##### 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 June 30,
2006
 Commission file number 1-1396
 EATON CORPORATION
 
  Ohio
    
    34-0196300(State or other jurisdiction of
    
    (IRS Employer Identification Number)incorporation or organization)Eaton Center, Cleveland, Ohio
    
    44114-2584(Address of principal executive offices)
    
    (Zip code)
  
  þ
  þ o o
 þ




---



TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion & Analysis of Financial Condition & 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
    
    
    Six months endedJune 30
    
    
    June 30(Millions except for per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    3,186
    
    
    $
    2,834
    
    
    $
    6,199
    
    
    $
    5,488Cost of products sold
    
    
    2,307
    
    
    
    2,039
    
    
    
    4,474
    
    
    
    3,952Selling & administrative expense
    
    
    499
    
    
    
    446
    
    
    
    979
    
    
    
    865Research & development expense
    
    
    82
    
    
    
    69
    
    
    
    163
    
    
    
    138Interest expense-net
    
    
    28
    
    
    
    22
    
    
    
    56
    
    
    
    44Other (income) expense-net
    
    
    (8
    )
    
    
    (9
    )
    
    
    (4
    )
    
    
    (14
    )Income before income taxes
    
    
    278
    
    
    
    267
    
    
    
    531
    
    
    
    503Income taxes
    
    
    25
    
    
    
    58
    
    
    
    70
    
    
    
    107Net income
    
    $
    253
    
    
    $
    209
    
    
    $
    461
    
    
    $
    396Net income per Common Share assuming dilution
    
    $
    1.64
    
    
    $
    1.37
    
    
    $
    3.00
    
    
    $
    2.55Average number of Common Shares outstanding
assuming dilution
    
    
    154.3
    
    
    
    153.4
    
    
    
    153.7
    
    
    
    155.2Net income per Common Share basic
    
    $
    1.67
    
    
    $
    1.40
    
    
    $
    3.06
    
    
    $
    2.62Average number of Common Shares outstanding
basic
    
    
    151.7
    
    
    
    149.8
    
    
    
    151.0
    
    
    
    151.4Cash dividends paid per Common Share
    
    $
    .35
    
    
    $
    .31
    
    
    $
    .70
    
    
    $
    .62
  2




---



##### Table of Contents





Eaton Corporation
Condensed Consolidated Balance Sheets


June 30,
    
    
    Dec. 31,(Millions)
    
    2006
    
    
    2005AssetsCurrent assetsCash
    
    $
    125
    
    
    $
    110Short-term investments
    
    
    354
    
    
    
    226Accounts receivable
    
    
    2,035
    
    
    
    1,785Inventories
    
    
    1,186
    
    
    
    1,099Deferred income taxes & other current assets
    
    
    419
    
    
    
    3584,119
    
    
    
    3,578Property, plant & equipment-net
    
    
    2,220
    
    
    
    2,175Goodwill
    
    
    3,152
    
    
    
    3,139Other intangible assets
    
    
    764
    
    
    
    626Deferred income taxes & other assets
    
    
    630
    
    
    
    700$
    10,885
    
    
    $
    10,218Liabilities & Shareholders EquityCurrent liabilitiesShort-term debt, primarily commercial paper
    
    $
    431
    
    
    $
    394Current portion of long-term debt
    
    
    477
    
    
    
    240Accounts payable
    
    
    1,012
    
    
    
    810Accrued compensation
    
    
    256
    
    
    
    277Accrued income & other taxes
    
    
    293
    
    
    
    305Other current liabilities
    
    
    1,010
    
    
    
    9423,479
    
    
    
    2,968Long-term debt
    
    
    1,514
    
    
    
    1,830Postretirement benefits other than pensions
    
    
    528
    
    
    
    537Pensions & other liabilities
    
    
    1,115
    
    
    
    1,105Shareholders equity
    
    
    4,249
    
    
    
    3,778$
    10,885
    
    
    $
    10,218


3




---



##### Table of Contents





Eaton Corporation
Condensed Statements of Consolidated Cash Flows


Six months endedJune 30(Millions)
    
