illinois tool works, inc. (itw) november 15, 2017 through 2020 itw’s management team targets 2-3%...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Sam Norman [[email protected]]

Illinois Tool Works, Inc. (ITW) November 15, 2017

Industrials – Diversified Industrials Stock Rating Sell

Investment Thesis Target Price $145-150 ITW has achieved revenue growth and margin expansion in recent years due to a strengthening economy and growth in industrial activity. We believe that continued economic strength will enable further growth and margin expansion through 2019. However, our expectations for a slowing economy beginning in 2020 limit ITW’s upside potential at its current price of $155.85. Drivers of Thesis

• We project that U.S. GDP will grow by an annual rate of roughly 3% through 2019, allowing for near-term organic growth and margin expansion. However, we believe that GDP growth will slow to 2-2.5% beginning in 2020, limiting growth in the medium-term.

• Our model assumes that total revenue will grow at a 5-year CAGR of 3.5% throughout the forecast horizon, driven by 4.2% compound annual growth through 2019. We project that revenue growth will slow to roughly 2.5% annually in 2020 and 2021 based on our expectations for weaker economic growth.

• We project that COGS and SG&A expense as a percentage of sales will each decline by 50 basis points in 2018 due to strong demand and internal cost reduction. However, we believe that declines in COGS and SG&A as a percentage of sales will be limited to 25 basis points in 2019 and 10 basis points in 2020 and 2021 due to weaker demand across the company’s end-market segments.

Risks to Thesis

• ITW is highly reliant on growth in overall economic and industrial activity. Higher-than-expected economic growth through 2019 or sustained economic strength through 2021 would be detrimental to the accuracy our model assumptions and investment thesis.

Henry Fund DCF $146.64 Henry Fund DDM $137.39 Relative Multiple $147.17 Price Data Current Price $155.85 52wk Range $120.06 – 159.36 Consensus 1yr Target $161.12 Key Statistics Market Cap (B) $53.39 Shares Outstanding (M) 342.60 Institutional Ownership 82.4% Five Year Beta 1.077 Dividend Yield 2.00% Est. 5yr Growth 9.70% Price/Earnings (TTM) 24.82 Price/Earnings (FY1) 22.28 Price/Sales (TTM) 3.82 Price/Book (mrq) 10.63 Profitability Operating Margin (TTM) 24.0% Profit Margin (TTM) 16.1% Return on Assets (TTM) 14.2% Return on Equity (TTM) 46.3%

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E

EPS $7.32 $5.16 $5.73 $6.67 $7.20 $7.84

growth 94.5% (29.5%) 11.0% 16.2% 8.0% 8.9%

12 Month Performance Company Description

Illinois Tool Works is a diversified manufacturer of specialized industrial products and equipment. The company’s operations are organized in seven reportable segments: Automotive OEM, Food Equipment, Measurement and Electronics, Welding, Polymers and Fluids, Construction Products, and Specialty Products. ITW’s businesses serve customers domestically and abroad, with operations in 57 countries and six continents. The company reported total revenue of $13.6 billion in fiscal 2016, 55% of which came from customers located outside of the U.S.

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Source: Bloomberg

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Source: Yahoo Finance

ITW S&P 500

EXECUTIVE SUMMARY

The Henry Fund recommends a sell for Illinois Tool Works (ITW) based on a target price of $145-150.

ITW has been in existence for over 100 years as a global manufacturer of industrial products and equipment. The company serves customers in a diverse set of end market industries and has proven to be a consistent and reliable operator through numerous economic cycles. In recent years, ITW has shifted its traditional M&A growth strategy to an enterprise strategy of organic growth and internal cost reduction. We believe that ITW’s operational strategy will allow for strong organic growth and margin expansion through 2019 due underlying economic strength. However, our expectations for weakening economic activity in 2020 and 2021 drive our target price below ITW’s current share price of 155.85.

COMPANY DESCRIPTION

ITW is a diversified manufacturer of industrial products and equipment serving customers in over 50 countries. The following chart shows the percentage of the company’s revenue received from domestic and international customers in its latest fiscal year.

In addition to its geographically diverse customer base, ITW receives revenue from a wide variety of end market industries. The company categorizes revenues into one of seven reportable segments: Automotive OEM, Food Equipment, Measurement and Electronics, Welding, Polymers and Fluids, Construction Products, and Specialty Products1. The following chart shows each segment’s contribution to total revenue in fiscal 2016.

For forward valuation, our analysis examines each of these segments individually based on their unique growth drivers. More information about each segment and our revenue projections can be found below.

Automotive OEM

Revenue from Automotive OEMs accounted for roughly 21% of total revenue in fiscal 2016. Automotive OEM revenue has grown at a 3-year CAGR of 6.1% since 2013, including 5.1% organic revenue growth in 20161.

ITW earns Automotive OEM revenue through the sale of components and fasteners to top-tier, global automotive OEMs. The company’s products within this segment include plastic and metal components, fasteners, and assemblies for automobiles and light trucks. Demand within this segment is driven largely by the levels of automotive production around the world1.

Domestic and international auto production has increased rapidly since 2009, aided by economic recovery throughout the world. Global automotive production totaled roughly 91 million units in 2016 and is expected to grow to roughly 107 million units by 2023. This forecast results in a global growth rate for automotive production of roughly 2.3% annually2. More information about the global automotive production outlook and sources of production growth can be found in the following chart.

Global Automotive Production Outlook

Source: IHS Markit – Automotive Industry Outlook

Historically, ITW has leveraged deep engineering relationships with key global auto OEMs to achieve segment growth above that of automotive production. ITW’s management believes that the company has the potential to achieve 3-4% of above-market growth in its automotive OEM segment due to its strong business portfolio and customer relationships3. We believe that this projection is somewhat ambitious in the long-run, but is achievable in the near-term given our expectations for a strong economy and steadily growing auto production market. Our model assumes that Automotive OEM revenue will be limited to 4% in Q4 of 2017 due to short-term weakness in global auto builds as describe in ITW’s Q3 2017 earnings call4. However, we believe that automotive OEM revenue will return to strong growth at 5% in 2018 and 4% in 2019. We believe that automotive production will level out in 2019 with the greater economy and limit Automotive OEM growth to 2.5% in 2020 and 2021.

Food Equipment

Revenue from Food Equipment accounted for roughly 16% of revenue in fiscal 2016 and has grown at a 3-year CAGR of 1% since 2013. The company also achieved organic revenue growth at 2.8% in fiscal 2016 within its Food Equipment Segment1.

ITW is an industry-leading provider of commercial food equipment differentiated by innovation and integrated service offerings. The company’s Food Equipment segment primarily serves the restaurant, food service, and food retail industries through product lines that include ware washing, cooking, refrigeration, food processing, and

kitchen ventilation equipment. In addition, the company offers maintenance and repair series on its food equipment.

Demand for the company’s food equipment is derived from growth in the restaurant and food service industries. Dynamics in consumer behavior continue to be favorable for commercial food service establishments. Consumers in the U.S. are choosing to eat away from more than ever, as shown in the chart below.

Shares of Total Food Expenditures, 1963-2014

Source: USDA Economic Research Service

This trend is also becoming common worldwide, leading to expectations for growth in the food service and retail food industries moving forward. The following chart shows projected growth among global foodservice and retail markets through 2024.

Estimated Growth in Worldwide Food Service and Retail

Source: Emerson Climate Technologies: Food Industry Forecast Through 2020

ITW’s management team targets 2-3% above-market organic growth in its Food Equipment segment3. We believe that this above-market growth is achievable in a

strong economy due to the company’s portfolio of industry-leading food equipment brands. We believe that the global food service and retail industry will grow by roughly 3% annually through 2019. Our model assumes that the company will achieve 1% above-market growth throughout this period, resulting in revenue growth projections of 4% in Q4 2017, fiscal 2018, and fiscal 2019. We believe that a slowing domestic and global economy will limit Food Equipment growth to 2.5% in 2020 and 2021.

Test, Measurement, and Electronics

Test, Measurement, and Electronics products accounted for roughly 15% of revenue in fiscal 2016. This segment has shrunk at a 3-year CAGR of -3.2% since 2013. However, organic revenue grew by 1.8% in fiscal 20161.

ITW’s Test, Measurement, and Electronics segment produces equipment, consumables, and related software for testing and measuring the physical properties of materials and structures. This segment also produces equipment and consumables used in the production of electronic subassemblies and microelectronics. ITW’s Test, Measurement, and Electronics segment sells to firms in a wide variety of industries including electronics, general industrial, industrial capital goods, and consumer durables markets.

We believe that overall economic activity is the best barometer of this segment’s growth potential, as customers come from a diverse set of cyclical end market industries. The following chart shows recent trends in domestic and international GDP growth, as well as future growth projections according to the International Monetary Fund (IMF).

Source: International Monetary Fund

We believe that U.S. and global economic growth will remain strong around 3% in through 2019. We believe that economic growth will slow to roughly 2-2.5% beginning in 2020.

ITW’s management team believes that its Test, Measurement, and Electronics segment has above-market growth potential of 2-3%3. We believe that ITW’s Test, Measurement, and Electronics products offer technological capabilities that will command 1-2% above market growth in periods of economic expansion. Based on this belief and our previously disclosed economic forecasts, we believe the ITW’s Test, Measurement, and Electronics segment revenues will grow by 5% in the remaining quarter of 2017, 4.5% in 2018 and 2019, and 3% in 2020 and 2021.

Specialty Products

ITW’s specialty products segment accounted for roughly 14% of total revenue in fiscal 2016. Specialty product revenues have shrunk at a 3-year CAGR of -2.1% since 2013. However, this segment reported organic revenue growth of 1.2% in 20161.

The specialty products segment is focused on diversified niche market opportunities including beverage packaging equipment and consumables, product coding, marketing equipment and consumables, and appliance components and fasteners. This segment primarily serves the food and beverage, general industrial, consumer durables, printing and publishing, and industrials capital goods markets.

