Illinois Tool Works Inc.

- Operating Model
($ in Millions Except Per Share and Per Unit Data)

INSTRUCTIONS:

Use the following template and assumptions to build a 3-statement projection model over 5 years for Illinois Tool Works (ITW), a global manufacturing company.

Please clearly note any additional assumptions or modifications you make. Assume that the company's performance will be similar to its performance over
the past 3 years, except where otherwise noted in the assumptions.

You have 30 minutes to complete as much of the model as you can.

If you have additional time remaining at the end, please write 1-2 sentence answers for the following case study questions:

1) What is the MAIN reason why the company's Cash balance changes the way it does over these 5 years?

Its Cash balance declines substantially because the company keeps repurchasing shares without raising any additional Debt to fund those repurchases;
it also keeps issuing Dividends at the same time, further reducing cash flow.

2) What would you recommend to company management as the best financing decision over the next several years?

We would recommend additional Debt as the best way to boost its Cash balance - the company's borrowing costs are already very low, so Debt makes more
sense than Equity. Another option is to cut its stock repurchases; cutting Dividends would make less sense because of investors' expectations.

3) Would it benefit this company more to focus on sales growth or margin improvement? What would you recommend to management?

Focusing on margin improvement would make the most sense because most of ITW's costs are variable, so reducing COGS or SG&A by 1% of revenue will make
a bigger difference than improving revenue growth by 1%; also, the company doesn't seem to be growing quickly, so there may not be much room for growth.

General Assumptions:

Company Name: Illinois Tool Works Inc.

Ticker: ITW
Current Share Price: $ 117.46
Last Historical Year: 2015-12-31

Annual Gross Margin Improvement: 0.30%

Effective Tax Rate: 30.0%
Interest Rate on Debt: 4.0%
Interest Rate on Cash: 0.5%
 Historical Projected
Financial Statement Drivers: Units: FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Income Statement Drivers:
Revenue Growth: % 5.0% 4.0% 4.0% 3.0% 3.0%
Gross Margin: % 39.5% 40.1% 41.2% 41.5% 41.8% 42.1% 42.4% 42.7%
SG&A % Revenue: % 18.0% 17.5% 17.5% 17.0% 17.0%

Amortization of Intangible Assets: $M 217.0 196.0 175.0 153.0 134.0

Impairment of Goodwill: $M - - - - -

Amortization of Debt: % 10.0% 10.0% 10.0% 10.0% 10.0%

Beginning Debt Balance: $M 7,422.0 6,679.8 5,937.6 5,195.4 4,453.2

(-) Amortization: $M (742.2) (742.2) (742.2) (742.2) (742.2)
Ending Debt Balance: $M 6,679.8 5,937.6 5,195.4 4,453.2 3,711.0

Interest Expense: $M 296.9 267.2 237.5 207.8 178.1

Interest Income: $M 15.5 11.9 8.9 6.6 4.4

Income from Discontinued Operations: $M - - - - -

Balance Sheet Drivers:

Days Sales Outstanding: # Days 61.1 57.8 60.0 59.6 59.6 59.6 59.6 59.6
Days Sales of Inventory: # Days 53.2 49.7 50.3 50.0 49.0 49.0 48.0 48.0
Days Payable Outstanding: # Days 27.1 21.5 20.8 20.0 19.0 19.0 18.0 18.0

Prepaid Expenses & Other % SG&A: % 91.9% 15.0% 14.1% 13.0% 13.0% 12.0% 12.0% 11.0%
Other Long-Term Assets % Revenue: % 11.0% 10.0% 10.7% 10.6% 10.6% 10.6% 10.6% 10.6%
Accrued Expenses % SG&A: % 45.2% 48.1% 47.0% 46.7% 46.7% 46.7% 46.7% 46.7%

Other Current Liabilities % SG&A: % 20.5% 9.3% 10.6% 10.0% 10.0% 10.0% 10.0% 10.0%
Other Long-Term Liabilities % SG&A: % 32.8% 37.4% 40.6% 36.9% 36.9% 36.9% 36.9% 36.9%

Cash Flow Statement Drivers:

Capital Expenditures: $M (285.0) (325.0) (375.0) (425.0) (475.0)
Depreciation % Revenue: % 2.1% 1.8% 1.8% 1.7% 1.8% 1.9% 2.0% 2.1%

Stock-Based Compensation % Revenue: % 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Deferred Taxes % Taxes: % 0.8% 6.8% (1.3%) 2.1% 2.1% 2.1% 2.1% 2.1%
Dividends % Net Income: % 31.4% 24.1% 39.1% 31.6% 31.6% 31.6% 31.6% 31.6%

Stock Repurchases: $M 1,900.0 4,198.0 1,943.0 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0

Other Non-Cash Items: $M - - - - -

Other Investing Items: $M - - - - -
Other Financing Items: $M - - - - -

FX Rate Effects % Revenue: % (0.7%) (3.7%) (3.5%) (2.6%) (2.6%) (2.6%) (2.6%) (2.6%)
 Historical Projected
Income Statement: Units: FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Total Revenue: $M $ 14,135.0 $ 14,484.0 $ 13,405.0 $ 14,075.3 $ 14,638.3 $ 15,223.8 $ 15,680.5 $ 16,150.9