    2006
    
    
    2005Net cash provided by operating activitiesNet income
    
    $
    461
    
    
    $
    396Adjustments to reconcile to net cash provided by operating
activitiesDepreciation & amortization
    
    
    214
    
    
    
    199Pensions
    
    
    100
    
    
    
    51Changes in working capital, excluding acquisitions of
businesses
    
    
    (108
    )
    
    
    (230
    )Voluntary contributions to United States & United Kingdom
qualified pension plans
    
    
    (107
    )
    
    
    (7
    )Other-net
    
    
    8
    
    
    
    6568
    
    
    
    415Net cash used in investing activitiesExpenditures for property, plant & equipment
    
    
    (139
    )
    
    
    (144
    )Acquisitions of businesses
    
    
    (144
    )
    
    
    (80
    )Purchases of short-term investments-net
    
    
    (121
    )
    
    
    (106
    )Other-net
    
    
    (42
    )
    
    
    5(446
    )
    
    
    (325
    )Net cash used in financing activitiesBorrowings with original maturities of more than three
monthsProceeds
    
    
    292
    
    
    
    275Payments
    
    
    (187
    )
    
    
    (6
    )Borrowings (payments) with original maturities of less than
three
months-net, primarily commercial paper
    
    
    (148
    )
    
    
    195Cash dividends paid
    
    
    (104
    )
    
    
    (93
    )Proceeds from exercise of employee stock options
    
    
    82
    
    
    
    34Income tax benefit from exercise of employee stock
options
    
    
    21
    
    
    
    Purchase of Common Shares
    
    
    (63
    )
    
    
    (450
    )(107
    )
    
    
    (45
    )Total increase in cash
    
    
    15
    
    
    
    45Cash at beginning of period
    
    
    110
    
    
    
    85Cash at end of period
    
    $
    125
    
    
    $
    130


4




---



##### Table of Contents



Notes To Condensed Consolidated Financial Statements
  Preparation of Financial Statements
  Acquisitions of Businesses
  Date of
    
    BusinessAcquired business
    
    acquisition
    
    segment
    
    Annual sales2006 AcquisitionsSynflex business unit of Saint-Gobain Performance
Plastics Corporation
    
    March 31, 2006
    
    Fluid Power
    
    $120 for 2005A U.S. based manufacturer of thermoplastic hoses
and tubingMarina Power and Lighting
    
    March 24, 2006
    
    Electrical
    
    $11 for 2005A U.S. manufacturer of marine duty electrical
distribution products2005 AcquisitionsAerospace division of PerkinElmer, Inc.
    
    December 6, 2005
    
    Fluid Power
    
    $150 for the year ended June 30, 2005Aerospace fluid and air division of Cobham plc
    
    November 1, 2005
    
    Fluid Power
    
    $210 for 2004Assets of Pringle Electrical Manufacturing CompanyA U.S. manufacturer of bolted contact switches and
other specialty switches
    
    October 11, 2005
    
    Electrical
    
    $6 for 2004, one-third of which were to EatonIndustrial filtration business of Hayward Industries,
Inc.
    
    September 6, 2005
    
    Fluid Power
    
    $100 for the year ended June 30, 2005Tractech Holdings, Inc.
    
    August 17, 2005
    
    Automotive
    
    $43 for 2004Morestana S.A. de C.V.
    
    June 30, 2005
    
    Automotive
    
    $13 for 2004Winner Group Holdings Ltd.
    
