##### 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, 2006
 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)
 (Registrants
telephone number, including area code)
 þ
 þ o o
 þ




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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. ExhibitsSignatureEX-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
    
    
    Nine monthsended September 30
    
    
    ended September 30(Millions except for per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    3,115
    
    
    $
    2,767
    
    
    $
    9,268
    
    
    $
    8,202Cost of products sold
    
    
    2,313
    
    
    
    1,983
    
    
    
    6,750
    
    
    
    5,894Selling & administrative expense
    
    
    468
    
    
    
    438
    
    
    
    1,445
    
    
    
    1,301Research & development expense
    
    
    86
    
    
    
    74
    
    
    
    248
    
    
    
    211Interest expense-net
    
    
    25
    
    
    
    24
    
    
    
    81
    
    
    
    68Other (income) expense-net
    
    
    (2
    )
    
    
    1
    
    
    
    (6
    )
    
    
    (14
    )Income from continuing operations before
income taxes
    
    
    225
    
    
    
    247
    
    
    
    750
    
    
    
    742Income taxes
    
    
    12
    
    
    
    50
    
    
    
    79
    
    
    
    154Income from continuing operations
    
    
    213
    
    
    
    197
    
    
    
    671
    
    
    
    588Income from discontinued operations, net of income taxes
    
    
    35
    
    
    
    2
    
    
    
    38
    
    
    
    7Net income
    
    $
    248
    
    
    $
    199
    
    
    $
    709
    
    
    $
    595Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.39
    
    
    $
    1.29
    
    
    $
    4.37
    
    
    $
    3.80Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    .25
    
    
    
    .05$
    1.62
    
    
    $
    1.30
    
    
    $
    4.62
    
    
    $
    3.85Average number of Common Shares outstanding
assuming dilution
    
    
    153.0
    
    
    
    152.4
    
    
    
    153.4
    
    
    
    154.4Net income per Common Share basicContinuing operations
    
    $
    1.42
    
    
    $
    1.32
    
    
    $
    4.45
    
    
    $
    3.90Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    .25
    
    
    
    .05$
    1.65
    
    
    $
    1.33
    
    
    $
    4.70
    
    
    $
    3.95Average number of Common Shares outstanding
basic
    
    
    150.5
    
    
    
    149.1
    
    
    
    150.7
    
    
    
    150.7Cash dividends paid per Common Share
    
    $
    .39
    
    
    $
    .31
    
    
    $
    1.09
    
    
    $
    .93
  2




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##### Table of Contents



Eaton Corporation
Condensed Consolidated Balance Sheets
 Sept. 30,
    
    
    Dec. 31,(Millions)
    
    2006
    
    
    2005AssetsCurrent
assetsCash
    
    $
    129
    
    
    $
    110Short-term investments
    
    
    572
    
    
    
    226Accounts receivable
    
    
    2,025
    
    
    
    1,785Inventories
    
    
    1,239
    
    
    
    1,099Deferred income taxes & other current assets
    
    
    436
    
    
    
    3584,401
    
    
    
    3,578Property, plant & equipment-net
    
    
    2,202
    
    
    
    2,175Goodwill
    
    
    3,156
    
    
    
    3,139Other intangible assets
    
    
    833
    
    
    
    626Deferred income taxes & other assets
    
    
    662
    
    
    
    700$
    11,254
    
    
    $
    10,218Liabilities & Shareholders EquityCurrent
liabilitiesShort-term debt, primarily commercial paper
    
    $
    390
    
    
    $
    394Current portion of long-term debt
    
    
    314
    
    
    
    240Accounts payable
    
    
    1,022
    
    
    
    810Accrued compensation
    
    
    280
    
    
    
    277Accrued income & other taxes
    
    
    269
    
    
    
    305Other current liabilities
    
    
    1,130
    
    
    
    9423,405
    
    
    
    2,968Long-term debt
    
    
    1,770
    
    
    
    1,830Postretirement benefits other than pensions
    
    
    526
    
    
    
    537Pensions & other liabilities
    
    
    1,165
    
    
    
    1,105Shareholders equity
    
    
    4,388
    
    
    
