ILLINOIS TOOL WORKS INC.

APRIL 23, 2013

Kaushik Andra, Dan Ballantine, & Keaton J. Cervantes
Agenda
 Introduction
 Macroeconomic Outlook
 Industry Overview
 Company Overview
 Financial Analysis
 Valuation
 Recommendation
Illinois Tool Works Inc.
 Founded in 1912, headquartered in Glenview,
Illinois
 Approximately 60,000 employees
 Manufacturer of industrial products and equipment
across 40 different operating segments with
operations in 58 countries
 Decentralized management structure: contains 8
separate business segments that operate independently
 Currently listed on RCMP Watch List
 Last reviewed in April 2005
Source: Illinois Tool Works 2012 10-K
Macroeconomic Outlook
 Industry trend to pursue “Southern Strategy” in the
United States
 Moving operations to right-to-work states

 United States becoming more competitive globally

 Decrease in energy and input costs
 Foreign worker compensation rising, while US wages
are stagnant

Source: The Wall Street Journal

Macroeconomic Outlook
 Improving industrial
output in the United
States
 Industrial
production
nearing 2007-2008
levels

Source: The Wall Street Journal

Macroeconomic Outlook
 After strong increase, shipments abroad are
decreasing

Source: The Wall Street Journal

Global Industrial Machinery
Overview
 Engine, Turbine, and Related is the largest segment
of the global industrial machinery, accounting for
36.5% of total revenue
 Asia-Pacific accounts for 36.8% of total revenue
 Mitsubishi Heavy is largest player in the industry,
generating 6.5% of market value

Source: MarketLine
Industry Projection

Source: MarketLine
Industry Forces Analysis
 Bargaining Power of Buyers: Moderate
 Low switching costs, but typically buyers opting for machinery best suited
to their needs
 Bargaining Power of Suppliers: Low
 Commodity inputs with a large number of industry suppliers

 Threat of New Entrants: Low

 Highly capital intensive industry

 Requires high amounts of specific knowledge

 Threat of Substitutes: Moderate

 Machines expected to work in heavy duty environment

 Degree of Rivalry: High

 4 largest players only own 14% of total market share

Source: MarketLine
Company Overview

Source: Illinois Tool Works 2012 Annual Report

Company Overview

Source: Illinois Tool Works 2012 10-K

Current Financial Position

Source: Illinois Tool Works 2012 Annual Report

Financial Highlights

Source: Illinois Tool Works 2012 10-K

Business Risks

Exchange Ballooning Low

Rates pension costs employee
morale

Economic Failure to
Divestiture downturn realize
Failures globally 80/20
SWOT Analysis

• Globally diversified revenue base

Strengths • Strong dividend history
• Multiple end markets and product groups

• High number of operating segments and product lines

Weaknesses • Unproven track record of management team
• Very uncertain future due to current strategy

Opportunities • Divest undesirable business segments to improve margins

• Efficient operations once 80/20 strategy is realized

• Sensitive to a variety of macroeconomic factors

Threats • Exposure to currency risk
• High industry competition
Strategy
 80/20 plan
 Focus
on the 20% of business that is responsible for
80% of revenue
 Large divestiture planned ahead
 Reduce business from 800 to 120 business units
 Restructure or end industrial packaging segment
 Currently looking at alternatives
 Using more discipline when deploying capital in the
future
Source: Illinois Tool Works Q4 2012 Earnings Presentation,
Illinois Tool Works Barclays Investor Conference
Management Outlook
 Anticipated increase of revenues in 2013 by 3-5%
 Anticipated 2013 operating margin of 16.5-16.9%
 Focus on executing enterprise strategy of
simplifying the business
 Improve operating margins to 20% by 2017
 Increase future dividends and share buybacks
 Looking to divest up to 25% of its remaining
revenue base

Source: Illinois Tool Works Q4 2012 Earnings Presentation

Recent News
 Former CEO David Speer passed away in 2012
 New CEO named in November 2012
 Sold 51% stake in Decorative Surfaces business unit
in August 2012
 Announced new strategy in August 2012
 Q4 2012:
 Revenuesdown 2.3% from Q4 2011, operating income
down 5.9%

