Earnings Call Transcript - ITW Q4 2025

Operator, Operator

Morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Illinois Tool Works Inc. Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star 1 a second time. You may ask one follow-up question. Thank you. Erin Linehan, Vice President of Investor Relations, you may begin the conference.

Erin Linehan, Vice President of Investor Relations

Thank you, Regina. Good morning, and welcome to our Illinois Tool Works Inc. fourth quarter 2025 conference call. I'm joined by our President and CEO, Christopher O'Herlihy, and Senior Vice President and CFO, Michael Larsen. During today's call, we will discuss Illinois Tool Works Inc.'s fourth quarter and full year and provide guidance for full year 2026. Slide two is a reminder that this presentation contains forward-looking statements. Please refer to the company's 2024 Form 10-Ks and subsequent reports filed with the SEC for more detail about important risks that could cause actual results to differ materially from our expectations.

Christopher O'Herlihy, President and CEO

This presentation uses certain non-GAAP measures, and a reconciliation of those measures to the most directly comparable GAAP measures is contained in the press release. Please turn to slide three, and it's now my pleasure to turn the call over to our president and CEO, Christopher O'Herlihy. Chris? Thank you, Erin, and good morning, everyone. As you saw in our press release this morning, Illinois Tool Works Inc. delivered a solid finish to the year. In the fourth quarter, we outperformed our underlying end markets with revenue growth of more than 4% and delivered a 7% increase in GAAP EPS to $2.72. Through disciplined operational execution, we expanded operating income and margins to record levels. Starting with the top line, organic growth of 1.3% marked our best quality performance of the year. Overall, Q4 demand improved, as reflected in higher than normal sequential improvement of 4% from Q3. In addition to market outperformance, the Illinois Tool Works Inc. team continued to execute at a high level, resulting in operating income of $1.1 billion, an increase of 5%. Segment margins were 27.7%, a 120 basis points increase, with a 140 basis point contribution from enterprise initiatives. Looking back on a challenging external environment in 2025, the Illinois Tool Works Inc. team delivered another year of robust financial performance. We consistently outperformed our markets, solidly improved profitability, and made meaningful progress on our next phase key strategic priorities. Throughout the year, we remained laser-focused on building above-market organic growth fueled by customer-backed innovation or CBI into a defining Illinois Tool Works Inc. strength. We are pleased to have achieved 2.4% CBI-fueled revenue growth in 2025, a 40 basis point improvement as we track toward our 2030 goal of 3% plus. Furthermore, I'm encouraged by a key leading indicator of CBI contribution, or patent filings, which increased by 9% last year following an 18% increase in 2024. Turning to guidance, we enter 2026 with solid momentum. Per our usual approach, our organic growth projection of 1% to 3% reflects current demand levels adjusted for seasonality. We are well-positioned to capitalize on any further improvement in the macro environment. Our EPS guidance midpoint of $11.20 represents 7% growth, and we expect operating margin expansion of about 100 basis points powered by enterprise initiatives. Our 2026 forecast ensures we remain firmly on track to deliver on our 2030 performance goals. In closing, I want to sincerely thank our global Illinois Tool Works Inc. colleagues for their unwavering dedication to serving our customers and executing our strategy with excellence each and every day. With that, I'll turn the call over to Michael to provide more detail on the quarter and our guidance for 2026.

