ILLINOIS TOOL WORKS INC.APRIL 23, 2013Kaushik 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

SWOT Analysis

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:

Revenues down 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 Price

$60.50

Trailing P/E

9.98

Forward P/E

14.21

Dividend Yield

2.51%

Market Cap ($ millions)

$27,312

Source: Capital IQ, Yahoo Finance

Financial Analysis

2008 2009 2010 2011 2012Current 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

2008 2009 2010 2011 2012Gross 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%

2008 2009 2010 2011 2012Debt/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

Liquidity Ratios

Profitability Ratios

Solvency Ratios

Financial Analysis

2008 2009 2010 2011 2012Accounts 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

2008 2009 2010 2011 2012Tax 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%

Activity Ratios

DuPont Analysis

Comparable Companies

Source: Capital IQ

Company Revenues ($ millions)

Market Cap ($ millions)

Operating 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%

Stock Performance

Source: Yahoo Finance

Comparable Company Analysis

Source: Capital IQ

Target CompanyTicker Symbol (Exchange)

Price/Book Value

Forward TEV/Sales

Forward TEV/EBITDA Forward P/E

Illinois Tool Works Inc. ITW (NYSE) 9.90x 1.69x 8.40x 14.21

Comparable CompaniesCummins 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 StatisticsHigh 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

Comparable Company Analysis

Source: Capital IQ

Multiple Low Median High MeanPrice/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 Share Price

Multiple WeightImplied ITW 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$

Discount Rate

Risk-Free Rate 1.70%Market Risk Premium 6.00%5-Year Beta 0.80

CAPM Cost of Equity 6.47%

CAPMYear Return2012 21.46%2011 1.99%2010 73.07%2009 37.41%

Total Realized Return 114.40%

Arithmetic Average Annual Return 33.48%Geometric Average Annual Return 16.48%

Annual Realized Returns

Source: Yahoo Finance

DCF Analysis

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%ITW Realized Return 16.48% 90.00%

Cost of Equity 15.48%

Tax Rate 32.0%

WACC 13.51%

Cost of Equity Weightings

Weighted Average Cost of Capital

DCF Analysis

2013E 2014E 2015E 2016E 2017ETerminal 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%

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$

Calculation of Implied Share Price Terminal Value

Illinois Tool Works Inc. Discounted Cash Flow Analysis ($ millions)

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 Current Stock 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