We believe that revenue growth in the specialty products segment is also best forecasted based on overall economic growth and industrial activity. ITW’s management team targets 1-2% above market growth in its Specialty Products segment3. However, we believe that these figures are ambitious given the commodity-like qualities of ITW’s specialty product line. We believe that the presence of substitutes will limit growth in this segment to that of the U.S. and world economy. As such, we believe that revenue from the Specialty Products segment will grow by 3% through 2019 and 2.5% throughout the remaining forecast horizon.

Construction Products

Construction products accounted for approximately 12% of total revenue in fiscal 2016 and have shrunk at a 3-year CAGR of -2.1% despite 3% organic growth in 20161.

ITW is a supplier of engineered fastening systems and solutions for customers in residential and commercial construction markets. Therefore, the company’s revenue from construction products is highly reliant on strength in residential and commercial construction markets.

U.S. total construction spending has grown steadily in recent years due, in large part, to a recovering economy. The following chart shows total construction spending in the U.S. since 2012.

Source: U.S. Census Bureau

Dodge Data & Analytics’ Construction Outlook predicts that total U.S. construction starts for 2018 will climb by 3%, following a 4% rise in 20175. We believe that 3% total construction growth is sustainable through 2019 due to our expectations for continued economic growth. However, we believe that construction market growth will slow to 2.5% beginning in 2020.

ITW’s management team targets 1-2% above-market growth within its Construction Products segment3. We believe that 1% above-market growth is attainable during periods of economic growth. However, we believe that the Construction products segment will return to market growth as the construction market slows in 2020. Our model predicts that Construction Products revenue will grow by 4% through 2019 and 2.5% thereafter.

Polymers and Fluids

Polymer and Fluid revenue accounted for roughly 12% of total revenue in fiscal 2016. This segment has shrunk at a 3-year CAGR of -5.3% but achieved 1.3% organic growth in 20161.

ITW’s Polymers and Fluids business is a branded supplier to niche end market industries. Businesses in the Polymers and Fluids segment produce polymers, adhesives, sealants, lubrication, cutting fluids, and fluids used for auto, industrial, and commercial aftermarket maintenance. This segment primarily serves the automotive aftermarket, general industrial, and construction markets.

We believe that Polymers and Fluids revenue will generally track growth in the underlying economy. While the company targets 1-2% above market growth in this segment, we believe that its product offerings have many substitutes and limit the segment’s growth to that of the overall market3. As such, our model predicts that ITW’s Polymers and Fluids segment will grow by 3% through 2019 and 2% thereafter through 2021.

Welding

Welding revenue accounted for approximately 11% of total revenue in 2016 and has shrunk at a 3-year CAGR of -9.94% since 2013. However, ITW’s welding segment has performed well year-to-date in 2017 and reported 4% organic growth in Q3 20173.

ITW offers welding equipment and specialty welding consumables to customers in the general industrial market including fabrication, shipbuilding, energy, construction, and capital goods industries. In addition, the company offers value-added welding data analytics that can be implemented to improve welding productivity. Organic welding revenue growth is highly reliant on overall levels of industrial activity in the United States and abroad.

Welding revenues typically track growth in overall industrial activity. U.S. industrial activity has remained near record highs throughout the past year. The following chart shows recent trends in the U.S. Industrial Production Index.

U.S. Industrial Production, 2007-Present

Source: Federal Reserve Economic Data (FRED)

Strength in U.S. industrial markets has been accompanied by growing worldwide industrial production. The following chart shows trends in the world industrial production index.

World Industrial Production Index, 1995-Q2 2017

Source: Yardeni Research

We predict that U.S. and worldwide industrial activity will continue to grow with the broader economy. In particular, we believe that industrial production will track economic growth at roughly 3% through 2019 and 2-2.5% in 2020 and 2021.

ITW targets 2-3% above-market growth in its Welding segment3. We believe that 1.5% above-market growth will achievable through 2019 due to economic strength and growing industrial activity. However, we predict that above-market growth will dissipate in 2020 and 2021 as the domestic and worldwide economies slow. Therefore, our model assumes that welding revenue will grow by 4.5% through 2019 and 2.5% thereafter through 2021.

Margins and Profitability

ITW has consistently expanded margins in recent years due to growing demand and internal cost cutting. The following chart shows the company’s margin performance in its last three fiscal years.

ITW Annual Margin Performance, 2014-2016

2014 2015 2016

Gross Margin 40.12% 41.16% 41.94%

Operating Margin 19.96% 21.40% 22.53%

Net Margin *20.34% 14.17% 14.96% *High net margin in 2014 due to income from discontinued operations

Source: ITW Annual Filings

We expect that margin growth will continue in the future as strong consumer demand is met with a continued focus on business structure simplification. Our model assumes that COGS and SG&A as a percentage of sales will each decrease by 0.5% in 2018, 0.25% in 2019, and 0.1% in 2020 and 2021.

The following chart shows our model’s final revenue and EPS estimates compared to analyst consensus estimates.

Revenue Estimate Summary ($mm)

2017E 2018E 2019E 2020E 2022E

Henry Fund Estimates

14,218 14,802 15,377 15,764 16,161

Analyst Consensus

14,213 14,773 15,207 15,803 16,707

Source: Bloomberg, Henry Fund Estimates

EPS Estimate Summary

2017E 2018E 2019E 2020E 2022E

Henry Fund Estimates

$6.67 $7.20 $7.84 $8.28 $8.73

Analyst Consensus

$6.60 $7.18 $7.73 $8.40 $9.32*

*Includes only one analyst estimate

Source: Bloomberg, Henry Fund Estimates

Company Analysis

ITW has fueled decades of profitable growth as a go-to problem solver for some of the largest industrial manufacturers in the world. The company boasts a

portfolio of over 17,000 granted or pending patents and continues to innovate new ways to apply known science.

Beginning in 2012, ITW instituted an enterprise strategy focused on an “80/20” management process, which aims to uniquely satisfy the needs of the company’s largest and most profitable customers while minimizing the cost, complexity and distractions of serving small customers. As part of this enterprise strategy, ITW has placed a renewed focus on organic growth that differs from the company’s historical strategy of M&A growth. The following chart shows the company’s organic revenue growth in recent years for each of its operating segments.

ITW Organic Revenue Growth, 2014-2016

2014 2015 2016

Automotive OEM 8.9% 5.8% 5.1%

Food Equipment 3.4% 3.4% 2.8%

Test, Measurement, and Electronics 1.5% -5.2% 1.8%

Specialty Products -0.3% -2.3% 1.2%

Construction Products 2.2% 3.7% 3.0%

Polymers & Fluids -1.2% -2.0% 1.3%

Welding 0.7% -7.6% -9.1%

Total Revenue 2.6% -0.4% 1.2%

Source: ITW Annual Filings

We believe that ITW will achieve particularly strong organic revenue growth through 2019, with more modest organic growth thereafter as economic growth slows. Our model only projects organic revenue growth and assumes that total revenue will grow at a rate of 4.6% in 2017, 4.1% in 2018, 3.9% in 2019 and 2.5% in 2020 and 2021.

The company’s “80/20” enterprise strategy has also allowed for margin expansion as the company focuses on its largest and most profitable customers. We expect margin expansion to continue throughout the forecast horizon, as the company continues to optimize its business structure and focus on its most profitable customers. Our model assumes that quarterly COGS as a percentage of sales will decline on a year-over-year basis by 50 basis points in Q4 2017 and fiscal 2018, 25 basis points in 2019, and 10 basis points in 2021 and 2021. In addition, we expect quarterly SG&A as a percentage of sales to decline by 50 basis points through the end of 2018, 25 basis points in 2019, and 10 basis points in 2020 and 2021. The following chart provides more information about historical margins and our model’s margin assumptions throughout the forecast horizon.

Historical and Projected Margins, 2014-2021E

Source: ITW Annual Filings, Henry Fund Estimates

ITW’s various business lines and broad customer base are key contributors to the company’s reputation as a steady and reliable industrial manufacturer. ITW has operated through over 100 years of economic cycles and is among the S&P 500 “Dividend Aristocrats” after growing its annual dividend for over 25 consecutive years. In addition to diverse product lines and end-market customers, the company benefits from a flexible capital structure with debt composing only 13% of enterprise value. This capital structure allowed the company to cover its annual interest expense by roughly 13 times in 2015 and 2016. In addition, ITW maintains a stable outlook from credit rating agencies and an A+ credit rating from S&P.

As mentioned, ITW has a long history of growing annual dividends each year. The company typically raises its dividend in the fourth quarter of each fiscal year. Our model assumes that dividends will grow by 3% in the fourth quarter of each year beginning in Q4 2018. Our model assumes that the higher dividend paid in each Q4 will be maintained throughout the first three quarters of the subsequent year. Our model also assumes that the company will return $1 billion to shareholders each year through share repurchases.

Overall, we believe that ITW has proven to be a stable operator within a diversified set of end-market industries. We believe that the company will continue to experience organic revenue growth and margin expansion throughout the forecast horizon, with particularly strong performance through 2019. However, we believe that a turning economic cycle will limit growth in 2020 and 2021.

RECENT DEVELOPMENTS

3Q 2017 Earnings Report

On October 23rd, 2017, ITW reported 3Q adjusted EPS of $1.714. This figure represented 3.7% outperformance over the analyst consensus EPS estimate of $1.65. The earnings outperformance was due largely due to a 4% increase in year-over-year revenue and an operating margin increase of 1.3% year-over-year. Organic revenue growth was positive in six of seven segments, including 5% growth in the company’s Specialty Products segment, 4% growth in Welding, and 4% growth in the Construction segment. ITW also raised its 2017 full-year EPS guidance to a range of $6.62 to $6.72, while including annual operating guidance of approximately 24.5%4.