Michael Larsen, Senior Vice President and CFO

Thank you, Chris, and good morning, everyone. In Q4, the Illinois Tool Works Inc. team delivered a solid operational and financial finish to the year. Organic growth was 1.3%, foreign currency translation added 2.5%, and acquisitions contributed 0.3%, bringing total revenue growth to 4.1%. Notably, our 4% sequential revenue growth from Q3 to Q4 significantly outperformed our historical sequential average of 2%. On a geographic basis, North America grew about 2%, Asia Pacific was up 3%, while Europe declined 2%. On the bottom line, we achieved a fourth-quarter record operating margin of 26.5%, with enterprise initiatives contributing 140 basis points. As noted in our press release, segment operating margin was 27.7%, a 120 basis point increase with incremental margins of more than 50%. All seven segments expanded operating margins driven by enterprise initiatives which contributed between 80 and 210 basis points per segment. Free cash flow conversion to net income was 109% for the quarter. We repurchased $375 million of our shares, and our tax rate was 22.8%. Please turn to slide four. And as Chris mentioned, CBI is our most impactful driver for organic growth. We're pleased with our 2025 progress, reaching a 2.4% CBI contribution, a 40 basis points year-over-year improvement. We expect meaningful progress again in 2026 on this key strategic initiative as we track toward our longer-term goal. Now let's move to the fourth quarter segment results, starting with Automotive OEM, where revenue increased 6% and organic revenue increased 2%. On a regional basis, North America was up 2%, while Europe was down 1% and China grew 5%. For the full year 2025, this segment outperformed relevant builds, and we expect our typical 200 to 300 basis points of outperformance in 2026. Full-year margins are a prime example of Illinois Tool Works Inc.'s 'do what we say' execution. In 2025, margins improved by 150 basis points to 21.1%, consistent with the goal established during our 2023 Investor Day. Driven by our culture of continuous improvement, we expect to further expand these margins in 2026. Turning to Slide five, Food Equipment delivered revenue growth of 4% with organic growth of 1% as equipment was flat, offset by 3% growth in service. By region, North America was flat, with institutional end markets up in the high single digits offset by restaurants, down also in the high single digits. Retail was a bright spot, up nearly 5%, and the international business grew 2% with Europe up 2%. Test and measurement and electronics had a solid quarter. Revenue was up 6%, organic revenue was up 2%. Test and measurement was up 3% and electronics was flat against the tough comparison year over year. Notably, we began to see a positive pickup in semiconductor and electronics activity with our semi-related businesses up mid-single digits in the quarter. Operating margins improved by 110 basis points to 28.1%. Moving on to slide six, Welding revenue grew 3% with organic growth of 2% in the fourth quarter. Equipment was up 4%, and while consumables were flat, filler metals were up in the high single digits. Regionally, North America was up 4%, while international declined 5% against the tough comparison of 9% last year. Notably, operating margin reached 33.3%, a 210 basis points improvement. Polymers and Fluids had a strong top-line quarter with 5% organic growth supported by new product launches in the automotive aftermarket, which grew 5%. Polymers was up 4% and fluids grew 6%. On a geographic basis, North America was up 5%, and international grew 4%. Operating margin expanded 110 basis points to 29%. Turning to Slide seven, in Construction Products, organic growth was down 4%. Regionally, North America was down 4%, with residential renovation down 5%, while commercial construction was up 5%. Europe was down 5%, and Australia and New Zealand were flat. Despite the top-line challenge, the team successfully expanded margins by 100 basis points to 29%. Specialty Products revenue increased 4%, and organic revenue was up 1%. Equipment growth was particularly strong, up 12%, and consumables were down 2% in the quarter. North America was flat, and international grew 3%. Moving to slide eight and full-year 2025 results, our global teams continued to execute at a high level, enabling us to consistently outperform our end markets and expand margins to deliver solid financial results in a mixed macro environment. Throughout 2025, we maintained our focus on maximizing Illinois Tool Works Inc.'s growth and performance over the long term, as we invested close to $800 million in high-return internal projects to accelerate organic growth and sustain productivity in our highly profitable core businesses. At the same time, we increased our dividend for the sixty-second consecutive year and returned a total of $3.3 billion to shareholders. Moving to Slide nine and our guidance for full year 2026, Illinois Tool Works Inc. is well-positioned to deliver meaningful progress on both the top and bottom lines in 2026. For our usual process, our total revenue projection of 2% to 4% and organic growth projection of 1% to 3% is based on current levels of demand adjusted for typical seasonality. At Illinois Tool Works Inc., growth is high quality, meaning it is delivered at attractive incremental margins in the mid to high forties for 2026. In terms of overall profitability, we expect operating margin to improve by approximately 100 basis points to a range of 26.5% to 27.5%. This includes a 100 basis points contribution from our enterprise initiatives, which provides margin expansion that is largely independent of volume. We're projecting a GAAP EPS range of $11 to $11.20, representing 7% growth at the $11.20 midpoint. Regarding the cadence for the year, we expect the first half, second half EPS split of approximately 47/53%, consistent with 2025. Factoring in typical seasonality, Q1 EPS should contribute roughly 23% of the full-year total. Lastly, we expect free cash flow conversion to net income of greater than 100% and plan to buy back approximately $1.5 billion of our shares in 2026. Turning to our final slide, Slide 10, all seven segments are projecting high-quality organic growth based on current run rates adjusted for seasonality, and every segment is well-positioned to outperform its respective end markets again in 2026. Consistent with Illinois Tool Works Inc.'s continuous improvement, never satisfied mindset, all segments are also projecting margin improvement, supported by another year of solid contributions from our enterprise initiatives. In summary, all seven segments are heading into 2026 well-positioned to deliver solid organic growth with industry-leading profitability and incremental margin. With that, Erin, I'll turn it back to you.

