Executive Summary

Q4 revenue declined 1.3% to $3.93B while GAAP EPS rose 7% to $2.54; record operating margin of 26.2% and record free cash flow of $1.0B underscored strong execution despite modestly negative organic growth (-0.5%; +0.4% ex-PLS) .
EPS beat Wall Street consensus ($2.49) while revenue missed ($3.98B); the beat/miss combination and record margin/FCF are the near-term stock catalysts .
2025 guidance initiated: GAAP EPS $10.15–$10.55 (including $0.30 FX headwind); operating margin 26.5–27.5% with ~100 bps from enterprise initiatives; organic growth 0–2% (1–3% ex-PLS); FCF >100% of net income; ~$1.5B buybacks; tax rate 24–24.5% .
Management emphasized continued margin expansion independent of volume, improving electronics/semi activity, and disciplined PLS/CBI to enable above-market growth; tariff risk viewed as manageable via “produce where we sell” and pricing agility .

What Went Well and What Went Wrong

What Went Well

Record operating margin and free cash flow; enterprise initiatives contributed ~120 bps to Q4 margin expansion (+140 bps YoY) and FCF conversion reached 133% .
Segment execution: Test & Measurement and Electronics turned positive (+2% organic) with margin +170 bps to 27%; welding stabilized (flat organic, margin +160 bps to 31.2%) as targeted CBI drove product contributions .
CEO tone confident on building above-market organic growth via Customer-Back Innovation: “We will continue to outperform our key end markets in 2025… driven by continuous improvement in Customer-Back Innovation…” .

What Went Wrong

Organic revenue modestly negative (-0.5%; -1.3% total), with Construction Products down 4.5% organic and broader North America (-1.5%) and Europe (-3%) softness; China was a bright spot (+9%) .
Revenue missed consensus by ~1.21% ($3.93B vs $3.98B), reflecting persistent end-market headwinds; management not yet seeing order pickup despite positive signals .
2025 EPS guide midpoint ($10.35) tempered by non-operational headwinds (FX -$0.30; restructuring/tax $0.15–$0.20), implying lower H1 cadence (Q1 ~22% of full-year EPS) .

Financial Results

Quarterly results (oldest → newest)

Metric	Q2 2024	Q3 2024	Q4 2024
Revenue ($USD Billions)	$4.027	$3.966	$3.932
GAAP Diluted EPS ($)	$2.54	$3.91	$2.54
Operating Margin %	26.2%	26.5%	26.2%
Free Cash Flow ($USD Billions)	$0.571	$0.783	$0.996

Notes: Q3 EPS included a $1.26 gain on the Wilsonart sale; ex-gain EPS was $2.65 .

YoY comparison (Q4 2024 vs Q4 2023)

Metric	Q4 2023	Q4 2024
Revenue ($USD Billions)	$3.983	$3.932
GAAP Diluted EPS ($)	$2.38	$2.54
Operating Margin %	24.8% (implied from operating income $988mm on $3.983B)	26.2%

Segment breakdown (Q4 2024)

Segment	Revenue ($USD Millions)	Operating Income ($USD Millions)	Operating Margin %
Automotive OEM	$785	$156	19.8%
Food Equipment	$672	$182	27.2%
Test & Measurement and Electronics	$747	$202	27.0%
Welding	$447	$139	31.2%
Polymers & Fluids	$430	$120	27.9%
Construction Products	$438	$123	28.0%
Specialty Products	$416	$118	28.4%
Total Company	$3,932	$1,031	26.2%

KPIs

KPI	Q4 2024
Cash from Operations ($USD Billions)	$1.114
Free Cash Flow ($USD Billions)	$0.996
FCF to Net Income Conversion (%)	133%
After-tax ROIC (annualized, 3 months)	29.9%
Share Repurchases ($USD Millions)	$375
Effective Tax Rate (%)	23.7%

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
GAAP EPS	FY 2025	N/A (initiated)	$10.15–$10.55; includes ~$0.30 FX headwind	Initiated
Operating Margin	FY 2025	N/A (initiated)	26.5–27.5%; ~100 bps from enterprise initiatives	Initiated
Organic Growth	FY 2025	N/A (initiated)	0–2% based on demand; 1–3% ex-PLS (~1-pt reduction)	Initiated
Revenue FX Impact	FY 2025	N/A (initiated)	~-3% translation; total revenue decline projected -1% to -3%	Initiated
Free Cash Flow	FY 2025	N/A (initiated)	>100% of net income	Initiated
Share Repurchases	FY 2025	~$1.5B (carried from 2024 plan)	~$1.5B	Maintained
Effective Tax Rate	FY 2025	N/A (initiated)	24–24.5%	Initiated
Dividend	2025	$6.00 annualized (raised 2024)	$1.50 quarterly (Q1 2025 declaration)	Maintained

