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 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 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 K

Current Financial Position Source: Illinois Tool Works 2012 Annual Report

Financial Highlights Source: Illinois Tool Works K

Business Risks Exchange Rates Ballooning pension costs Low employee morale Divestiture Failures Economic downturn globally Failure to realize 80/20

SWOT Analysis Globally diversified revenue base Strong dividend history Multiple end markets and product groups Strengths High number of operating segments and product lines Unproven track record of management team Very uncertain future due to current strategy Weaknesses Divest undesirable business segments to improve margins Efficient operations once 80/20 strategy is realized Opportunities Sensitive to a variety of macroeconomic factors Exposure to currency risk High industry competition Threats

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 Q Earnings Presentation, Illinois Tool Works Barclays Investor Conference

Management Outlook  Anticipated increase of revenues in 2013 by 3-5%  Anticipated 2013 operating margin of %  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 Q 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, Q Earnings Presentation

Current Stock Information MetricValue Current Stock Price $60.50 Trailing P/E9.98 Forward P/E14.21 Dividend Yield 2.51% Market Cap ($ millions) $27,312 Source: Capital IQ, Yahoo Finance

Financial Analysis

Comparable Companies Source: Capital IQ CompanyRevenues ($ millions) Market Cap ($ millions) Operating Margin Cummins Inc.$17,334$19, % Danaher Corp.$18,389$43, % Honeywell International Inc.$37,686$61, % Ingersoll-Rand Plc$14,035$18, % Lincoln Electric Holdings Inc.$2,853$3, % Parker-Hannifin Corporation$13,086$14, % Stanley Black & Decker$10,191$15, % Illinois Tool Works Inc.$17,924$29, %

Stock Performance Source: Yahoo Finance

Comparable Company Analysis Source: Capital IQ

Comparable Company Analysis Source: Capital IQ

Discount Rate Source: Yahoo Finance

DCF Analysis

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 months after divestiture process is more complete