Erin Linehan, Vice President of Investor Relations

Thank you, Michael. Regina, I think we're ready to open the queue for questions. Please.

Operator, Operator

At this time, I would like to remind everyone to ask a question, press star then the number one on your telephone keypad. You'll have the opportunity to ask. Our first question will come from the line of Andrew Kaplowitz with Citigroup. Please go ahead.

Andrew Kaplowitz, Analyst

Good morning, everyone.

Christopher O'Herlihy, President and CEO

Morning. Morning, Andy.

Andrew Kaplowitz, Analyst

Chris or Michael, so test and measurement within the segment looks like it did improve meaningfully in Q4. You called out the commentary in semicons. It's been improving for you again, which is good to hear. You've had a couple of maybe, I'll call it, head fakes in semicon. So you're seeing more definitive turn now? And are you seeing a bit more of an unlock of your CapEx businesses in general in terms of growth?

Christopher O'Herlihy, President and CEO

Yeah. So, Andy, in general, as you said, test and measurement had a pretty solid quarter. After what was a pretty challenging year, you might remember, mid of the year, we had pretty much a CapEx freeze related to the China shipments for two quarters. And so we certainly saw improvement in bookings in general industrial here in Q4. As Michael mentioned, we also saw an improvement in demand for semi electronics. Just to contextualize that, I mean, semi is about 15% of test and measurement. So just to give you a perspective. I would say that the semi at this point seems to be sustainable based on what we see right now. But you know, as you said, we had an uptick in Q2, came back down in Q3, but we've seen a recovery in Q4. And I think this is a part of the market where we've got very strong competitive advantages, particularly as it relates to semi-manufacturing testing equipment. So whatever happens, we're well-positioned to take share as the end market continues to improve. And I may just add beyond that, Andy, you know, the general industrial orders are also improving in test and measurement. As well as you've seen the improvement in revenues and our growth rates on the equipment side in welding. So all of that suggests that we are certainly seeing, I would say, a little more than green shoots at this point. Meaningful improvement not just in sales but also orders and backlog is looking pretty good at this point. And so we've got some pretty good momentum going into 2026 as reflected in the guidance that we gave for those two segments.

Andrew Kaplowitz, Analyst

Yes, that's great to hear, guys. And then when we think about margin expansion across your businesses in 2026, I know you expect it in all segments. Normally, I would think we just model higher incrementals where you're modeling higher growth. But you, for instance, had really good margin performance in construction again in Q4. And there is, you know, there are metals inflation out there. So any more advice on how to think about margin performance across the segments?

