UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

EATON CORPORATION

 

(Exact name of registrant as specified in its charter)

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)

(216) 523-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange on
Title of each class		which registered
Common Share ($.50 par value)		The New York Stock Exchange
		The Chicago Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past ninety days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of Common Stock held by non-affiliates of the registrant as of June 30, 2009 was $7.4 billion.

As of January 31, 2010, there were 166.4 million Common Shares outstanding.

Portions of the Proxy Statement for the 2010 annual shareholders meeting are incorporated by reference into Part III.

 

 

Part I

Item 1. Business.

Eaton Corporation is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy and information statements, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company’s Internet web site at http://www.eaton.com. These filings are also accessible on the SEC’s Internet web site at http://www.sec.gov.

In 2009, Eaton acquired a business and entered into a joint venture for combined net cash purchase prices of $10. The Statements of Consolidated Income include the results of these businesses from the dates of acquisition or formation. A summary of these transactions follows:

		Date of		Business
Acquired business		acquisition		segment		Annual sales
Micro Innovation Holding AG		September 1,		Electrical		$33 for 2008
A Switzerland-based manufacturer of human		2009		Rest of
machine interfaces, programmable logic				World
controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.
SEG Middle East Power Solutions & Switchboard Manufacture LLC		July 2,		Electrical		$10 for 2008
A 49%-owned joint venture to manufacture low		2009		Rest of
voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets				World

Business Segment Information

Information by business segment and geographic region regarding principal products, principal markets, methods of distribution, net sales, operating profit and assets is presented in “Business Segment & Geographic Region Information” on pages 48 through 52. Additional information regarding Eaton’s segments and business is presented below.

Electrical Americas and Electrical Rest of World

Seasonal Fluctuations — In normal economic cycles, sales of these segments are historically lower in the first quarter and higher in the third and fourth quarters of a year.

Significant Customers — Approximately 11% of the sales of the Electrical Americas segment in 2009 were made to one large distributor of electrical products.

Competition — Principal methods of competition in these segments are performance of products and systems, technology, customer service and support, and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Hydraulics

Seasonal Fluctuations — Sales of this segment are historically higher in the first and second quarters and lower in the third and fourth quarters of the year.

Competition — Principal methods of competition in this segment are product performance, geographic coverage, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Aerospace

Significant Customers — Approximately 13% of this segment’s sales in 2009 were made to one large manufacturer of aircraft.

Competition — Principal methods of competition in this segment are total cost of ownership, product and system performance, quality, design engineering capabilities and timely delivery. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products and platforms, is considered among the market leaders.

Truck

Significant Customers — Approximately 54% of this segment’s sales in 2009 were made to four large manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles.

Competition — Principal methods of competition in this segment are product performance, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Automotive

Seasonal Fluctuations — Sales of this segment historically are lower in the third quarter of the year as a result of the normal seasonal pattern of automotive industry production.

Significant Customers — Approximately 29% of this segment’s sales in 2009 were made to two large manufacturers of vehicles.

Competition — Principal methods of competition in this segment are product performance, service and price. Eaton has a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.

Information Concerning Eaton’s Business in General

Raw Materials - Eaton’s major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, silver, molybdenum, titanium, vanadium, rubber, plastic and insulating materials. Materials are purchased in various forms, such as extrusions, castings, powder metal, metal sheets and strips, forging billets, bar stock and plastic pellets. Raw materials, as well as parts and other components, are purchased from many suppliers and, under normal circumstances, the Company had no difficulty obtaining them. In 2009, prices decreased for some basic metals purchased by Eaton through the second quarter, with some prices rising during the second half of 2009 due to optimism that the global economic slow down was over and recovery was beginning. The Company maintained appropriate levels of inventory to guard against basic metals shortages, and did not experience any general availability constraints in 2009.

Patents and Trademarks - Eaton views its name and mark as significant to its business as a whole. Eaton’s products are marketed with a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. Eaton develops and acquires new intellectual property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of Eaton’s product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments. Eaton’s policy is to file applications and obtain patents for its new products including product modifications and improvements.

