To our shareholders:
The past year was a powerful proof point that we’re on the right course with our mission – to improve the quality of life and the environment through the work we do as an intelligent power management company.
In the face of COVID-19 variants, a challenging supply chain environment, severe labor shortages and a rise in inflation, we had one of our best years ever. We demonstrated that sharing a responsibility for what happens in society and working to protect the environment can also be good for shareholders. When done well, the three are synergistic for a company like Eaton.
As a shareholder, you’re looking for a company that has strong employee and community engagement, a company that’s well governed, a company that’s a good steward of the environment, and a company that delivers strong financial returns. Well, that’s exactly what we delivered last year. What’s even better – we have a company culture, operating model and growth plans that will allow us to deliver for years to come.
Delivering growth
Our strong growth during the year was aided by three notable trends that are impacting society and changing the world at an unprecedented pace – electrification, energy transition, and digitalization. And Eaton’s businesses are perfectly suited to take advantage of these trends. We also increased our research and development and new product investments, which will allow Eaton to grow faster than our end markets.
- We capitalized on global growth trends, supporting the world’s transition to renewable energy and helping our customers meet their sustainability goals. Noteworthy examples from our Electrical Sector include advanced electric vehicle charging infrastructure and microgrid solutions that support energy resiliency and independence from the utility grid. We also collaborated with our global data center customer base to develop ways for data centers to monetize existing assets and integrate more renewable energy sources to help create a more stable and sustainable grid.
- Our Industrial Sector introduced new products and technologies to ensure a sustainable future, including variable valve actuation and cylinder deactivation technology and a zero-leak vent valve to help our customers meet emissions regulations. In addition, we secured two significant wins with our Breaktor solution, the industry’s first resettable device for switching and protecting electrical loads on electric vehicles.
- We also joined Bill Gates’ Breakthrough Energy Ventures and the UK-based Business Growth Fund in providing venture capital support to Reactive Technologies, an energy technology company focused on accelerating the clean energy transition.
- Finally, we built strong momentum with our digitalization strategy. In 2021, we secured key customer wins for our Brightlayer digital offerings with a major American utility, a global chemical processing company and a global critical infrastructure management company. Our teams also launched two development programs ─ one that provides intelligent insights for home health care by monitoring activities of daily living and another that provides insights that allow consumers to manage their home energy usage.
Delivering a strong portfolio
We delivered one of the most transformative years in the history of our company, buying high-growth, high-margin businesses and selling a slow-growth and lower-margin business. Now, approximately 90% of our profits come from our Electrical and Aerospace businesses.
- We continued the evolution of the company by completing the sale of our Hydraulics business, a large but slower-growth, lower-margin business than the rest of the company.
- We acquired Tripp Lite, Green Motion and Cobham Mission Systems and acquired a 50% ownership stake in Jiangsu Yineng Electric’s busway business and in HuanYu High Tech. And in early 2022, we acquired Royal Power Solutions. In total, these moves represent $8 billion in portfolio actions, add new products and new capabilities to our Electrical, Aerospace and eMobility businesses, and significantly advance our efforts to build a higher-growth and higher-margin company with more consistent earnings.
Delivering strong financial results
We delivered solid financial performance in the year, achieving record segment margins and record adjusted earnings per share. And we had a strong year in total shareholder returns as compared to our peers and the S&P 500.
Our financial results for the year were as follows:
- Earnings per share for 2021 were $5.34. Excluding charges of $0.90 per share related to intangible amortization, $0.23 per share from acquisitions and divestitures, and $0.15 per share related to a multi-year restructuring program, adjusted earnings per share were $6.62, up 35% over 2020.
- Segment margins of 18.9% for 2021 were a record.
- Operating cash flow for 2021 was $2.2 billion. Excluding a contribution of $200 million to our U.S. qualified pension plan and $340 million paid in taxes on the sale of our Hydraulics business, adjusted operating cash flow was $2.7 billion.
- We continued to reinvest in growing the company, deploying $575 million for capital expenditures and $616 million toward research and development activities.
- For full year 2021, sales were $19.6 billion, reflecting 10% organic growth in a challenging environment.