Christopher O'Herlihy, President and CEO

Yeah. I would just say I'll go back to kind of our prepared remarks there, Andy. We expect, based on bottoms-up planning with our segments, based on having a chance to review the enterprise initiative savings, the actual projects, for 2026, we expect every segment to improve their operating margins in 2026. And the biggest driver, I think you pointed out, will be the enterprise initiatives again. So about 100 basis points from initiatives. And then, you know, there is some positive operating leverage at incremental margins that at this point are quite a bit higher than what we put up historically, as I said, kind of in that mid to high forties. So maybe that's a way to think about the margin improvement for each one of the segments in 2026. Now I will say this. We do have three segments now that are above 30% and so maybe you'll see a little bit less of improvement in those segments relative to the ones like auto that have been putting up some meaningful operating margin improvement, test and measurement as well, that still have a ways to go to get to the high twenties, 30% level. And improved CBI is the other driver of increased margins. As you know, as we've talked about, the CBI progress is really encouraging, obviously not just as a contributor to growth, but all of these new products that are coming in are coming in at higher margins. And so that's really the key to unlocking margin improvement on a go-forward basis, particularly in places like automotive OEM.

Andrew Kaplowitz, Analyst

I appreciate all the color, guys. Thank you.

Operator, Operator

Our next question will come from the line of Joseph Ritchie with Goldman Sachs. Please go ahead.

Joseph Ritchie, Analyst

Morning, Joe. Hey. Can we just can we touch on the price-cost dynamics? So I think in the slides you had mentioned that price-cost is expected to be positive in 2026. Can you elaborate on that a little bit? And then also, seeing that resin prices have continued to come down, at this point, you know, what percentage of your COGS is resin?

Christopher O'Herlihy, President and CEO

Let me start with the first part. I think on price-cost, we've been talking about this for a while in terms of, you know, this having kind of normalized after the wave of tariff-related increases we saw last year. So at this point, we're back to kind of where we used to be around price-cost, which is slightly favorable for full year 2026. But not a big driver of the margin improvement. Really, the efforts, particularly the tariffs, have really been centered around not just price, but also supply chain and making sure we do everything we can to mitigate some of these increases so we don't have to pass them on to our customers. So that's maybe one way to think about price-cost. I'm not sure I have the resin number right in front of me. It's pretty small. I think here again, I'm not quite sure where you were going with the question, but to the extent that there are increases or decreases in resin cost, those will be reflected in pricing actions that are taken again at the division level where this is more of a meaningful driver of their material costs.

Joseph Ritchie, Analyst

No. Appreciate the comments. Michael. I guess I was thinking back, like, back in the, I don't know, call it 2016 timeframe when you guys saw some deflation in resin. And I remember it being, like, 10 to 15% of your COGS back then. Obviously, that's a long time ago. But there are areas like polyfluid, areas in, like, auto, like injection molding, and like, you know, gas caps, like plastic fasteners where you guys did see a benefit. So I was just really trying to think back at that time frame where you had some deflation in your cost structure, but then you have these longer-term contracts and like the auto business where you can get some pricing. So I was just trying to understand whether that was gonna be potentially a meaningful mover to the 2026 bridge.

Christopher O'Herlihy, President and CEO

Yes. So, Joe, I'd say the longer-term dynamic, long-term contract dynamic is still there, but the percentage is considerably less than I think we've always sent to 15 back then. I would say it's a lot less. And we have a very small portion of our business in specialty products that index to resin costs. And automotive, you know, there typically aren't adjustments made, you know, on the way up or on the way down, as you're well aware. So not something that's on our radar here in a meaningful way. Just because it's not gonna be material to the overall performance of the company this year as we sit here today.

Operator, Operator

Our next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell, Analyst

Hi. Good morning. I guess just my first one, the sequential revenue growth in the quarter, the 4% relative to normally 2%. Just color around that. Do you think that's more Illinois Tool Works Inc. specific, i.e., CBI is getting more traction, or would you know, say it's probably more just industrial markets getting better with 50 last month? And then my second question, Michael, just on the incremental margins for 2026, obviously implied very strong, you said mid to high 40s. That's above your 35 to 40% medium-term target on okay organic growth. So I'm just wondering if there's an underappreciated, you know, margin story or incremental margins can be higher. Maybe it's CBI. But just trying to piece that above-average incremental margins versus your target on and a half percent organic growth?

