##### 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, 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)
 (Registrants telephone number, including area code)
 þ o
 þ o 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 ProceduresItem 4T. Controls and ProceduresPART II  OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission to a Vote of Security HoldersItem 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 endedMarch 31(Millions except for per share data)
    
    2007
    
    
    2006Net sales
    
    $
    3,153
    
    
    $
    2,991Cost of products sold
    
    
    2,256
    
    
    
    2,149Selling & administrative expense
    
    
    508
    
    
    
    479Research & development expense
    
    
    83
    
    
    
    80Interest expense-net
    
    
    30
    
    
    
    28Other expense-net
    
    
    7
    
    
    
    4Income from continuing operations before income taxes
    
    
    269
    
    
    
    251Income taxes
    
    
    35
    
    
    
    45Income from continuing operations
    
    
    234
    
    
    
    206Income from discontinued operations
    
    
    
    
    
    
    2Net income
    
    $
    234
    
    
    $
    208Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.56
    
    
    $
    1.35Discontinued operations
    
    
    
    
    
    
    .01$
    1.56
    
    
    $
    1.36Average number of Common Shares outstanding assuming dilution
    
    
    150.0
    
    
    
    153.1Net income per Common Share basicContinuing operations
    
    $
    1.59
    
    
    $
    1.37Discontinued operations
    
    
    
    
    
    
    .01$
    1.59
    
    
    $
    1.38Average number of Common Shares outstanding basic
    
    
    147.6
    
    
    
    150.4Cash dividends paid per Common Share
    
    $
    .43
    
    
    $
    .35
  Page 2




---



##### Table of Contents



Eaton Corporation
Condensed Consolidated Balance Sheets
 Mar. 31,
    
    
    Dec. 31,(Millions)
    
    2007
    
    
    2006AssetsCurrent assetsCash
    
    $
    106
    
    
    $
    114Short-term investments
    
    
    313
    
    
    
    671Accounts receivable
    
    
    2,139
    
    
    
    1,928Inventories
    
    
    1,389
    
    
    
    1,293Deferred income taxes & other current assets
    
    
    458
    
    
    
    4024,405
    
    
    
    4,408Property, plant & equipment-net
    
    
    2,275
    
    
    
    2,271Goodwill
    
    
    3,425
    
    
    
    3,034Other intangible assets
    
    
    1,385
    
    
    
    969Deferred income taxes & other assets
    
    
    750
    
    
    
    735$
    12,240
    
    
    $
    11,417Liabilities & Shareholders EquityCurrent liabilitiesShort-term debt, primarily commercial paper
    
    $
    676
    
    
    $
    490Current portion of long-term debt
    
    
    61
    
    
    
    322Accounts payable
    
    
    1,060
    
    
    
    1,050Accrued compensation
    
    
    256
    
    
    
    305Other current liabilities
    
    
    1,082
    
    
    
    1,1233,135
    
    
    
    3,290Long-term debt
    
    
    2,553
    
    
    
    1,774Pension liabilities
    
    
    814
    
    
    
    942Other postretirement liabilities
    
    
    780
    
    
    
    766Other long-term liabilities
    
    
    680
    
    
    
    539Shareholders equity
    
    
    4,278
    
    
    
    4,106$
    12,240
    
    
    $
    11,417
  Page 3




---



##### Table of Contents



Eaton Corporation
Condensed Statements of Consolidated Cash Flows
 Three months endedMarch 31(Millions)
    
    2007
    
    
    2006Net cash provided by (used in) operating activitiesNet income
    
    $
    234
    
    
    $
    208Adjustments to reconcile to net cash provided by operating activitiesDepreciation & amortization
    
    
    109
    
    
    
    106Pension liabilities
    
    
    47
    
    
    
    45Changes in working capital, excluding acquisitions of businesses
    
    
    (359
    )
    
    
    (137
    )Voluntary contributions to United States & United Kingdom qualified
pension plans
    
    
    (156
    )
    
    
    (103
    )Other-net
    
    
    11
    
    
    
    8(114
    )
    
    
    127Net cash provided by (used in) investing activitiesExpenditures for property, plant & equipment
    
    
    (67
    )
    
    
    (62
    )Cash paid for acquisitions of businesses
    
    
    (733
    )
    
    
    (143
    )Sales (purchases) of short-term investments-net
    
    
    383
    
    
    
    (108
    )Other-net
    
    
    (29
    )
    
    
    (26
    )(446
    )
    
    
    (339
    )Net cash provided by (used in) financing activitiesBorrowings with original maturities of more than three monthsProceeds
    
    
    1,205
    
    
    
    157Payments
    
    
    (358
    )
    
    
    (51
    )(Payments) borrowings with original maturities of less than three months-
net, primarily commercial paper
    