Cost of Goods Sold (COGS): $M 8,554.0 8,673.0 7,888.0 8,240.2 8,525.9 8,821.2 9,038.8 9,261.5

Gross Profit: $M 5,581.0 5,811.0 5,517.0 5,835.1 6,112.4 6,402.6 6,641.7 6,889.4

Operating Expenses:
(+) Selling, General & Administrative: $M 2,815.0 2,678.0 2,417.0 2,533.5 2,561.7 2,664.2 2,665.7 2,745.7
(+) Amortization of Intangible Assets: $M 250.0 242.0 231.0 217.0 196.0 175.0 153.0 134.0
(+) Impairment of Goodwill: $M 2.0 3.0 2.0 - - - - -
Total Operating Expenses: $M 3,067.0 2,923.0 2,650.0 2,750.5 2,757.7 2,839.2 2,818.7 2,879.7

Operating Income (EBIT): $M 2,514.0 2,888.0 2,867.0 3,084.5 3,354.7 3,563.4 3,823.0 4,009.7
Operating (EBIT) Margin: % 17.8% 19.9% 21.4% 21.9% 22.9% 23.4% 24.4% 24.8%

Other Income / (Expense):

(-) Interest Expense: $M (239.0) (250.0) (226.0) (296.9) (267.2) (237.5) (207.8) (178.1)
(+) Interest and Other Income: $M 72.0 61.0 78.0 15.5 11.9 8.9 6.6 4.4
Total Other Income / (Expense): $M (167.0) (189.0) (148.0) (281.4) (255.3) (228.6) (201.2) (173.8)

Pre-Tax Income: $M 2,347.0 2,699.0 2,719.0 2,803.1 3,099.4 3,334.8 3,621.8 3,836.0
(-) Provision For Income Taxes: $M (717.0) (809.0) (820.0) (840.9) (929.8) (1,000.4) (1,086.5) (1,150.8)
Income from Continuing Operations: $M 1,630.0 1,890.0 1,899.0 1,962.2 2,169.6 2,334.3 2,535.2 2,685.2

(+) Income from Discontinued Operations: $M 49.0 1,056.0 - - - - - -

Net Income: $M $ 1,679.0 $ 2,946.0 $ 1,899.0 $ 1,962.2 $ 2,169.6 $ 2,334.3 $ 2,535.2 $ 2,685.2
 Historical Projected
Balance Sheet: Units: FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
ASSETS:
Current Assets:
Cash & Equivalents: $M $ 3,618.0 $ 3,990.0 $ 3,090.0 $ 2,373.4 $ 1,778.0 $ 1,317.7 $ 871.5 $ 562.3
Accounts Receivable: $M 2,365.0 2,293.0 2,203.0 2,298.8 2,390.8 2,486.4 2,561.0 2,637.8
Inventory: $M 1,247.0 1,180.0 1,086.0 1,128.8 1,144.6 1,184.2 1,188.7 1,218.0
Prepaid Expenses & Other Current Assets: $M 2,586.0 401.0 341.0 329.4 333.0 319.7 319.9 302.0
Total Current Assets: $M 9,816.0 7,864.0 6,720.0 6,130.4 5,646.3 5,308.0 4,941.1 4,720.1

Non-Current Assets:
Net PP&E: $M 1,709.0 1,686.0 1,577.0 1,622.7 1,684.2 1,770.0 1,881.4 2,017.2
Goodwill: $M 4,886.0 4,667.0 4,439.0 4,439.0 4,439.0 4,439.0 4,439.0 4,439.0
Other Intangible Assets: $M 1,999.0 1,799.0 1,560.0 1,343.0 1,147.0 972.0 819.0 685.0
Other Long-Term Assets: $M 1,556.0 1,449.0 1,433.0 1,487.4 1,546.9 1,608.8 1,657.0 1,706.7
Total Non-Current Assets: $M 10,150.0 9,601.0 9,009.0 8,892.1 8,817.1 8,789.7 8,796.4 8,847.9

Total Assets: $M $ 19,966.0 $ 17,465.0 $ 15,729.0 $ 15,022.5 $ 14,463.4 $ 14,097.8 $ 13,737.5 $ 13,568.1

LIABILITIES AND EQUITY:

Current Liabilities:
Accounts Payable: $M $ 634.0 $ 512.0 $ 449.0 $ 451.5 $ 443.8 $ 459.2 $ 445.8 $ 456.7
Accrued Expenses: $M 1,272.0 1,287.0 1,136.0 1,184.4 1,197.6 1,245.5 1,246.2 1,283.6
Other Current Liabilities: $M 577.0 250.0 257.0 253.4 256.2 266.4 266.6 274.6
Total Current Liabilities: $M 2,483.0 2,049.0 1,842.0 1,889.3 1,897.5 1,971.1 1,958.5 2,014.8