Christopher O'Herlihy, President and CEO

Better than what I thought. Thanks. Let me talk about increments for glad you asked, by the way. So, like, I think historically, we've been in that 35 to 40% range. That's what our kind of long-term TSR algorithm is based on 35 to 40. If you look at kind of what we've been putting up over the last few quarters with limited growth, frankly starting to improve. And when we look at kind of the plan for 2026, that's where we get to the mid to high forties. We can't really think of a reason why this wouldn't be sustainable over the long term. I mean, we've done a lot of work around the portfolio. Over a decade of enterprise initiatives. So the margin profile, variable margin, gross margin, all of those things the quality of the portfolio has never been better than it is today. And then you add on top of that accelerating how contributions from new products that all are coming in at higher margins. And then maybe most importantly, as Chris said, and I mentioned in my remarks, we're doing all of this while we are investing in Illinois Tool Works Inc. to kinda maximize the long-term performance from a growth and profitability standpoint. So about $800 million this year in our organic growth initiatives in our kind of productivity initiatives, the enterprise initiatives. And so it's not like we're holding back on investments. All of this is happening in the incrementals in the mid to high forties are happening while we're fully funding all the quality projects that we have available to us inside the company. I think that's anything else on the market? And I would just highlight, Jamie, this is one of the side benefits of PLS, Noah, is this you know, you do PLS for enough time. What happens is you get an improvement in the quality of the portfolio. PLS is effectively a portfolio pruning exercise. And so what's really driving these incrementals and the reason that fundamentally believe there are no sustainably in the mid-forties comes from, you know, improvement in the quality of our portfolio from, you know, many years of thoughtful PLS, coupled with a continuous improvement in the practice of the business model against that portfolio. So you got those two things working together, and that's ultimately why incrementals now shifted from what was mid-thirties to what we know the least mid-forties.

Julian Mitchell, Analyst

Right.

Christopher O'Herlihy, President and CEO

And then I think, Jamie, on your other question on the sequentials from Q3 to Q4. So it was pretty broad-based. Nothing really stood out, which suggests that this is really kinda maybe a little bit of tailwind from the markets after a long time.

Jamie Cook, Analyst

It was more pronounced.

Christopher O'Herlihy, President and CEO

In the segments that have a higher contribution from CBI. That is true. We didn't talk about polymers and fluids, but high contribution from new products in the automotive aftermarket, but also in the fluids business that's the part of that business that's really centered around biopharma. And then in the performance polymers side, it was growth in China. Again, taking advantage of the EV growth that Chris talked about earlier. So test and measurement, also seeing a pickup here. Sequentially from Q3 to Q4. They typically do. Maybe a little bit more pronounced than usual, and I think that's part of the semi pickup that we talked about. We saw that start to come through not just in order activity, but also in actual sales. Here in the fourth quarter. So it feels pretty good. Good momentum going into 2026, and off to a pretty good start so far.

Operator, Operator

Thank you. Our next question comes from the line of Steven Fisher with UBS. Please go ahead.

Steven Fisher, Analyst

Thanks. Good morning.

Christopher O'Herlihy, President and CEO

I take out 100 basis points of.

Steven Fisher, Analyst

Enterprise initiatives, it seems like the margins are maybe really only flattish. I'm curious why they wouldn't be higher with the positive organic growth and the high incrementals you're talking about, maybe the incrementals are a function of the enterprise initiatives, but why isn't the margins higher with that positive organic growth?

