##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 Commission
file number 1-1396
 EATON CORPORATION
 
 Ohio
    
    34-0196300(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)Eaton Center, Cleveland, Ohio
    
    44114-2584(Address of principal executive offices)
    
    (Zip Code)
  
 þ o
  þ o o
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSignatureExhibit IndexEX-12EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Eaton Corporation  Statements of Consolidated Income
 Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 30(Millions except for per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    3,298
    
    
    $
    3,083
    
    
    $
    9,659
    
    
    $
    9,164Cost of products sold
    
    
    2,381
    
    
    
    2,289
    
    
    
    6,954
    
    
    
    6,675Selling & administrative expense
    
    
    528
    
    
    
    467
    
    
    
    1,558
    
    
    
    1,440Research & development expense
    
    
    88
    
    
    
    84
    
    
    
    258
    
    
    
    243Interest expense-net
    
    
    37
    
    
    
    25
    
    
    
    108
    
    
    
    81Other expense (income)-net
    
    
    1
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    (10
    )Income from continuing operations before income taxes
    
    
    263
    
    
    
    221
    
    
    
    782
    
    
    
    735Income taxes
    
    
    25
    
    
    
    11
    
    
    
    75
    
    
    
    75Income from continuing operations
    
    
    238
    
    
    
    210
    
    
    
    707
    
    
    
    660Income from discontinued operations
    
    
    20
    
    
    
    38
    
    
    
    31
    
    
    
    49Net income
    
    $
    258
    
    
    $
    248
    
    
    $
    738
    
    
    $
    709Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.59
    
    
    $
    1.38
    
    
    $
    4.71
    
    
    $
    4.30Discontinued operations
    
    
    .12
    
    
    
    .24
    
    
    
    .20
    
    
    
    .32$
    1.71
    
    
    $
    1.62
    
    
    $
    4.91
    
    
    $
    4.62Average number of Common Shares outstanding assuming dilution
    
    
    150.4
    
    
    
    153.0
    
    
    
    150.2
    
    
    
    153.4Net income per Common Share basicContinuing operations
    
    $
    1.62
    
    
    $
    1.40
    
    
    $
    4.80
    
    
    $
    4.38Discontinued operations
    
    
    .13
    
    
    
    .25
    
    
    
    .21
    
    
    
    .32$
    1.75
    
    
    $
    1.65
    
    
    $
    5.01
    
    
    $
    4.70Average number of Common Shares outstanding basic
    
    
    147.0
    
    
    
    150.5
    
    
    
    147.3
    
    
    
    150.7Cash dividends paid per Common Share
    
    $
    .43
    
    
    $
    .39
    
    
    $
    1.29
    
    
    $
    1.09




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##### Table of Contents



Eaton Corporation  Condensed Consolidated Balance Sheets
 Sept. 30,
    
    
    Dec. 31,(Millions)
    
    2007
    
    
    2006ASSETSCurrent assetsCash
    
    $
    171
    
    
    $
    114Short-term investments
    
    
    568
    
    
    
    671Accounts receivable
    
    
    2,220
    
    
    
    1,928Inventories
    
    
    1,399
    
    
    
    1,293Deferred income taxes & other current assets
    
    
    468
    
    
    
    4024,826
    
    
    
    4,408Property, plant & equipment-net
    
    
    2,252
    
    
    
    2,271Goodwill
    
    
    3,486
    
    
    
    3,034Other intangible assets
    
    
    1,391
    
    
    
    969Deferred income taxes & other assets
    
    
    784
    
    
    
    735$
    12,739
    
    
    $
    11,417LIABILITIES & SHAREHOLDERS EQUITYCurrent liabilitiesShort-term debt, primarily commercial paper
    
    $
    541
    
    
    $
    490Current portion of long-term debt
    
    
    12
    
    
    
    322Accounts payable
    
    
    1,126
    
    
    
    1,050Accrued compensation
    
    
    320
    
    
    
    305Other current liabilities
    
    
    1,154
    
    
    
    1,1233,153
    
    
    
    3,290Long-term debt
    
    
    2,547
    
    
    
    1,774Pension liabilities
    
    
    862
    
    
    
    942Other postretirement liabilities
    
    
    773
    
    
    
    766Other long-term liabilities
    
    
    661
    
    
    