Our model results in a full-year EPS estimate of $6.67 for 2017, which falls within management’s EPS guidance range. Our model assumes that 2017 operating margin will be 24.3%, only slightly less than management’s operating margin guidance of 24.5%. We believe that our EPS and operating margin estimates are appropriate given each figure’s proximity to management’s guidance through nine months of 2017.

Tax Reform Optimism

U.S. Industrials had a median effective tax rate of 31% in 2016, the fourth highest out of eleven sectors in the S&P 500 index6. The industry’s current tax burden brings significant optimism about potential tax reform. Industry optimism surrounding potential tax reform stems from proposals of 20% federal tax rates and the immediate write-off of depreciable assets. In 2016, ITW’s federal tax rate was 35% and the company paid an effective tax rate of roughly 30% after the effects of state taxes, non-taxable foreign income, and tax benefits provided to U.S. manufacturers.

Our model assumes that the company’s tax rate will remain at its 2016 effective rate throughout the forecast horizon. We believe that current tax reform proposals will face difficulty in gaining legislative approval and, if reform is accomplished, it will be with significant concessions that dilute the effects of tax reform for industrials operators.

INDUSTRY TRENDS

U.S. and Worldwide Economic Growth

The industrials sector has benefitted from domestic and international economic growth and strong industrial activity throughout 2017. Strengthening domestic and global economic indicators have particularly boosted investor optimism towards diversified industrial manufacturers, as these firms tend to be highly reliant on overall economic and industrial activity for growth.

We project that U.S. GDP will grow at an annual rate of roughly 3% through 2019, driving continued strength in industrial activity. We also expect international economies to remain strong through 2019. We project that U.S. and worldwide GDP growth will begin to slow in 2020 and 2021. In particular, we expect U.S. and worldwide GDP growth to slow to 2-2.5% annually in 2020 and 2021.

We believe that ITW will experience strong growth through 2019 due to domestic and international economic activity. However, we believe that revenue growth will slow beginning in 2020 due to a turning economic cycle. As such, our projections are less optimistic than analyst consensus estimates in 2020 and 2021.

Focus on Portfolio Optimization

Diversified industrials manufacturers have recently placed a strong emphasis on portfolio optimization as opposed to historical strategies of aggressive M&A growth. While M&A remains a growth driver within the industry, ITW and other others industry participants continue attempts to shift from low-margin, cyclical, commodity businesses to higher-growth, higher-margin businesses. In many cases, companies are seeking higher margins through technologically superior product offerings.

ITW has invested roughly $225 million annually in R&D since 2014, focused primarily on innovating products for the unique needs of the company’s largest customers. ITW’s targeted R&D efforts are backed by its “80/20” management strategy, which places a strong emphasis on serving customers at a local level. This strategy has been a key component of the company’s operating margin improving by over 6% since the strategy’s introduction in 2012. We believe that ITW’s customer-focused

operational strategy allows the company to respond rapidly to changing market dynamics and is a distinct advantage relative to industry peers. We believe that the company’s “80/20” management process and product portfolio optimization will enable further margin expansion throughout the forecast horizon (see company analysis section for more details about margin growth assumptions).

MARKETS AND COMPETITION

ITW offers a wide range of products and serves a diverse group of end markets, many of which are fragmented. The company’s competitors vary by product line, end market, and geographic area. In general, ITW’s competitors include numerous regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies1.

In each of its segments, ITW differentiates itself from competitors based on product innovation, product quality, brand preference, and service delivery1. These competitive dynamics have led larger industry competitors to focus on product portfolio optimization in recent years to shift from lower-margin, cyclical, commodity products to differentiated, higher growth, higher margin businesses. These business lines typically involve the introduction of technological advancements to traditional products. In response to this changing market dynamic, ITW has invested roughly $225 million annually in R&D spending since 2014.

The company’s current and prior investments in its product portfolio have resulted in industry-leading brands within each of ITW’s business segments. We believe that the company’s longstanding reputation and brand name recognition, coupled with its international footprint, provide a competitive advantage relative to smaller competitors. Our expectations for above-market growth in ITW’s segments point to growing market share and pricing power throughout the forecast horizon. We believe that these competitive advantages will allow for margin growth in the coming years, particularly through 2019.

Industry Life Cycle Stage

The diversified industrials industry is mature, as industry growth is highly reliant on overall economic activity. The industry has historically tapped into M&A markets to achieve growth above that of the underlying economy,

which we expect to continue in the future. However, we expect that M&A activity will become more selective and targeted during our forecast horizon. Many firms, including ITW, have pivoted to an internal growth strategy centered on portfolio optimization, penetration in existing markets, and internal cost discipline. Excluding a roughly $400 million acquisition in 2016, ITW’s M&A-related expenditures have trailed off in recent years due to the company’s new enterprise strategy implemented in 2012.

ITW Acquisition Activity, 2007-2016

Source: Bloomberg

We believe that ITW and other industry participants will continue to complete targeted acquisitions in the years to come. However, we do not include acquisition growth in our model due to the company’s focus on growing its internal business units.

We believe that diversified industrial manufacturers will remain reliant on overall economic activity for growth. Our model projects that ITW will achieve above-market growth through 2019 due to further implementation of its “80/20” enterprise strategy and growing market share. While we believe that ITW has above-market growth potential in the short-term, we believe that the industry’s maturity limits long-run growth potential to growth in the underlying economy.

Peer Comparisons

ITW is most directly comparable to several other large, U.S.-based, diversified industrial manufacturers. While the company’s peers cater towards a broad range of end markets, the industry tends to trade in unison based on underlying economic and industrial strength. Our analysis includes a peer group consisting of Eaton Corp. (ETN),

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Roper Technologies Inc. (ROP), Fortive Corp. (FTV), Parker Hannifin Corp. (PH), Ingersoll-Rand PLC (IR), and Dover Corp. (DOV). The following chart shows important operating and valuation statistics for ITW and its diversified industrials peers.

Peer Group Operating Statistics

Mkt. Cap ($B)

TTM Revenue

($B)

Gross Margin (TTM)

Operating Margin (TTM)

ITW 54.3 14.1 41.8% 23.4%

ETN 33.9 20.1 32.5% 12.6%

ROP 26.3 4.4 62.1% 27.5%

FTV 25.3 6.5 49.3% 21.2%

PH 23.9 12.7 24.3% 12.6%

IR 21.2 13.9 31.3% 12.3%

DOV 14.6 7.6 36.7% 12.2%

Source: Bloomberg

Peer Group Valuation Statistics

Forward P/E

Forward P/S

EV/EBITDA Dividend

Yield

ITW 22.3 3.6 14.9 1.8%

ETN 15.1 1.6 11.9 3.2%

ROP 20.9 5.3 19.3 0.6%

FTV 26.0 3.5 17.9 0.4%

PH 18.2 1.7 14.2 1.5%

IR 16.7 1.4 12.3 2.0%

DOV 23.0 1.8 13.2 1.9%

Average 20.3 2.7 14.8 1.6%

Source: Bloomberg

ITW leverages its strong product portfolio, existing customer relationships, and “80/20” enterprise strategy to achieve higher margins than most industry peers. ITW trails only ROP in terms of operating margin due to ROP’s focus on technologically advanced industrial automation products that command higher margins from customers. ITW’s strong margins are rewarded by investors in the market through the company’s above-average multiples relative to industry peers.

We believe that ITW’s premium relative to most diversified industrial peers is warranted based on the company’s history of stability and margin strength. We believe that the company will continue to command above-average

price multiples based on our expectations for strong organic growth and margin expansion through 2019.

ECONOMIC OUTLOOK

GDP

Source: U.S. Bureau of Economic Analysis

U.S. GDP grew at an annual rate of 3% in the third quarter of 2017 after growing at an annual rate of 3.1% in Q28. We project that U.S. GDP will grow by 3% annually through 2019, with slower growth at a rate of roughly 2-2.5% in 2020 and 2021.

GDP is an important economic indicator for ITW and other diversified industrial manufacturers whose revenue growth is highly correlated with overall economic activity. Our model’s projections for slower revenue growth in 2020 and 2021 are the result of our expectations for a slowing economy in these years. Our expectations for a peaking economic cycle in 2019 explains most our model’s deviation from analyst consensus in 2020 and 2021.

Interest Rates

Source: FRED

Interest rates have risen throughout 2017 due, in large part, to two Federal Reserve rate hikes. The target Federal Funds rate is currency 1-1.25% and 10-year treasury rates currently sit at roughly 2.4%9. We project that the Federal Reserve will increase the target rate once more in 2017

and twice in 2018, resulting in a target Fed Funds rate of 1.75-2% by the end of 2019. We expect 10-year treasury rates to rise to roughly 3.3-3.5% by the end of 2019.

Rising interest rates have the potential to disrupt further economic growth. However, we believe that the market is expecting these rate hikes in the near-term based on the Federal Reserve’s transparency concerning policy goals. Therefore, we do not expect short-term economic disruptions based on rising interest rates. However, we believe that economic growth will slow in 2020 due, in part, to higher interest rates slowing overall activity. As such, we expect weaker earnings growth for ITW towards the end of our five-year forecast horizon.

Industrial Production Index

Source: FRED

The U.S. industrial production index is a key indicator of strength in the overall industrials sector. U.S. industrial production reached all-time highs in November of 2014, but has remained near these all-time highs in recent months. According to the Federal Reserve, the U.S. Industrial Production Index was 104.6 in September of 201710.

We expect industrial production to remain strong in the near term, as firms benefit from continued economic growth. However, we believe that industrial production will begin to decline beginning in 2020. We believe that declining industrial production beginning in 2020 will decrease demand for ITW’s products, limit revenue and margin growth, and lead to less earnings growth in 2020 and 2021.

PMI Manufacturing Index

Source: Institute For Supply Management

The PMI manufacturing index compiled by the Institute for Supply Management is an indicator us U.S. manufacturing strength. PMI measured at 58.7% in October of 2017, a slight decrease from the September reading of 60.8%11. However, surveyed executives cited expanding business conditions that indicate the PMI figures will remain strong in the near-term.