    March 31, 2005
    
    Fluid Power
    
    $26 for 2004Pigozzi S.A. Engrenagens e Transmissoes
    
    March 1, 2005
    
    Truck
    
    $42 for 2004
 Acquisition Integration Charges
  5




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Electrical
    
    $
    3
    
    
    $
    7
    
    
    $
    5
    
    
    $
    12Fluid Power
    
    
    3
    
    
    
    1
    
    
    
    6
    
    
    
    5Truck
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    Automotive
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Pretax charges
    
    $
    9
    
    
    $
    8
    
    
    $
    18
    
    
    $
    17After-tax charges
    
    $
    6
    
    
    $
    5
    
    
    $
    12
    
    
    $
    11Per Common Share
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .08
    
    
    $
    .07
 Excel 07 Plant Closing Charges
  Three months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2006Electrical
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    1Fluid Power
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Truck
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Automotive
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    16Pretax charges
    
    
    
    
    
    $
    25
    
    
    
    
    
    
    
    
    
    
    $
    30
 Summary of Acquisition Integration and Excel 07 Plant
Closing Charges
  PlantWorkforce reductions
    
    
    integrationEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance remaining at December 31, 2005
    
    
    166
    
    
    $
    3
    
    
    $
    1
    
    
    $
    42006 charges
    
    
    818
    
    
    
    23
    
    
    
    25
    
    
    
    48Utilized in 2006
    
    
    (104
    )
    
    
    (3
    )
    
    
    (20
    )
    
    
    (23
    )Balance remaining at June 30, 2006
    
    
    880
    
    
    $
    23
    
    
    $
    6
    
    
    $
    29
  Retirement Benefit Plans Expense
  6




---



##### Table of Contents



Three months ended June 30Other postretirementPension benefits
    
    
    benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    39
    
    
    $
    32
    
    
    $
    3
    
    
    $
    4Interest cost
    
    
    37
    
    
    
    36
    
    
    
    12
    
    
    
    12Expected return on plan assets
    
    
    (41
    )
    
    
    (42
    )
    
    
    
    
    
    
    Other
    
    
    16
    
    
    
    12
    
    
    
    3
    
    
    
    351
    
    
    
    38
    
    
    
    18
    
    
    
    19Curtailment loss
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Settlement loss
    
    
    12
    
    
    
    10
    
    
    
    
    
    
    
    $
    63
    
    
    $
    48
    
    
    $
    19
    
    
    $
    19
 Six months ended June 30Other postretirementPension benefits
    
    
    benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    74
    
    
    $
    61
    
    
    $
    7
    
    
    $
    8Interest cost
    
    
    73
    
    
    
    71
    
    
    
    24
    
    
    
    24Expected return on plan assets
    
    
    (82
    )
    
    
    (83
    )
    
    
    
    
    
    
    Other
    
    
    33
    
    
    
    24
    
    
    
    6
    
    
    
    698
    
    
    
    73
    
    
    
    37
    
    
    
    38Curtailment loss
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    Settlement loss
    
    
    23
    
    
    
    16
    
    
    
    
    
    
    
    $
    123
    
    
    $
    89
    
    
    $
    38
    
    
    $
    38
  Stock Options
    7




---



##### Table of Contents



2006
    
    2005Expected volatility
    
    
    25
    %
    
    
    27
    %Expected option life in years
    
    
    5
    
    
    
    5Expected dividend yield
    
    
    2.0
    %
    
    
    2.0
    %Risk-free interest rate
    
    4.3% to 5.0%
    
    3.7% to 4.4%
    Six months ended June 30, 2006Weighted-Weighted-
    
    
    
    
    
    averageaverage
    
    
    
    
    
    remaining
    
    Aggregateprice per
    
    
    
    
    
    contractual
    
    intrinsicoption
    
    Options
    
    life in years
    
    valueOutstanding December 31, 2005
    
    $
    42.95
    
    
    
    14.4Granted
    
    
    68.63
    
    
    
    1.8Exercised
    
    
    35.41
    
    
    
    (2.3
    )Forfeited
    
    
    56.97
    
    
    
    (.2
    )Outstanding June 30, 2006
    
    $
    47.52
    
    
    
    13.7
    
    
    
    5.7
    
    
    $
    383Exercisable June 30, 2006
    
    $
    41.57
    
    
    
    7.9
    
    
    
    5.2
    
    
    $
    267Reserved for future grants
June 30, 2006
    
    
    
    
    
    
    5.1
   Six months ended June 302006
    
    2005Proceeds from stock options exercised
    
    $
    82
    
    
    $
    34Income tax benefits related to stock options exercisedReported in operating activities in statement of cash
flows
    