    539Shareholders equity
    
    
    4,743
    
    
    
    4,106$
    12,739
    
    
    $
    11,417




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##### Table of Contents



Eaton Corporation  Condensed Statements of Consolidated Cash Flows
 Nine months endedSeptember 30(Millions)
    
    2007
    
    
    2006Net cash provided by (used in) operating activitiesNet income
    
    $
    738
    
    
    $
    709Adjustments to reconcile to net cash provided by operating activitiesDepreciation & amortization
    
    
    344
    
    
    
    322Pension liabilities
    
    
    150
    
    
    
    155Gains on sales of businesses
    
    
    (41
    )
    
    
    (34
    )Changes in working capital, excluding acquisitions and sales of businesses
    
    
    (235
    )
    
    
    10Voluntary contributions to United States & United Kingdom qualified pension plans
    
    
    (171
    )
    
    
    (114
    )Other-net
    
    
    (52
    )
    
    
    (32
    )733
    
    
    
    1,016Net cash provided by (used in) investing activitiesExpenditures for property, plant & equipment
    
    
    (228
    )
    
    
    (223
    )Cash paid for acquisitions of businesses
    
    
    (794
    )
    
    
    (249
    )Proceeds from sales of businesses
    
    
    119
    
    
    
    66Sales (purchases) of short-term investments-net
    
    
    162
    
    
    
    (333
    )Other-net
    
    
    (30
    )
    
    
    (51
    )(771
    )
    
    
    (790
    )Net cash provided by (used in) financing activitiesBorrowings with original maturities of more than three monthsProceeds
    
    
    1,311
    
    
    
    617Payments
    
    
    (888
    )
    
    
    (549
    )Borrowings (payments) with original maturities of less than three months-net,
primarily commercial paper
    
    
    31
    
    
    
    (89
    )Cash dividends paid
    
    
    (188
    )
    
    
    (162
    )Proceeds from exercise of employee stock options
    
    
    130
    
    
    
    86Income tax benefit from exercise of employee stock options
    
    
    39
    
    
    
    22Purchase of Common Shares
    
    
    (340
    )
    
    
    (132
    )95
    
    
    
    (207
    )Total increase in cash
    
    
    57
    
    
    
    19Cash at beginning of year
    
    
    114
    
    
    
    110Cash at end of period
    
    $
    171
    
    
    $
    129




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements
  Preparation of Financial Statements
  Discontinued Automotive Operations
  Financial Presentation Changes
  Acquisitions of Businesses
  BusinessAcquired business
    
    Date of acquisition
    
    segment
    
    Annual salesPulizzi EngineeringA U.S. manufacturer of alternating current (AC) power distribution,
AC power sequencing, redundant power and remote-reboot power
management systems
    
    June 19, 2007
    
    Electrical
    
    $12 for 2006Technology and related assets of SMC Electrical Products, Inc.s
industrial medium-voltage adjustable frequency drive business
    
    May 18, 2007
    
    Electrical
    
    NoneFuel components division of Saturn Electronics & Engineering, Inc.A U.S. designer and manufacturer of fuel containment and shutoff
valves, emissions control valves and specialty actuators
    
    May 2, 2007
    
    Automotive
    
    $28 for 2006Aphel Technologies LimitedA U.K.-based global supplier of high density, fault-tolerant power
distribution solutions for datacenters, technical offices, laboratories
and retail environments
    
    April 5, 2007
    
    Electrical
    
    $12 for 2006Argo-TechA U.S.-based manufacturer of high performance aerospace engine
fuel pumps and systems, airframe fuel pumps and systems, and
ground fueling systems for commercial and military aerospace
markets
    
    March 16, 2007
    
    Fluid Power
    
    $206 for 2006
 Page 5




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BusinessAcquired business
    
    Date of acquisition
    
    segment
    
    Annual salesPower Protection Business of Power Products Ltd.A Czech Republic distributor and service provider of Powerware®
products and other uninterruptible power systems
    
    February 7, 2007
    
    Electrical
    
    $3 for 2006Schreder-Hazemeyer Eaton acquired the remaining 50% ownership of the Belgium
manufacturer of low and medium voltage electrical distribution
switchgear
    
    December 1, 2006
    
    Electrical
    
    $9 for 2006Diesel fuel processing technology & associated assets of Catalytica Energy
Systems Inc.A U.S. developer of emission control solutions for trucks
    
