ILLINOIS TOOL WORKS, ILLINOIS TOOL WORKS, INCINC

RCMP - Initial AnalysisRCMP - Initial Analysis

April 21April 21stst, 2005, 2005

By Alex PoltorakBy Alex Poltorak

OverviewOverview

General Corporate InformationGeneral Corporate Information Macroeconomic AnalysisMacroeconomic Analysis Company StrategyCompany Strategy Relevant FinancialsRelevant Financials

Corporate InformationCorporate Information

Major Business Falls Into 3 Categories:Major Business Falls Into 3 Categories: Highly-Engineered ProductsHighly-Engineered Products Specialty SystemsSpecialty Systems Leasing & InvestmentsLeasing & Investments

Decentralized 650 Business UnitsDecentralized 650 Business Units Customers and Operations in 45 Customers and Operations in 45

CountriesCountries

Corporate InformationCorporate Information

Highly-Engineered Products – used by Highly-Engineered Products – used by customers in their own products.customers in their own products. Examples: fasteners, non-slip materials, Examples: fasteners, non-slip materials,

etc.etc.

Specialty Systems – machinery and Specialty Systems – machinery and consumables that are used by the consumables that are used by the customer’s production process.customer’s production process. Examples: food equipment, construction, Examples: food equipment, construction,

automobile markets, etc.automobile markets, etc.

Corporate InformationCorporate Information

Leases & InvestmentsLeases & Investments Examples: investments in mortgage Examples: investments in mortgage

entities, leases of telecommunications, entities, leases of telecommunications, aircraft, air traffic control and other aircraft, air traffic control and other equipment, as well as properties, equipment, as well as properties, affordable housing and a venture capital affordable housing and a venture capital fund.fund.

Corporate InformationCorporate InformationRevenue DistributionRevenue Distribution

4%

6%18%

12%

16%

26%

18%

Construction

Automotive

Food/Retail

General Industrial

Construction

Automotive

Food/Retail

General Industrial

Food/Beverage

Consumer Durable

Other

Food/Beverage

Consumer Durable

Other

6%

26%

9%17%

22%

20%

Corporate InformationCorporate Information

Each ‘business unit’ is a highly specialized, Each ‘business unit’ is a highly specialized, niche market company. niche market company. Example 1:Example 1: ITW Hi-Cone – Manufactures 6-pack plastic ITW Hi-Cone – Manufactures 6-pack plastic

rings (engineered products)rings (engineered products) Example 2:Example 2: ROCOL Lubricants – Produces bearing ROCOL Lubricants – Produces bearing

greases that extend bearing lifetime and cutting tool greases that extend bearing lifetime and cutting tool greases to protect parts (consumables).greases to protect parts (consumables).

Example 3:Example 3: ITW Gema - manufactures automatic & ITW Gema - manufactures automatic & manual application equipment for powder paint, manual application equipment for powder paint, recovery systems to increase powder application recovery systems to increase powder application efficiency and heating equipment for curing powder coat efficiency and heating equipment for curing powder coat finishes used in the automotive, appliance and industrial finishes used in the automotive, appliance and industrial equipment industries (Specialty Systems).equipment industries (Specialty Systems).

Switching gears now to a Switching gears now to a Macroeconomic Overview of Macroeconomic Overview of

ITW’s environmentITW’s environment

Macroeconomic OverviewMacroeconomic Overview

Capital Goods Sector - diversified over Capital Goods Sector - diversified over many industries (Misc. Capital Goods).many industries (Misc. Capital Goods).

Industry consists of a mix of regional Industry consists of a mix of regional and worldwide companies.and worldwide companies.

No overall competitors, individual No overall competitors, individual business unit competitors do exist.business unit competitors do exist.

Industry Beta: Industry Beta:

Macroeconomic OverviewMacroeconomic Overview

The misc. capital goods industry The misc. capital goods industry market cap. is $143B (yahoo) and market cap. is $143B (yahoo) and ITW’s individual market cap. is ITW’s individual market cap. is $25.7B. Industry’s largest, $5B more $25.7B. Industry’s largest, $5B more than 2than 2ndnd Hitachi, Ltd. Hitachi, Ltd.

70% of ITW’s revenues come from 70% of ITW’s revenues come from products which are considered products which are considered market leading.market leading.