Christopher O'Herlihy, President and CEO

Yeah. That's a good question, Steven. I'd say let me just say it's hard to quibble with margins, I think, that are in that 26 to 27% range to begin with. But if you look at 2026, there's definitely some positive operating leverage given the midpoint of our revenue guidance here and that, you know, 3% range, 2% organic. We're getting about 100 basis points from the enterprise initiatives. Price cost is slightly favorable. And then what you're seeing is an offset. So these are which is primarily inflation in some of our employee-related costs. Wages, health and welfare benefits. And there's also some investment. That Chris talked about to really accelerate the organic growth rate inside the company and maintain high levels of productivity inside the company. So those are really we've talked about this category before. And so that's the offset to what we're giving you. And I might just say, you know, we're giving you a range on margins. Right? So 26 and a half, to 27 and a half, about 100 basis points of improvement. And if we get if this short cycle demand recovery really materializes and we get organic growth rates moving up in our range here, at the incrementals we're talking about, you're absolutely right. We should expect to see higher margins in 2026.

Steven Fisher, Analyst

Super helpful. And then just maybe a clarification. Did I hear you say that the commercial side of construction in North America was up in the quarter? And I guess if so, how surprised were you to see that? Were you already seeing that in your run rates at the start of the quarter? Or is that something that changed? And are you seeing that carry forward? I mean you do have a pretty big inflection in construction in '26.

Christopher O'Herlihy, President and CEO

Yeah. I'd say it's a fairly small portion of our business in look at North America. You know, it's about 20% of our exposure or sales are into the commercial side of things. So they can be a little bit lumpy. There was some pickup in activity as you might expect, related to things like data centers, for example, which sounds very exciting. But keep in mind what I just said. This is a pretty small part of the company but certainly encouraging to see a pickup on the commercial side. While the residential side, you know, our most perhaps our most interest rate-sensitive business remains, you know, really kind of stuck in some pretty challenging end markets. Housing starts down in the mid-single digits. But perhaps, you know, 2026 could be the year this really turns around on the residential side. That's not included in our guidance. That would but if it were to happen, we'd be really well-positioned to take advantage of that. The improvement drivers for '26 are more related to less PLS, and more CBI.

Steven Fisher, Analyst

Okay. Perfect. Thank you.

Operator, Operator

Our next question comes from the line of Sabrina Abrams with Bank of America. Please go ahead.

Sabrina Abrams, Analyst

Morning. I wanted to follow-up on something that I believe you said in response to Julian's question. If every quarter we have revenue growing 2% to 4%, I think the FX tailwind just based on the DXY, FX tailwind is pretty material in Q1, and then it tails off quite a bit in the remaining quarters of the year. So would it be fair to think that the organic growth the organic portion of growth accelerates as we move through the year? And just try to think if that assumption is correct and what's underlying the assumption.

Christopher O'Herlihy, President and CEO

Yeah. I think there's definitely, as you point out, a little bit more currency tailwind here in the first quarter. There is positive organic growth in Q1, but it's not as high as it is in Q3 and Q4. So maybe that's a way to think about it.

Sabrina Abrams, Analyst

Thank you. And then don't think anyone asked on this segment, but polymers and fluids had a nice surprise at least relative to what I was modeling. And it seems that it was pretty broad-based across the aftermarket, auto aftermarket and the fluids and polymer side. Anything to call out there that you're from an end market demand standpoint that maybe trended differently versus expectation?

Christopher O'Herlihy, President and CEO

Yeah. So, Sabrina, we did actually talk about this a couple of minutes ago, but just real quick. So a big contribution from CBI new products in the automotive aftermarket, specifically in the car care business. If you're in the market for wiper blades, Wanax wiper blades were up meaningfully here in the fourth quarter with the launch of a new wiper blade in that space. In China, specifically polymers continues to gain share. On the automotive EV side of things up double digits. More than 10%. In the fourth quarter. And then the reagents business that's part of fluids which is really focused around biopharma was up more than 20%. And again, so what you're seeing is more CBI, little less PLS, and we're expecting more of the same here as we go into 2026.

Sabrina Abrams, Analyst

Got it. I guess just as a quick follow-up then, just wanna understand why guiding for deceleration from Q4 next year?