    October 26, 2006
    
    Truck
    
    NoneSenyuan International Holdings LimitedA China-based manufacturer of vacuum circuit breakers and other
electrical switchgear components
    
    September 14, 2006
    
    Electrical
    
    $47 for 2005Ronningen-Petter business unit of Dover Resources, Inc.A U.S.-based manufacturer of industrial fine filters and components
    
    September 5, 2006
    
    Fluid Power
    
    $30 for 2005Synflex business unit of Saint-Gobain Performance Plastics Corp.A U.S.-based manufacturer of thermoplastic hose and tubing
    
    March 31, 2006
    
    Fluid Power
    
    $121 for 2005Marina Power & Lighting A U.S. manufacturer of marine duty electrical distribution products
    
    March 24, 2006
    
    Electrical
    
    $11 for 2005
  
   PlantWorkforce Reductions
    
    
    closingEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance at January 1, 2007
    
    
    1,076
    
    
    $
    33
    
    
    $
    22
    
    
    $
    55Liabilities recorded in 2007
    
    
    221
    
    
    
    9
    
    
    
    44
    
    
    
    53Utilized in 2007
    
    
    (547
    )
    
    
    (14
    )
    
    
    (48
    )
    
    
    (62
    )Balance at September 30, 2007
    
    
    750
    
    
    $
    28
    
    
    $
    18
    
    
    $
    46
 Page 6




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Acquisition Integration Charges
  Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Electrical
    
    $
    4
    
    
    $
    1
    
    
    $
    8
    
    
    $
    6Fluid Power
    
    
    13
    
    
    
    5
    
    
    
    36
    
    
    
    11Truck
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    5Automotive
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    3Pretax charges
    
    $
    18
    
    
    $
    7
    
    
    $
    45
    
    
    $
    25After-tax charges
    
    $
    11
    
    
    $
    5
    
    
    $
    29
    
    
    $
    17Per Common Share
    
    $
    .08
    
    
    $
    .03
    
    
    $
    .20
    
    
    $
    .11
  Plant Closing Charges
  Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006Electrical
    
    $
    4
    
    
    $
    5Fluid Power
    
    
    9
    
    
    
    19Truck
    
    
    22
    
    
    
    25Automotive
    
    
    31
    
    
    
    47Pretax charges
    
    $
    66
    
    
    $
    96
  Page 7




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##### Table of Contents



Summary of Acquisition Integration and Plant Closing Charges
  PlantWorkforce Reductions
    
    
    closingEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance at January 1, 2007
    
    
    1,603
    
    
    $
    49
    
    
    $
    6
    
    
    $
    55Charges recorded in 2007
    
    
    
    
    
    
    2
    
    
    
    46
    
    
    
    48Utilized in 2007
    
    
    (899
    )
    
    
    (30
    )
    
    
    (50
    )
    
    
    (80
    )Balance at September 30, 2007
    
    
    704
    
    
    $
    21
    
    
    $
    2
    
    
    $
    23
 Retirement Benefit Plans Expense
  Three months ended September 30Other postretirementPension benefits
    
    
    benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    (37
    )
    
    $
    (35
    )
    
    $
    (3
    )
    
    $
    (4
    )Interest cost
    
    
    (41
    )
    
    
    (38
    )
    
    
    (12
    )
    
    
    (12
    )Expected return on plan assets
    
    
    45
    
    
    
    42Amortization
    
    
    (19
    )
    
    
    (17
    )
    
    
    (3
    )
    
    
    (4
    )(52
    )
    
    
    (48
    )
    
    
    (18
    )
    
    
    (20
    )Curtailment loss
    
    
    
    
    
    
    (8
    )Settlement loss
    
    
    (11
    )
    
    
    (11
    )$
    (63
    )
    
    $
    (67
    )
    
    $
    (18
    )
    
    $
    (20
    )
 Nine months ended September 30Other postretirementPension benefits
    
    
    benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    (112
    )
    
    $
    (108
    )
    
    $
    (10
    )
    
    $
    (11
    )Interest cost
    
    
    (122
    )
    
    
    (111
    )
    
    
    (35
    )
    
    
    (36
    )Expected return on plan assets
    
    
    134
    
    
    
