vs $4.088B* (slight miss). Gross margin tracked above consensus (44.49% actual vs 44.15%) .
Values with asterisk () are from S&P Global consensus. Values retrieved from S&P Global.
FY25 EPS guidance midpoint ($10.45) is essentially in line with FY25 consensus $10.459*; lowered tax rate (~23%) offsets top-line trending toward the low end of ranges .
Values with asterisk (*) are from S&P Global consensus. Values retrieved from S&P Global.

Key Takeaways for Investors

High-quality beat: EPS upside on record margins despite modest top-line; Street likely to raise margin assumptions while trimming organic growth for segments with ongoing pressure (P&F, Construction) .
Guidance dynamics: Narrowed EPS range with lower tax rate offsets softer demand—watch Q4 seasonality and any update on order momentum in T&M/E and Construction .
Auto OEM as growth/margin engine: Continued content gains (notably China EVs) support outgrowth and margin expansion into 2026; a positive multi-quarter narrative driver .
Cash returns intact: Robust FCF (110% conversion) and consistent buybacks/dividend increases provide downside protection to the equity story .
Tariff overhang easing operationally: Price/cost actions and supply chain adjustments are offsetting costs; demand choppiness remains the bigger swing factor .
Watch for Q4 execution: Typical sequential pattern plus normalized tax rate suggests EPS close to Q3 ex-tax; incremental any demand uptick in T&M/E could enable a small beat .
Medium-term: EI and CBI underpin pathway toward structurally higher incrementals and the 30% margin aspiration by 2030, positioning ITW to outperform when end-markets recover .

Citations:

Q3 2025 press release and financials:
Q3 2025 Form 8-K and exhibits:
Q3 2025 earnings call transcript (prepared remarks and Q&A):
Q2 2025 press release:
Q1 2025 press release:
Dividend increase press release:

S&P Global consensus disclaimer: Values marked with an asterisk (*) are retrieved from S&P Global.

ILLINOIS TOOL WORKS INC (ITW)·Q3 2025 Earnings Summary