    3,778$
    11,254
    
    
    $
    10,218
  3




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##### Table of Contents



Eaton Corporation
Condensed Statements of Consolidated Cash Flows
 Nine monthsended September 30(Millions)
    
    2006
    
    
    2005Net cash provided by operating activitiesNet income
    
    $
    709
    
    
    $
    595Adjustments to reconcile to net cash provided by operating
activitiesDepreciation & amortization
    
    
    322
    
    
    
    300Pensions
    
    
    155
    
    
    
    83Gain on sales of businesses
    
    
    (34
    )
    
    
    Changes in
working capital, excluding acquisitions & sales of businesses
    
    
    10
    
    
    
    (182
    )Voluntary contributions to United States & United Kingdom
qualified pension plans
    
    
    (114
    )
    
    
    (61
    )Other-net
    
    
    (32
    )
    
    
    (24
    )1,016
    
    
    
    711Net cash used in investing activitiesExpenditures for property, plant & equipment
    
    
    (223
    )
    
    
    (232
    )Acquisitions of businesses
    
    
    (249
    )
    
    
    (319
    )Sales of businesses
    
    
    66
    
    
    
    Purchases of short-term investments-net
    
    
    (333
    )
    
    
    (20
    )Other-net
    
    
    (51
    )
    
    
    8(790
    )
    
    
    (563
    )Net cash used in financing activitiesBorrowings with original maturities of more than three monthsProceeds
    
    
    617
    
    
    
    275Payments
    
    
    (549
    )
    
    
    (40
    )Borrowings (payments) with original maturities of less than three
months-net, primarily commercial paper
    
    
    (89
    )
    
    
    158Cash dividends paid
    
    
    (162
    )
    
    
    (138
    )Proceeds from exercise of employee stock options
    
    
    86
    
    
    
    54Income tax benefit from exercise of employee stock options
    
    
    22
    
    
    
    Purchase of Common Shares
    
    
    (132
    )
    
    
    (450
    )(207
    )
    
    
    (141
    )Total increase in cash
    
    
    19
    
    
    
    7Cash at beginning of period
    
    
    110
    
    
    
    85Cash at end of period
    
    $
    129
    
    
    $
    92
  4




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Notes To Condensed Consolidated Financial Statements
  Preparation of Financial Statements
  Discontinued Automotive Operations
  Acquisitions of Businesses
  Date of
    
    BusinessAcquired business
    
    acquisition
    
    segment
    
    Annual sales2006
AcquisitionsSenyuan 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 CorporationA U.S. based manufacturer of thermoplastic hoses
and tubing
    
    March 31, 2006
    
    Fluid Power
    
    $121 for 2005Marina Power and LightingA U.S. manufacturer of marine duty electrical
distribution products
    
    March 24, 2006
    
    Electrical
    
    $11 for 20052005
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 Company
    
    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
 5




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Acquisition Integration Charges
  Three months
    
    
    Nine monthsended September 30
    
    
    ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Electrical
    
    $
    1
    
    
    $
    4
    
    
    $
    6
    
    
    $
    16Fluid Power
    
    
    5
    
    
    
    
    
    
    
    11
    
    
    
    5Truck
    
    
    1
    
    
    
    1
    
    
    
    5
    
    
    
    1Automotive
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    
    1Pretax charges
    
    $
    7
    
    
    $
    6
    
    
    $
    25
    
    
    $
    23After-tax charges
    
    $
    5
    
    
    $
    4
    
    
    $
    17
    
    
    $
    15Per Common Share
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .11
    
    
    $
    .10
 Excel 07 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
 6




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##### Table of Contents



Summary of Acquisition Integration and Excel 07 Plant Closing Charges
  Workforce reductions
    
    
    Plant integrationEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance at December 31, 2005
    
    
    166
    
    
    $
    3
    
    
    $
    1
    
    
    $
    42006 charges
    
    
    1,879
    
    
    
    72
    
    
    
    49
    
    
    
    121Utilized in 2006
    
    
    (225
    )
    
    
    (11
    )
    
    
    (42
    )
    
