##### 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 March 31, 2008
 1-1396
 EATON CORPORATION(Exact name of registrant as specified in its charter)
 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)
 (216) 523-5000(Registrants telephone number, including area code)Not applicable(Former name, former address and former fiscal year if changed since last report)
 þ  ̈
  Large accelerated filer þAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o  ̈ þ




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TABLE OF CONTENTS  PART 1  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 4. Submission of Matters to a Vote of Security HoldersSignatureExhibit IndexEX-3(a)EX-3(b)EX-12EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART 1  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Eaton Corporation
Statements of Consolidated Income
 Three months endedMarch 31(Millions except for per share data)
    
    2008
    
    
    2007Net sales
    
    $
    3,496
    
    
    $
    3,113Cost of products sold
    
    
    2,532
    
    
    
    2,227Selling & administrative expense
    
    
    552
    
    
    
    507Research & development expense
    
    
    89
    
    
    
    80Interest expense-net
    
    
    38
    
    
    
    30Other (income) expense-net
    
    
    (1
    )
    
    
    6Income from continuing operations before income taxes
    
    
    286
    
    
    
    263Income taxes
    
    
    42
    
    
    
    34Income from continuing operations
    
    
    244
    
    
    
    229Income from discontinued operations
    
    
    3
    
    
    
    5Net income
    
    $
    247
    
    
    $
    234Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.62
    
    
    $
    1.53Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.64
    
    
    $
    1.56Average number of Common Shares outstanding assuming dilution
    
    
    150.5
    
    
    
    150.0Net income per Common Share basicContinuing operations
    
    $
    1.65
    
    
    $
    1.56Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.67
    
    
    $
    1.59Average number of Common Shares outstanding basic
    
    
    147.7
    
    
    
    147.6Cash dividends paid per Common Share
    
    $
    .50
    
    
    $
    .43
  Page 2




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##### Table of Contents



Eaton Corporation
Condensed Consolidated Balance Sheets
 March 31,
    
    
    December 31,(Millions)
    
    2008
    
    
    2007ASSETSCurrent assetsCash
    
    $
    157
    
    
    
    $
    142Short-term investments
    
    
    426
    
    
    
    
    504Accounts receivable
    
    
    2,561
    
    
    
    
    2,208Inventories
    
    
    1,634
    
    
    
    
    1,483Deferred income taxes & other current assets
    
    
    471
    
    
    
    
    4305,249
    
    
    
    
    4,767Property, plant & equipment-net
    
    
    2,473
    
    
    
    
    2,333Goodwill
    
    
    4,427
    
    
    
    
    3,982Other intangible assets
    
    
    1,662
    
    
    
    
    1,557Deferred income taxes & other assets
    
    
    835
    
    
    
    
    791$
    14,646
    
    
    
    $
    13,430LIABILITIES & SHAREHOLDERS EQUITYCurrent liabilitiesShort-term debt
    
    $
    1,290
    
    
    
    $
    825Current portion of long-term debt
    
    
    171
    
    
    
    
    160Accounts payable
    
    
    1,319
    
    
    
    
    1,170Accrued compensation
    
    
    268
    
    
    
    
    355Other current liabilities
    
    
    1,214
    
    
    
    
    1,1494,262
    
    
    
    
    3,659Long-term debt
    
    
    2,704
    
    
    
    
    2,432Pension liabilities
    
    
    705
    
    
    
    
    681Other postretirement liabilities
    
    
    768
    
    
    
    
    772Other long-term liabilities & deferred income taxes
    
    
    707
    
    
    
    
    714Shareholders equity
    
    
    5,500
    
    
    
    
    5,172$
    14,646
    
    
    
    $
    13,430
  Page 3




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##### Table of Contents



Eaton Corporation
Condensed Statements of Consolidated Cash Flows
 Three months endedMarch 31(Millions)
    

    2008

    

    2007Net cash provided by (used in) operating activitiesNet income
    
    
    $
    247
    
    
    
    $
    234Adjustments to reconcile to net cash provided by (used in) operating activitiesDepreciation & amortization
    
    
    
    126
    
    
    
    
    109Pension liabilities
    
    
    
    47
    
    
    
    
    47Changes in working capital, excluding acquisitions & sales of businesses
    
    
    
    (348
    )
    
    
    
