Illinois Tool Works (ITW) FY2025 Earnings Quality Report

Grade: F — 0% Organic Growth, High Margins, Massive Buybacks

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-13, FY ended December 31, 2025) + Yahoo Finance

Auditor: Deloitte & Touche LLP — Unqualified opinion (1 critical audit matter: income taxes)

One-line verdict: Illinois Tool Works ran its playbook in 2025: 0% organic growth, 26.3% operating margin, $1.5B in buybacks, $1.8B in dividends. Operating revenue rose just 0.9% to $16,044M — entirely from foreign currency translation (0.8%) and acquisitions (0.1%); organic growth was 0.0%. Operating income fell 1.1% to $4,216M (-1.8% organic). GAAP diluted EPS fell 10.4% to $10.49 — but this is because 2024 had a $1.26 benefit from the Wilsonart sale and a $0.30 benefit from a LIFO accounting method change. Excluding those, underlying EPS rose 3.3%. The screening engine flags three things: cash $0.9B covers only 9% of debt $9.2B (the worst cash/debt ratio in the screening set), goodwill+intangibles $5.7B at 176% of equity, and the underlying organic revenue story. But these are characteristics of a 113-year-old industrial that has chosen to return all cash flow to shareholders, and ITW's legendary 80/20 operating discipline continues to produce industry-leading margins.

The Industrial That Returns All Cash

ITW operates seven segments: Automotive OEM, Food Equipment, Test & Measurement and Electronics, Welding, Polymers & Fluids, Construction Products, and Specialty Products. From Item 1. Business: the Company employs approximately 43,000 people, 16,000 in the US and the remainder in "multiple other countries where the Company's businesses operate."

The defining financial characteristic of ITW is capital return. From the MD&A: "The Company repurchased approximately 6.0 million shares of its common stock in 2025 for approximately $1.5 billion. The Company increased the quarterly dividend on common stock from $1.50 to $1.61 per share in 2025, or from $6.00 to $6.44 per share on an annualized basis. Total cash dividends of approximately $1.8 billion were paid in 2025."

$1.5B buybacks + $1.8B dividends = $3.3B of capital return — more than net income of $3.1B.

Financial Performance: The Price of No Growth

From the Results of Operations for Total Company:

The MD&A's organic growth decomposition is the clearest in the screening set:

From the MD&A: "Organic revenue was flat as growth in the Automotive OEM, Welding, Food Equipment and Specialty Products segments was offset by a decline in the Construction Products, Test & Measurement and Electronics and Polymers & Fluids segments. Product line simplification activities reduced organic revenue by 60 basis points."

Note the "60 basis points" deliberate reduction from product line simplification — ITW's 80/20 discipline continues to prune low-margin SKUs, which is a deliberate revenue-dampening choice to improve margins.

Geographic Organic Trends

The China performance is the single strongest data point — ITW is actually growing in China while most US-listed industrials report Chinese demand weakness. This likely reflects ITW's local-for-local manufacturing strategy.

Margin Mechanics

From the MD&A: "Operating margin of 26.3% decreased 50 basis points. Excluding the 70 basis points of favorable impact from the LIFO accounting method change in the first quarter of 2024, operating margin increased 20 basis points primarily driven by benefits from the Company's enterprise initiatives of 130 basis points and favorable price/cost of 10 basis points, partially offset by higher employee-related expenses, including higher health and welfare expenses."

The 130bp of "enterprise initiative" benefits are the signature ITW number — continuous cost-out from 80/20 simplification, portfolio actions, and productivity programs. Even with zero organic growth, ITW generated 130bp of internal margin improvement — which is why the franchise keeps its industry-leading 26% operating margin.

EPS Decomposition

From the MD&A: "Diluted earnings per share (EPS) of $10.49 in 2025 decreased 10.4%, or increased 3.3% excluding the favorable impact of $1.26 from the third quarter 2024 Wilsonart transaction and the favorable impact from the first quarter 2024 LIFO accounting method change of $0.30."

So:

Genuine underlying EPS growth of 3.3% is respectable given zero organic growth.

Cash Flow

CFFO has declined for two consecutive years ($3,539M → $3,281M → $3,126M). Over the same period, capital return has remained around $3.3B/year. The math is sustainable only because ITW's net income hasn't changed much and the $2.7B of free cash flow supports the capital return program.

Balance Sheet

C4 Cash vs Debt: FAIL. Cash $0.9B covers only 9% of debt $9.2B — the worst cash/debt coverage in the screening set.

D1 Goodwill + Intangibles: FAIL. $5.7B = 176% of equity. This is high because ITW has been buying back so many shares that equity has shrunk from retained earnings plus treasury stock accumulation. Total equity of $3.2B is less than half the debt of $9.2B.

D2 Leverage: PASS. Debt/EBITDA of 2.0x is fine for an A-rated industrial.

The Equity Shrinkage Effect

ITW's equity has been shrinking for years because the company has been buying back shares faster than it has been adding to retained earnings. This is an accounting artifact of a successful capital-return strategy. The D1 ratio of 176% reflects that equity is small, not that goodwill is large.