We believe that the U.S. manufacturing sector will remain strong through 2019, as a growing economy and renewed support for U.S. manufacturing foster a favorable business environment. However, we believe that manufacturing strength will begin to trail off in 2020 due to a slowing economy. Due to these expectations, our model assumes more sluggish growth for ITW during the second half of our five-year forecast horizon.

INVESTMENT POSITIVES

• ITW has proven to be a diversified operator within a broad array of end-market industries, which has allowed for stability through numerous economic cycles and annual dividend growth for over 20 years

• We expect that ITW’s “80/20” management process will allow for continued organic growth and margin expansion

• We believe that organic growth and margin expansion will be particularly strong through 2019 due to our expectations for 3% growth in the underlying economy in the near-term

INVESTMENT NEGATIVES

• As a diversified industrial manufacturer, ITW’s growth potential is limited by the industry’s maturity and saturation of viable end market industries

• The company’s growth is extremely reliant on strength in domestic and international economies

• We believe that U.S. economic growth will slow beginning in 2020, which limits the company’s growth potential in the second half of our forecast horizon

VALUATION

Our revenue growth assumptions are derived from our quarterly, segment-specific revenue growth projections described throughout this report. Our segment-specific revenue growth projections result in projected total revenue growth of 4.6% in 2017, 4.1% in 2018, 3.9% in 2019, 2.5% in 2020 and 2021.

We project COGS as percentage of sales based on the company’s COGS as a percentage of sales in its latest fiscal year. Our model also includes quarterly declines in year-over-year COGS as a percentage of sales of 50 basis points through 2018, 25 basis points throughout 2019, and 10 basis points through 2021.

Our model’s SG&A as a percentage of sales figure is based on the company’s SG&A as a percentage of sales in its most recent fiscal year. Like COGS, our model includes our expectations that quarterly, year-over-year SG&A as a percentage of sales will decline by 50 basis points through 2018, 25 basis points in 2019, and 10 basis points throughout the remaining forecast horizon.

Depreciation and amortization expenses are projected based on historical depreciation rates of PP&E and amortization rates of intangibles. Interest expense is based on the firm’s estimated cost of debt and total debt included on the balance sheet.

Our model assumes that ITW will grow its dividend by 3% in the fourth quarter of every fiscal year beginning in Q4 2018. Our model assumes that ITW’s quarterly dividend will remain constant for the first three quarters of the next fiscal year before the dividend is again raised in the subsequent Q4. Our model also assumes that the company will repurchase $1 billion worth of shares in each year of the forecast horizon.

We assume that ITW will invest in capital expenditures for fixed assets at an annual rate of 2% of sales. This projection is based on ITW’s historical capex rate as a percentage of sales, which is typically around 2%.

ITW’s pretax cost of debt is estimated by adding an appropriate credit spread to the risk-free rate. The chosen credit spread is equal to the spread between the 30-year Treasury and 30-year cost of borrowing for A+ rated industrials firms (ITW is A+ rated by S&P).

We estimate the company’s cost of equity using the CAPM. We use the current 30-year treasury rate of 2.77% as a proxy for the risk-free rate. Our model assumes a beta of 1.077, which is ITW’s five-year weekly beta. We also assume a market risk premium of 4.8%.

Our DCF model yields a target price of $146.64 based on these assumptions. Relative valuation yields a target price of $147.17 based on P/E ratios of companies in ITW’s peer group and our model’s EPS estimates. We believe that the DCF model and relative valuation are the most appropriate measure of value for the firm. However, we also created a DDM model that yielded a target price of $137.39.

Our final target price of $145-150 is slightly below the analyst consensus target price of 161.12. Our target price is lower than analyst consensus mainly because of our expectations for a slowing economy in 2020 and 2021, which limit revenue growth near the end of our forecast horizon.

KEYS TO MONITOR

Moving forward, domestic and worldwide GDP growth will be an important factor in ITW’s operational success. We believe that U.S. GDP growth will remain strong at roughly 3% through 2019. However, we project that economic growth will slow to 2-2.5% by 2020. Longer-than-expected economic expansion would counteract important assumptions in our valuation model and point to undervaluation at our target price.

The results of U.S. corporate tax reform efforts will also be an important factor to monitor moving forward. We believe that proposed reforms will either be rejected or become less business-friendly throughout the legislative process. Therefore, our model assumes that ITW’s marginal tax rate will remain constant throughout the forecast horizon at the company’s 2016 tax rate. However,

a changing corporate tax rate would significantly affect our model’s final valuation.

Lastly, our model assumes that the company’s “80/20” management process will continue to decrease quarterly COGS and SG&A expenses (as a % of sales) by 50 basis points through 2018, 25 basis points in 2019, and 10 basis points in 2020 and 2021, respectively, on a year-over-year basis. These assumptions have a significant impact on our final valuation and the company’s quarterly margin performance should be closely monitored to assess the accuracy of our model’s margin assumptions.

REFERENCES

1. ITW 2016 20-K 2. IHS Markit: Automotive Industry Outlook (Oct. 2016) 3. ITW Investor Presentation (2016) 4. ITW Q3 2017 Earnings Call 5. Dodge Data & Analytics: 2018 Construction Outlook 6. Bloomberg 7. Ernst & Young Capital Insights: Diversified Industrials 8. U.S. Bureau of Economic Analysis (BEA) 9. U.S. Department of the Treasury: Daily Treasury Yield

Curve Rates 10. U.S. Federal Reserve 11. Institute for Supply Management: October PMI

Report 12. USDA Economic Research Serivce 13. Emerson Climate Technologies: Food Service

Forecast Through 2020 14. U.S. Census Bureau 15. Federal Reserve Economic Data (FRED) 16. Yardeni Research: Global Industrial Production

(Nov. 2017)

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures

included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

IllinoisToolWorks,Inc.RevenueDecomposition

Q42016 FY2016 Q12017 Q22017 Q32017 Q42017E FY2017E Q12018E Q22018E Q32018E Q42018E FY2018E Q12019E Q22019E Q32019E Q42019E FY2019EForthePeriodEnded 12/31/16 12/31/16 3/31/17 6/30/17 9/30/17 12/31/17 12/31/17 3/31/18 6/30/18 9/30/18 12/31/18 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19 12/31/19

RevenuebySegmentAutomotive OEM 773 2,864 828 820 795 804 3,247 869 861 835 844 3,409 904 895 868 878 3,546Food Equipment 532 2,110 497 529 549 553 2,128 517 550 571 575 2,213 538 572 594 598 2,302Test & Measurement and Electronics 487 1,974 480 519 525 511 2,035 502 542 549 534 2,127 524 567 573 558 2,223Specialty Products 456 1,885 463 490 498 470 1,921 477 505 513 484 1,978 491 520 528 498 2,038Construction Products 386 1,609 395 425 440 401 1,661 411 442 458 417 1,728 427 460 476 434 1,797Polymers & Fluids (Adhesives, Sealants, Lubrication & Cutting Fluids) 408 1,691 426 437 434 420 1,717 439 450 447 433 1,769 452 464 460 446 1,822Welding 361 1,486 387 385 378 377 1,527 404 402 395 394 1,596 423 420 413 412 1,668Intersegment Revenues (4) (20) (5) (6) (4) (4) (19) (5) (6) (4) (4) (18) (5) (6) (4) (4) (18)TotalRevenue 3,399 13,599 3,471 3,599 3,615 3,533 14,218 3,614 3,747 3,763 3,678 14,802 3,754 3,892 3,909 3,821 15,377

SegmentPercentageofTotalRevenueAutomotive OEM 22.74% 21.06% 23.85% 22.78% 21.99% 22.75% 22.84% 24.06% 22.98% 22.18% 22.95% 23.03% 24.08% 23.01% 22.21% 22.97% 23.06%Food Equipment 15.65% 15.52% 14.32% 14.70% 15.19% 15.66% 14.97% 14.30% 14.68% 15.17% 15.64% 14.95% 14.32% 14.70% 15.19% 15.66% 14.97%Test & Measurement and Electronics 14.33% 14.52% 13.83% 14.42% 14.52% 14.47% 14.32% 13.88% 14.48% 14.58% 14.53% 14.37% 13.96% 14.56% 14.67% 14.61% 14.45%Specialty Products 13.42% 13.86% 13.34% 13.61% 13.78% 13.29% 13.51% 13.20% 13.47% 13.63% 13.15% 13.36% 13.08% 13.36% 13.52% 13.04% 13.25%Construction Products 11.36% 11.83% 11.38% 11.81% 12.17% 11.36% 11.69% 11.37% 11.80% 12.16% 11.35% 11.67% 11.38% 11.81% 12.17% 11.36% 11.69%Polymers & Fluids 12.00% 12.43% 12.27% 12.14% 12.01% 11.89% 12.08% 12.14% 12.01% 11.88% 11.77% 11.95% 12.04% 11.91% 11.78% 11.67% 11.85%Welding 10.62% 10.93% 11.15% 10.70% 10.46% 10.68% 10.74% 11.19% 10.74% 10.50% 10.72% 10.78% 11.26% 10.80% 10.56% 10.78% 10.85%Intersegment Revenues -0.12% -0.15% -0.14% -0.17% -0.11% -0.11% -0.13% -0.13% -0.16% -0.10% -0.10% -0.12% -0.13% -0.15% -0.10% -0.10% -0.12%TotalRevenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

