Dear Shareholders,
We were founded on a spirit of innovation. We began in an era of dramatic change in transportation, where our products made trucks safer, more reliable and more efficient.
In 2023, we’re celebrating 100 years as a public company. In that time, we’ve never stopped transforming. As we’ve evolved, we’ve stayed focused on our responsibility to our key stakeholders – our employees, customers, shareholders, communities – and all of society. At Eaton, we make what matters work and we power what matters next.
We’re looking ahead to what’s next. Trends like the energy transition and digitalization are positioning us for a growth super cycle that will put us on the leading edge of solving the world’s intelligent power management needs.
To our shareholders:
This year marks an extraordinary milestone in Eaton’s history: the 100th anniversary of our listing on the New York Stock Exchange (NYSE). Of the 2,400 companies currently being traded on the NYSE, only 32 have been listed for 100 consecutive years or more. We’d like to take this moment to reflect on Eaton’s progress since first becoming a public company, and to consider how our progress over the years reflects our resiliency and ability to adapt to a rapidly changing world. While much about Eaton has changed over the last 100 years, our values have remained the same. And at the center of those values lies our relentless focus on serving our customers.
Sustaining this focus over the past century has required that we reinvent ourselves time and again, driven by our customers’ need for technologies and solutions that solve the world’s most urgent power management challenges. Over time, we’ve created value for our shareholders, customers, communities and employees and made good on the broader promise we’ve made to society: to improve the environment and the quality of life for people everywhere.
Our latest transformation is our most significant yet. With $13 billion in capital expenditures and investments in R&D, and more than $20 billion in acquisitions over the past decade, we’re a profoundly different company than we were 10 years ago. Today, we’re a global intelligent power management company delivering faster growth and higher margins, and better earnings consistency. In a dramatic shift from our vehicle beginnings, approximately 90% of our profits now come from our Electrical and Aerospace businesses. And we’re the company we are today because of the confidence that you, our shareholders, continue to show in our management team.
While we’re proud of our history and all we’ve achieved, the best days for our company are still to come. We’re only now beginning to realize the benefits that powerful global trends will have on our company: energy transition, the electrification of the economy and digitalization will drive growth in our markets for years to come.
In 2022, we remained committed to the formula that has led to our success: doing business right, focusing on our customers, investing in differentiated technology, delivering high-quality products, and serving all our stakeholders. When we get this right, our shareholders are rewarded and continue to invest in us.
Some of our most notable accomplishments in the year follow.
100 years of creating value for our stakeholders, for society
We created value for our shareholders. Despite the year’s inflationary environment, labor shortages and supply chain challenges, we delivered record segment margins and adjusted earnings per share. And we once again delivered strong total shareholder returns compared to our peers and the S&P 500.
Our financial results for the year include:
- Earnings per share for 2022 were $6.14. Excluding charges of $0.99 per share related to intangible amortization, $0.37 per share from acquisitions and divestitures, and $0.07 per share related to a multi-year restructuring program, adjusted earnings per share were $7.57, up 14% over 2021.
- Segment margins for 2022 were 20.2%, a full-year record.
- Operating cash flow for 2022 was $2.5 billion.
- For the full year, 2022 sales were $20.8 billion, up 6% from 2021.
- Finally, we posted 13% growth in organic revenue, which was more than 60% above the midpoint of our original guidance for the year.
While we exceeded the midpoint of our original guidance for the year in three out of four of our financial metrics – organic revenue, segment margins and adjusted EPS – we missed on free cash flow due to our efforts to protect customers with higher levels of inventory. We know we must and will do better in 2023.
We created value for our customers.
- We expanded partnerships to enhance grid reliability and began work with the U.S. federal government to make electric transportation safer and more efficient.
- We secured a growing number of wins tied to our customers’ goals around electrification and energy transition, including significant orders for our Breaktor® power protection technology and solutions to support electric vehicle charging stations and needed upgrades to electrical infrastructure.
- We also helped customers address critical power management challenges through our BrightlayerTM suite of digital solutions. Our wins in the year moved us closer to our target of achieving $500 million in revenue from our smart and connected hardware, software and digital services. In support of this goal, we enabled 13 existing Eaton hardware products to be smart and connected and launched 9 new software offerings to strengthen our Brightlayer suite.
