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To our shareholders:

In my letter to shareholders last year, I spoke about how we are transforming Eaton into a better, stronger, more resilient company. A company that:

  • Delivers consistent earnings, stronger cash flow, higher margins and better topline growth.
  • Is focused on sustainability and innovation.
  • Shareholders can be proud to own under all business conditions.

That is what we promised at the beginning of 2019, and that is what we delivered.

In order to make this transformation, we needed to change – to change the way we lead, the things we do, and in some cases, the very makeup of our company. 2019 was a pivotal year for Eaton, one in which we made significant progress on our journey to become an intelligent power management company. We performed well, executed on our promises, and as a result, delivered strong financial performance. In this report, you’ll see why I’m proud of our accomplishments and optimistic about our future.

Transforming our financial results

2019 was a year defined by trade tensions, tariffs and political in-fighting, headwinds that show no signs of subsiding. As expected, this environment contributed to an extraordinary level of uncertainty and some weakness in the markets we serve. Despite these challenges, 2019 was a very good year for Eaton and our shareholders.

Our continued focus on organic growth, expanding margins and our disciplined approach to capital allocation paid off. Earnings per share for 2019 were $5.25. Excluding adjustments, earnings per share were $5.761 − up 7 percent from the prior year2.

We delivered strong segment operating margins of 17.2 percent. Excluding adjustments, segment margins were 17.6 percent3, an all-time record and up 80 basis points over 2018. In addition, operating cash flow was $3.5 billion and free cash flow was $2.9 billion4. These results, which were both all-time records, represent growth of 17 percent and 20 percent, respectively4. We anticipate 2020 will be another year of strong free cash flow.

We also expanded our share repurchase program to buy back $1 billion of our shares, which represents 3 percent of the shares outstanding at the beginning of 2019.

Our repurchase program, coupled with solid operational performance, clearly created value for our shareholders. Over the past year, our stock price increased 38 percent and, when combined with our dividend payout, we generated an all-in shareholder return of 43 percent. We were pleased to see our stock performance begin to reflect the transformation taking place inside our company, and we intend to keep it going.

Our ability to deliver these results during a time of market weakness is strong evidence that our strategy is working. We’ve created better-performing businesses and we’re a better company, but we’re not satisfied. We know you expect more from us and we can do more. The way we’ll deliver more is by continuing the rigorous deployment of the Eaton Business System (EBS). EBS is the standard set of processes and tools through which we run our company. It includes a common set of practices and measures; it’s how we learn and improve; it’s how we achieve the benefit of scale across our company; and it’s how we grow and expand margins. In short, it’s how we differentiate our company from competitors and deliver the stock price you deserve.

Transforming the makeup of our company

As we transition into an intelligent power management company, our business portfolio must be comprised of market-leading businesses, each strong on its own and made stronger as a part of Eaton. Throughout 2019, we continued to transform Eaton by aggressively managing and reshaping our portfolio of businesses. We strengthened key businesses through strategic acquisitions such as Ulusoy Elektrik, Innovative Switchgear and Power Distribution, Inc. in our Electrical Systems and Services segment, and with the addition of Souriau-Sunbank in our Aerospace segment.

Souriau-Sunbank provides Eaton with a new capability to serve the electrical connector market in both Aerospace and our core electrical markets. Together, these acquisitions are expected to add approximately $600 million in revenue.

At the same time, we completed the sale of our Automotive Fluid Conveyance business and announced plans to exit our Lighting and Hydraulics businesses. These three businesses no longer fit our portfolio criteria and we believe they will be more successful under new ownership. We’re deeply grateful for the dedicated service of the employees who were part of these businesses and expect them to have a bright future.

An important part of our transformation story also includes our efforts to create new organic growth platforms. The most significant example is the creation of our new eMobility segment. Launched just two years ago, this new segment is expected to become a $2 billion − $4 billion revenue business over the next 10 years. Our team has already delivered $460 million in new wins and we’re bidding on a significant number of new customer platforms.

Transforming how we work

I’m also pleased to report our digitalization initiatives gained considerable momentum in 2019. Digitalization is impacting every part of the company and allowing Eaton to grow and expand margins. We have organized around four workstreams that will enable us to enhance internal productivity, improve customer-facing processes, create the intelligent factory of the future, and generate new revenue from connected and intelligent products. These efforts are the foundation of our transformation into an intelligent power management company.