    
    (53
    )Balance at September 30, 2006
    
    
    1,820
    
    
    $
    64
    
    
    $
    8
    
    
    $
    72
  Retirement Benefit Plans Expense
  Three months ended September 30OtherpostretirementPension benefits
    
    
    benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    35
    
    
    $
    28
    
    
    $
    4
    
    
    $
    3Interest cost
    
    
    38
    
    
    
    35
    
    
    
    12
    
    
    
    12Expected return on plan assets
    
    
    (42
    )
    
    
    (41
    )
    
    
    
    
    
    
    Other
    
    
    17
    
    
    
    12
    
    
    
    4
    
    
    
    248
    
    
    
    34
    
    
    
    20
    
    
    
    17Curtailment loss
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    Settlement loss
    
    
    11
    
    
    
    10
    
    
    
    
    
    
    
    $
    67
    
    
    $
    44
    
    
    $
    20
    
    
    $
    17
 Nine months ended September 30OtherpostretirementPension benefits
    
    
    benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    109
    
    
    $
    89
    
    
    $
    11
    
    
    $
    11Interest cost
    
    
    111
    
    
    
    106
    
    
    
    36
    
    
    
    36Expected return on plan assets
    
    
    (124
    )
    
    
    (124
    )
    
    
    
    
    
    
    Other
    
    
    50
    
    
    
    36
    
    
    
    10
    
    
    
    8146
    
    
    
    107
    
    
    
    57
    
    
    
    55Curtailment loss
    
    
    10
    
    
    
    
    
    
    
    1
    
    
    
    Settlement loss
    
    
    34
    
    
    
    26
    
    
    
    
    
    
    
    $
    190
    
    
    $
    133
    
    
    $
    58
    
    
    $
    55
  7




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##### Table of Contents



Stock Options
    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%
 8




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##### Table of Contents



Nine months ended September 30, 2006Weighted-Weighted-
    
    
    
    
    
    averageaverage
    
    
    
    
    
    remaining
    
    Aggregateprice per
    
    
    
    
    
    contractual
    
    intrinsicoption
    
    Options
    
    life in years
    
    valueOutstanding December 31, 2005
    
    $
    42.95
    
    
    
    14.4Granted
    
    
    68.65
    
    
    
    1.9Exercised
    
    
    35.41
    
    
    
    (2.5
    )Forfeited
    
    
    64.90
    
    
    
    (.2
    )Outstanding September 30, 2006
    
    $
    47.59
    
    
    
    13.6
    
    
    
    5.5
    
    
    $
    290Exercisable September 30, 2006
    
    $
    41.85
    
    
    
    7.8
    
    
    
    5.1
    
    
    $
    211Reserved for future grants
September 30, 2006
    
    
    
    
    
    
    5.2
   Nine months ended September 302006
    
    2005Proceeds from stock options exercised
    
    $
    86
    
    
    $
    54Income tax benefits related to stock options exercisedReported in operating activities in statement of cash flows
    
    
    7
    
    
    
    18Reported in financing activities in statement of cash flows
    
    
    22
    
    
    
    Intrinsic value of stock options exercised
    
    
    88
    
    
    
    59
  9




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net
incomeAs reported
    
    $
    199
    
    
    $
    595Stock-based compensation expense, net of income taxes
    
    
    (5
    )
    
    
    (14
    )Assuming fair-value-based method
    
    $
    194
    
    
    $
    581Net income
per Common Share assuming dilutionAs reported
    
    $
    1.30
    
    
    $
    3.85Stock-based compensation expense, net of income taxes
    
    
    (.03
    )
    
    
    (.09
    )Assuming fair-value-based method
    
    $
    1.27
    
    
    $
    3.76Net
income per Common Share basicAs reported
    
    $
    1.33
    
    
    $
    3.95Stock-based compensation expense, net of income taxes
    
    
    (.03
    )
    
    
    (.10
    )Assuming fair-value-based method
    
    $
    1.30
    
    
    $
    3.85
 Income Taxes
   Repurchase of Common Shares
   10




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##### Table of Contents



Net Income per Common Share
  Three months
    
    
    Nine monthsended September 30
    
    
    ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Income from continuing operations
    
    $
    213
    
    
    $
    197
    
    
    $
    671
    
    
    $
    588Income from discontinued operations
    
    
    35
    
    
    