The 18-Point Screening

Revenue Quality

Interesting observation: A2 passes even though AR grew 7.9% vs 0.9% revenue — because the screening engine's 2-year test does not flag a single-year gap. But the 2025 single-year difference (AR +7.9% on revenue +0.9%) is worth noting. In a flat-revenue year, AR growth that much is unusual and could reflect slowing collections at ITW distributors.

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Key Risks from the 10-K

1. Global Economic Downturn Exposure

Item 1A: "The Company's businesses are impacted by economic conditions around the globe. Slower economic growth, financial market instability, supply chain disruptions, natural disasters, public health crises (such as the COVID-19 pandemic), labor market challenges, rapid inflation, armed conflicts (such as the Russia and Ukraine conflict), government deficit reduction, sequestration and other austerity measures impacting the markets the Company serves can adversely affect the Company's businesses by reducing demand for the Company's products and services, limiting financing available to the Company's customers..."

2. International Operations — 50%+ Non-U.S.

Item 1A: "Over 50% of the Company's net sales are derived from customers outside the United States, and the Company currently operates in 49 countries. The risks inherent in the Company's global operations include: fluctuation in currency exchange rates... the imposition of duties and tariffs and other trade barriers and retaliatory countermeasures... The global geopolitical and trade environment has resulted in raw material inflation and potential for increased escalation of domestic and international tariffs and retaliatory trade policies."

3. Interest Rate Pressure on Customers

Item 1A: "Rising interest rates could have a dampening effect on overall economic activity and/or the financial condition of the Company's customers, either or both of which could negatively affect customer demand for the Company's products and customers' ability to repay obligations to the Company. Rising interest rates could have an impact on the Company and its customers' cost of capital."

4. Income Tax Complexity — Critical Audit Matter

Deloitte: "The Company's income tax expense is recognized and measured based on management's interpretation of the tax regulations and rulings in numerous taxing jurisdictions, which requires significant judgment. When calculating income tax expense, management makes estimates and assumptions, including determination of the completeness of book income in each jurisdiction, calculation of taxable income through identification and classification of book to tax differences (either temporary or permanent items), consideration of applicable tax deductions or credits and the identification of uncertain tax positions. The evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position... Given the number of taxing jurisdictions and the complex and subjective nature of the associated tax regulations and rulings, certain audit matters required a high degree of auditor judgment and increased extent of effort, including the need to involve our income tax specialists."

ITW operates in 49 countries, so the tax complexity is naturally high. The CAM flags the difficulty of auditing uncertain tax positions, not a specific misstatement concern. The MD&A disclosed multiple discrete tax items in 2025: a $21M NOL valuation allowance reversal, a $43M federal tax benefit, offset by a $16M foreign audit resolution — net $48M of discrete benefits. In 2024, ITW had $194M of similar discrete items (capital loss carryforward from Wilsonart, IP reorganization, intercompany transaction remeasurement).

The volume of discrete tax items year-over-year is high enough that adjusted results differ materially from GAAP.

5. Construction, Automotive, and Industrial Cyclicality

The MD&A reveals that three of ITW's seven segments (Construction Products, Test & Measurement and Electronics, Polymers & Fluids) posted organic declines in 2025. Since these segments don't get broken out by the engine's pass/fail logic, the segment rotation is worth understanding: customers in construction and discretionary electronics are softer than automotive assembly, food equipment, and welding demand.

6. Product Line Simplification Cost

The MD&A disclosed: "Product line simplification activities reduced organic revenue by 60 basis points." This is deliberate, not a warning sign — ITW prunes SKUs to improve margins. But it is a 60bp revenue headwind that management chooses to accept, and investors evaluating ITW on pure revenue growth should understand that.

Summary

Grade: F. The flags are both mechanical products of ITW's extreme capital return strategy, not earnings quality concerns.

Illinois Tool Works posted its flattest year in a while: 0% organic growth, -50bp operating margin (but +20bp excluding the 2024 LIFO benefit). The company responded by deploying $3.3B in capital return ($1.5B buybacks + $1.8B dividends), extending a decades-long streak of returning essentially all free cash flow to shareholders.

The F grade is driven by two flags:

These are structural characteristics, not warning signs. If ITW ever slowed its buyback program, both ratios would normalize within a few years.

The real operating concerns are different:

For investors who understand that ITW is essentially a tax-efficient cash-return machine with industrial exposure rather than a growth industrial, the F grade is just category noise. For investors looking for earnings-quality red flags, there aren't any — the M-Score is -2.43, the Z-Score is 8.56, the revenue recognition is straightforward, and Deloitte's only CAM is the tax complexity that naturally arises from 49 countries of operations.

**Disclaimer**: This report is based on ITW's FY2025 10-K filed with SEC EDGAR on February 13, 2026. This is NOT investment advice.

Data: SEC EDGAR 10-K (Accession 0000049826-26-000008) + Yahoo Finance

Auditor: Deloitte & Touche LLP (Unqualified opinion, 1 critical audit matter — income taxes)

Fiscal year ended: December 31, 2025