    
    7
    
    
    
    14Reported in financing activities in statement of cash
flows
    
    
    21
    
    
    
    Intrinsic value of stock options exercised
    
    
    83
    
    
    
    39
  Three months ended
    
    
    
    
    Six months endedJune 30, 2005
    
    
    
    
    June 30, 2005Net incomeAs reported
    
    
    
    
    
    $
    209
    
    
    
    
    
    
    $
    396Stock-based compensation expense, net of income taxes
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (8
    )Assuming fair-value-based method
    
    
    
    
    
    $
    205
    
    
    
    
    
    
    $
    388
 8




---



##### Table of Contents



Three months ended
    
    
    
    
    Six months endedJune 30, 2005
    
    
    
    
    June 30, 2005Net income per Common Share assuming dilutionAs reported
    
    
    
    
    
    $
    1.37
    
    
    
    
    
    
    $
    2.55Stock-based compensation expense, net of income taxes
    
    
    
    
    
    
    (.03
    )
    
    
    
    
    
    
    (.05
    )Assuming fair-value-based method
    
    
    
    
    
    $
    1.34
    
    
    
    
    
    
    $
    2.50Net income per Common Share basicAs reported
    
    
    
    
    
    $
    1.40
    
    
    
    
    
    
    $
    2.62Stock-based compensation expense, net of income taxes
    
    
    
    
    
    
    (.03
    )
    
    
    
    
    
    
    (.05
    )Assuming fair-value-based method
    
    
    
    
    
    $
    1.37
    
    
    
    
    
    
    $
    2.57
 Income Taxes
   Repurchase of Common Shares
   Net Income per Common Share
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    253
    
    
    $
    209
    
    
    $
    461
    
    
    $
    396Average number of Common Shares outstanding
assuming dilution
    
    
    154.3
    
    
    
    153.4
    
    
    
    153.7
    
    
    
    155.2Less dilutive effect of stock options
    
    
    2.6
    
    
    
    3.6
    
    
    
    2.7
    
    
    
    3.8Average number of Common Shares outstanding basic
    
    
    151.7
    
    
    
    149.8
    
    
    
    151.0
    
    
    
    151.4Net income per Common Share assuming dilution
    
    $
    1.64
    
    
    $
    1.37
    
    
    $
    3.00
    
    
    $
    2.55Net income per Common Share basic
    
    $
    1.67
    
    
    $
    1.40
    
    
    $
    3.06
    
    
    $
    2.62
 Comprehensive Income
  Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    253
    
    
    $
    209
    
    
    $
    461
    
    
    $
    396Foreign currency translation
    
    
    26
    
    
    
    (18
    )
    
    
    51
    
    
    
    (41
    )Other
    
    
    
    
    
    
    4
    
    
    
    (5
    )
    
    
    8Comprehensive income
    
    $
    279
    
    
    $
    195
    
    
    $
    507
    
    
    $
    363
 9




---



##### Table of Contents



Inventories
  June 30,
    
    
    Dec. 31,2006
    
    
    2005Raw materials
    
    $
    486
    
    
    $
    469Work-in-process & finished goods
    
    
    787
    
    
    
    707Inventories at FIFO
    
    
    1,273
    
    
    
    1,176Excess of FIFO over LIFO cost
    
    
    (87
    )
    
    
    (77
    )$
    1,186
    
    
    $
    1,099
  Business Segment Information
 Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Net salesElectrical
    
    $
    1,040
    
    
    $
    924
    
    
    $
    2,005
    
    
    $
    1,772Fluid Power
    
    
    1,026
    
    
    
    842
    
    
    
    2,000
    
    
    
    1,627Truck
    
    
    646
    
    
    
    596
    
    
    
    1,253
    
    
    
    1,138Automotive
    
    
    474
    
    
    
    472
    
    
    
    941
    
    
    
    951$
    3,186
    
    
    $
    2,834
    
    
    $
    6,199
    
    
    $
    5,488Operating profitElectrical
    
    $
    113
    
    
    $
    87
    
    
    $
    216
    
    
    $
    158Fluid Power
    
    
    110
    
    
    