    
    (164
    )
    
    
    82Cash dividends paid
    
    
    (63
    )
    
    
    (52
    )Proceeds from exercise of employee stock options
    
    
    85
    
    
    
    59Income tax benefit from exercise of employee stock options
    
    
    25
    
    
    
    15Purchase of Common Shares
    
    
    (178
    )552
    
    
    
    210Total (decrease) in cash
    
    
    (8
    )
    
    
    (2
    )Cash at beginning of year
    
    
    114
    
    
    
    110Cash at end of period
    
    $
    106
    
    
    $
    108
  Page 4




---



##### Table of Contents



Notes to Condensed Consolidated Financial Statements
  Preparation of Financial Statements
  Financial Presentation Changes
  Acquisitions of Businesses
  Date of
    
    BusinessAcquired business
    
    acquisition
    
    segment
    
    Annual salesArgo-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 and other uninterruptible power systems
    
    February 7, 2007
    
    Electrical
    
    $3 for 2006Schreder-HazemeyerEaton 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.
    
    October 26, 2006
    
    Truck
    
    NoneA U.S. developer of emission control solutions for TrucksSenyuan 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 & LightingA U.S. manufacturer of marine duty electrical distribution
products
    
    March 24, 2006
    
    Electrical
    
    $11 for 2005
   Page 5




---



##### Table of Contents



PlantWorkforce Reductions
    
    
    closingEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance at January 1, 2007
    
    
    1,076
    
    
    $
    33
    
    
    $
    22
    
    
    $
    55Liabilities recorded in 2007
    
    
    59
    
    
    
    4
    
    
    
    14
    
    
    
    18Utilized in 2007
    
    
    (177
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (19
    )Balance at March 31, 2007
    
    
    958
    
    
    $
    33
    
    
    $
    21
    
    
    $
    54
  Acquisition Integration Charges
  Three months endedMarch 312007
    
    
    2006Electrical
    
    $
    2
    
    
    $
    2Fluid Power
    
    
    11
    
    
    
    3Truck
    
    
    
    
    
    
    2Automotive
    
    
    
    
    
    
    2Pretax charges
    
    $
    13
    
    
    $
    9After-tax charges
    
    $
    9
    
    
    $
    6Per Common Share
    
    $
    .06
    
    
    $
    .04
  Summary
of Acquisition Integration and Excel 07 Plant Closing
Charges
 PlantWorkforce Reductions
    
    
    closingEmployees
    
    
    Dollars
    
    
    & other
    
    
    TotalBalance at January 1, 2007
    
    
    1,603
    
    
    $
    49
    
    
    $
    6
    
    
    $
    55Charges in 2007
    
    
    
    
    
    
    1
    
    
    
    14
    
    
    
    15Utilized in 2007
    
    
    (480
    )
    
    
    (18
    )
    
    
    (16
    )
    
    
    (34
    )Balance at March 31, 2007
    
    
    1,123
    
    
    $
    32
    
    
    $
    4
    
    
    $
    36
 Page 6




---



##### Table of Contents



Retirement Benefit Plans Expense
  Three months ended March 31OtherpostretirementPension benefits
    
    
    benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    (36
    )
    
    $
    (35
    )
    
    $
    (3
    )
    
    $
    (4
    )Interest cost
    
    
    (41
    )
    
    
    (36
    )
    
    
    (12
    )
    
    
    (12
    )Expected return on plan assets
    
    
    45
    
    
    
    41Amortization
    
    
    (19
    )
    
    
    (17
    )
    
    
    (3
    )
    
    
    (3
    )(51
    )
    
    
    (47
    )
    
    
    (18
    )
    
    
    (19
    )Curtailment loss
    
    
    
    
    
    
    (2
    )Settlement loss
    
    
    (7
    )
    
    
    (11
    )$
    (58
    )
    
    $
    (60
    )
    
    $
    (18
    )
    
    $
    (19
    )
  Income Taxes
       Long-term Debt
 st
 Page 7




---



##### Table of Contents



Common Shares
  Shares repurchased
    
    
    Cost(Shares in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006First quarter
    
    
    2.312
    
    
    
    
    
    
    $
    178Second quarter
    
    
    
    
    
    
    0.895
    
    
    
    
    
    
    $
    63Third quarter
    
    
    
    
    
    
    1.051
    
    
    
    
    
    
    
    69Fourth quarter
    
    
    
    
    
    
    3.340
    
    
    
    
    
    
    
    2542.312
    
    
    
    5.286
    
    
    $
    178
    
    
    $
    386
  Net Income per Common Share
  Three months endedMarch 312007
    
    
    2006Income from continuing operations
    
    $
    234
    
    
    $
    206Income from discontinued operations
    
    
    