    124Amortization
    
    
    (56
    )
    
    
    (50
    )
    
    
    (10
    )
    
    
    (10
    )(156
    )
    
    
    (145
    )
    
    
    (55
    )
    
    
    (57
    )Curtailment loss
    
    
    (1
    )
    
    
    (10
    )
    
    
    
    
    
    
    (1
    )Settlement loss
    
    
    (31
    )
    
    
    (34
    )$
    (188
    )
    
    $
    (189
    )
    
    $
    (55
    )
    
    $
    (58
    )
  Income Taxes
  Page 8




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Long-term Debt
  Page 9




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##### Table of Contents



Common Shares
  Shares repurchased
    
    
    Cost(Shares in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006First quarter
    
    
    2.312
    
    
    
    
    
    
    $
    178Second quarter
    
    
    1.437
    
    
    
    0.895
    
    
    
    131
    
    
    $
    63Third quarter
    
    
    0.343
    
    
    
    1.051
    
    
    
    31
    
    
    
    69Fourth quarter
    
    
    
    
    
    
    3.340
    
    
    
    
    
    
    
    2544.092
    
    
    
    5.286
    
    
    $
    340
    
    
    $
    386
  Net Income per Common Share
  Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Income from continuing operations
    
    $
    238
    
    
    $
    210
    
    
    $
    707
    
    
    $
    660Income from discontinued operations
    
    
    20
    
    
    
    38
    
    
    
    31
    
    
    
    49Net income
    
    $
    258
    
    
    $
    248
    
    
    $
    738
    
    
    $
    709Average number of Common Shares outstanding assuming dilution
    
    
    150.4
    
    
    
    153.0
    
    
    
    150.2
    
    
    
    153.4Less dilutive effect of stock options
    
    
    3.4
    
    
    
    2.5
    
    
    
    2.9
    
    
    
    2.7Average number of Common Shares outstanding basic
    
    
    147.0
    
    
    
    150.5
    
    
    
    147.3
    
    
    
    150.7Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.59
    
    
    $
    1.38
    
    
    $
    4.71
    
    
    $
    4.30Discontinued operations
    
    
    .12
    
    
    
    .24
    
    
    
    .20
    
    
    
    .32$
    1.71
    
    
    $
    1.62
    
    
    $
    4.91
    
    
    $
    4.62Net income per Common Share basicContinuing operations
    
    $
    1.62
    
    
    $
    1.40
    
    
    $
    4.80
    
    
    $
    4.38Discontinued operations
    
    
    .13
    
    
    
    .25
    
    
    
    .21
    
    
    
    .32$
    1.75
    
    
    $
    1.65
    
    
    $
    5.01
    
    
    $
    4.70
 Page 10




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##### Table of Contents



Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    258
    
    
    $
    248
    
    
    $
    738
    
    
    $
    709Foreign currency translation
    
    
    86
    
    
    
    3
    
    
    
    166
    
    
    
    54Pension and other postretirement liabilities, net of income taxes
    
    
    12
    
    
    
    (1
    )
    
    
    44
    
    
    
    (7
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    6Comprehensive income
    
    $
    355
    
    
    $
    249
    
    
    $
    954
    
    
    $
    756
 Inventories
  Sept. 30,
    
    
    Dec. 31,2007
    
    
    2006Raw materials
    
    $
    651
    
    
    $
    570Work-in-process & finished goods
    
    
    859
    
    
    
    825Inventories at FIFO
    
    
    1,510
    
    
    
    1,395Excess of FIFO over LIFO cost
    
    
    (111
    )
    
    
    (102
    )$
    1,399
    
    
    $
    1,293
 Business Segment Information
 Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Net salesElectrical
    
    $
    1,221
    
    
    $
    1,076
    
    
    $
    3,463
    
    
    $
    3,081Fluid Power
    
    
    1,139
    
    
    
    998
    
    
    
    3,330
    
    
    
    2,998Truck
    
    
    541
    
    
    
    647
    
    
    
    1,615
    
    
    
    1,900Automotive
    
    
    397
    
    
    
    362
    
    
    
    1,251
    
    
    
    1,185$
    3,298
    
    
    $
    3,083
    
    
    $
    9,659
    
    
    $
    9,164Operating profitElectrical
    
    $
    156
    
    
    $
    116
    
    
    $
    415
    
    
    $
    332Fluid Power
    
    
    128
    
    
    