And we delivered for our shareholders. We returned $1.2 billion to our shareholders in the form of dividends and saw a 44% increase in our share price. Combined, these represent a total shareholder return of 47%, earning Eaton a No. 2 ranking among our 20 peer companies for the year. Also of note, Eaton was recognized by Institutional Investor magazine as a Most Honored Company following its annual survey of portfolio managers and analysts.
Delivering for society
As the world responded to another year of challenges, Eaton remained focused on our mission and aspirational goals. We know that engaged employees and a strong community give us the best opportunity to build a successful and sustainable company, and our team delivered. We also enhanced our inclusive, diverse and equitable culture, and remained firm in our conviction to do business right, leading by our values, regardless of the pressures we faced in the year.
- We strengthened our inclusive, values-based culture and published our first Global Inclusion and Diversity Transparency Report, summarizing our goals and progress toward our comprehensive inclusion and diversity commitments. The diversity of our board of directors also increased in the year, with two thirds of our directors now women or U.S. minorities. And our company was recognized by Newsweek as a Top 100 Most Loved Workplace, one of only a handful of manufacturing companies to be recognized.
- Through our supplier diversity program, we purchased approximately $1.42 billion in goods and services from small and diverse suppliers in 2021, representing 31% of our overall spend with U.S. suppliers. Our goal is to increase our spend with these suppliers to 40% by 2030 and, based on our current run rate, we’re well on our way.
- We supported communities in crisis, providing emergency funding to regions hit hardest by COVID-19, including India and Brazil. Eaton also delivered disaster relief to Europe, China and British Columbia following catastrophic flooding in those regions, and to those impacted by deadly winter storms in North America. These are just a few examples of important causes that our company supported around the world in the year.
- And we made our facilities safer. While we believe even one injury in an Eaton facility is one too many, we finished the year strong with a 7% reduction in our recordable injury rate over 2020. Our teams plan to sustain this momentum and improve our safety results even further in 2022.
Delivering for the environment
Throughout 2021, our commitment to sustainability ─ conducting business in a way that allows our customers and all of society to prosper today and into the future – remained at the core of all we do. We continued our efforts to protect the environment, accelerating our progress toward our ambitious, science-based targets. Here are a number of key accomplishments in the year:
- We moved closer to achieving our ambitious 2030 sustainability targets. At year’s end, we had reduced greenhouse gas emissions from our operations by approximately 9% since 2018, which represents 18% of our 2030 goal. An additional 16 Eaton sites were certified zero waste to landfill, bringing us to 65% of our 2030 goal, and nine of our sites were certified zero water discharge, achieving 50% of our 2030 goal.
- We also named our first Chief Sustainability Officer, a move that signals the depth of our commitment to sustainability and the complex challenges the work entails, and published our first climate-related financial disclosures report.
- Finally, we further strengthened our commitment to climate action by signing the United Nations Global Compact and participating in the Race to Zero campaign.
Delivering for the future
While we anticipate that some of the challenges of the past year will stay with us, particularly issues related to the global supply chain, we expect 2022 to be another strong year for Eaton. Our portfolio transformation has positioned us for sustained growth, and we’ll continue to seek new opportunities to grow our company through acquisition, allocating capital to high-performing, high-growth, high-margin businesses. We’ll continue to invest to grow organically. Our teams will capitalize on the growth super cycle ─ underpinned by the global trends of electrification, energy transition and digitalization ─ a cycle that is just beginning and will be with us for the next decade. And as always, our long-standing commitment to ESG, a key growth driver for Eaton, will remain at the forefront of all we do.
In closing
With the support of our investors and the dedication of our employees, Eaton has made important progress in a journey that will shape the future of our company.
But our best years are still ahead of us. As we continue to transform the company, we’ll find new ways to better serve our customers, employees, and communities, and deliver stronger returns to our shareholders. And we’ll find new opportunities to leverage our intelligent power management solutions to create a positive and lasting impact on the environment and on the lives of those we serve.
There’s never been a more important time than now to be an intelligent power management company.
Thank you for your confidence in our company, and for standing with us on this journey. Together, we’ll build a promising future for Eaton and for all who depend on us.
