ITW Q3 Deep Dive: Auto and Asia Offset Choppy Demand as Guidance Narrows

Manufacturing company Illinois Tool Works (NYSE:ITW) missed Wall Street’s revenue expectations in Q3 CY2025 as sales rose 2.3% year on year to $4.06 billion. Its GAAP profit of $2.81 per share was 4.1% above analysts’ consensus estimates.

Is now the time to buy ITW? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Illinois Tool Works’ third quarter results drew a negative market reaction, as organic revenue growth lagged Wall Street expectations and overall sales growth remained modest. Management attributed these outcomes to ongoing demand softness across several end markets, particularly in North America and Europe, while highlighting standout growth in Asia and the automotive original equipment manufacturer (OEM) segment. CEO Christopher O’Herlihy pointed to effective cost control, continued operational execution, and the company’s ability to “outpace underlying end market demand” as partial offsets to a mixed revenue environment.

Looking ahead, Illinois Tool Works’ guidance reflects a measured approach amid persistent macroeconomic uncertainty and choppy demand trends. Management expects to leverage ongoing enterprise initiatives, continued customer-backed innovation, and pricing actions to support margins and earnings despite a subdued top-line outlook. CFO Michael Larsen emphasized that the company is “taking a more cautious approach to guidance” for the remainder of the year, given unpredictable swings in order activity and slower than anticipated recoveries in certain segments.

Key Insights from Management’s Remarks

Illinois Tool Works’ management emphasized disciplined execution and targeted innovation as key drivers supporting margins, even as end market demand remained inconsistent and regional performance varied widely.

• Automotive OEM Outperformance: The automotive OEM segment delivered 5% organic growth, with strong gains across all geographies—especially a 10% increase in China. Management credited customer-backed innovation for driving higher content per vehicle, particularly in the electric vehicle (EV) market.

• Asia-Pacific and China Strength: Asia-Pacific revenue rose 7%, underpinned by double-digit growth in China. O’Herlihy noted China’s outsized contribution to patent activity and highlighted the company's deepening relationships with Chinese OEMs.

• Enterprise Initiatives Bolster Margins: Companywide enterprise initiatives contributed 140 basis points to operating margin, enabling Illinois Tool Works to maintain a 27.4% margin despite uneven demand. These initiatives include strategic sourcing, rigorous application of the “80/20” business process, and ongoing product line simplification (PLS).

• Construction and Welding Segment Dynamics: The construction segment continued to face persistent organic revenue declines, but operating margins improved due to portfolio quality and focus on attractive submarkets. Welding benefited from new equipment launches, though consumables demand remained soft due to weaker discretionary spending.

• Pricing and Tariff Actions: Supply chain and pricing actions more than offset tariff-related cost increases, with management stating that price/cost was a positive contributor to both earnings and margin in the quarter. These actions helped insulate the business from external cost pressures.

Drivers of Future Performance

Management’s outlook for the remainder of the year centers on cautious revenue expectations, margin resilience from enterprise initiatives, and further gains from customer-backed innovation.

• Enterprise Initiatives Drive Margins: The company expects enterprise initiatives, such as strategic sourcing and ongoing operational improvements, to deliver approximately 125 basis points of operating margin benefit for the year, regardless of volume trends. Management sees these efforts as critical to offsetting demand softness.

• Customer-Backed Innovation as Growth Lever: Illinois Tool Works continues to prioritize customer-backed innovation, with management targeting a yield of 3% or more in the coming years. This focus is particularly strong in automotive and welding, where new product launches are driving content gains and market share.

• Challenging Demand and Mixed Recovery: The company anticipates a mixed demand environment to persist, with pockets of strength in Asia and automotive but ongoing weakness in construction and European markets. Management highlighted the risk of further volatility in order patterns and noted that full-year guidance assumes revenue at the lower end of the projected range.

Catalysts in Upcoming Quarters

In upcoming quarters, the StockStory team will closely monitor (1) sustained momentum in the automotive OEM business, especially in China and EV content growth, (2) realization of margin gains from enterprise initiatives and product line simplification efforts, and (3) signs of stabilization or recovery in end markets like construction and electronics. Additionally, the impact of future tariff changes and the pace of customer-backed innovation adoption will be critical markers of Illinois Tool Works’ execution.

Illinois Tool Works currently trades at $244.32, down from $257.41 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

High Quality Stocks for All Market Conditions

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.

StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.