    105
    
    
    
    375
    
    
    
    319Truck
    
    
    95
    
    
    
    122
    
    
    
    277
    
    
    
    372Automotive
    
    
    45
    
    
    
    3
    
    
    
    164
    
    
    
    92CorporateAmortization of intangible assets
    
    
    (19
    )
    
    
    (13
    )
    
    
    (54
    )
    
    
    (35
    )Interest expense-net
    
    
    (37
    )
    
    
    (25
    )
    
    
    (108
    )
    
    
    (81
    )Minority interest
    
    
    (4
    )
    
    
    (3
    )
    
    
    (9
    )
    
    
    (6
    )Pension & other postretirement benefit expense
    
    
    (42
    )
    
    
    (40
    )
    
    
    (123
    )
    
    
    (120
    )Stock option expense
    
    
    (8
    )
    
    
    (7
    )
    
    
    (22
    )
    
    
    (20
    )Contribution to Eaton Charitable Fund
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Other corporate expensenet
    
    
    (35
    )
    
    
    (37
    )
    
    
    (117
    )
    
    
    (118
    )Income from continuing operations before income taxes
    
    
    263
    
    
    
    221
    
    
    
    782
    
    
    
    735Income taxes
    
    
    25
    
    
    
    11
    
    
    
    75
    
    
    
    75Income from continuing operations
    
    
    238
    
    
    
    210
    
    
    
    707
    
    
    
    660Income from discontinued operations
    
    
    20
    
    
    
    38
    
    
    
    31
    
    
    
    49Net income
    
    $
    258
    
    
    $
    248
    
    
    $
    738
    
    
    $
    709
 Page 11




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview of the Company
  Highlights of Results for 2007
 Three months ended September 30
    
    Nine months ended September 302007
    
    
    2006
    
    
    Increase
    
    2007
    
    
    2006
    
    
    IncreaseContinuing operationsNet sales
    
    $
    3,298
    
    
    $
    3,083
    
    
    
    7%
    
    
    $
    9,659
    
    
    $
    9,164
    
    
    
    5%Gross profit
    
    
    917
    
    
    
    794
    
    
    
    15%
    
    
    
    2,705
    
    
    
    2,489
    
    
    
    9%Percent of net sales
    
    
    27.8
    %
    
    
    25.8
    %
    
    
    
    
    
    
    28.0
    %
    
    
    27.2
    %Income before income taxes
    
    
    263
    
    
    
    221
    
    
    
    19%
    
    
    
    782
    
    
    
    735
    
    
    
    6%Income after income taxes
    
    $
    238
    
    
    $
    210
    
    
    
    13%
    
    
    $
    707
    
    
    $
    660
    
    
    
    7%Income from discontinued operations
    
    
    20
    
    
    
    38
    
    
    
    
    
    
    
    31
    
    
    
    49Net income
    
    $
    258
    
    
    $
    248
    
    
    
    4%
    
    
    $
    738
    
    
    $
    709
    
    
    
    4%Net income per Common Share
assuming dilutionContinuing operations
    
    $
    1.59
    
    
    $
    1.38
    
    
    
    15%
    
    
    $
    4.71
    
    
    $
    4.30
    
    
    
    10%Discontinued operations
    
    
    .12
    
    
    
    .24
    
    
    
    
    
    
    
    .20
    
    
    
    .32$
    1.71
    
    
    $
    1.62
    
    
    
    6%
    
    
    $
    4.91
    
    
    $
    4.62
    
    
    
    6%
  Page 12




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##### Table of Contents



Date of
    
    Business
    
    AnnualAcquired business
    
    acquisition
    
    segment
    
    salesPulizzi EngineeringA U.S. manufacturer of alternating current (AC) power distribution,
AC power sequencing, redundant power and remote-reboot power
management systems
    
    June 19, 2007
    
    Electrical
    
    $12 for 2006Technology and related assets of SMC Electrical Products, Inc.s
industrial medium-voltage adjustable frequency drive business
    
    May 18, 2007
    
    Electrical
    
    NoneFuel components division of Saturn Electronics & Engineering, Inc.A U.S. designer and manufacturer of fuel containment and shutoff
valves, emissions control valves and specialty actuators
    