    
    
    
    2Net income
    
    $
    234
    
    
    $
    208Average number of Common Shares outstanding
assuming dilution
    
    
    150.0
    
    
    
    153.1Less dilutive effect of stock options
    
    
    2.4
    
    
    
    2.7Average number of Common Shares outstanding basic
    
    
    147.6
    
    
    
    150.4Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.56
    
    
    $
    1.35Discontinued operations
    
    
    
    
    
    
    .01$
    1.56
    
    
    $
    1.36Net income per Common Share basicContinuing operations
    
    $
    1.59
    
    
    $
    1.37Discontinued operations
    
    
    
    
    
    
    .01$
    1.59
    
    
    $
    1.38
 Comprehensive Income (Loss)
  Three months endedMarch 312007
    
    
    2006Net income
    
    $
    234
    
    
    $
    208Foreign currency translation
    
    
    27
    
    
    
    25Other
    
    
    15
    
    
    
    (5
    )Comprehensive income
    
    $
    276
    
    
    $
    228
 Page 8




---



##### Table of Contents



Inventories
  Mar. 31,
    
    
    Dec. 31,2007
    
    
    2006Raw materials
    
    $
    630
    
    
    $
    570Work-in-process & finished goods
    
    
    867
    
    
    
    825Inventories at FIFO
    
    
    1,497
    
    
    
    1,395Excess of FIFO over LIFO cost
    
    
    (108
    )
    
    
    (102
    )$
    1,389
    
    
    $
    1,293
 Business Segment Information
 Three months endedMarch 312007
    
    
    2006Net salesElectrical
    
    $
    1,084
    
    
    $
    965Fluid Power
    
    
    1,041
    
    
    
    974Truck
    
    
    576
    
    
    
    607Automotive
    
    
    452
    
    
    
    445$
    3,153
    
    
    $
    2,991Operating profitElectrical
    
    $
    120
    
    
    $
    103Fluid Power
    
    
    117
    
    
    
    104Truck
    
    
    107
    
    
    
    117Automotive
    
    
    63
    
    
    
    53CorporateAmortization of intangible assets
    
    
    (16
    )
    
    
    (11
    )Interest expense-net
    
    
    (30
    )
    
    
    (28
    )Minority interest
    
    
    (2
    )
    
    
    (1
    )Pension & other postretirement benefit expense
    
    
    (38
    )
    
    
    (40
    )Stock option expense
    
    
    (7
    )
    
    
    (6
    )Other corporate expensenet
    
    
    (45
    )
    
    
    (40
    )Income from continuing operations before income taxes
    
    
    269
    
    
    
    251Income taxes
    
    
    35
    
    
    
    45Income from continuing operations
    
    
    234
    
    
    
    206Income from discontinued operations
    
    
    
    
    
    
    2Net income
    
    $
    234
    
    
    $
    208
 Page 9




---



##### Table of Contents



Item 2. Managements Discussion & Analysis of Financial Condition & Results of Operations
  Overview of the Company
  Highlights of Results for 2007
 Three months ended March 312007
    
    
    2006
    
    
    IncreaseNet sales
    
    $
    3,153
    
    
    $
    2,991
    
    
    
    5
    %Gross profit
    
    
    897
    
    
    
    842
    
    
    
    7
    %Percent of net sales
    
    
    28.4
    %
    
    
    28.2
    %Income before income taxes
    
    
    269
    
    
    
    251
    
    
    
    7
    %Income after income taxes
    
    $
    234
    
    
    $
    206
    
    
    
    14
    %Income from discontinued operations
    
    
    
    
    
    
    2Net income
    
    $
    234
    
    
    $
    208
    
    
    
    13
    %Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.56
    
    
    $
    1.35
    
    
    
    16
    %Discontinued operations
    
    
    
    
    
    
    .01$
    1.56
    
    
    $
    1.36
    
    
    
    15
    %
    Page 10




---



##### Table of Contents



Business
    
    AnnualAcquired business
    
    Date of acquisition
    
    segment
    
    salesArgo-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 and other uninterruptible power systems
    
    February 7, 2007
    
    Electrical
    
    $3 for 2006
         Page 11




---



##### Table of Contents



Results of Operations  2007 Compared to 2006
 Three months ended March 312007
    
    
    2006
    
    
    IncreaseNet sales
    
    $
    3,153
    
    
    $
    2,991
    
    
    
    5
    %Gross profit
    
    
    897
    
    
    
    842
    
    
    
    7
    %Percent of net sales
    
    
    28.4
    %
    
    
    28.2
    %Income before income taxes
    
    
    269
    
    
    
    251
    
    
    