Source: Illinois Tool Works 2012 Annual Report, Q4

2012 Earnings Presentation
 Current Stock Information

Metric Value
Current Stock $60.50
Price
Trailing P/E 9.98
Forward P/E 14.21
Dividend 2.51%
Yield
Market Cap $27,312
($ millions)

Source: Capital IQ, Yahoo Finance

Financial Analysis
Liquidity Ratios
2008 2009 2010 2011 2012
Current Ratio 1.21 2.00 1.93 2.30 3.00
Quick Ratio 0.84 1.36 1.37 1.52 1.63
Cash Ratio 0.15 0.47 0.38 0.40 1.05

Profitability Ratios
2008 2009 2010 2011 2012
Gross Profit Margin 34.58% 34.10% 35.15% 35.24% 36.09%
Operating Profit Margin 14.63% 9.99% 14.62% 15.35% 15.88%
Net Margin 8.88% 6.82% 9.75% 11.64% 16.01%
ROA 9.88% 6.05% 9.30% 12.10% 15.39%
ROE (Book Value) 17.86% 11.49% 16.52% 21.33% 27.86%

Solvency Ratios
2008 2009 2010 2011 2012
Debt/Assets 0.24 0.19 0.17 0.22 0.26
Debt/Equity 0.48 0.35 0.30 0.40 0.48
Interest Coverage 16.19 8.41 12.88 14.22 13.30
Financial Analysis
Activity Ratios
2008 2009 2010 2011 2012
Accounts Receivable Turnover 6.40 5.64 5.96 6.47 6.45
Days Sales Outstanding 57.01 64.67 61.20 56.40 56.62
Accounts Payable Turnover 14.95 13.73 13.85 15.87 16.69
Days Payables 24.41 26.58 26.36 22.99 21.87
Fixed Asset Turnover 8.22 6.76 7.41 8.79 8.92
Total Asset Turnover 1.11 0.89 0.95 1.04 0.96

DuPont Analysis
2008 2009 2010 2011 2012
Tax Burden 64.60% 78.02% 71.95% 79.87% 79.66%
Interest Burden 94.01% 87.58% 92.68% 94.95% 126.55%
Operating Profit Margin 14.63% 9.99% 14.62% 15.35% 15.88%
Asset Turnover 112.41% 86.29% 94.87% 98.90% 92.83%
Leverage 1.99 1.82 1.73 1.79 1.83
ROE 19.82% 10.74% 16.02% 20.64% 27.15%
Comparable Companies
Company Revenues ($ Market Cap Operating
millions) ($ millions) Margin

Cummins Inc. $17,334 $19,843 11.2%

Danaher Corp. $18,389 $43,324 17.6%

Honeywell International Inc. $37,686 $61,088 11.4%

Ingersoll-Rand Plc $14,035 $18,406 10.9%

Lincoln Electric Holdings Inc. $2,853 $3,960 13.1%

Parker-Hannifin Corporation $13,086 $14,285 11.5%

Stanley Black & Decker $10,191 $15,196 11.2%

Illinois Tool Works Inc. $17,924 $29,592 15.9%

Source: Capital IQ
Stock Performance

Source: Yahoo Finance

 Comparable Company Analysis

Ticker Symbol Price/Book Forward Forward

Target Company (Exchange) Value TEV/Sales TEV/EBITDA Forward P/E
Illinois Tool Works Inc. ITW (NYSE) 9.90x 1.69x 8.40x 14.21

Comparable Companies
Cummins Inc. CMI (NYSE) 3.50x 1.16x 7.60x 12.20
Danaher Corp. DHR (NYSE) NM 2.25x 10.20x 16.88
Honeywell International Inc. HON (NYSE) NM 1.53x 8.20x 14.59
Ingersoll-Rand Plc IR (NYSE) NM 1.26x 9.00x 14.89
Lincoln Electric Holdings Inc. LECO (NASDAQ) 3.90x 1.33x 8.60x 15.27
Parker-Hannifin Corporation PH (NYSE) 19.30x 1.07x 7.40x 12.12
Stanley Black & Decker SWK (NYSE) NM 1.37x 8.20x 13.89