Christopher O'Herlihy, President and CEO

Well, I'm not sure that's really the case. I mean, I think we're guiding one to three. If you look at the performance for the full year this year, in polymers and fluids, a little bit different than the fourth quarter. And then obviously, we're not going to launch the same amount of new products every quarter. So maybe the fourth quarter was a little bit higher from a CBI standpoint than kind of the typical run rate. So maybe that's a way to think about it.

Operator, Operator

And our final question will come from the line of David Rasa with Evercore. Please go ahead.

David Rasa, Analyst

Hi. I wonder if you'd help us. We're all sort of dancing around the organic cadence. How is January playing out versus the 1% to 3% guide? It just feels like there's a lot of, you know, filler metals up high single digit. Semis up mid-single. It feels like you're off to a relatively strong start to the year based off those cyclical trends exiting. Am I misreading the first quarter organic is at the full year guide? Or even above it? Any color in January would be great. And the company inventory, it went down a little bit sequentially. Histor I mean, it moves it moves around a lot. I appreciate that. Yeah. It went down to where wasn't even up year over year more than sales. And to me, that could be a little tell if know, hey. But think things are picking up. You'd be building some inventory. Just trying to square all that together.

Christopher O'Herlihy, President and CEO

Yeah. Thanks, David. So I think just on the inventory, that's kind of the typical cadence. Inventory levels do come down towards the year-end. I can tell you there's nothing going on in terms of lowering inventory levels because we expect lower growth. I think, as a matter of fact, if you go back to kind of the middle of the year, we, in some cases, like test and measurement, Chris talked about with some of the tariffs, to mitigate the risk from a supply chain standpoint, we actually added inventory in a few segments to mitigate that risk. So nothing unusual really from an inventory standpoint. In the fourth quarter. You know, I'd say January is off to we're we are. I can say this, we're right on track to where we thought we were gonna be. I did say that our revenue growth guide for this year, if you look at it on a quarterly basis, we will be up if things stay the way they are. And, obviously, with a pretty dynamic environment in that, you know, the three to 4% range. The organic growth rate is slightly lower in the first quarter relative to Q2, Q3, Q4. That's typical seasonality. Based on what we know today. So it's not gonna be three, 4% organic growth in the first quarter based on current run rate. But it will be positive organic growth. We have a little bit more tailwind from currency at the beginning of the year, just kinda how the comparisons work out. And so that's how you get to a revenue growth rate in Q1 that's maybe closer to the other quarters even though organic is lower. Does that make sense to you?

David Rasa, Analyst

Yeah. No. That's helpful. And semi, I know you said 15% of the business. Think it used to be a little bit bigger, but obviously, it's been slower. That incremental margin I feel like historically when that starts moving the incrementals, like, to be for the t and m margins were better than I was modeling for the quarter. Is semi a big part of that incremental margin improvement? Or am I overstating the impact when semi.

Christopher O'Herlihy, President and CEO

No, that is correct. I mean, this is the positioning has always been we know this is a cyclical space. And when we are at the bottom of the cycle, we want to be profitable, and when things are going well, orders are picking up, revenues are picking up, incrementals come through at above-average levels and above-average levels of profitability. So that is a reasonable assumption. Now it's 15% of test and measurement. 3% of Illinois Tool Works Inc. So but it is a space, as you know, when these cycles start to pick up, you can see some really, you know, above-average, meaningful growth rates for a period of time. And it's too early to tell whether that's what's going on here, but if you look at fab utilization, you look at the order activity, you look at, you know, plus 5% at attractive margins in Q4, it's looking pretty promising as we just start 2026. We're one month in. I'll just caution that things can change quickly. In this environment, but we feel really good about where we're at. We feel confident in our guidance, and well-positioned to deliver some solid results here both operationally and financially in 2026.

David Rasa, Analyst

Alright. Thank you for the time. Appreciate it.

Christopher O'Herlihy, President and CEO

Sure. Thank you.

Operator, Operator

And that concludes our question and answer session and our call today. Thank you all for joining. You may disconnect at this time.