Enterprise Strategy Update

We launched our current strategy in late 2012 with the explicit goal of positioning ITW to deliver solid growth with best-in-class margins and returns by focusing the entire company on utilizing ITW’s highly differentiated and proprietary Business Model to its full potential.

The ITW Business Model is the core source of our competitive advantage as a company. It drives our ability to win with customers and deliver differentiated returns for our shareholders. A description of the three elements of the ITW Business Model can be found on the tab “How We Work”.

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We implemented a number of key initiatives in conjunction with our Enterprise Strategy and we have made significant progress over the course of the last four years.

Since we launched our Enterprise Strategy in 2012, we have increased ITW’s operating margin from 15.9% to 22.5% and after-tax return on invested capital from 14.5% to 22.1%. And in 2016, despite a global macroeconomic environment that remained challenging on many fronts, we generated organic growth of more than 2 percentage points above the average of our peer group.

We have come a long way over the last four years and ITW’s performance is now approaching best-in-class levels. As a result, we are frequently asked “what’s next” and whether we are getting close to maxing out on our current strategy. The really good news from our perspective is that despite our considerable progress, we have significant opportunity for further performance improvement within the framework of our current strategy before ITW is operating to its full potential.

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OUR PATH TO FULL POTENTIAL

Further Structural Margin Improvement – Targeting 25% Operating Margin Exiting 2018

ITW’s 80/20 business management process is a core element of the ITW Business Model and has been a key value driver for the company for over three decades. Our proprietary management process is comprised of a set of unique and what some might consider unconventional business practices and processes that we utilize in every ITW business. It was started up inside the company in the mid-1980s, and has been in a state of continuous evolution ever since.

Over the last four years, we have completely reengineered our 80/20 business management process by updating and aggregating the most effective ITW 80/20 practices from around the company into a single unified enterprise-wide framework. As a result, our current iteration of 80/20 is by far the most powerful and impactful in our history, and we see significant potential for additional margin expansion as we continue deploying our current version of 80/20 across the company.

Strategic Sourcing, which we launched in 2013 in conjunction with our Enterprise Strategy, has now become a core element of ITW’s operational capability. Over the past four years, our Strategic Sourcing initiative has delivered in excess of $345 million in procurement cost savings across the company and we are far from done. We expect to generate meaningful additional structural margin improvement from the execution of our strategic sourcing initiative over the next several years.

Consistent High-Quality Revenue Growth – Targeting 2%+ Above-Market Organic Growth

We have done extensive work on our business portfolio and operating structure to position the company to generate consistent above-market organic growth. We have narrowed the focus and significantly improved the organic growth potential of ITW’s business portfolio by making sustainable differentiation the defining attribute of our “strategic fit” criteria. As a result, we divested over 30 businesses that largely operated in commoditized end markets and exited hundreds of commoditized product lines inside otherwise highly differentiated ITW businesses. We have also taken steps to significantly simplify and scale-up ITW’s operating structure in order to better leverage our growth investments and to tighten our focus on our best growth opportunities.

As a result, ITW is now comprised of seven industry-leading segments that each has strong and sustainable differentiation attributes, positive long-term macro market fundamentals, compelling competitive advantages with relevance to key market trends, and plenty of room to grow. ITW’s seven highly differentiated and high-performing segments can be found in the Business Segments section.
As of the end of 2015, we had completed the bulk of our portfolio reshaping and organizational restructuring efforts and shifted our attention more fully to the growth component of our Enterprise Strategy agenda. We are encouraged by the more than 2 percentage points of organic growth out-performance versus the average of our peer group that we delivered in 2016, and we are confident that the company is well-positioned to generate consistent above-market organic growth going forward.

ITW: DIFFERENTIATED BUSINESS MODEL=DIFFERENTIATED PERFORMANCE

As we have stated, our strategy is to leverage the full potential of the ITW Business Model to generate solid growth with best-in-class margins and returns. With this objective firmly in mind, we are committed to achieving the following performance goals by the end of 2018:
■ Organic Growth of 2 percentage points or more above market
■ 25%+ Operating Margin
■ 20%+ After-tax Return on Invested Capital
■ Free Cash Flow of 100%+ of Net Income
■ 12-14% Average Total Shareholder Returns

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This is an exciting time at ITW. We have come a long way over the past four years, and in 2016 we delivered the best performance in our company’s history on a number of fronts. While we are pleased with our progress, we are energized by the potential for further performance improvement that we have within the framework of our current Enterprise Strategy.