    (359
    )Voluntary contributions to United States & United Kingdom qualified
pension plans
    
    
    
    (13
    )
    
    
    
    (156
    )Other-net
    
    
    
    (76
    )
    
    
    
    11(17
    )
    
    
    
    (114
    )Net cash provided by (used in) investing activitiesExpenditures for property, plant & equipment
    
    
    
    (83
    )
    
    
    
    (67
    )Cash paid for acquisitions of businesses
    
    
    
    (634
    )
    
    
    
    (733
    )Sales of short-term investments-net
    
    
    
    137
    
    
    
    
    383Other-net
    
    
    
    (28
    )
    
    
    
    (29
    )(608
    )
    
    
    
    (446
    )Net cash provided by (used in) financing activitiesBorrowings with original maturities of more than three monthsProceeds
    
    
    
    353
    
    
    
    
    1,205Payments
    
    
    
    (340
    )
    
    
    
    (358
    )Borrowings (payments) with original maturities of less than three months-net,
primarily commercial paper
    
    
    
    670
    
    
    
    
    (164
    )Cash dividends paid
    
    
    
    (73
    )
    
    
    
    (63
    )Proceeds from exercise of employee stock options
    
    
    
    24
    
    
    
    
    85Income tax benefit from exercise of employee stock options
    
    
    
    6
    
    
    
    
    25Purchase of Common Shares
    
    
    
    
    
    
    
    
    (178
    )640
    
    
    
    
    552Total increase (decrease) in cash
    
    
    
    15
    
    
    
    
    (8
    )Cash at the beginning of the year
    
    
    
    142
    
    
    
    
    114Cash at the
end of the period
    
    
    $
    157
    
    
    
    $
    106
  Page 4




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Notes to Condensed Consolidated Financial Statements
 Preparation of Financial Statements
 Realignment of Business Segment Reporting
 Acquisitions of Businesses
 Date of
    
    BusinessAcquired business
    
    acquisition
    
    segment
    
    Annual salesBalmen Electronic, S.L.A Spain-based distributor and service provider
of uninterruptible power supply (UPS) systems
    
    March 31,
2008
    
    Electrical
    
    $6 for 2007Phoenixtec Power Company Ltd.A Taiwan-based manufacturer of single- and
three-phase uninterruptible power supply (UPS)
systems
    
    February 26,
2008
    
    Electrical
    
    $515 for 2007Arrow Hose & Tubing Inc.A Canada-based manufacturer of thermoplastic
hose and tubing for the industrial, food and
beverage, and agricultural markets
    
    November 8,
2007
    
    Hydraulics
    
    $12 for 2006MGE small systems UPS business from
Schneider ElectricA France-based global provider of power quality
solutions including uninterruptible power supply
(UPS) systems, power distribution units, static
transfer switches and surge suppressors
    
    October 31,
2007
    
    Electrical
    
    $245 for the
year ended
Sept. 30, 2007Babco Electric GroupA Canada-based manufacturer of specialty low-
and medium-voltage switchgear and electrical
housings for use in the Canadian oil and gas
industry and other harsh environments
    
    October 19,
2007
    
    Electrical
    
    $11 for the
year ended
April 30, 2007
 Page 5




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##### Table of Contents



Date of
    
    BusinessAcquired business
    
    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-Tech CorporationA 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
    
    Aerospace
    
    $206 for 2006Power Protection Business of Power Products Ltd.A Czech Republic distributor and service provider
of Powerware®products and other
uninterruptible
power supply (UPS) systems
    
    February 7,
2007
    
    Electrical
    
    $3 for 2006
   
  Pro Forma Results of Continuing Operations
 Page 6




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Three months endedMarch
31, 2007Net sales
    
    $
    3,209Income from continuing operations
    
    
    216Income from continuing operations per Common ShareAssuming dilution
    
    $
    1.44Basic
    
    $
    1.46
 Restructuring Liabilities
 PlantWorkforce reductions
    
    closingEmployees
    
    Dollars
    
    & other
    
    TotalBalance at January 1, 2008
    
    
    659
    
    
    
    $27
    
    
    
    $12
    
    
    
    $39Liabilities recorded in 2008
    
    
    7
    
    
    
    
    
    
    
    4
    
    
    