    2
    
    
    
    38
    
    
    
    7Net income
    
    $
    248
    
    
    $
    199
    
    
    $
    709
    
    
    $
    595Average number of Common Shares outstanding
assuming dilution
    
    
    153.0
    
    
    
    152.4
    
    
    
    153.4
    
    
    
    154.4Less dilutive effect of stock options
    
    
    2.5
    
    
    
    3.3
    
    
    
    2.7
    
    
    
    3.7Average number of Common Shares outstanding basic
    
    
    150.5
    
    
    
    149.1
    
    
    
    150.7
    
    
    
    150.7Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.39
    
    
    $
    1.29
    
    
    $
    4.37
    
    
    $
    3.80Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    .25
    
    
    
    .05$
    1.62
    
    
    $
    1.30
    
    
    $
    4.62
    
    
    $
    3.85Net income per Common Share basicContinuing operations
    
    $
    1.42
    
    
    $
    1.32
    
    
    $
    4.45
    
    
    $
    3.90Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    .25
    
    
    
    .05$
    1.65
    
    
    $
    1.33
    
    
    $
    4.70
    
    
    $
    3.95
 Comprehensive Income
  Three months
    
    
    Nine monthsended September 30
    
    
    ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    248
    
    
    $
    199
    
    
    $
    709
    
    
    $
    595Foreign currency translation
    
    
    3
    
    
    
    17
    
    
    
    54
    
    
    
    (24
    )Other
    
    
    (2
    )
    
    
    8
    
    
    
    (7
    )
    
    
    16Comprehensive income
    
    $
    249
    
    
    $
    224
    
    
    $
    756
    
    
    $
    587
 Inventories
  Sept. 30,
    
    
    Dec. 31,2006
    
    
    2005Raw materials
    
    $
    507
    
    
    $
    469Work-in-process & finished goods
    
    
    824
    
    
    
    707Inventories at FIFO
    
    
    1,331
    
    
    
    1,176Excess of FIFO over LIFO cost
    
    
    (92
    )
    
    
    (77
    )$
    1,239
    
    
    $
    1,099
  11




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##### Table of Contents



Business Segment Information
 Three months
    
    
    Nine monthsended September 30
    
    
    ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Net salesElectrical
    
    $
    1,076
    
    
    $
    978
    
    
    $
    3,081
    
    
    $
    2,750Fluid Power
    
    
    998
    
    
    
    774
    
    
    
    2,998
    
    
    
    2,401Truck
    
    
    647
    
    
    
    601
    
    
    
    1,900
    
    
    
    1,739Automotive
    
    
    394
    
    
    
    414
    
    
    
    1,289
    
    
    
    1,312$
    3,115
    
    
    $
    2,767
    
    
    $
    9,268
    
    
    $
    8,202Operating profitElectrical
    
    $
    116
    
    
    $
    111
    
    
    $
    332
    
    
    $
    269Fluid Power
    
    
    105
    
    
    
    73
    
    
    
    319
    
    
    
    243Truck
    
    
    122
    
    
    
    119
    
    
    
    372
    
    
    
    348Automotive
    
    
    6
    
    
    
    48
    
    
    
    103
    
    
    
    179CorporateAmortization of intangible assets
    
    
    (13
    )
    
    
    (7
    )
    
    
    (35
    )
    
    
    (21
    )Interest expense-net
    
    
    (25
    )
    
    
    (24
    )
    
    
    (81
    )
    
    
    (68
    )Minority interest
    
    
    (3
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (4
    )Pension & other postretirement benefit expense
    
    
    (40
    )
    
    
    (29
    )
    
    
    (120
    )
    
    
    (89
    )Stock option expense
    
    
    (7
    )
    
    
    
    
    
    
    (20
    )
    
    
    Other corporate expense-net
    
    
    (36
    )
    
    
    (42
    )
    
    
    (114
    )
    
    
    (115
    )Income from continuing operations before
income taxes
    
    
    225
    
    
    
    247
    
    
    
    750
    
    
    
    742Income taxes
    
    
    12
    
    
    
    50
    
    
    
    79
    
    
    