- We continued to invest in high-growth, high-margin businesses to meet the changing needs of our customers and strengthen our portfolio, closing the acquisitions of Royal Power Solutions and a 50% stake in the circuit breaker business of Jiangsu Huineng Electric Co., Ltd.
We created value for our people.
- We maintained a strong focus on workplace safety, delivering a safety performance that remained at world-class levels, including a days-away injury rate that improved by 6% over 2021. But our total recordable injury rate was flat for the year at 0.39%, which shows we’ll need to work harder to deliver our 2030 world-leading target rate of 0.25%.
- We appointed leaders from inside Eaton to our topmost leadership roles, naming Heath Monesmith and Paulo Ruiz to lead our Electrical and Industrial Sectors, respectively, and Terry Szmagala to lead our Legal function. And early in 2023, Mike Yelton and Pete Denk were named to succeed Brian Brickhouse and João Faria following their retirements later this year and will lead our Electrical Sector Americas Region and Vehicle Group, respectively. These appointments reflect the rigor of our succession planning efforts and commitment to talent development across the enterprise.
- We strengthened our reputation as a values-driven company, earning a 100% score on the Human Rights Campaign’s 2022 Corporate Equality Index in the U.S. for the seventh consecutive year. In addition, Eaton was named one of the World’s Most Ethical Companies by Ethisphere magazine, one of the World’s Most Admired Companies by Fortune magazine, one of the 100 Best Corporate Citizens by 3BL Media and, for the second year in a row, a Best Place to Work for Disability Inclusion, earning a score of 100 out of 100 on the Disability Equality Index. Finally, our Legal team achieved Mansfield Rule certification in recognition of our efforts to elevate traditionally underrepresented lawyers in our company.
We created value for society.
- We aggressively pursued our 2030 sustainability targets and made substantial progress toward reducing Eaton’s carbon footprint. At year’s end, we had reduced greenhouse gas emissions from our operations by an estimated 18% since 2018, keeping us on target to meet our goal of a 50% reduction by 2030. We also certified 20 additional Eaton sites as zero waste-to-landfill, bringing us to 75% of our 2030 goal, and certified nine additional Eaton sites as zero-water discharge, representing 84% of our 2030 goal. Finally, Eaton issued its first sustainability-linked bond, a historic action that provides a financial incentive to meet our emissions reduction goals.
- We purchased approximately $1.7 billion in goods and services from small and diverse suppliers, representing 32% of our overall spend with U.S. suppliers in the year. Our goal remains to increase our spend with small and diverse suppliers to 40% by 2030. And in acknowledgment of our diverse business practices, we were named among the Best-of-the-Best Corporations in America for Inclusion by the National LGBT Chamber of Commerce and its partners in the National Business Inclusion Consortium.
- We celebrated our legacy of giving back to our communities, marking the 30th anniversary of our Stover Awards program, which honors our colleagues for extraordinary acts of service. And our teams around the world stepped up to provide vital support to those impacted by the war in Ukraine, to deliver food and critical supplies to Eaton employees who faced extended COVID lockdowns in China, and to support relief efforts for those affected by a series of deadly natural disasters in the year.
- We transparently reported our progress on our environmental, social and governance (ESG) commitments with the publication of our annual Sustainability, Task Force on Climate-related Financial Disclosures (TCFD), and Global Inclusion and Diversity Transparency reports.
We’ve positioned Eaton for future value creation.
As we shift our focus to what comes next for Eaton, we do so in a world that is going through a digital transformation – a transformation that will drive the need for more of our intelligent products and more data centers, a significant growth segment for our company. Our Electrical business will also benefit from secular growth trends tied to energy transition. In addition, we’re gearing up to support our Aerospace customers as they get ready for the coming growth cycle in the commercial aerospace and defense markets. And as the world continues to adopt electric vehicles, our eMobility business will see transformative growth. Finally, governments worldwide are investing heavily in clean energy spending programs, important investments that will increase the size of our served markets. We’re well positioned in growth markets now and will be for years to come.
In closing,
As we celebrate Eaton’s 100th year as a public company, we remain committed to maximizing the value we create for our shareholders and for all those we serve. We’re resolved to keep our promise to improve the quality of life and the environment for people everywhere. And we’re committed to earning the trust of our shareholders every day, demonstrating that there’s never been a better time to invest in Eaton.
Thank you for your continued confidence in our company.
Craig Arnold
Chairman and Chief Executive Officer
Read the original letter here.
