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To our shareholders:

I am happy to report that 2017 was another year of progress – our efforts over the last several years to strengthen our company are paying off. We are on track to deliver the 5-year financial commitment that we made, starting in 2015 and ending in 2020, and we’re delivering on our broader commitments to our customers, our employees and our communities. Our team is getting better every day and I’m proud of our accomplishments. Now, allow me to share some highlights from 2017 and tell you why we are excited about the future.

We delivered our financial commitments

2017 was a good year for Eaton, in large part because we did what we said we would and then some.

We increased revenues in the majority of our businesses and total organic revenues grew three percent over the prior year. We also delivered record segment operating margins of 15.8 percent. And our net income and adjusted earnings per share were $6.68. Excluding the gain from the formation of the joint venture with Cummins Inc., and income from the new U.S. tax bill, our adjusted earnings per share were $4.65, 20 cents higher than the mid-point of our guidance. We also completed the largest restructuring program in our company’s history, significantly improving our competitiveness.  

In addition, we achieved record cash flow, making it possible to reinvest in our businesses and return more than $1.9 billion to shareholders through a combination of share buybacks and dividends. Our board of directors increased the quarterly cash dividend, maintaining our attractive yield, and we deployed additional capital into our pension plan.

While reinvesting in the business

In all of our businesses, we continued to invest in technology leadership and innovation, build on our channel and aftermarket strengths, and delivered superior value for our customers. Here are a few examples from the year that show how these strategies came to life.

  • Electrical: Our extensive channel presence and leading service capabilities helped solve tough customer challenges. We expanded our digital platforms and capabilities to capitalise on emerging Internet of Things (IoT) opportunities – investing in an IoT Centre of Excellence to increase product development and reduce development time. In addition, we laid the groundwork for our cybersecurity research and testing facility in Pittsburgh to become the industry’s first lab approved to participate in UL’s Data Acceptance Program for cybersecurity.
  • Aerospace: Our focus on growing our share of the aftermarket is paying off. Our customers are replacing aging technology with higher capability products that enable more dynamic operations.
  • Hydraulics: We improved our cost competitiveness and expanded our addressable market by launching new products that serve a broader set of customer requirements. We are now positioned to say “yes” more often and build even stronger relationships with our distribution partners and OEM customers.   
  • Vehicle: We found an innovative solution to accelerate our growth by forming a joint venture with Cummins Inc., for automated transmissions. Our joint venture also launched the new Endurant™ transmission, which is the lightest, most efficient heavy-duty transmission in the marketplace.  

And making progress on our aspirational goals

Investing in our businesses and delivering on our financial commitments are both important, but there’s so much more to Eaton. Every day we are taking steps to make the company a great place to work, and the world a little better. Here, too, we made progress last year. 

First, we made good on our pledge to be active stewards of the environment – exceeding our greenhouse gas, water use and waste reduction goals. And, while we’re reducing our environmental footprint in a major way, we are not stopping there. We’re compounding the benefits by helping our customers reduce theirs as well.

Second, we made progress with our employees – improving safety, reducing voluntary turnover across the organization, and increasing the diversity of our workforce. In fact, Forbes magazine recently recognised us as one of America’s Best Employers for Diversity and Fortune magazine named us one of the World’s Most Admired Companies – an indication that we’re not just saying the right things, we’re doing them, too.

Third, we helped strengthen our communities by investing more than $11.4 million in local community organisations. We also established the Eaton Qualified Disaster Relief Fund at our employees’ request to help colleagues who lost or suffered significant damage to their homes as a result of hurricanes Harvey and Maria. Nothing made me prouder during the year than seeing our employees respond to these disasters.

The passion our employees have for doing what’s right is one of the reasons why I’m so proud to lead this organisation.  

Our future is promising

Our corporate strategy for creating long-term value has not changed.

  • We will focus on strategic growth initiatives by developing technology leadership, converting on our channel and service strength, and delivering superior value to our customers.
  • We will expand margins by accelerating our operational excellence initiatives, implementing multi-year productivity plans, focusing on growing outperforming businesses, and improving or divesting underperformers.
  • We will continue our disciplined approach to capital allocation by investing to win in all of our businesses, consistently returning cash to shareholders and pursuing strategic acquisitions.

On growth, we are very excited about the significant role we can play in creating a better tomorrow by innovating and investing in Intelligent Power solutions. And, we can already see how our products are making a difference in the world.

  • In cities across the globe, our intelligent lighting solutions are helping customers better manage resources, gather important data, enhance security and save energy.
  • Our sensors are helping customers upgrade equipment performance – improving hydraulic stability and maximising efficiency.
  • We are transforming the way the world uses traditional and renewable energy generation sources with our microgrid energy systems, and we’re making power grids more resilient and efficient so they can operate under challenging conditions.
  • We’re helping lorry drivers and fleet owners keep their fleets on the road by enhancing remote diagnostics and real-time performance monitoring.
  • And, we’re changing the way homeowners manage power with our smart circuit breakers by providing insights and analytics to keep systems running at top efficiency.

But that’s not all. We’re also looking forward to participating in the ever-increasing trend of electrification of mobile vehicles – cars, lorries, construction and agricultural equipment, and aeroplanes to name a few. Almost everything we do in our Electrical business today is applicable to the emerging opportunity we see in mobile vehicles. Our pedigree in serving these markets, when added to our proven electrical technologies, creates a powerful combination. And, as a result, we are creating a new segment that we call eMobility.  

And we’re not stopping there. We are continuing on our journey to become a world-class manufacturing company. In addition to improving the way we execute in our factories, we are investing in new technologies like additive manufacturing. We have created a shared technology centre for additive manufacturing and are already developing new components that have better performance, reduced weight and lower costs. In other words, we’re helping our customers solve some of their most important problems. 

In closing

A few years ago, we introduced a new vision for our company – to improve the quality of life and the environment through our power management products and services. This vision felt right then and it feels even better today as we see the difference we are making in the world.

On behalf of Eaton employees and partners, and those around the world who benefit from your confidence in us, thank you. Our strategy is working. Our commitments are real. Our future is promising.

Sincerely,
Craig Arnold, chairman and chief executive officer