Segment outlook (management commentary): Automotive OEM: 0–2% organic (1–3% ex-PLS) and ~100 bps margin improvement via enterprise initiatives ; Construction Products: about flat amid uncertain housing starts ; all segments project margin improvement with 60–190 bps enterprise initiatives .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2: Q2 2024)	Previous Mentions (Q-1: Q3 2024)	Current Period (Q4 2024)	Trend
Customer-Back Innovation (CBI)	Investing to build above-market growth; margin expansion independent of volume	CBI yield ~2% vs <1% pre-COVID; framework launched; aim 3%+ by 2030	Patent filings +18% in 2024; continued progress; welding >3% CBI contribution	Improving
Supply chain / Pricing	Price/cost normalized; price offsets cost pressures	Channel inventories normalized; focus on inventory reductions	Nimble pricing and “produce where we sell” mitigate tariffs; exposures: China ~5–6%, Canada ~2%, Mexico ~2% of US imports	Stable/Manageable
Tariffs / Macro	Guidance excludes tariff pricing adjustments	Discussion on China/Europe auto, macro headwinds	Tariff impacts manageable; plan to recover costs with price; FX -3% revenue headwind in 2025	Manageable headwind
Product performance	Welding: down mid-single digit; strong margin and new product pipeline	Welding +3% innovation contribution; Specialty +6% organic with PLS	Welding flat; margins +160 bps; Specialty -4% organic due to planned PLS, margin 28.4%	Stabilizing
Regional trends	APAC -1% (Q3); China flat; NA -3%	China outperformance in auto; NA/Europe softness	NA -1.5%, Europe -3%; APAC +5% with China +9%	Mixed: China improving
R&D / Execution	R&D spend ~1.8% of sales; fund all good projects	CBI framework deployment across 84 divisions	Target 3%+ CBI yield by 2030; all segments progressing, highlights in Welding, Food, T&M/Electronics, Auto	Improving
AI/data centers	Not a specific focus; disciplined M&A only if criteria met	—	Consistent stance; high-quality acquisitions over thematic plays	Stable

Management Commentary

CEO: “We outperformed underlying end markets, expanded operating margin by 140 basis points, generated record free cash flow, and delivered seven percent earnings per share growth in the fourth quarter” .
CFO: “Operating margin of 26.2%… an increase of 140 basis points year-over-year driven by enterprise initiatives, which contributed 120 basis points” .
CEO on margins and CBI: “Organic growth and margin go hand in hand… the path to 30% by 2030 is paved with operating leverage more than structural cost reduction” .
CFO on 2025 cadence: “We expect Q1 EPS to contribute about 22% of the year’s EPS… due to increased restructuring and typical sequential step down” .

Q&A Highlights

Enterprise initiatives are the primary driver of margin expansion across segments; largest impact in Automotive OEM (~190 bps), lower in already high-margin segments like Welding (~60 bps) .
PLS and CBI are complementary; PLS provides portfolio focus and cost benefits that feed enterprise initiatives; 2024 PLS elevated by Specialty, 2025 ~1-pt primarily in Auto/Construction/Specialty .
Tariffs: combined US imports from China (~5–6%), Canada (~2%), Mexico (~2%); playbook is to recover cost via price; impact viewed as manageable .
China auto: consistent share gains; outperformed builds by ~800 bps; EV content strong; margin profile similar to other regions .
Guidance clarity: FX -3% top-line headwind; restructuring/tax headwinds concentrated in H1; EPS split ~47/53 first half/second half .

Estimates Context

S&P Global (SPGI) consensus data was unavailable due to access limits; therefore, external sources are referenced for consensus.

Metric	Q4 2024 Actual	Q4 2024 Consensus	Surprise
Revenue ($USD Billions)	$3.93	$3.98	-1.21%
EPS ($)	$2.54	$2.49	+2.01%

Key Takeaways for Investors

Margin durability: Record 26.2% OI margin with 120 bps from enterprise initiatives highlights resilient profitability even in flat-to-down volumes; expect ~100 bps margin improvement in 2025 independent of volume .
Cash generation: Record Q4 FCF ($996mm) and >100% FCF conversion guided for 2025 support ongoing $1.5B buybacks and $6.00 annual dividend; cash discipline remains a support for total return .
Growth trajectory: Near-term organic growth conservative (0–2%; 1–3% ex-PLS) with improving signals in electronics/semi; track segment CBI contributions and early-cycle recovery exposure (T&M/Instron, Welding) .
China differentiation: Continued auto outperformance and EV content gains provide a structural tailwind; monitor tariff developments and pricing responses, but impact appears manageable .
2025 cadence: Expect softer Q1 (22% of full-year EPS) on typical seasonality plus restructuring/tax; second-half weighted earnings profile may create trading windows around H1 headlines .
Portfolio/PLS: Specialty’s PLS-driven repositioning is improving long-term growth/margins; elevated PLS in 2025 (~1 pt) supports clarity and incremental margin gains .
Risk/FX: ~3% revenue headwind from FX embedded in guidance; any weakening of USD or order pickup could bias EPS above midpoint ($10.35) .

ILLINOIS TOOL WORKS INC (ITW)·Q4 2024 Earnings Summary