Profitable Growth with Strong Returns - Investor …investor.itw.com/~/media/Files/I/ITW-IR/documents/presentations/...2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

2011 Investor Meeting – December 2, 2011 1

Profitable Growth with Strong Returns Ron Kropp, CFO

December 2, 2011

2011 Investor Meeting – December 2, 2011

Capital Structure

Profitable Growth with Strong Returns

• Acquisitions

• Operating Margins

• Return on Invested Capital

Q&A

2

Today’s Topics


0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

Net income FOCF

3

Free Operating Cash Flow vs. Net Income

2000 – 2011F Average FOCF % of Net Income: 114.3%

1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast. 2010 and prior numbers not restated for discontinued operations or the elimination

of the one month reporting lag.

$ in millions

Strong generator of cash flow –

even in recessionary periods


Capital Structure Overview • Strong balance sheet

– Debt/capital = 31.7% at Sept 2011

– Debt/EBITDA = 1.4x at Sept 2011*

– Issued new long-term debt of $1.0 billion in August

2011 at attractive rates

– Credit line of $2.5 billion backstops commercial paper

program

– Cash of $1.3 billion at Sept 2011 (mostly non-U.S.)

• Target debt-to-capital range of 20% to 30%

– Currently above target range due to larger

acquisitions and share repurchase activity

• Balanced capital allocation

– 60% returned to shareholders over last ten years via

dividends and share repurchases, which compares

favorably to peer group

– Our capital allocation strategy is flexible to adapt to

current market opportunities, including:

• Investments to accelerate growth, including

acquisitions

• Share repurchases

Uses of free cash

flow & debt

2001-2010

4

*Debt/EBITDA calculated as total debt divided by EBITDA; EBITDA calculated as operating income before depreciation and amortization & impairment of goodwill and

other intangible assets on a trailing twelve month basis.


Capital Structure

Balanced Uses of Capital

5

Dividends

• Guideline: 30% to 45% of the last two years’ average free operating cash flow

• Increased dividend 6% in August 2011 to an annual rate of $1.44 per share

• Current dividend yield of approximately 3%, which is above peer group average

Acquisitions

• Preferred use of free operating cash flow and available debt capacity

• Forecasted to hit acquired revenue range of $800 million to $1.0 billion in 2011

• Long-term acquisition target of 5% to 7% of total revenues

Share Repurchase Program

• August 2007: $3 billion authorization (completed in 3Q’11)

• New $4 billion authorization in May 2011

• Repurchased $400 million in 3Q2011 and $950 million YTD


Capital Allocation – ITW vs. Peers

2006-2011

42.5%

98.5%

83.1%

66.0%

60.9%

54.6%

46.7% 43.9%

35.1% 35.0% 34.7% 30.3%

25.4%

19.4%

8.0% 7.4%

24.5%

1.5%

11.5%

24.1%

19.4%

14.1%

19.6% 25.6%

12.6%

35.6%

27.2%

27.9% 40.0%

46.9%

31.5%

39.4%

33.0%

5.4% 9.9%

19.7%

31.3% 33.7%

30.5%

52.3%

29.4%

38.1% 41.7%

34.6% 33.7%

60.5%

53.2%

ITW Danaher IR Eaton Dover Parker Hannifin

Textron Caterpillar Cooper Emerson Honeywell UTX 3M Tyco Deere Masco

1) Source: Capital IQ as of 02 Nov 2011. Cumulative allocation from 2006 – 2011; 2011 values through 9/30/11.

2) Dividends Paid is sum of common dividends paid and preferred dividends paid.

3) Net Share Repurchase is calculated as shares repurchased less shares issued.