    154Income from continuing operations
    
    
    213
    
    
    
    197
    
    
    
    671
    
    
    
    588Income from discontinued operations, net of
income taxes
    
    
    35
    
    
    
    2
    
    
    
    38
    
    
    
    7Net income
    
    $
    248
    
    
    $
    199
    
    
    $
    709
    
    
    $
    595
 12




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##### 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 September 30
    
    
    Nine months ended September 302006
    
    
    2005
    
    
    Increase
    
    
    2006
    
    
    2005
    
    
    IncreaseContinuing operationsNet sales
    
    $
    3,115
    
    
    $
    2,767
    
    
    
    13%
    
    
    $
    9,268
    
    
    $
    8,202
    
    
    
    13%Gross profit
    
    
    802
    
    
    
    784
    
    
    
    2%
    
    
    
    2,518
    
    
    
    2,308
    
    
    
    9%Percent of net sales
    
    
    25.7
    %
    
    
    28.3
    %
    
    
    
    
    
    
    27.2
    %
    
    
    28.1
    %Income after income taxes
    
    $
    213
    
    
    $
    197
    
    
    
    8%
    
    
    $
    671
    
    
    $
    588
    
    
    
    14%Income from discontinued
operations, net income
taxes
    
    
    35
    
    
    
    2
    
    
    
    
    
    
    
    38
    
    
    
    7Net income
    
    $
    248
    
    
    $
    199
    
    
    
    25%
    
    
    $
    709
    
    
    $
    595
    
    
    
    19%Net income
per Common Share assuming dilutionContinuing operations
    
    $
    1.39
    
    
    $
    1.29
    
    
    
    8%
    
    
    $
    4.37
    
    
    $
    3.80
    
    
    
    15%Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    
    
    
    
    .25
    
    
    
    .05$
    1.62
    
    
    $
    1.30
    
    
    
    25%
    
    
    $
    4.62
    
    
    $
    3.85
    
    
    
    20%
    13




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##### Table of Contents



Date of
    
    BusinessAcquired business
    
    acquisition
    
    segment
    
    Annual salesSenyuan 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 CorporationA U.S. based manufacturer of thermoplastic
hoses and tubing
    
    March 31, 2006
    
    Fluid Power
    
    $121 for 2005Marina Power and LightingA U.S. manufacturer of marine duty electrical
distribution products
    
    March 24, 2006
    
    Electrical
    
    $11 for 2005
   14




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##### Table of Contents



Results of Operations  2006 Compared to 2005
 Three months ended September 30
    
    
    Nine months ended September 302006
    
    
    2005
    
    
    Increase
    
    
    2006
    
    
    2005
    
    
    IncreaseContinuing operationsNet sales
    
    $
    3,115
    
    
    $
    2,767
    
    
    
    13%
    
    
    $
    9,268
    
    
    $
    8,202
    
    
    
    13%Gross profit
    
    
    802
    
    
    
    784
    
    
    
    2%
    
    
    
    2,518
    
    
    
    2,308
    
    
    
    9%Percent of net sales
    
    
    25.7
    %
    
    
    28.3
    %
    
    
    
    
    
    
    27.2
    %
    
    
    28.1
    %Income after income taxes
    
    $
    213
    
    
    $
    197
    
    
    
    8%
    
    
    $
    671
    
    
    $
    588
    
    
    
    14%Income from discontinued
operations, net income
taxes
    
    
    35
    
    
    
    2
    
    
    
    
    
    
    
    38
    
    
    
    7Net income
    
    $
    248
    
    
    $
    199
    
    
    
    25%
    
    
    $
    709
    
    
    $
    595
    
    
    
    19%Net income
per Common Share assuming dilutionContinuing operations
    
    $
    1.39
    
    
    $
    1.29
    
    
    
    8%
    
    
    $
    4.37
    
    
    $
    3.80
    
    
    
    15%Discontinued operations
    
    
    .23
    
    
    
    .01
    
    
    
    
    
    
    
    .25
    
    
    
    .05$
    1.62
    
    
    $
    1.30
    
    
    
    25%
    
    
    $
    4.62
    
    
    $
    3.85
    
    
    