    4Utilized in 2008
    
    
    (174
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    (9
    )Balance at March 31, 2008
    
    
    492
    
    
    
    $19
    
    
    
    $15
    
    
    
    $34
 Acquisition Integration Charges
 Three months endedMarch 312008
    
    2007Electrical
    
    
    $   3
    
    
    
    $   2Hydraulics
    
    
    2
    
    
    
    4Aerospace
    
    
    7
    
    
    
    7Automotive
    
    
    1Pretax charges
    
    
    $ 13
    
    
    
    $ 13After-tax charges
    
    
    $   9
    
    
    
    $   9Per Common Share
    
    
    $.06
    
    
    
    $.06
   Page 7




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Summary of Acquisition Integration & Plant Closing Charges & Liabilities
 PlantWorkforce reductions
    
    closingEmployees
    
    Dollars
    
    & other
    
    TotalBalance at January 1, 2008
    
    
    563
    
    
    
    $14
    
    
    
    $   1
    
    
    
    $ 15Liabilities recorded in 2008
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14Utilized in 2008
    
    
    (106
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    (16
    )Balance at March 31, 2008
    
    
    457
    
    
    
    $11
    
    
    
    $   2
    
    
    
    $ 13
  Long-term Debt & Sale of Eaton Common Shares
  Retirement Benefit Plans Expense
 Three months ended March 31OtherpostretirementPension benefits
    
    benefits2008
    
    2007
    
    2008
    
    2007Service cost
    
    
    $(35
    )
    
    
    $(36
    )
    
    
    $  (4
    )
    
    
    $  (3
    )Interest cost
    
    
    (44
    )
    
    
    (41
    )
    
    
    (12
    )
    
    
    (12
    )Expected return on plan assets
    
    
    48
    
    
    
    45Amortization
    
    
    (12
    )
    
    
    (19
    )
    
    
    (3
    )
    
    
    (3
    )(43
    )
    
    
    (51
    )
    
    
    (19
    )
    
    
    (18
    )Settlement loss
    
    
    (13
    )
    
    
    (7
    )$(56
    )
    
    
    $(58
    )
    
    
    $(19
    )
    
    
    $(18
    )
 Page 8




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Income Taxes
 Comprehensive Income (Loss)
 Three months endedMarch 312008
    
    2007Net income
    
    
    $247
    
    
    
    $234Foreign currency translation
    
    
    93
    
    
    
    27Pensions & other postretirement benefits
    
    
    19
    
    
    
    10Other
    
    
    
    
    
    
    5Comprehensive Income
    
    
    $359
    
    
    
    $276
 Inventories
 March 31,
    
    December 31,2008
    
    2007Raw materials
    
    
    $   713
    
    
    
    $   674Work-in-process & finished goods
    
    
    1,031
    
    
    
    917Inventories at FIFO
    
    
    1,744
    
    
    
    1,591Excess of FIFO over LIFO cost
    
    
    (110
    )
    
    
    (108
    )$1,634
    
    
    
    $1,483
 Net Income per Common Share
 Three months endedMarch 31(Shares in millions)
    
    2008
    
    2007Income from continuing operations
    
    $
    244
    
    
    $
    229Income from discontinued operations
    
    
    3
    
    
    
    5Net income
    
    $
    247
    
    
    $
    234Average number of Common Shares outstanding assuming dilution
    
    
    150.5
    
    
    
    150.0Less dilutive effect of stock options
    
    
    2.8
    
    
    
    2.4Average number of Common Shares outstanding basic
    
    
    147.7
    
    
    
    147.6Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.62
    
    
    $
    1.53Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.64
    
    
    $
    1.56Net income per Common Share basicContinuing operations
    
    $
    1.65
    
    
    $
    1.56Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.67
    
    
    $
    1.59
 Page 9




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Financial Assets and Liabilities Measured at Fair Value
 Fair value measurement usedQuoted prices
    
    Quoted pricesin active
    
    in activemarkets for
    
    markets for
    
    Otheridentical
    
    similar
    
    unobservableRecorded
    
    instruments
    
    instruments
    
    inputsvalue
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Short-term investments
    
    
    $426
    
    
    
    $426Foreign currency forward exchange
contracts
    
    
    5
    
    
    
    
    
    
    
    $   5Commodity contracts
    
    
    1
    
    
    
    
    