• Profitable growth with strong returns creates

higher economic profit, which drives long-term

shareholder value

• Three drivers of higher economic profit:

–Growth – grow revenues and income both

organically and by acquiring new businesses

–Profitability – improve margins of base and

acquired businesses

–Returns – generate return on invested capital

significantly above our cost of capital over the

long-term

7



Acquisitions • Executing value enhancing acquisitions is important to driving

increased shareholder value – Contributes to growth in revenue and earnings, which leads to higher

economic profit

– Focused on platforms which have higher long-term growth expectations

– Operating performance of the acquired companies improved through

implementation of the ITW Toolbox

– Margin improvements for acquired companies drive future earnings

growth and higher ROIC

• We take a disciplined approach to the valuation of acquisitions – Focused on generating long-term ROIC significantly above our cost of

capital

– We generally pay below our industry and peer M&A valuation multiples

• Two types of acquisitions: – Smaller, bottoms-up deals executed at business unit level (typically less

than $100 mil)

– Larger, top down deals executed by Corporate operating management

(typically $100 to $500 mil)

8


$ in Millions 2006 2007 2008 2009 2010 Nov. YTD

Annualized

Revenues

Acquired

$1,714 $995 $1,539 $290 $530 $828

Amount Paid $1,663 $877 $1,597 $286 $531 $1,285

Revenue Multiple 1.0x 0.9x 1.0x 1.0x 1.0x 1.6x

Number of

Acquisitions 53 52 50 20 24 24

81% of acquired revenues in 2011 directly tied to emerging market and platform

growth initiatives

ITW Global Brands (SOPUS) and Despatch: key platform acquisitions

Completed seven emerging market-related acquisitions

Higher revenue multiple in 2011 related to higher growth, higher margin

businesses

Margins for newly acquired businesses were 14.6% for Q3’11 YTD (excluding

amortization)

Consistent long-term ROIC expectations

ITW Acquisition Activity


3.1%

3.7%

-0.1%

6.4% 5.9%

8.1%

10.0%

5.0%

11.2%

14.6%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2007 2008 2009 2010 2011 Q3 YTD

Acq OI % as reported Acq OI % excluding amortization

“Excluding amortization” calculated as operating income before amortization and other non-cash purchase accounting adjustments.

10

Acquisition Operating Margins

1st Year of Acquisition

Reported margins distort acquisition

performance because of amortization and

other non-cash purchase accounting items


5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

2007 2008 2009 2010 2011

2006-2010 Acquisitions

2006 Acquisition Year 2007 Acquisition Year 2008 Acquisition Year 2009 Acquisition Year 2010 Acquisition Year

Operating income before amortization and other non-cash purchase accounting adjustments.

11

Acquisition Performance by Year Operating Margin % by Year

Includes acquisitions > $20 million;

54 deals with acquired revenues totaling $4 billion


Operating Margins

• Continued focus on achieving high operating margins

• 80/20 simplification process focuses efforts and

investment on most profitable business, and results in:

– Higher growth and more profitable 80/20 products and customers

– Lower costs by eliminating activities related to 20/80 activities

– Lean and efficient manufacturing processes and back offices

• Continuously focused on margin improvement

opportunities

– Improving the margins of acquired businesses

– Further improvement of the base businesses

– Further leveraging enterprise-wide spend

• Have primarily focused on leveraging indirect spend categories

• Accelerating efforts re: direct material categories

12


17.3% 16.3%

14.6%

10.0%

14.8% 15.5%

12.4% 11.6%

9.4%

7.8%

11.4%

13.3%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 Q3YTD

ITW Peer Group

13

ITW

Peer Group

Versus Peer

Group

‘06 – ‘11 Average 14.8% 11.0% +3.8%

Operating Margins: ITW vs. Peer Group

1) Source: 2010 ITW Annual Report and 2011 Form 10Q’s; 2010 and prior numbers not restated for discontinued operations or the el imination


2) Peer group includes: Caterpillar, Cooper, Danaher, Deere, Dover, Eaton, Emerson, Honeywell, 3M, Masco, Ingersoll Rand, Parker

Hannifin, Textron, Tyco, United Technologies.