YoYGrowthAutomotive OEM 25.69% 13.25% 26.22% 22.39% 3.92% 4.00% 13.37% 5.00% 5.00% 5.00% 5.00% 5.00% 4.00% 4.00% 4.00% 4.00% 4.00%Food Equipment 0.00% 0.67% -0.40% -1.12% 0.92% 4.00% 0.87% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Test & Measurement and Electronics -2.60% 0.25% 3.45% 2.37% 1.74% 5.00% 3.11% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%Specialty Products -0.44% 0.00% -1.07% 1.24% 4.40% 3.00% 1.89% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Construction Products 2.12% 1.39% 2.86% 0.24% 6.02% 4.00% 3.26% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%Polymers & Fluids (Adhesives, Sealants, Lubrication & Cutting Fluids) 1.49% -1.23% 1.91% -1.35% 2.84% 3.00% 1.55% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%Welding -8.61% -9.94% -0.51% 2.67% 4.71% 4.50% 2.78% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%Intersegment Revenues -20.00% -13.04% 25.00% -14.29% -20.00% -3.00% -5.60% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00% -3.00%TotalRevenue 3.79% 1.45% 6.02% 4.90% 3.43% 3.95% 4.55% 4.12% 4.11% 4.09% 4.11% 4.11% 3.88% 3.88% 3.88% 3.88% 3.88%

IllinoisToolWorks,Inc.IncomeStatement

Q42016 Q12017 Q22017 Q32017 Q42017E Q12018E Q22018E Q32018E Q42018E Q12019E Q22019E Q32019E Q42019EForthePeriodEnded 12/31/16 3/31/17 6/30/17 9/30/17 12/31/17 3/31/18 6/30/18 9/30/18 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19

Revenue 3,399 3,471 3,599 3,615 3,533 3,614 3,747 3,763 3,678 3,754 3,892 3,909 3,821CostofGoodsSold 2,006 2,004 2,087 2,094 2,068 2,068 2,154 2,161 2,134 2,139 2,228 2,235 2,207GrossProfit 1,393 1,467 1,512 1,521 1,466 1,545 1,593 1,602 1,544 1,615 1,664 1,674 1,614DepreciationExpense 64 61 62 65 66 65 66 67 67 66 67 68 69AmortizationExpense 54 53 52 51 48 46 45 44 41 40 39 38 36SellingGeneralandAdministrativeExpenses 533 544 524 524 536 548 527 527 540 560 538 537 551LitigationExpense(Income) - - - (80) - - - - - - - - -OperatingIncome 742 809 874 961 815 886 955 964 896 949 1,021 1,030 958Loss/(Recovery)onImpairofIntangibleAssets - - - - - - - - - - - - -InterestExpense 63 64 65 65 76 74 74 76 77 74 76 77 77OtherNon-OperatingExpenses(Income) (47) (4) (10) (10) (15) (16) (16) (16) (16) (16) (17) (17) (17)IncomeBeforeIncomeTaxes 726 749 819 906 754 828 898 905 835 891 962 970 897IncomeTaxExpense(Benefit) 219 213 232 266 221 243 264 266 245 262 282 285 263IncomeBeforeExtraordinaryItems 507 536 587 640 533 585 634 639 590 629 680 685 634Loss(Benefit)fromDiscontinuedOperations - - - - - - - - - - - - -NetIncome 507 536 587 640 533 585 634 639 590 629 680 685 634

PeriodEndSharesOutstanding 351 346 345 344 343 341 340 339 338 336 335 334 333

WeightedAverageShares-Basic 348 346 345 343 343 342 341 339 338 337 336 335 333BasicEarningsPerShare($) 1.46 1.55 1.70 1.86 1.55 1.71 1.86 1.88 1.74 1.87 2.02 2.05 1.90DividendsPerShare 0.65 0.65 0.65 0.78 0.78 0.80 0.80 0.80 0.80 0.83 0.83 0.83 0.83

IllinoisToolWorks,Inc.BalanceSheet

Q42016 Q12017 Q22017 Q32017 Q42017E Q12018E Q22018E Q32018E Q42018E Q12019E Q22019E Q32019E Q42019EForthePeriodEnded 12/31/16 3/31/17 6/30/17 9/30/17 12/31/17 3/31/18 6/30/18 9/30/18 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19

CurrentAssetsCashandEquivalents 2,472 2,493 2,496 2,785 2,748 2,889 3,078 3,215 3,287 3,456 3,685 3,860 3,969AccountsReceivable-Trade 2,357 2,534 2,629 2,672 2,450 2,638 2,737 2,781 2,551 2,741 2,843 2,889 2,650Inventories 1,076 1,158 1,199 1,225 1,119 1,206 1,248 1,275 1,164 1,252 1,297 1,325 1,210PrepaidExpensesandOther 218 245 246 230 250 256 265 266 260 266 275 276 270DeferredIncomeTaxAsset(Short-Term) - - - - - - - - - - - - -AssetsHeldForSale - - - - - - - - - - - - -TotalCurrentAssets 6,123 6,430 6,570 6,912 6,567 6,988 7,328 7,537 7,263 7,715 8,100 8,350 8,098NoncurrentAssetsLongTermInvestments - - - - - - - - - - - - -PropertyPlant&Equipment-Net 1,652 1,674 1,726 1,759 1,764 1,771 1,780 1,788 1,795 1,803 1,814 1,824 1,832DeferredIncomeTaxAsset(Long-Term) 449 425 488 473 458 443 428 413 398 383 368 353 338OtherIntangibleAssets 1,463 1,411 1,366 1,319 1,271 1,225 1,180 1,136 1,094 1,055 1,016 978 942Goodwill 4,558 4,605 4,675 4,732 4,732 4,732 4,732 4,732 4,732 4,732 4,732 4,732 4,732OtherNoncurrentAssets 956 984 1,097 1,119 1,120 1,145 1,188 1,193 1,166 1,190 1,234 1,239 1,211TotalNoncurrentAssets 9,078 9,099 9,352 9,402 9,344 9,316 9,307 9,262 9,185 9,163 9,164 9,126 9,055TotalAssets 15,201 15,529 15,922 16,314 15,911 16,304 16,635 16,799 16,447 16,878 17,264 17,477 17,154

CurrentLiabilitiesAccountsPayable-Trade 511 574 582 585 531 598 606 609 553 621 629 633 574Short-TermBorrowings 652 671 691 698 648 696 721 734 675 723 749 762 701AccruedExpenses 1,202 1,149 1,172 1,231 1,197 1,225 1,270 1,275 1,246 1,272 1,319 1,325 1,295DividendsAccrued/Payable 226 225 224 267 222 244 265 267 246 263 284 286 264OtherCurrentLiabilities - - - - - - - - - - - - -DeferredIncomeTaxLiability(Short-Term) - - - - - - - - - - - - -IncomeTaxesAccrued/Payable 169 256 157 86 72 79 85 86 79 85 91 92 85TotalCurrentLiabilities 2,760 2,875 2,826 2,867 2,670 2,840 2,947 2,970 2,799 2,963 3,073 3,097 2,920NonCurrentLiabilitiesLongTermDebt 7,177 7,205 7,360 7,439 7,243 7,382 7,460 7,475 7,241 7,385 7,472 7,492 7,255DeferredIncomeTaxes(Liabilities) 134 121 121 112 103 94 85 76 67 58 49 40 31OtherNoncurrentLiabilities 871 830 841 870 840 859 891 895 875 893 926 930 909TotalNoncurrentLiabilities 8,182 8,156 8,322 8,421 8,186 8,335 8,436 8,446 8,183 8,336 8,447 8,462 8,195TotalLiabilities 10,942 11,031 11,148 11,288 10,856 11,176 11,383 11,416 10,983 11,299 11,519 11,559 11,115StockholderEquityCommonStock 1,199 1,195 1,205 1,216 1,229 1,243 1,256 1,269 1,283 1,296 1,309 1,322 1,336TreasuryStock (14,638) (14,871) (15,095) (15,336) (15,586) (15,836) (16,086) (16,336) (16,586) (16,836) (17,086) (17,336) (17,586)AccumulatedOtherComprehensiveIncome (1,807) (1,643) (1,516) (1,407) (1,407) (1,407) (1,407) (1,407) (1,407) (1,407) (1,407) (1,407) (1,407)RetainedEarnings 19,505 19,817 20,180 20,553 20,818 21,129 21,490 21,857 22,175 22,526 22,929 23,338 23,696TotalShareholdersEquity 4,259 4,498 4,774 5,026 5,055 5,128 5,253 5,383 5,465 5,579 5,745 5,917 6,039TotalLiabilitiesandShareholdersEquity 15,201 15,529 15,922 16,314 15,911 16,304 16,635 16,799 16,447 16,878 17,264 17,477 17,154

IllinoisToolWorks,Inc.CashFlowStatement

Q42016 Q12017 Q22017 Q32017ForthePeriodEnded 12/31/16 3/31/17 6/30/17 9/30/17

CashfromOperatingActivitiesNetIncome 507 536 587 640Depreciation&Amortization 118 114 114 116Stock-BasedCompensation 8 9 10 8DeferredIncomeTaxes (35) 20 3 32OtherNon-CashAdj (23) 2 (6) -(Inc)DecinAcctsReceiv 66 (148) (38) (11)(Inc)DecinInventories 56 (67) (15) (11)Inc(Dec)inAcctsPayable (26) 56 (9) (6)Inc(Dec)inOther (7) (59) (182) 12NetCashFromDiscOps - - - -CashfromOperatingActivities 664 463 464 780

CashfromInvestingActivitiesDispofFixedProdAssets 5 3 - 5AcqofFixedProdAssets (71) (64) (77) (78)CashfromDivestitures 2 - 2 -CashforAcqofSubs 3 (3) - -OtherInvestingActivities 166 7 10 1NetCashFromDiscOps - - - -CashfromInvestingActivities 105 (57) (65) (72)

CashfromFinancingActivitiesDividendsPaid (228) (226) (224) (224)CashFrom(Repay)STDebt (714) 671 20 6CashFromLTDebt 991 - - -RepaymentsofLTDebt -(652) - -IncreaseinCapitalStock 14 18 27 13DecreaseinCapitalStock (518) (250) (250) (250)OtherFinancingActivities (1) (11) (2) -NetCashFromDiscOps - - - -CashfromFinancingActivities (456) (450) (429) (455)