    94
    
    
    
    214
    
    
    
    170Truck
    
    
    133
    
    
    
    120
    
    
    
    250
    
    
    
    229Automotive
    
    
    47
    
    
    
    67
    
    
    
    102
    
    
    
    136CorporateAmortization of intangible assets
    
    
    (11
    )
    
    
    (7
    )
    
    
    (22
    )
    
    
    (14
    )Interest expense-net
    
    
    (28
    )
    
    
    (22
    )
    
    
    (56
    )
    
    
    (44
    )Minority interest
    
    
    (2
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (2
    )Pension & other postretirement benefit expense
    
    
    (40
    )
    
    
    (32
    )
    
    
    (80
    )
    
    
    (60
    )Stock option expense
    
    
    (7
    )
    
    
    
    
    
    
    (13
    )
    
    
    Other corporate expense-net
    
    
    (37
    )
    
    
    (39
    )
    
    
    (77
    )
    
    
    (70
    )Income before income taxes
    
    
    278
    
    
    
    267
    
    
    
    531
    
    
    
    503Income taxes
    
    
    25
    
    
    
    58
    
    
    
    70
    
    
    
    107Net income
    
    $
    253
    
    
    $
    209
    
    
    $
    461
    
    
    $
    396
 10




---



##### Table of Contents



Item 2. Managements Discussion & Analysis of
Financial Condition & Results of Operations
  Overview of the Company
  Highlights of Results for 2006
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    3,186
    
    
    $
    2,834
    
    
    
    12
    %
    
    $
    6,199
    
    
    $
    5,488
    
    
    
    13
    %Gross margin
    
    
    879
    
    
    
    795
    
    
    
    11
    %
    
    
    1,725
    
    
    
    1,536
    
    
    
    12
    %Percent of net sales
    
    
    27.6
    %
    
    
    28.0
    %
    
    
    
    
    
    
    27.8
    %
    
    
    28.0
    %Net income
    
    $
    253
    
    
    $
    209
    
    
    
    21
    %
    
    $
    461
    
    
    $
    396
    
    
    
    16
    %Net income per Common
Share assuming dilution
    
    $
    1.64
    
    
    $
    1.37
    
    
    
    20
    %
    
    $
    3.00
    
    
    $
    2.55
    
    
    
    18
    %
      11




---



##### Table of Contents



BusinessAcquired business
    
    Date of acquisition
    
    segment
    
    Annual salesSynflex business unit of Saint-Gobain Performance
Plastics Corporation
    
    March 31, 2006
    
    Fluid Power
    
    $120 for 2005A U.S. based manufacturer of thermoplastic
hoses and tubingMarina Power and Lighting
    
    March 24, 2006
    
    Electrical
    
    $11 for 2005A U.S. manufacturer of marine duty electrical
distribution products
      12




---



##### Table of Contents



Results of Operations  2006 Compared to 2005
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    3,186
    
    
    $
    2,834
    
    
    
    12
    %
    
    $
    6,199
    
    
    $
    5,488
    
    
    
    13
    %Gross margin
    
    
    879
    
    
    
    795
    
    
    
    11
    %
    
    
    1,725
    
    
    
    1,536
    
    
    
    12
    %Percent of net sales
    
    
    27.6
    %
    
    
    28.0
    %
    
    
    
    
    
    
    27.8
    %
    
    
    28.0
    %Net income
    
    $
    253
    
    
    $
    209
    
    
    
    21
    %
    
    $
    461
    
    
    $
    396
    
    
    
    16
    %Net income per Common
Share assuming dilution
    
    $
    1.64
    
    
    $
    1.37
    
    
    
    20
    %
    
    $
    3.00
    
    
    $
    2.55
    
    
    
    18
    %
       13




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005Electrical
    
    $
    3
    
    
    $
    7
    
    
    $
    5
    
    
    $
    12Fluid Power
    
    
    3
    
    
    
    1
    
    
    
    6
    
    
    
    5Truck
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    Automotive
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    Pretax charges
    