    May 2, 2007
    
    Automotive
    
    $28 for 2006Aphel Technologies LimitedA U.K.-based global supplier of high density, fault-tolerant power
distribution solutions for datacenters, technical offices, laboratories
and retail environments
    
    April 5, 2007
    
    Electrical
    
    $12 for 2006Argo-TechA U.S.-based manufacturer of high performance aerospace engine
fuel pumps and systems, airframe fuel pumps and systems, and
ground fueling systems for commercial and military aerospace
markets
    
    March 16, 2007
    
    Fluid Power
    
    $206 for 2006Power Protection Business of Power Products Ltd.A Czech Republic distributor and service provider of Powerware®
products and other uninterruptible power systems
    
    February 7, 2007
    
    Electrical
    
    $3 for 2006
 Page 13




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##### Table of Contents



 
        Page 14




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##### Table of Contents



Results of Operations  2007 Compared to 2006
 Three months ended September 30
    
    Nine months ended September 302007
    
    
    2006
    
    
    Increase
    
    2007
    
    
    2006
    
    
    IncreaseContinuing operationsNet sales
    
    $
    3,298
    
    
    $
    3,083
    
    
    
    7%
    
    
    $
    9,659
    
    
    $
    9,164
    
    
    
    5%Gross profit
    
    
    917
    
    
    
    794
    
    
    
    15%
    
    
    
    2,705
    
    
    
    2,489
    
    
    
    9%Percent of net sales
    
    
    27.8
    %
    
    
    25.8
    %
    
    
    
    
    
    
    28.0
    %
    
    
    27.2
    %Income before income taxes
    
    
    263
    
    
    
    221
    
    
    
    19%
    
    
    
    782
    
    
    
    735
    
    
    
    6%Income after income taxes
    
    $
    238
    
    
    $
    210
    
    
    
    13%
    
    
    $
    707
    
    
    $
    660
    
    
    
    7%Income from discontinued operations
    
    
    20
    
    
    
    38
    
    
    
    
    
    
    
    31
    
    
    
    49Net income
    
    $
    258
    
    
    $
    248
    
    
    
    4%
    
    
    $
    738
    
    
    $
    709
    
    
    
    4%Net income per Common Share
assuming dilutionContinuing operations
    
    $
    1.59
    
    
    $
    1.38
    
    
    
    15%
    
    
    $
    4.71
    
    
    $
    4.30
    
    
    
    10%Discontinued operations
    
    
    .12
    
    
    
    .24
    
    
    
    
    
    
    
    .20
    
    
    
    .32$
    1.71
    
    
    $
    1.62
    
    
    
    6%
    
    
    $
    4.91
    
    
    $
    4.62
    
    
    
    6%
   Page 15




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30
    
    
    September 302007
    
    
    2006
    
    
    2007
    
    
    2006Electrical
    
    $
    4
    
    
    $
    1
    
    
    $
    8
    
    
    $
    6Fluid Power
    
    
    13
    
    
    
    5
    
    
    
    36
    
    
    
    11Truck
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    5Automotive
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    3Pretax charges
    
    $
    18
    
    
    $
    7
    
    
    $
    45
    
    
    $
    25After-tax charges
    
    $
    11
    
    
    $
    5
    
    
    $
    29
    
    
    $
    17Per Common Share
    
    $
    .08
    
    
    $
    .03
    
    
    $
    .20
    
    
    $
    .11
   Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006Electrical
    
    $
    6
    
    
    $
    5Fluid Power
    
    
    11
    
    
    
    24Truck
    
    
    24
    
    
    
    33Automotive
    
    
    34
    
    
    
    52Corporate
    
    
    1
    
    
    
    1Pretax charges
    
    $
    76
    
    
    $
    115
  Page 16




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##### Table of Contents



Results by Business Segment
 Electrical
 Three months ended September 30
    
    Nine months ended September 302007
    
    2006
    
    Increase
    
    2007
    
    2006
    
    IncreaseNet sales
    
    $
    1,221
    
    
    $
    1,076
    
    
    
    13
    %
    
    $
    3,463
    
    
    $
    3,081
    
    
    
    12
    %Operating profit
    
    
    156
    
    
    
    116
    
    
    
    34
    %
    
    
    415
    
    
    