EffectofForeignExchangeRates (140) 65 33 36

NetChangesinCash 173 21 3 289

IllinoisToolWorks,Inc.ForecastedCashFlowStatement

Q42017E Q12018E Q22018E Q32018E Q42018E Q12019E Q22019E Q32019E Q42019EForthePeriodEnded 12/31/17 3/31/18 6/30/18 9/30/18 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19

NetIncome 533 585 634 639 590 629 680 685 634DepreciationExpense 66 65 66 67 67 66 67 68 69AmortizationExpense 48 46 45 44 41 40 39 38 36AccountsReceivable-Trade 222 (188) (99) (44) 231 (190) (103) (46) 239Inventories 106 (87) (43) (27) 111 (88) (44) (28) 115PrepaidExpensesandOther (20) (6) (9) (1) 6 (5) (10) (1) 6DeferredIncomeTaxAsset(Short-Term) - - - - - - - - -AssetsHeldForSale - - - - - - - - -DeferredIncomeTaxAsset(Long-Term) 15 15 15 15 15 15 15 15 15AccountsPayable-Trade (54) 66 8 3 (56) 68 9 3 (58)AccruedExpenses (34) 27 45 5 (29) 26 47 6 (30)OtherCurrentLiabilities - - - - - - - - -DeferredIncomeTaxLiability(Short-Term) - - - - - - - - -IncomeTaxesAccrued/Payable (14) 7 7 1 (7) 5 7 1 (7)DeferredIncomeTaxes(Liabilities) (9) (9) (9) (9) (9) (9) (9) (9) (9)NetCashFromOperatingActivities 859 522 660 693 960 557 697 732 1,010

Long-TermInvestments - - - - - - - - -CapitalExpenditures (71) (72) (75) (75) (74) (75) (78) (78) (76)Goodwill - - - - - - - - -OtherNoncurrentAssets (1) (26) (42) (5) 27 (24) (44) (5) 28NetCashFromInvestingActivities (72) (98) (117) (80) (47) (99) (122) (83) (49)

Short-TermBorrowings (50) 48 26 12 (59) 48 27 13 (61)DividendsAccrued/Payable (45) 22 21 2 (21) 16 21 2 (22)LongTermDebt (196) 139 78 15 (233) 144 87 21 (237)OtherNoncurrentLiabilities (30) 19 32 4 (20) 18 33 4 (21)ESOPExercises 13 13 13 13 13 13 13 13 13PurchaseofTreasuryStock (250) (250) (250) (250) (250) (250) (250) (250) (250)DividendsPaid (267) (274) (273) (272) (271) (278) (277) (276) (275)AccumulatedOtherComprehensiveIncome - - - - - - - - -NetCashFromFinancingActivities (825) (283) (354) (476) (841) (289) (347) (473) (853)

NetChangeinCash (37) 140 189 137 73 169 228 175 108

CashandEquivalentsatBeginningofPeriod 2,785 2,748 2,889 3,078 3,215 3,287 3,456 3,685 3,860CashandEquivalentsatEndofPeriod 2,748 2,889 3,078 3,215 3,287 3,456 3,685 3,860 3,969

IllinoisToolWorks,Inc.AnnualizedIncomeStatement

FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E FY2020E FY2021EForthePeriodEnded 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21

Revenue 14,484 13,405 13,599 14,218 14,802 15,377 15,764 16,161CostofGoodsSold 8,673 7,888 7,896 8,253 8,518 8,810 9,016 9,227GrossProfit 5,811 5,517 5,703 5,966 6,285 6,567 6,748 6,935DepreciationExpense 262 244 246 254 265 270 276 282AmortizationExpense 242 231 224 204 177 152 131 113SellingGeneralandAdministrativeExpenses 2,416 2,173 2,169 2,128 2,142 2,186 2,226 2,266LitigationExpense(Income) - - - (80) - - - -OperatingIncome 2,891 2,869 3,064 3,459 3,701 3,959 4,116 4,274Loss/(Recovery)onImpairofIntangibleAssets 3 2 - - - - - -InterestExpense 250 226 237 270 300 305 305 306OtherNon-OperatingExpenses(Income) (61) (78) (81) (39) (64) (67) (69) (70)IncomeBeforeIncomeTaxes 2,699 2,719 2,908 3,228 3,465 3,721 3,879 4,039IncomeTaxExpense(Benefit) 809 820 873 932 1,017 1,092 1,139 1,186IncomeBeforeExtraordinaryItems 1,890 1,899 2,035 2,296 2,448 2,628 2,740 2,853Loss(Benefit)fromDiscontinuedOperations (1,056) - - - - - - -NetIncome 2,946 1,899 2,035 2,296 2,448 2,628 2,740 2,853

PeriodEndSharesOutstanding 391 363 351 343 338 333 328 325BasicEarningsPerShare($) 7.32 5.16 5.73 $6.67 $7.20 $7.84 $8.29 $8.74DividendsPerShare 1.82 2.01 2.30 2.86 3.21 3.31 3.41 3.51

IllinoisToolWorks,Inc.AnnualizedBalanceSheet


CurrentAssetsCashandEquivalents 3,990 3,090 2,472 2,748 3,287 3,969 4,716 5,579AccountsReceivable-Trade 2,293 2,203 2,357 2,450 2,551 2,650 2,717 2,785Inventories 1,180 1,086 1,076 1,119 1,164 1,210 1,240 1,271PrepaidExpensesandOther 401 341 218 250 260 270 277 284DeferredIncomeTaxAsset(Short-Term) - - - - - - - -AssetsHeldForSale - - - - - - - -TotalCurrentAssets 7,864 6,720 6,123 6,567 7,263 8,098 8,950 9,920NoncurrentAssets - - - - - - - -LongTermInvestments - - - - - - - -PropertyPlant&Equipment-Net 1,686 1,577 1,652 1,764 1,795 1,832 1,872 1,913DeferredIncomeTaxAsset(Long-Term) 338 346 449 458 398 338 278 218OtherIntangibleAssets 1,799 1,560 1,463 1,271 1,094 942 811 698Goodwill 4,667 4,439 4,558 4,732 4,732 4,732 4,732 4,732OtherNoncurrentAssets 1,111 1,087 956 1,120 1,166 1,211 1,242 1,273TotalNoncurrentAssets 9,601 9,009 9,078 9,344 9,185 9,055 8,935 8,835TotalAssets 17,465 15,729 15,201 15,911 16,447 17,154 17,884 18,755

CurrentLiabilities - - - - - - - -AccountsPayable-Trade 512 449 511 531 553 574 589 604Short-TermBorrowings 1,476 526 652 648 675 701 719 737AccruedExpenses 1,287 1,136 1,202 1,197 1,246 1,295 1,327 1,361DividendsAccrued/Payable 186 200 226 222 246 264 276 287OtherCurrentLiabilities - - - - - - - -DeferredIncomeTaxLiability(Short-Term) - - - - - - - -IncomeTaxesAccrued/Payable 64 57 169 72 79 85 89 92TotalCurrentLiabilities 3,525 2,368 2,760 2,670 2,799 2,920 3,000 3,081NonCurrentLiabilitiesLongTermDebt 5,943 6,896 7,177 7,243 7,241 7,255 7,246 7,250DeferredIncomeTaxes(Liabilities) 171 256 134 103 67 31 - -OtherNoncurrentLiabilities 1,002 981 871 840 875 909 932 955TotalNoncurrentLiabilities 7,116 8,133 8,182 8,186 8,183 8,195 8,178 8,205TotalLiabilities 10,641 10,501 10,942 10,856 10,983 11,115 11,177 11,286StockholderEquity - - - - - - - -CommonStock 1,107 1,145 1,199 1,229 1,283 1,336 1,389 1,442TreasuryStock (10,798) (12,729) (14,638) (15,586) (16,586) (17,586) (18,586) (19,586)AccumulatedOtherComprehensiveIncome (658) (1,504) (1,807) (1,407) (1,407) (1,407) (1,407) (1,407)RetainedEarnings 17,173 18,316 19,505 20,818 22,175 23,696 25,311 27,019TotalShareholdersEquity 6,824 5,228 4,259 5,055 5,465 6,039 6,707 7,469TotalLiabilitiesandShareholdersEquity 17,465 15,729 15,201 15,911 16,447 17,154 17,884 18,755

IllinoisToolWorks,Inc.AnnualizedCashFlowStatement

FY2014 FY2015 FY2016ForthePeriodEnded 12/31/14 12/31/15 12/31/16

CashfromOperatingActivitiesNetIncome 2,946 1,899 2,035Depreciation&Amortization 507 477 470Stock-BasedCompensation 39 41 39DeferredIncomeTaxes 55 (11) (263)OtherNon-CashAdj (54) (1) (17)(Inc)DecinAcctsReceiv (70) (42) (132)(Inc)DecinInventories (10) 25 9Inc(Dec)inAcctsPayable (20) (30) (3)Inc(Dec)inOther (59) (59) 164NetCashFromDiscOps (1,718) - -CashfromOperatingActivities 1,616 2,299 2,302

CashfromInvestingActivitiesDispofFixedProdAssets 28 30 16AcqofFixedProdAssets (361) (284) (273)CashfromDivestitures 18 29 3CashforAcqofSubs (45) (6) (453)OtherInvestingActivities 11 21 175NetCashFromDiscOps 3,191 - -CashfromInvestingActivities 2,842 (210) (532)

CashfromFinancingActivitiesDividendsPaid (711) (742) (821)CashFrom(Repay)STDebt (239) (946) (526)CashFromLTDebt 3,329 1,099 992RepaymentsofLTDebt (1,751) (2) (1)IncreaseinCapitalStock 181 79 113DecreaseinCapitalStock (4,346) (2,002) (2,000)OtherFinancingActivities (14) (12) (12)NetCashFromDiscOps - - -CashfromFinancingActivities (3,551) (2,526) (2,255)

EffectofForeignExchangeRates (535) (463) (133)