Below are a few examples of digital innovations we’re investing in to address a number of the world’s most pressing challenges:

  • Enabling the smart grid of the future and improving grid reliability and efficiency with advanced intelligence.
  • Embedding intelligent products in the electrical infrastructure of buildings to help customers better manage their energy use.
  • Combining our vehicle and electrical expertise to develop differentiated electric vehicle technologies.
  • Designing intelligent and connected solutions that improve uptime and reduce total lifecycle costs for aerospace customers.

In the world of the internet of things, we like the fact that we make the things. This past year, the things we make at Eaton became more intelligent. More of our products were connected to the internet, and we found new ways of creating value from the information our innovative products generate. Sustaining and expanding these efforts in 2020 and beyond is a top priority for our new Chief Digital Officer and an important driver in how we will become an intelligent power management company.

Transforming the way we contribute to society

A company’s success should be determined by more than financial results; it should also be defined by its commitment to the environment, its contributions to society, and the strength of its governance. These elements, also known as ESG, form the basis of our approach to sustainability. Here are some of the ways Eaton is embracing the broader definition of sustainability today, and making power safe, reliable, and efficient for the future.

While output from Eaton facilities around the world increased over the past year, we continued our efforts to reduce our impact on the environment. By the end of 2019, more than half of our sites had achieved Zero-Waste-to-Landfill status, representing an 11 percent increase over 2018. We’re pleased with these results, but we are striving to do more. Our goal is for 100 percent of our manufacturing facilities to achieve this designation by 2030.

We’ve also reduced greenhouse gas (GHG) emissions from our operations by 10 percent from 2018 levels. Our work has earned us a Supplier Engagement Leader score of A- from the CDP, formerly the Carbon Disclosure Project, but we’re not done yet – we aim to cut another 10 percent of emissions from our operations by 2025. And we’re helping our suppliers reduce their GHG emissions.

Finally, we continue to make a difference in the communities where we operate. In 2019, Eaton employees donated their time and efforts to causes important to them. Whether providing in-home care for the elderly through a partnership with a social welfare foundation in Taiwan, supporting emergency family services for victims of domestic violence in the United States, or volunteering for organizations that serve low-income and vulnerable children in Mexico, we encourage our employees throughout the world to take an active role in bettering their communities.

In closing

2019 was a transformational year for Eaton. We reshaped our portfolio and improved our operations. And our solid financial results were a strong endorsement of the strategy that we have in place. We also demonstrated that we can deliver strong results, even when our end markets are weak. Looking ahead, our task is clear. We must continue to focus on organic growth, run the company well, and smartly deploy our strong free cash flow.

Eaton is on a new journey to become an intelligent power management company. We will achieve our objective by leveraging the strength of the Eaton Business System, by building a strong portfolio of businesses, and by creating a digital foundation for the way we work and the products and solutions we sell. We are a stronger company today than we were one year ago, but we know our work is not done.

As a shareholder, you have unlimited investment choices. We recognize this and appreciate your trust in us. On behalf of our 97,000 employees and all of our partners around the world, thank you for your confidence in Eaton and for your support of our mission – to improve the quality of life and the environment while delivering industry-leading returns to shareholders.

Respectfully yours,
Craig Arnold, Chairman and Chief Executive Officer
  1. Net income per share attributable to Eaton ordinary shareholders-diluted of $5.25 for 2019 was $5.76 excluding $0.42 per share expense from acquisition integration and divestiture charges and $0.09 per share expense from expected warranty costs in the Vehicle segment to correct the performance of a product which incorporated a defective part from a supplier.
  2. Net income per share attributable to Eaton ordinary shareholders-diluted of $4.91 for 2018 was $5.39 excluding $0.48 per share expense from the arbitration decision related to the legacy Cooper Industries business acquired in 2012.
  3. Segment margins of 17.2 percent for 2019 were 17.6 percent excluding the items described in note 1.
  4. The cash flow numbers for 2018 used to compare to the cash flow numbers for 2019 were operating cash flow of $2,955 million and free cash flow of $2,390 million, both of which numbers exclude the $297 million payment made for the arbitration decision related to the legacy Cooper Industries business acquired in 2012. Free cash flow is operating cash flow less capital expenditures of $587 million and $565 million in 2019 and 2018, respectively.