Non-Current Liabilities:
Long-Term Debt: $M 6,344.0 7,419.0 7,422.0 6,679.8 5,937.6 5,195.4 4,453.2 3,711.0
Deferred Tax Liability: $M 507.0 171.0 256.0 273.6 293.1 314.1 336.9 361.1
Other Long-Term Liabilities: $M 923.0 1,002.0 981.0 935.7 946.1 983.9 984.5 1,014.0
Total Non-Current Liabilities: $M 7,774.0 8,592.0 8,659.0 7,889.1 7,176.8 6,493.4 5,774.6 5,086.1

Total Liabilities: $M $ 10,257.0 $ 10,641.0 $ 10,501.0 $ 9,778.4 $ 9,074.3 $ 8,464.5 $ 7,733.1 $ 7,100.9

Equity: $M $ 9,709.0 $ 6,824.0 $ 5,228.0 $ 5,244.1 $ 5,389.1 $ 5,633.3 $ 6,004.4 $ 6,467.2

Total Liabilities & Equity: $M $ 19,966.0 $ 17,465.0 $ 15,729.0 $ 15,022.5 $ 14,463.4 $ 14,097.8 $ 13,737.5 $ 13,568.1

Balance Check: OK! OK! OK! OK! OK! OK! OK! OK!
 Historical Projected
Cash Flow Statement: Units: FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income: $M $ 1,679.0 $ 2,946.0 $ 1,899.0 $ 1,962.2 $ 2,169.6 $ 2,334.3 $ 2,535.2 $ 2,685.2
Adjustments for Non-Cash Charges:
(+) Depreciation: $M 299.0 262.0 244.0 239.3 263.5 289.3 313.6 339.2
(+) Impairment of Goodwill: $M 2.0 3.0 2.0 - - - - -
(+) Amortization of Other Intangibles: $M 312.0 242.0 231.0 217.0 196.0 175.0 153.0 134.0
(+/-) Deferred Taxes: $M 6.0 55.0 (11.0) 17.6 19.5 21.0 22.8 24.1
(+) Stock-Based Compensation: $M 37.0 39.0 41.0 39.3 40.8 42.5 43.7 45.1
(+/-) Other Non-Cash Items: $M 76.0 (1,700.0) - - - - - -
Changes in Operating Assets and Liabilities:
Accounts Receivable: $M (83.0) (70.0) (42.0) (95.8) (92.0) (95.6) (74.6) (76.8)
Inventory: $M 24.0 (10.0) 25.0 (42.8) (15.8) (39.7) (4.4) (29.3)
Prepaid Expenses & Other Assets: $M 226.0 (98.0) 24.0 (42.8) (63.2) (48.6) (48.4) (31.9)
Accounts Payable: $M 8.0 (20.0) (30.0) 2.5 (7.7) 15.4 (13.4) 11.0
Accrued Expenses: $M 161.0 5.0 (56.0) 48.4 13.2 47.9 0.7 37.4
Other Liabilities: $M (219.0) (38.0) (28.0) (49.0) 13.2 48.1 0.7 37.5
Net Cash Provided by Operating Activities: $M 2,528.0 1,616.0 2,299.0 2,295.9 2,537.2 2,789.6 2,928.9 3,175.5

CASH FLOWS FROM INVESTING ACTIVITIES:

(-) Capital Expenditures: $M (368.0) (361.0) (284.0) (285.0) (325.0) (375.0) (425.0) (475.0)
(+/-) Other Investing Items: $M (88.0) 3,203.0 74.0 - - - - -
Net Cash Used in Investing Activities: $M (456.0) 2,842.0 (210.0) (285.0) (325.0) (375.0) (425.0) (475.0)

CASH FLOWS FROM FINANCING ACTIVITIES:

(-) Dividends Paid: $M (528.0) (711.0) (742.0) (619.1) (684.5) (736.5) (799.9) (847.2)
(-) Stock Repurchases: $M (1,900.0) (4,198.0) (1,943.0) (1,000.0) (1,000.0) (1,000.0) (1,000.0) (1,000.0)
(+) Debt Issuances / (-) Repayments: $M 1,264.0 1,339.0 151.0 (742.2) (742.2) (742.2) (742.2) (742.2)
(+) Other Financing Items: $M 24.0 19.0 8.0 - - - - -
Net Cash Provided by Financing Activities: $M (1,140.0) (3,551.0) (2,526.0) (2,361.3) (2,426.7) (2,478.7) (2,542.1) (2,589.4)

FX Rate Effects: $M (93.0) (535.0) (463.0) (366.2) (380.9) (396.1) (408.0) (420.2)

Change in Cash & Cash Equivalents: $M 839.0 372.0 (900.0) (716.6) (595.4) (460.2) (446.2) (309.2)
Beginning Cash: $M 2,779.0 3,618.0 3,990.0 3,090.0 2,373.4 1,778.0 1,317.7 871.5
Ending Cash: $M $ 3,618.0 $ 3,990.0 $ 3,090.0 $ 2,373.4 $ 1,778.0 $ 1,317.7 $ 871.5 $ 562.3