NetChangesinCash 372 (900) (618)

Acqoffixedassetsas%ofsales -2.49% -2.12% -2.01%

IllinoisToolWorks,Inc.Common-SizeIncomeStatement

FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E FY2020E FY2021E

ForthePeriodEnded 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21

Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%CostofGoodsSold 59.88% 58.84% 58.06% 58.04% 57.54% 57.29% 57.19% 57.09%GrossProfit 40.12% 41.16% 41.94% 41.96% 42.46% 42.71% 42.81% 42.91%DepreciationExpense 1.81% 1.82% 1.81% 1.79% 1.79% 1.76% 1.75% 1.74%AmortizationExpense 1.67% 1.72% 1.65% 1.44% 1.19% 0.99% 0.83% 0.70%SellingGeneralandAdministrativeExpenses 16.68% 16.21% 15.95% 14.97% 14.47% 14.22% 14.12% 14.02%LitigationExpense(Income) 0.00% 0.00% 0.00% -0.56% 0.00% 0.00% 0.00% 0.00%OperatingIncome 19.96% 21.40% 22.53% 24.33% 25.00% 25.74% 26.11% 26.45%Loss/(Recovery)onImpairofIntangibleAssets 0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%InterestExpense 1.73% 1.69% 1.74% 1.90% 2.03% 1.98% 1.94% 1.89%OtherNon-OperatingExpenses(Income) -0.42% -0.58% -0.60% -0.28% -0.43% -0.43% -0.43% -0.43%IncomeBeforeIncomeTaxes 18.63% 20.28% 21.38% 22.70% 23.41% 24.20% 24.61% 24.99%IncomeTaxExpense(Benefit) 5.59% 6.12% 6.42% 6.56% 6.87% 7.10% 7.22% 7.34%IncomeBeforeExtraordinaryItems 13.05% 14.17% 14.96% 16.15% 16.54% 17.09% 17.38% 17.65%Loss(Benefit)fromDiscontinuedOperations -7.29% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%NetIncome 20.34% 14.17% 14.96% 16.15% 16.54% 17.09% 17.38% 17.65%

IllinoisToolWorks,Inc.Common-SizeBalanceSheet


CurrentAssetsCashandEquivalents 27.55% 23.05% 18.18% 19.33% 22.21% 25.81% 29.92% 34.52%AccountsReceivable-Trade 15.83% 16.43% 17.33% 17.23% 17.23% 17.23% 17.23% 17.23%Inventories 8.15% 8.10% 7.91% 7.87% 7.87% 7.87% 7.87% 7.87%PrepaidExpensesandOther 2.77% 2.54% 1.60% 1.76% 1.76% 1.76% 1.76% 1.76%DeferredIncomeTaxAsset(Short-Term) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%AssetsHeldForSale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%TotalCurrentAssets 54.29% 50.13% 45.03% 46.19% 49.07% 52.67% 56.77% 61.38%NoncurrentAssetsLongTermInvestments 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%PropertyPlant&Equipment-Net 11.64% 11.76% 12.15% 12.40% 12.12% 11.91% 11.87% 11.84%DeferredIncomeTaxAsset(Long-Term) 2.33% 2.58% 3.30% 3.22% 2.69% 2.20% 1.76% 1.35%OtherIntangibleAssets 12.42% 11.64% 10.76% 8.94% 7.39% 6.13% 5.15% 4.32%Goodwill 32.22% 33.11% 33.52% 33.28% 31.97% 30.77% 30.02% 29.28%OtherNoncurrentAssets 7.67% 8.11% 7.03% 7.88% 7.88% 7.88% 7.88% 7.88%TotalNoncurrentAssets 66.29% 67.21% 66.75% 65.72% 62.05% 58.89% 56.68% 54.67%TotalAssets 120.58% 117.34% 111.78% 111.91% 111.11% 111.56% 113.45% 116.05%

CurrentLiabilitiesAccountsPayable-Trade 3.53% 3.35% 3.76% 3.74% 3.74% 3.74% 3.74% 3.74%Short-TermBorrowings 10.19% 3.92% 4.79% 4.56% 4.56% 4.56% 4.56% 4.56%AccruedExpenses 8.89% 8.47% 8.84% 8.42% 8.42% 8.42% 8.42% 8.42%DividendsAccrued/Payable 1.28% 1.49% 1.66% 1.56% 1.66% 1.72% 1.75% 1.78%OtherCurrentLiabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%DeferredIncomeTaxLiability(Short-Term) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%IncomeTaxesAccrued/Payable 0.44% 0.43% 1.24% 0.50% 0.54% 0.55% 0.56% 0.57%TotalCurrentLiabilities 24.34% 17.67% 20.30% 18.78% 18.91% 18.99% 19.03% 19.06%NonCurrentLiabilitiesLongTermDebt 41.03% 51.44% 52.78% 50.94% 48.92% 47.18% 45.96% 44.86%DeferredIncomeTaxes(Liabilities) 1.18% 1.91% 0.99% 0.72% 0.45% 0.20% 0.00% 0.00%OtherNoncurrentLiabilities 6.92% 7.32% 6.40% 5.91% 5.91% 5.91% 5.91% 5.91%TotalNoncurrentLiabilities 49.13% 60.67% 60.17% 57.57% 55.28% 53.29% 51.87% 50.77%TotalLiabilities 73.47% 78.34% 80.46% 76.36% 74.20% 72.28% 70.90% 69.83%StockholderEquityCommonStock 7.64% 8.54% 8.82% 8.65% 8.66% 8.69% 8.81% 8.92%TreasuryStock -74.55% -94.96% -107.64% -109.62% -112.05% -114.37% -117.90% -121.19%AccumulatedOtherComprehensiveIncome -4.54% -11.22% -13.29% -9.90% -9.51% -9.15% -8.93% -8.71%RetainedEarnings 118.57% 136.64% 143.43% 146.42% 149.81% 154.10% 160.56% 167.18%TotalShareholdersEquity 47.11% 39.00% 31.32% 35.55% 36.92% 39.27% 42.55% 46.21%TotalLiabilitiesandShareholdersEquity 120.58% 117.34% 111.78% 111.91% 111.11% 111.56% 113.45% 116.05%

IllinoisToolWorks,Inc.ValueDriverEstimation


EBITARevenue 14,484 13,405 13,599 14,218 14,802 15,377 15,764 16,161CostofGoodsSold 8,673 7,888 7,896 8,253 8,518 8,810 9,016 9,227DepreciationExpense 262 244 246 254 265 270 276 282AmortizationExpense 242 231 224 204 177 152 131 113SellingGeneralandAdministrativeExpenses 2,416 2,173 2,169 2,128 2,142 2,186 2,226 2,266ImpliedInterestonOperatingLeaseObligations 11 10 11 12 12 13 13 14Loss(Benefit)fromDiscontinuedOperations (1,056) - - - - - - -EBITA 1,824 2,859 3,053 3,367 3,689 3,946 4,102 4,260

AdjustedTaxesFederalTaxRate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%StateTaxRate 1.6% 1.4% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%DifferencesBetweenFederalandStateTaxRates -3.5% -3.1% -3.6% -3.6% -3.6% -3.6% -3.6% -3.6%NontaxableForeignInterestIncome -3.6% -3.3% -2.1% -2.1% -2.1% -2.1% -2.1% -2.1%TaxEffectofForeignDividends 2.1% 2.8% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%TaxReliefforU.S.Manufacturers -1.5% -1.6% -1.4% -1.4% -1.4% -1.4% -1.4% -1.4%Other,Net -0.1% -1.1% -0.7% -0.7% -0.7% -0.7% -0.7% -0.7%MarginalTaxRate 30.0% 30.1% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

IncomeTaxExpense 809 820 873 932 1,017 1,092 1,139 1,186

PlusTaxShieldonLitigationExpense - - - (24) - - - -

PlusTaxShieldonLossonImparimentofIntangibles 1 1 - - - - - -

PlusTaxShieldonInterestExpense 75 68 71 81 90 91 92 92

PlusTaxShieldonOtherNon-OperatingExpenses (18) (23) (24) (12) (19) (20) (21) (21)

PlusTaxonLeaseInterest 3 3 3 4 4 4 4 4

TotalAdjustedTaxes 870 868 923 981 1,092 1,168 1,214 1,261

PlusChangeinDeferredTaxes 59 77 (225) (40) 24 24 29 60

NOPLAT 1,013 2,068 1,904 2,346 2,621 2,802 2,917 3,060

NetOperatingWorkingCapitalCashandEquivalents 3,990 3,090 2,472 2,748 3,287 3,969 4,716 5,579

PlusAccountsReceivable-Trade 2,293 2,203 2,357 2,450 2,551 2,650 2,717 2,785

PlusInventories 1,180 1,086 1,076 1,119 1,164 1,210 1,240 1,271

PlusPrepaidExpensesandOther 401 341 218 250 260 270 277 284

MinusAccountsPayable-Trade 512 449 511 531 553 574 589 604

MinusAccruedExpenses 1,287 1,136 1,202 1,197 1,246 1,295 1,327 1,361

MinusDividendsAccrued/Payable 186 200 226 222 246 264 276 287

MinusOtherCurrentLiabilities - - - - - - - -

MinusIncomeTaxesAccrued/Payable 64 57 169 72 79 85 89 92

NetOperatingWorkingCapital 5,815 4,878 4,015 4,545 5,138 5,879 6,669 7,576PlusNetPP&E 1,686 1,577 1,652 1,764 1,795 1,832 1,872 1,913