    
    
    1Cross currency interest rate swaps
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Fixed-to-floating interest rate swaps
    
    
    27
    
    
    
    
    
    
    
    27Long-term debt converted to floating
interest rates by interest rate swaps
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )$429
    
    
    
    $426
    
    
    
    $   3
    
    
    
    $0
 Page 10




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Business Segment Information
 Three months endedMarch 312008
    

2007Net salesElectrical
    
    
    $1,304
    
    
    
    $1,084Hydraulics
    
    
    657
    
    
    
    574Aerospace
    
    
    430
    
    
    
    350Truck
    
    
    567
    
    
    
    576Automotive
    
    
    538
    
    
    
    529$3,496
    
    
    
    $3,113Operating profitElectrical
    
    
    $   160
    
    
    
    $   120Hydraulics
    
    
    78
    
    
    
    66Aerospace
    
    
    63
    
    
    
    45Truck
    
    
    85
    
    
    
    107Automotive
    
    
    46
    
    
    
    63CorporateAmortization of intangible assets
    
    
    (25
    )
    
    
    (16
    )Interest expense-net
    
    
    (38
    )
    
    
    (30
    )Minority interest
    
    
    (3
    )
    
    
    (2
    )Pension & other postretirement benefit expense
    
    
    (38
    )
    
    
    (38
    )Stock option expense
    
    
    (7
    )
    
    
    (7
    )Other corporate expensenet
    
    
    (35
    )
    
    
    (45
    )Income from continuing operations before income taxes
    
    
    286
    
    
    
    263Income taxes
    
    
    42
    
    
    
    34Income from continuing operations
    
    
    244
    
    
    
    229Income from discontinued operations
    
    
    3
    
    
    
    5Net income
    
    
    $   247
    
    
    
    $   234
 Page 11




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Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations
  Overview of Eaton
 Highlights of Results for 2008
 Three months ended March 312008
    
    2007
    
    IncreaseContinuing operationsNet sales
    
    $
    3,496
    
    
    $
    3,113
    
    
    12%Gross profit
    
    
    964
    
    
    
    886
    
    
    9%Percent of net sales
    
    
    27.6
    %
    
    
    28.5
    %Income before income taxes
    
    
    286
    
    
    
    263
    
    
    9%Income after income taxes
    
    $
    244
    
    
    $
    229
    
    
    7%Income from discontinued operations
    
    
    3
    
    
    
    5Net income
    
    $
    247
    
    
    $
    234
    
    
    6%Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.62
    
    
    $
    1.53
    
    
    6%Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.64
    
    
    $
    1.56
    
    
    5%
  Page 12




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  
    Page 13




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Results of Operation  2008 Compared to 2007
 Three months ended March 312008
    
    2007
    
    IncreaseContinuing operationsNet sales
    
    $
    3,496
    
    
    $
    3,113
    
    
    12%Gross profit
    
    
    964
    
    
    
    886
    
    
    9%Percent of net sales
    
    
    27.6
    %
    
    
    28.5
    %Income before income taxes
    
    
    286
    
    
    
    263
    
    
    9%Income after income taxes
    
    $
    244
    
    
    $
    229
    
    
    7%Income from discontinued operations
    
    
    3
    
    
    
    5Net income
    
    $
    247
    
    
    $
    234
    
    
    6%Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.62
    
    
    $
    1.53
    
    
    6%Discontinued operations
    
    
    .02
    
    
    
    .03$
    1.64
    
    
    $
    1.56
    
    
    5%
  Page 14




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Other Results of Operations
 Three months endedMarch 312008
    

2007Electrical
    
    $
    3
    
    
    $
    2Hydraulics
    
    
    2
    
    
    
    4Aerospace
    
    
    7
    
    
    
    7Automotive
    
    
    1Pretax charges
    
    $
    13
    
    
    $
    13After-tax charges
    
    $
    9
    
    
    $
    9Per Common Share
    
    $
    .06
    
    
    $
    .06
    Results by Business Segment
 Electrical
 Three months ended March 312008
    

2007
    

IncreaseNet sales
    
    $
    1,304
    
    
    $
    1,084
    
    
    20%Operating profit
    
    
    160
    
    
    
    120
    
    
    33%Operating margin
    
    
    12.3
    %
    
    
    11.1
    %
  Page 15




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  
 Hydraulics
 Three months ended March 312008
    