    20%
   15




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##### Table of Contents



Three months
    
    
    Nine monthsended September 30
    
    
    ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Electrical
    
    $
    1
    
    
    $
    4
    
    
    $
    6
    
    
    $
    16Fluid Power
    
    
    5
    
    
    
    
    
    
    
    11
    
    
    
    5Truck
    
    
    1
    
    
    
    1
    
    
    
    5
    
    
    
    1Automotive
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    
    1Pretax charges
    
    $
    7
    
    
    $
    6
    
    
    $
    25
    
    
    $
    23After-tax charges
    
    $
    5
    
    
    $
    4
    
    
    $
    17
    
    
    $
    15Per Common Share
    
    $
    .03
    
    
    $
    .03
    
    
    $
    .11
    
    
    $
    .10
   16




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##### Table of Contents



Results by Business Segment
 Electrical
 Three months ended September 30
    
    Nine months ended September 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    1,076
    
    
    $
    978
    
    
    
    10
    %
    
    $
    3,081
    
    
    $
    2,750
    
    
    
    12
    %Operating profit
    
    
    116
    
    
    
    111
    
    
    
    5
    %
    
    
    332
    
    
    
    269
    
    
    
    23
    %Operating margin
    
    
    10.8
    %
    
    
    11.4
    %
    
    
    
    
    
    
    10.8
    %
    
    
    9.8
    %
   17




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##### Table of Contents



Fluid Power
 Three months ended September 30
    
    Nine months ended September 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    998
    
    
    $
    774
    
    
    
    29
    %
    
    $
    2,998
    
    
    $
    2,401
    
    
    
    25
    %Operating profit
    
    
    105
    
    
    
    73
    
    
    
    44
    %
    
    
    319
    
    
    
    243
    
    
    
    31
    %Operating margin
    
    
    10.5
    %
    
    
    9.4
    %
    
    
    
    
    
    
    10.6
    %
    
    
    10.1
    %
     18




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##### Table of Contents



Truck
 Three months ended September 30
    
    Nine months ended September 302006
    
    2005
    
    Increase
    
    2006
    
    2005
    
    IncreaseNet sales
    
    $
    647
    
    
    $
    601
    
    
    
    8
    %
    
    $
    1,900
    
    
    $
    1,739
    
    
    
    9
    %Operating profit
    
    
    122
    
    
    
    119
    
    
    
    3
    %
    
    
    372
    
    
    
    348
    
    
    
    7
    %Operating margin
    
    
    18.9
    %
    
    
    19.8
    %
    
    
    
    
    
    
    19.6
    %
    
    
    20.0
    %
       19




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##### Table of Contents



Automotive
 Three months ended September 30
    
    Nine months ended September 302006
    
    2005
    
    Decrease
    
    2006
    
    2005
    
    DecreaseNet sales
    
    $
    394
    
    
    $
    414
    
    
    
    (5
    %)
    
    $
    1,289
    
    
    $
    1,312
    
    
    
    (2
    %)Operating profit
    
    
    6
    
    
    
    48
    
    
    
    (88
    %)
    
    
    103
    
    
    
    179
    
    
    
    (42
    %)Operating margin
    
    
    1.5
    %
    
    
    11.6
    %
    
    
    
    
    
    
    8.0
    %
    
    
    13.6
    %
       Corporate
    20




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##### Table of Contents



Changes in Financial Condition During 2006
       Forward-Looking Statements
  21




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
    
 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 programsJuly 2006
    
    
    1,000,000
    
    
    $
    65.48
    
    
    
    1,000,000
    
    
    
    4,725,596August
2006
    
    
    50,700
    
    
    $
    63.14
    
    
    
    50,700
    
    
    
    4,674,896Total
    
    
    1,050,700
    
    
    $
    65.37
    
    
    
    1,050,700
 
 Item 6. Exhibits
  22




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##### Table of Contents



Signature
  EATON CORPORATION

RegistrantDate: November 3, 2006
    
    /s/ Richard H. Fearon

Richard H. FearonExecutive Vice President -Chief Financial and Planning Officer
 23




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##### Table of Contents



Eaton Corporation
Third 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)
 24