Macroeconomic OverviewMacroeconomic Overview

Industry growth continuesIndustry growth continues World production capacity constantly World production capacity constantly

expandingexpanding Innovation is driving the need for Innovation is driving the need for

specialized products and systems specialized products and systems provided by this industry. Leading to provided by this industry. Leading to increased overall demand.increased overall demand.

ITW vs S&P 500 (5 year)ITW vs S&P 500 (5 year)

Stock Performance (5 year)Stock Performance (5 year)

Any questions before moving on Any questions before moving on to the Financial Statistics?to the Financial Statistics?

Financial StatisticsFinancial Statistics

Current Price (4/20/05): $86.04Current Price (4/20/05): $86.04 52 week range: $83.03 - $96.7052 week range: $83.03 - $96.70 Market Capitalization: $25.15 BillionMarket Capitalization: $25.15 Billion Beta: 0.84Beta: 0.84

Trailing P/E (ttm, intraday):19.04Trailing P/E (ttm, intraday):19.04 Forward P/E (fye 31-Dec-06)¹:14.94Forward P/E (fye 31-Dec-06)¹:14.94 PEG Ratio (5 yr expected)±:1.32PEG Ratio (5 yr expected)±:1.32

Financial StatisticsFinancial Statistics

ProfitabilityProfitability Net Income Avl to Common (ttm): $1.36BNet Income Avl to Common (ttm): $1.36B Diluted EPS (ttm): $4.52Diluted EPS (ttm): $4.52 Profit Margin (ttm): 11.26%Profit Margin (ttm): 11.26% Operating Margin (ttm): 17.25%Operating Margin (ttm): 17.25%

Return RatiosReturn Ratios Return on Assets (ttm):11.67%Return on Assets (ttm):11.67% Return on Equity (ttm):17.32%Return on Equity (ttm):17.32%

Financial StatisticsFinancial Statistics

Capital StructureCapital Structure Total Debt: $1.75BTotal Debt: $1.75B Debt Ratio: 0.228Debt Ratio: 0.228

Growth RatesGrowth Rates Revenue (ttm): $12.10BRevenue (ttm): $12.10B Revenue Growth (lfy)³: 16.90%Revenue Growth (lfy)³: 16.90% Earnings Growth (lfy)³: 30.80%Earnings Growth (lfy)³: 30.80%

Any questions about the numbers?Any questions about the numbers?

Company StrategyCompany Strategy

The 80/20 Philosophy Defined:The 80/20 Philosophy Defined: 80 percent of a business' sales are derived from the 20 80 percent of a business' sales are derived from the 20

percent of its product offering being sold to key customers. percent of its product offering being sold to key customers. ““This process is really about simplifying and focusing on This process is really about simplifying and focusing on

the key parts of your business. Simplicity focuses action, the key parts of your business. Simplicity focuses action, while complexity often blurs what is important. In the while complexity often blurs what is important. In the process of simplification, we view all aspects of the process of simplification, we view all aspects of the business on an 80/20 basis. This includes finding ways to business on an 80/20 basis. This includes finding ways to simplify our product lines, customer and supply base, and simplify our product lines, customer and supply base, and business processes and systems. In the end, 80/20 business processes and systems. In the end, 80/20 improves quality, productivity, delivery, innovation, market improves quality, productivity, delivery, innovation, market penetration, and ultimately, customer satisfaction.”penetration, and ultimately, customer satisfaction.”

Company StrategyCompany Strategy

Innovation:Innovation: ITW is “focused on creating value-added ITW is “focused on creating value-added

products and innovative customer products and innovative customer solutions.”solutions.”

Expanding patent portfolio – 16000 Expanding patent portfolio – 16000 patents worldwide, 2900 US patents, patents worldwide, 2900 US patents, and 1116 pending US applicationsand 1116 pending US applications

Top 100 US patent issuers yearlyTop 100 US patent issuers yearly

Company StrategyCompany Strategy

Internal GrowthInternal Growth Increase Revenues from current OperationsIncrease Revenues from current Operations Increase Operating and Profit MarginsIncrease Operating and Profit Margins Add new customers and expand relationships with Add new customers and expand relationships with

existing customers (value-adding)existing customers (value-adding) External GrowthExternal Growth

Continue Strategic Acquisitions - $600M-$800M Continue Strategic Acquisitions - $600M-$800M yearlyyearly

243 Acquisitions since 1997 - $7.76B in Revenues243 Acquisitions since 1997 - $7.76B in Revenues Expanding to new marketsExpanding to new markets

The EndThe EndThank you for your timeThank you for your time