Comparable Statistics
High 19.30x 2.25x 10.20x 16.88
Median 3.90x 1.33x 8.20x 14.59
Low 3.50x 1.07x 7.40x 12.12
Mean 8.90x 1.42x 8.46x 14.26

Source: Capital IQ
 Comparable Company Analysis

Implied ITW Share Price

Multiple Low Median High Mean
Price/Book Value $ 21.32 $ 23.75 $ 117.54 $ 54.20
Forward TEV/Sales $ 36.53 $ 46.63 $ 82.37 $ 50.29
Forward TEV/EBITDA $ 52.99 $ 59.26 $ 74.95 $ 61.28
Forward P/E $ 51.60 $ 62.12 $ 71.87 $ 60.73

Implied ITW
Multiple Weight Share Price
Price/Book Value 0% $ 54.20
Forward TEV/Sales 30% $ 50.29
Forward TEV/EBITDA 30% $ 61.28
Forward P/E 40% $ 60.73
ITW Implied Share Price $ 57.76

Source: Capital IQ
 Discount Rate

Annual Realized Returns

Year Return
CAPM 2012 21.46%
2011 1.99%
Risk-Free Rate 1.70% 2010 73.07%
Market Risk Premium 6.00% 2009 37.41%
5-Year Beta 0.80
Total Realized Return 114.40%
CAPM Cost of Equity 6.47%
Arithmetic Average Annual Return 33.48%
Geometric Average Annual Return 16.48%

Source: Yahoo Finance

DCF Analysis
Weighted Average Cost of Capital

Share Price $ 60.50

Shares Outstanding (millions) 451.44
Market Value of Equity $ 27,312.12

Debt $ 5,048.00

Percent Equity Weight 84.40%

Percent Debt Weight 15.60%

Cost of Debt 4.23%

Cost of Equity
CAPM Cost of Equity 6.47% 10.00% Cost of Equity
ITW Realized Return 16.48% 90.00% Weightings
Cost of Equity 15.48%

Tax Rate 32.0%

WACC 13.51%
DCF Analysis
Illinois Tool Works Inc. Discounted Cash Flow Analysis ($ millions)

Terminal
2013E 2014E 2015E 2016E 2017E
Value
Net Income 2,176 2,311 2,354 2,380 2,404
Amortization & Depreciation 652 651 662 665 667
Capital Expenditures (380) (380) (385) (385) (390)
Changes in Net Working Capital
Less Increases in A/R 118 (22) 20 35 37
Less Increase in Inventories 11 (82) (10) (61) (6)
Plus Increases in A/P 24 20 4 3 3
Free Cash Flow 2,601 2,499 2,646 2,637 2,715 26,599
Present Value of FCF 2,292 1,940 1,809 1,588 1,440 14,114

Discount Rate 13.51%

Calculation of Implied Share Price Terminal Value

Implied Enterprise Value $ 23,183 Terminal Growth Rate 3.00%
Less Debt $ (5,048)
Plus Cash $ 2,779
Implied Market Cap $ 20,914

Implied Share Price $ 46.33

Decision Drivers
 Strengths:
 Improved operating margins
 Geographically diversified revenue base

 GICS diversification

 Strong dividend history

 Concerns:
 Management’s ability to execute restructuring plan
 Stagnating sales growth in key segments

 Exposure to a number of global macro factors

Recommendation
 Valuation Summary
 CurrentStock Price: $60.78 per share
 Comparable Companies Valuation: $57.76 per share

 DCF Valuation: $46.33 per share

 Recommendation: WATCH LIST

 Place on RCMP Watch List
 Consider reviewing again in 18-36 months after
divestiture process is more complete