    2007
    
    IncreaseNet sales
    
    $
    657
    
    
    $
    574
    
    
    14%Operating profit
    
    
    78
    
    
    
    66
    
    
    18%Operating margin
    
    
    11.9
    %
    
    
    11.5
    %
   Aerospace
 Three months ended March 312008
    
    2007
    
    IncreaseNet sales
    
    $
    430
    
    
    $
    350
    
    
    23%Operating profit
    
    
    63
    
    
    
    45
    
    
    40%Operating margin
    
    
    14.7
    %
    
    
    12.9
    %
 Page 16




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##### Table of Contents



Truck
 Three months ended March 312008
    
    2007
    

(Decrease)Net sales
    
    
    $ 567
    
    
    
    $576
    
    
    (2%)Operating profit
    
    
    85
    
    
    
    107
    
    
    (21%)Operating margin
    
    
    15.0
    %
    
    
    18.6
    %
   Automotive
 Three months ended March 31Increase2008
    
    2007
    
    (Decrease)Net sales
    
    $
    538
    
    
    
    $529
    
    
    2%Operating profit
    
    
    46
    
    
    
    63
    
    
    (27%)Operating margin
    
    
    8.6
    %
    
    
    11.9
    %
  Page 17




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Corporate
  Changes
in Financial Condition During 2008
     Page 18




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Contractual Obligations
 Forward-Looking Statements
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  Page 19




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PART II  OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
  Approved the election of four directors
    
    For
    
    WithheldNed C. Lautenbach
    
    
    126,067,343
    
    
    
    6,654,789John R. Miller
    
    
    128,913,496
    
    
    
    3,808,636Gregory R. Page
    
    
    129,877,836
    
    
    
    2,844,296Victor A. Pelson
    
    
    129,192,551
    
    
    
    3,529,581
 Approved
an increase in the authorized number of Common Shares from
300 million to 500 million
 For
    
    
    119,241,872Against
    
    
    12,264,031Abstain
    
    
    1,216,223
 Approved the adoption of majority voting in director elections
 For
    
    
    126,246,711Against
    
    
    5,061,022Abstain
    
    
    1,410,480
 Approved the authorization of the Board of Directors to amend the Amended Regulations
 For
    
    
    121,239,243Against
    
    
    9,896,943Abstain
    
    
    1,582,011
 Approved the 2008 Stock Plan
 For
    
    
    104,116,078Against
    
    
    16,156,578Abstain
    
    
    1,438,070
 Approved the Senior Executive Incentive Compensation Plan
 For
    
    
    123,644,027Against
    
    
    7,453,818Abstain
    
    
    1,620,359
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Approved the Executive Strategic Incentive Plan
 For
    
    
    124,637,850Against
    
    
    6,558,065Abstain
    
    
    1,522,288
 Approved the appointment of Ernst & Young LLP as independent auditor for 2008
 For
    
    
    129,147,758Against
    
    
    2,426,546Abstain
    
    
    1,147,803
 Item 6. Exhibits
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##### Table of Contents



Signature
  EATON CORPORATIONRegistrant Date: May 5, 2008
    /s/ Richard H. FearonRichard H. FearonExecutive Vice President -
Chief Financial and Planning Officer Page 22




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##### Table of Contents



Eaton Corporation
First Quarter 2008 Report on Form 10-Q
 
 Exhibit Index
 3 (a)
    
    Amended Articles of Incorporation (amended and restated as of April 24, 2008)  Filed in
conjunction with this Form 10-Q Report3 (b)
    
    Amended Regulations (amended and restated as of April 23, 2008)  Filed in conjunction
with this Form 10-Q Report4
    
    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 Charges  Filed in conjunction with this Form 10-Q Report31.1
    
    Certification of Chief Executive Officer (Pursuant to Rule 13a-14(a))  Filed in conjunction with
this Form 10-Q Report31.2
    
    Certification of Chief Financial Officer (Pursuant to Rule 13a-14(a))  Filed in conjunction with
this Form 10-Q Report32.1
    
    Certification of Chief Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act)  Filed in conjunction with this Form 10-Q Report32.2
    
    Certification of Chief Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act)  Filed in conjunction with this Form 10-Q Report
 Page 23