    7
    %Income after income taxes
    
    $
    234
    
    
    $
    206
    
    
    
    14
    %Income from discontinued operations
    
    
    
    
    
    
    2Net income
    
    $
    234
    
    
    $
    208
    
    
    
    13
    %Net income per Common Share assuming dilutionContinuing operations
    
    $
    1.56
    
    
    $
    1.35
    
    
    
    16
    %Discontinued operations
    
    
    
    
    
    
    .01$
    1.56
    
    
    $
    1.36
    
    
    
    15
    %
    Three months endedMarch 312007
    
    
    2006Electrical
    
    $
    2
    
    
    $
    2Fluid Power
    
    
    11
    
    
    
    3Truck
    
    
    
    
    
    
    2Automotive
    
    
    
    
    
    
    2Pretax charges
    
    $
    13
    
    
    $
    9After-tax charges
    
    $
    9
    
    
    $
    6Per Common Share
    
    $
    .06
    
    
    $
    .04
   Page 12




---



##### Table of Contents



Three months endedMarch 31, 2006Electrical
    
    $
    3Fluid Power
    
    
    6Truck
    
    
    2Automotive
    
    
    6Pretax charges
    
    $
    17After-tax charges
    
    $
    11Per Common Share
    
    $
    .07
     Results by Business Segment
 Electrical
 Three months ended March 312007
    
    2006
    
    IncreaseNet sales
    
    $
    1,084
    
    
    $
    965
    
    
    
    12
    %Operating profit
    
    
    120
    
    
    
    103
    
    
    
    17
    %Operating margin
    
    
    11.1
    %
    
    
    10.7
    %
   Page 13




---



##### Table of Contents



Fluid Power
 Three months ended March 312007
    
    2006
    
    IncreaseNet sales
    
    $
    1,041
    
    
    $
    974
    
    
    
    7
    %Operating profit
    
    
    117
    
    
    
    104
    
    
    
    13
    %Operating margin
    
    
    11.2
    %
    
    
    10.7
    %
    Truck
 Three months ended March 312007
    
    2006
    
    (Decrease)Net sales
    
    $
    576
    
    
    $
    607
    
    
    
    (5
    %)Operating profit
    
    
    107
    
    
    
    117
    
    
    
    (9
    %)Operating margin
    
    
    18.6
    %
    
    
    19.3
    %
   Page 14




---



##### Table of Contents



Automotive
 Three months ended March 312007
    
    2006
    
    IncreaseNet sales
    
    $
    452
    
    
    $
    445
    
    
    
    2
    %Operating profit
    
    
    63
    
    
    
    53
    
    
    
    19
    %Operating margin
    
    
    13.9
    %
    
    
    11.9
    %
    Changes in Financial Condition During 2007
    st
 Page 15




---



##### Table of Contents



Contractual
Obligations
  Forward-Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
    Page 16




---



##### Table of Contents



Item 4T. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Total number of
    
    
    Maximum numbershares
    
    
    (or approximatepurchased as
    
    
    dollar value) ofTotal
    
    
    
    
    
    
    part of publicly
    
    
    shares that may yetnumber of
    
    
    Average
    
    
    announced
    
    
    be purchasedshares
    
    
    price paid
    
    
    plans or
    
    
    under the plans orMonth
    
    purchased
    
    
    per share
    
    
    programs
    
    
    programsJanuary
    
    
    1,804,600
    
    
    $
    76.11
    
    
    
    1,804,600
    
    
    
    8,195,400February
    
    
    465,000
    
    
    $
    80.22
    
    
    
    465,000
    
    
    
    7,730,400March
    
    
    42,100
    
    
    $
    81.93
    
    
    
    42,100
    
    
    
    7,688,300Total
    
    
    2,311,700
    
    
    $
    77.05
    
    
    
    2,311,700
 
 Item 4. Submission to a Vote of Security Holders
  Voting on Directors
    
    For
    
    WithheldChristopher M. Connor
    
    
    108,569,819
    
    
    
    23,440,571Michael J. Critelli
    
    
    123,865,855
    
    
    
    8,144,535Charles E. Golden
    
    
    129,657,880
    
    
    
    2,352,510Ernie Green
    
    
    123,560,339
    
    
    
    8,450,051
 Ratification of Ernst & Young LLP as Independent AuditorsFor
    
    
    127,606,939Against
    
    
    3,368,733Abstain
    
    
    1,034,720
 
 Item 6. Exhibits
  Page 17




---



##### Table of Contents



Signature
  EATON CORPORATIONRegistrantDate: May 4, 2007
    /s/ Richard H. FearonRichard H. FearonExecutive Vice President -
Chief Financial and Planning Officer Page 18




---



##### Table of Contents



Eaton Corporation
First 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 19