    332
    
    
    
    25
    %Operating margin
    
    
    12.8
    %
    
    
    10.8
    %
    
    
    
    
    
    
    12.0
    %
    
    
    10.8
    %
 Page 17




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##### Table of Contents



 
     ®
 Page 18




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##### Table of Contents



Fluid Power
 Three months ended September 30
    
    Nine months ended September 302007
    
    2006
    
    Increase
    
    2007
    
    2006
    
    IncreaseNet sales
    
    $
    1,139
    
    
    $
    998
    
    
    
    14
    %
    
    $
    3,330
    
    
    $
    2,998
    
    
    
    11
    %Operating profit
    
    
    128
    
    
    
    105
    
    
    
    22
    %
    
    
    375
    
    
    
    319
    
    
    
    18
    %Operating margin
    
    
    11.2
    %
    
    
    10.5
    %
    
    
    
    
    
    
    11.3
    %
    
    
    10.6
    %
     
  Page 19




---



##### Table of Contents



Truck
 Three months ended September 30
    
    Nine months ended September 302007
    
    2006
    
    (Decrease)
    
    2007
    
    2006
    
    (Decrease)Net sales
    
    $
    541
    
    
    $
    647
    
    
    
    (16
    %)
    
    $
    1,615
    
    
    $
    1,900
    
    
    
    (15
    %)Operating profit
    
    
    95
    
    
    
    122
    
    
    
    (22
    %)
    
    
    277
    
    
    
    372
    
    
    
    (26
    %)Operating margin
    
    
    17.6
    %
    
    
    18.9
    %
    
    
    
    
    
    
    17.2
    %
    
    
    19.6
    %
    Automotive
 Three months ended September 30
    
    Nine months ended September 302007
    
    2006
    
    Increase
    
    2007
    
    2006
    
    IncreaseNet sales
    
    $
    397
    
    
    $
    362
    
    
    
    10
    %
    
    $
    1,251
    
    
    $
    1,185
    
    
    
    6
    %Operating profit
    
    
    45
    
    
    
    3
    
    
    
    1400
    %
    
    
    164
    
    
    
    92
    
    
    
    78
    %Operating margin
    
    
    11.3
    %
    
    
    0.8
    %
    
    
    
    
    
    
    13.1
    %
    
    
    7.8
    %
   Page 20




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Changes in Financial Condition During 2007
     Page 21




---



##### Table of Contents



Contractual Obligations
  Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  Page 22




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Maximum number (orTotal number of
    
    approximate dollarshares purchased as
    
    value) of sharespart of publicly
    
    that may yet beTotal number of
    
    Average price paid
    
    announced plans or
    
    purchased under theMonth
    
    shares purchased
    
    per share
    
    programs
    
    plans or programsAugust
    
    
    343,200
    
    
    $
    89.79
    
    
    
    343,200
    
    
    
    5,907,800
  
 Item 6. Exhibits
  Page 23




---



##### Table of Contents



Signature
  EATON CORPORATIONRegistrantDate:    November 5, 2007
    /s/ Richard H. FearonRichard H. FearonExecutive Vice President 
Chief Financial and Planning Officer Page 24




---



##### Table of Contents



Eaton Corporation
Third Quarter 2007 Report on Form 10-Q
Exhibit Index
 3 (i)
    
    Amended Articles of Incorporation (amended and restated as of April
27, 1994) filed as Exhibit 3(a) to the Form 10-K Report for the year
ended December 31, 2002 and incorporated herein by reference3 (ii)
    
    Amended Regulations (amended and restated as of April 26, 2000)
filed as Exhibit 3(b) to the Form 10-Q Report for the quarter ended
June 30, 2000 and incorporated herein by reference4
    
    Instruments defining rights of security holders, including
indentures (Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees
to furnish to the Commission, upon request, a copy of the
instruments defining the rights of holders of long-term debt)12
    
    Ratio of Earnings to Fixed Charges31.1
    
    Certification of Chief Executive Officer (Pursuant to Rule 13a-14(a))31.2
    
    Certification of Chief Financial Officer (Pursuant to Rule 13a-14(a))32.1
    
    Certification of Chief Executive Officer (Pursuant to Rule
13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act)32.2
    
    Certification of Chief Financial Officer (Pursuant to Rule
13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act)
 Page 25