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To our shareholders:

In a year defined by crises – the COVID-19 pandemic, widespread civil unrest, an urgent need to address climate change, and a global economic downturn – we united as a company to keep our promises to our customers, our employees and to society.

From the outset of the pandemic, Eaton products and services were deemed critical to our global infrastructure. By implementing our comprehensive disaster preparedness plan and employing rigorous protocols to keep our employees safe, we were able to remain open and meet our customers’ needs throughout the crisis.  

The past year was also a time of reckoning for society as the fight for racial equality took on renewed urgency. Our employees responded with empathy and compassion, speaking out against injustice and inequality around the world and supporting local initiatives where we could make a measurable impact. One local example included an effort to close the digital divide in Cleveland, Ohio. 

The need for climate action also intensified throughout the year. At Eaton, we believe that what’s good for the planet is also good for our business. So, in support of our leadership on environmental, social, and corporate governance (ESG) matters, we announced our commitment to become carbon neutral by 2030. And we’re already making solid progress toward this goal. 

Finally, although the economic crisis had a profound impact on our end markets, we delivered better-than-expected financial results and had one of our best years ever in total shareholder returns. This is clear evidence of how we’re becoming a stronger company.

These results would not have been possible without the extraordinary efforts of our employees. Throughout the year, they continued to lead with our values, focusing on meeting the needs of all our stakeholders – our colleagues, our customers and suppliers, our communities, and our shareholders.  

A year of progress

Despite the historic impacts of the pandemic, the year was also defined by a number of notable achievements across the company.

  • We announced and made strong progress toward achieving our science-based emissions targets. In alignment with our comprehensive ESG strategy, we announced plans to cut emissions from our operations by 50 per cent by 2030. In 2020, we achieved a 19 per cent reduction in greenhouse gas emissions at our manufacturing sites, bringing us closer to our 2030 goal. In addition, as of year’s end, 60 per cent of our manufacturing sites were certified zero waste-to-landfill, marking a 5 per cent increase over 2019. Our goal is for 100 per cent of our sites to achieve this certification by 2030.
  • We advanced our goal to become a model of inclusion and diversity. In further support of our ESG efforts, we celebrated a milestone in the evolution of our board, with 50 per cent of our directors now either women or US minorities. This builds on the strength of our global leadership team, 54 per cent of whom are US minorities. And in 2020, we strengthened our supplier diversity programme, purchasing approximately $1.9 billion in goods and services from small and diverse suppliers, and growing our business with women-owned businesses by approximately 7 per cent and with veteran-owned businesses by nearly 5 per cent over 2019.
  • We made significant portfolio moves. In the first quarter, we completed the sale of our Lighting business and announced the sale of our Hydraulics business. In addition, we completed the acquisition of Power Distribution, Inc., a supplier of power distribution, static switching and power monitoring equipment and services for data centres and industrial and commercial customers, and announced plans to acquire a 50 per cent stake in low-voltage circuit breaker manufacturer HuanYu High Tech. More recently, we signed agreements to acquire Tripp Lite, a supplier of power quality products and connectivity solutions for data centres and the industrial, medical and communications markets, and Cobham Mission Systems, a manufacturer of air-to-air refuelling systems, environmental systems, and actuation primarily for defence markets. These moves will enable us to invest heavily in high-growth and high-margin strategic areas of our business. 
  • We built momentum around our digital transformation – a critical step in our transformation into an intelligent power management company. We created the Eaton Digital Office and introduced Brightlayer™, our market-facing platform that allows us to monetise our data through new insights and software. The impact of these efforts will significantly accelerate our growth, generating an anticipated $500 million in additional revenue for our company by 2025.
  • We strengthened our communities. In addition to meeting the needs of our customers during the pandemic, we produced protective face shields, surgical masks, and created a number of innovative tools designed to protect health care professionals from COVID-19. Outside of Eaton, our employees were also busy making a difference. They donated thousands of volunteer hours, collected and distributed medical supplies, donated personal protective equipment and provided food and essential items to those in need. And our colleagues in more than two dozen countries contributed to our global COVID-19 relief matching gift programme, providing vital funding to support the pandemic response.
  • We delivered the best safety performance in our company’s history. In addition to implementing and adhering to rigorous pandemic protocols, we saw outstanding results in our traditional safety measures. In 2020, we delivered the largest-ever annual decreases in severe and overall injuries and exceeded world-class benchmarks in both our total recordable case rate and days-away case rate metrics.
  • We flexed our business and delivered better-than-expected financial results. Despite the challenges of 2020, our team continued to perform during the economic downturn, maintaining our focus on organic growth, delivering strong margins and generating very strong free cash flow. Earnings per share for 2020 were $3.49. Excluding charges of $0.33 per share related to acquisitions and divestitures and $0.42 per share related to a multi-year restructuring programme, adjusted earnings per share were $4.24. And our segment margins were strong, coming in at 16.4 per cent, with a decremental margin of 23 per cent. Our operating cash flow remained resilient at $2.9 billion and free cash flow was $2.6 billion. Free cash flow as a percentage of revenues was 14.3 per cent, 90 basis points over 2019 and an all-time record.1
  • We delivered for our shareholders. We returned $2.8 billion to our shareholders in the form of dividends and share repurchases. Dividends totalled $1.2 billion and share repurchases totalled $1.6 billion, representing 4 per cent of our shares outstanding at the beginning of 2020. In addition, we saw a 27 per cent increase in our stock price during the year. When combined with our dividend payout, we generated a total shareholder return of 31 per cent – the third highest among our 18 peers for the year.

A look ahead

While some of the challenges of 2020 remain with us, we believe our future has never been brighter. The advances we made this past year have positioned us for continued success in 2021 and beyond. And societal trends are on our side. We are at the beginning stages of what we think are some of the most important secular growth trends that we will experience in our lifetime – rapid growth in electrification, an energy transition driven by climate change and explosive growth in connectivity. These three trends are perfectly aligned with our direction and they will allow us to accelerate our rate of growth and deliver higher and more consistent earnings for years to come. There is no better time than now to be an intelligent power management company, and there is no better time to be an investor in Eaton.   

A trusted partner

Finally, I want to acknowledge Rick Fearon, our long-time vice-chairman and chief financial and planning officer, for his extraordinary service to our company. Over the years, Rick has been instrumental in shaping Eaton into the company it is today and has served as a trusted partner to our senior leadership team, our board and certainly to me. We wish him and his family all the best as he enters retirement.

In closing

It’s often through crises that the true character of an individual, an organisation or a society is revealed. Over the course of the year, Eaton demonstrated that we are a company that leads by its values and will continue to do so, no matter what challenges lie ahead.

On behalf of our 92,000 employees and our partners around the world, thank you for your continued confidence in our company. Throughout our history, our investors have helped us deliver on our promise to improve the quality of life of people and our planet. With your sustained support, we’ll continue to pursue our mission and make meaningful contributions to society. And we’ll do all we can to serve as a beacon of hope in a world that needs more empathy, compassion and unity. 

Stay healthy. Stay safe.
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Craig Arnold, Chairman and Chief Executive Officer
  1. In 2020, free cash flow of $2.6 billion was operating cash flow of $2.9 billion less capital expenditures of $0.4 billion. In 2019, free cash flow of $2.9 billion was operating cash flow of $3.5 billion less capital expenditures of $0.6 billion.