PlusOtherIntangibleAssets 1,799 1,560 1,463 1,271 1,094 942 811 698

PlusOtherNoncurrentAssets 1,111 1,087 956 1,120 1,166 1,211 1,242 1,273

PlusCapitalizedPVofOperatingLeases 305 270 305 319 330 344 359 376

MinusOtherNoncurrentLiabilities 1,002 981 871 840 875 909 932 955

NetInvestedCapital 9,714 8,391 7,520 8,178 8,648 9,300 10,021 10,881

ROICNOPLAT 1,013 2,068 1,904 2,346 2,621 2,802 2,917 3,060BeginningIC 9,445 9,714 8,391 7,520 8,178 8,648 9,300 10,021ROIC 10.7% 21.3% 22.7% 31.2% 32.0% 32.4% 31.4% 30.5%

FCFNOPLAT 1,013 2,068 1,904 2,346 2,621 2,802 2,917 3,060

MinusChangeinIC 268 (1,323) (871) 658 470 652 720 861

FCF 744 3,391 2,775 1,688 2,151 2,150 2,197 2,199

EPBeginningInvestedCapital 9,445 9,714 8,391 7,520 8,178 8,648 9,300 10,021ROIC 10.7% 21.3% 22.7% 31.2% 32.0% 32.4% 31.4% 30.5%WACC 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%EP 331 1,366 1,299 1,803 2,031 2,178 2,246 2,336

IllinoisToolWorks,Inc.WeightedAverageCostofCapital(WACC)Estimation

Pre-TaxCostofDebt 3.75%MarginalTaxRate 29.36%After-TaxCostofDebt 2.65%TotalDebt 8,137,000,000PVofOperatingLeases 305,006,710MarketValueofDebt 8,442,006,710

30-YearTreasuryRate 2.77%Beta 1.077MarketRiskPremium 4.80%CostofEquity 7.94%SharesOutstanding 344,149,000SharePrice $155.85MarketValueofEquity 53,635,621,650

EnterpriseValue 62,077,628,360Debt/EnterpriseValue 13.60%Equity/EnterpriseValue 86.40%WACC 7.22%

IllinoisToolWorks,Inc.DiscountedCashFlow(DCF)andEconomicProfit(EP)ValuationModels

KeyInputs:CVGrowth 3.00%CVROIC 30.53%WACC 7.22%CostofEquity 7.94%

FiscalYearsEndingDec.31 2017E 2018E 2019E 2020E 2021E

DCFModelNOPLAT 2,346 2,621 2,802 2,917 3,060BeginningIC 7,520 8,178 8,648 9,300 10,021EndingIC 8,178 8,648 9,300 10,021 10,881ChangeinIC 658 470 652 720 861FCF 1,688 2,151 2,150 2,197 2,199TerminalValue 65,375

PVofFCF 1,574 1,871 1,744 1,662 49,466

ValueofOperatingAssets 56,317

MinusTotalDebt 8,137

MinusPVofOperatingLeases 305

MinusPensionandOtherPostretirementLiability 338

MinusPVofESOP 330

ValueofEquity 47,207SharesOutstanding 344IntrinsicValuePerShare(12/31/16) $137.17IntrinsicValuePerShareToday $146.64

EPModelNOPLAT 2,346 2,621 2,802 2,917 3,060BeginningIC 7,520 8,178 8,648 9,300 10,021ROIC-WACC 24.0% 24.8% 25.2% 24.1% 23.3%EP 1,803 2,031 2,178 2,246 2,336TerminalValue 55,354

PVofEP 1,681 1,766 1,767 1,699 41,884

TotalPVofEP 48,797PlusBeginningIC 7,520ValueofOperatingAssets 56,317

MinusTotalDebt 8,137

MinusPVofOperatingLeases 305

MinusPensionandOtherPostretirementLiability 338

MinusPVofESOP 330

ValueofEquity 47,207SharesOutstanding 344IntrinsicValuePerShare(12/31/16) $137.17IntrinsicValuePerShareToday $146.64

IllinoisToolWorks,Inc.DividendDiscountModel(DDM)orFundamentalP/EValuationModel

FiscalYearsEndingDec.31 2017E 2018E 2019E 2020E 2021E

EPS $6.67 $7.20 $7.84 $8.29 $8.74

KeyAssumptionsCVgrowth 3.00%CVROE 40.25%CostofEquity 7.94%

FutureCashFlowsP/EMultiple(CVYear) 18.74EPS(CVYear) $8.74FutureStockPrice $163.73DividendsPerShare $2.86 $3.21 $3.31 $3.41 $3.51FutureCashFlows $2.86 $3.21 $3.31 $3.41 $163.73

DiscountedCashFlows $2.65 $2.76 $2.63 $2.51 $120.61

IntrinsicValuePerShare(12/31/16) $128.52IntrinsicValuePerShareToday $137.39

IllinoisToolWorks,Inc.RelativeValuationModels

EPS EPS Est.5yrTicker Company Price 2017E 2018E P/E17 P/E18 EPSgr. PEG17 PEG18

ETN EatonCorporation $78.10 $4.61 $5.16 16.9 15.1 9.8 1.73 1.54FTV FortiveCorporation $73.64 $2.85 $3.19 25.8 23.1 10.2 2.53 2.26DOV DoverCorporation $95.92 $4.17 $4.54 23.0 21.1 15.5 1.48 1.36PH ParketHannifinCorporation $185.38 $9.46 $10.52 19.6 17.6 11.5 1.71 1.53ROP RoperTechnologiesInc. $256.04 $9.17 $9.99 27.9 25.6 12.8 2.18 2.00IR Ingersoll-RandPLC $86.25 $4.50 $5.15 19.2 16.7 9.9 1.94 1.69

Average 22.1 19.9 1.9 1.7

ITW IllinoisToolWorks,Inc. $155.85 $6.67 $7.20 23.4 21.7 8.8 2.7 2.5

ImpliedValue:RelativeP/E(EPS17) $147.17RelativeP/E(EPS18) 143.16$PEGRatio(EPS17) 112.89$PEGRatio(EPS18) 109.55$

IllinoisToolWorks,Inc.KeyManagementRatios

FiscalYearsEndingDec.31 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

LiquidityRatiosCurrentRatio(CA/CL) 2.23 2.84 2.22 2.46 2.59 2.77 2.98 3.22QuickRatio(Cash&Receivables/CL) 1.78 2.24 1.75 1.95 2.09 2.27 2.48 2.71CashRatio(Cash/CL) 1.13 1.30 0.90 1.03 1.17 1.36 1.57 1.81

ActivityorAsset-ManagementRatiosReceivablesTurnover(Sales/AvgReceivables) 6.22 5.96 5.96 5.92 5.92 5.91 5.88 5.87FixedAssetTurnover(Sales/AvgNetPP&E) 8.53 8.22 8.42 8.33 8.32 8.48 8.51 8.54TotalAssetTurnover(Sales/AvgTotalAssets) 0.77 0.81 0.88 0.91 0.91 0.92 0.90 0.88

FinancialLeverageRatiosDebttoTotalAssets(ST&LTDebt/TotalAssets) 0.42 0.47 0.52 0.50 0.48 0.46 0.45 0.43DebttoEquity(ST&LTDebt/TotalEquity) 1.09 1.42 1.84 1.56 1.45 1.32 1.19 1.07InterestCoverage(EBIT/InterestExpense) 11.80 13.03 13.27 12.94 12.54 13.21 13.71 14.20

ProfitabilityRatiosGrossMargin(GrossIncome/Sales) 40.12% 41.16% 41.94% 41.96% 42.46% 42.71% 42.81% 42.91%OperatingMargin(OperatingIncome/Sales) 19.96% 21.40% 22.53% 24.33% 25.00% 25.74% 26.11% 26.45%NetProfitMargin(NI/Sales) 20.34% 14.17% 14.96% 16.15% 16.54% 17.09% 17.38% 17.65%ROE(NI/AvgEquity) 35.64% 31.51% 42.90% 49.30% 46.54% 45.69% 43.00% 40.25%ROA(NI/AvgAssets) 15.74% 11.44% 13.16% 14.76% 15.13% 15.64% 15.64% 15.57%

PayoutPolicyRatiosDividendPayoutRatio 24.79% 38.83% 40.11% 42.91% 44.65% 42.21% 41.13% 40.18%

SG&AAsa%ofSales PretaxCostofDebt146.64 13.00% 14.00% 15.68% 16.00% 17.00% 146.64 2.00% 3.00% 3.75% 4.00% 5.00%

COGSasa%ofSales 57.00% 153.15 151.76 149.43 148.99 147.61 CostofEquity 6.00% 281.93 269.68 261.11 258.35 247.8458.00% 151.76 150.38 148.05 147.61 146.22 7.00% 199.56 192.86 188.08 186.53 180.5559.02% 150.35 148.97 146.64 146.20 144.82 7.94% 154.11 149.77 146.64 145.62 141.6660.00% 148.99 147.61 145.28 144.84 143.46 9.00% 120.59 117.67 115.55 114.85 112.1461.00% 147.61 146.22 143.90 143.46 142.07 10.00% 98.57 96.43 94.87 94.36 92.35

EquityRiskPremium CVROIC146.64 4.00% 4.50% 4.80% 5.00% 5.50% 146.64 20.00% 25.00% 30.53% 30.00% 35.00%

Beta 0.90 228.96 198.37 183.28 174.29 154.84 CVGrowth 1.00% 102.81 103.97 104.81 104.74 105.291.00 201.40 174.29 160.89 152.90 135.61 2.00% 116.97 119.72 121.72 121.56 122.871.08 183.90 158.97 146.64 139.29 123.34 3.00% 137.82 142.94 146.64 146.34 148.781.20 160.89 138.80 127.85 121.32 107.14 4.00% 171.64 180.57 187.05 186.53 190.781.30 145.56 125.34 115.31 109.31 96.30 5.00% 235.91 252.11 263.85 262.91 270.62

146.64 0 146.64172CapExRate 1.00% 147.57 WACC 6.00% 219.88

1.50% 147.10 7.00% 156.552.00% 146.64 7.22% 146.642.50% 146.18 8.00% 118.593.00% 145.72 8.00% 118.59

illinois tool works, inc. (itw) november 15, 2017 through 2020 itw’s management team targets 2-3%...

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