    $
    9
    
    
    $
    8
    
    
    $
    18
    
    
    $
    17After-tax charges
    
    $
    6
    
    
    $
    5
    
    
    $
    12
    
    
    $
    11Per Common Share
    
    $
    .04
    
    
    $
    .03
    
    
    $
    .08
    
    
    $
    .07
        Results by Business Segment
 Electrical
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    1,040
    
    
    $
    924
    
    
    
    13
    %
    
    $
    2,005
    
    
    $
    1,772
    
    
    
    13
    %Operating profit
    
    
    113
    
    
    
    87
    
    
    
    30
    %
    
    
    216
    
    
    
    158
    
    
    
    37
    %Operating margin
    
    
    10.9
    %
    
    
    9.4
    %
    
    
    
    
    
    
    10.8
    %
    
    
    8.9
    %
 14




---



##### Table of Contents



Fluid Power
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    1,026
    
    
    $
    842
    
    
    
    22
    %
    
    $
    2,000
    
    
    $
    1,627
    
    
    
    23
    %Operating profit
    
    
    110
    
    
    
    94
    
    
    
    17
    %
    
    
    214
    
    
    
    170
    
    
    
    26
    %Operating margin
    
    
    10.7
    %
    
    
    11.2
    %
    
    
    
    
    
    
    10.7
    %
    
    
    10.4
    %
  15




---



##### Table of Contents



Truck
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    646
    
    
    $
    596
    
    
    
    8
    %
    
    $
    1,253
    
    
    $
    1,138
    
    
    
    10
    %Operating profit
    
    
    133
    
    
    
    120
    
    
    
    11
    %
    
    
    250
    
    
    
    229
    
    
    
    9
    %Operating margin
    
    
    20.6
    %
    
    
    20.1
    %
    
    
    
    
    
    
    20.0
    %
    
    
    20.1
    %
     16




---



##### Table of Contents



Automotive
 Three months ended June 30
    
    Six months ended June 302006
    
    2005
    
    Decrease
    
    2006
    
    2005
    
    DecreaseNet sales
    
    $
    474
    
    
    $
    472
    
    
    
    
    
    
    $
    941
    
    
    $
    951
    
    
    
    (1
    %)Operating profit
    
    
    47
    
    
    
    67
    
    
    
    (30
    %)
    
    
    102
    
    
    
    136
    
    
    
    (25
    %)Operating margin
    
    
    9.9
    %
    
    
    14.2
    %
    
    
    
    
    
    
    10.8
    %
    
    
    14.3
    %
    Corporate
    Changes in Financial Condition During 2006
   17




---



##### Table of Contents



Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
    18




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Total number of
    
    
    Maximum number (orshares
    
    
    approximate dollarTotal
    
    
    
    
    
    
    purchased as
    
    
    value) of shares thatnumber of
    
    
    Average
    
    
    part of publicly
    
    
    may yet beshares
    
    
    price paid
    
    
    announced plans
    
    
    purchased under theMonth
    
    purchased
    
    
    per share
    
    
    or programs
    
    
    plans or programsJune
2006
    
    
    894,504
    
    
    $
    70.41
    
    
    
    894,504
    
    
    
    5,725,596
 
 Item 6. Exhibits
  19




---



##### Table of Contents



Signature
  EATON CORPORATIONRegistrantDate:
August 4, 2006
    
    
    
    /s/ Richard H. FearonRichard H. FearonExecutive Vice President -Chief Financial and Planning Officer
 20




---



##### Table of Contents



Eaton Corporation
Second Quarter 2006 Report on Form 10-Q
Exhibit Index
 3 (i)
    
    Amended Articles of Incorporation (amended and restated as of April 27, 1994) 
Incorporated by reference to the Form 10-K for the year ended December 31, 20023 (ii)
    
    Amended Regulations (amended and restated as of April 26, 2000)  Incorporated by
reference to the Form 10-Q for the six months ended June 30, 20004
    
    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 Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302)31.2
    
    Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302)32.1
    
    Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906)32.2
    
    Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906)
 21