Operating margins have consistently

been above peer group


13.3%

15.2%

15.5%

16.8% 16.9% 17.3%

16.3%

14.6%

10.0%

14.8%

15.5% 14.5%

15.5% 15.7%

17.3% 17.5%

18.2%

17.3%

15.7%

12.2%

16.2%

16.9%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q3 YTD

Operating Margin EBITA Margin

14

Operating

Margin

EBITA

Margin ∆ %

‘01 – ’11

Average

15.1% 16.1% +1.0%

ITW Operating Margins vs. EBITA Margins



2) EBITA calculated as operating income before amortization and impairment of goodwill and other intangible assets.

Noncash amortization of intangibles

has reduced reported margins


18.2% 17.3%

15.7%

12.2%

16.2% 16.9%

13.0%

12.1%

10.1%

8.7%

12.3%

14.1%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 Q3YTD

ITW Peer Group

15

ITW

US-Based

Diversified

Industrials

Versus Peer

Group

‘06 – ‘11 Average 16.1% 11.7% +4.4%

EBITA Margins: ITW vs. Peer Group





3) EBITA calculated as operating income before amortization and impairment of goodwill and other intangible assets.

Peer group margins have been less

impacted by amortization


14.9% 14.8%

13.4%12.9%

13.7%

10.6%

12.3%

13.7%

16.8%

17.6%

18.3%18.0%

16.0%

10.7%

15.3%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

Return on average invested capital

16

Return on Invested Capital (ROIC)

Average ROIC: 14.7%

ITW Cost of Capital range: 8.5% - 10.0%

Consistently generate economic

profit with returns significantly

above cost of capital

1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast. 2010 and prior numbers not restated for discontinued operations or the elimination



$0.2 $0.2 $0.2 $0.2

$0.3

$0.1

$0.2

$0.3

$0.6

$0.7

$0.8 $0.9

$0.8

$0.2

$0.6

$0.9

14.9% 14.8%

13.4%12.9%

13.7%

10.6%

12.3%

13.7%

16.8%17.6%

18.3%18.0%

16.0%

10.7%

15.3%

$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.6

$0.7

$0.8

$0.9

$1.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Economic Profit ($) ROIC (%)

1) Source: 2010 ITW Annual Report; 2011 represents full year management forecast. 2010 and prior numbers not restated for

discontinued operations or the elimination of the one month reporting lag.

2) Economic profit calculated based on the midpoint of the cost of capital range.

17

ITW Demonstrates Strong Returns to Investors

Average ROIC: 14.7%

Economic Profit and ROIC

$ Billions ROIC %


18.3% 18.0%

16.0%

10.7%

15.3% 16.4%

16.7%

15.6%

11.4%

14.6%

10%

12%

14%

16%

18%

20%

2006 2007 2008 2009 2010

ITW Peer Group

18

ITW

US-Based

Diversified

Industrials

5-yr Average 15.7% 14.9%

Historical ROIC: ITW vs. Peer Group

1) Source: 2010 ITW Annual Report; 2010 and prior numbers not restated for discontinued operations or the elimination of the one month

reporting lag.



Consistently generate higher

returns than peer group


• Our primary focus is to target investments that will

generate both growth and returns over the long-term

• Organic investments are focused on innovation and

emerging markets, which drive growth at high returns

• Acquisitions targeted to accelerate growth in key

platforms and to enhance long-term returns

– In the short term, acquisitions dilute the Company’s ROIC as we

work to grow and improve the acquired businesses

– Growth and margin improvement are catalyst for improving

returns over time

19



ITW 25 Year Revenue/Operating Income Consistent strategy has yielded long-term results

$100

$600

$1,100

$1,600

$2,100

$2,600

$3,100

$0

$3,000

$6,000

$9,000

$12,000

$15,000

$18,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Revenues (in millions) Operating Income (in millions)

CAGR Revenue: 14%

CAGR Net Income: 17%

Average ROIC: 14%

CAGR Shareholder Return: 15%

20

Source: 2010 ITW Annual Report; Numbers not restated for discontinued operations or the elimination of the one month reporting lag.


Q & A

21

Documents

Profitable Growth with Strong Returns - Investor …investor.itw.com/~/media/Files/I/ITW-IR/documents/presentations/...2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F