Order Backlog - Since a significant portion of open orders placed with Eaton by original equipment manufactures of trucks, off-highway vehicles and passenger cars are historically subject to month to month releases by customers during each model year, these orders are not considered firm. In measuring backlog of orders, the Company includes only the amount of those orders to which customers are firmly committed as of the dates listed. Using this criterion, total backlog at December 31, 2009 and 2008 was approximately $2.7 billion and $3.2 billion, respectively. Backlog should not be relied upon as being indicative of results of operations for future periods.

Research and Development - Research and development expenses (in millions) for new products and improvement of existing products in 2009, 2008 and 2007 were $395, $417 and $335, respectively. Over the past five years, the Company has invested approximately $1.7 billion in research and development.

Protection of the Environment - Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify certain processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, are not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton’s estimated capital expenditures for environmental control facilities are not expected to be material for 2010 and 2011. Information regarding the Company’s liabilities related to environmental matters is presented in “Protection of the Environment & Sustainability” on page 38.

Foreign Operations - Financial information related to Eaton’s foreign operations is presented in “Geographic Region Information” on page 50. Information regarding risks that may affect Eaton’s foreign operations is presented in Item 1A of this Form 10-K Report.

Item 1A. Risk Factors.

Among the risks that could materially adversely affect Eaton’s businesses, financial condition or results of operations are the following:

Uncertainty regarding the rate of recovery in the global end markets that Eaton serves.

As a result of the global economic downturn, Eaton’s end markets significantly declined during the first half of 2009. While most of Eaton’s markets have begun to recover, certain markets that are characterized as late cycle markets are still declining. While Eaton remains optimistic about a global economic recovery, there is still substantial uncertainty about the rate of that recovery.

Eaton’s segment revenues, operating results and profitability have varied in the past and may vary from quarter to quarter in the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has undertaken measures to reduce the impact of this volatility through diversification of markets it serves and expansion of geographic regions in which it operates. Future downturns in any of the markets that Eaton serves could adversely affect the Company’s revenues, operating results and profitability.

Eaton’s operating results depend in part on continued successful research, development and marketing of new and/or improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new products and services.

The success of new and improved products and services depends on their initial and continued acceptance by Eaton’s customers. The Company’s businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience difficulties or delays in the research, development, production or marketing of new products and services which may prevent Eaton from recouping or realizing a return on the investments required to bring new products and services to market. The end result could be a negative impact on the Company’s operating results.

Eaton’s operations depend on production facilities throughout the world, many of which are located outside the United States and are subject to greater risks of disrupted production.

Eaton manages businesses with manufacturing facilities worldwide. In recent years, the Company’s operations outside the United States have increased significantly in relative size in comparison to its total operations. The Company’s manufacturing facilities and operations could be disrupted by a natural disaster, or labor strike, war, political unrest, terrorist activity or public health concerns. Some of Eaton’s non-United States manufacturing facilities also may be more susceptible to economic and political upheaval than Eaton’s United States facilities. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate the Company for the losses.

Eaton’s substantial foreign sales subject it to economic risk as Eaton’s results of operations may be adversely affected by changes in local government regulations and policies and foreign currency fluctuations.

As noted above in Item 1 “Foreign Operations,” a significant portion of Eaton’s sales are to customers outside the United States, and the Company expects sales in foreign markets to continue to represent a significant portion of its total sales. Foreign sales and operations are subject to changes in local government regulations and policies, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, exchange controls and repatriation of earnings. Changes in the relative values of currencies occur from time to time and could affect Eaton’s operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging activities, these risks could adversely affect the Company’s operating results.

Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases or suppliers insolvencies could increase operating costs and adversely impact the competitive positions of Eaton’s products.

Eaton’s major requirements for raw materials are described above in Item 1 “Raw Materials”. Significant shortages could affect the prices Eaton’s affected businesses are charged and the competitive position of their products and services, all of which could adversely affect Eaton’s results of operations.

Further, Eaton’s suppliers of component parts may increase their prices in response to increases in costs of raw materials that they use to manufacture component parts. As a result, the Company may not be able to increase its prices commensurately with its increased costs. Consequently, the Company’s results of operations could be materially and adversely affected.

Finally, while Eaton carefully monitors the viability of each of its suppliers, the global economic downturn has, and may continue to have, an adverse impact on Eaton’s suppliers’ liquidity and solvency. Should one or more of Eaton’s material suppliers become insolvent, Eaton could be required to pay increased prices for affected raw materials or components, or experience difficulty in replacing the insolvent supplier, either of which could adversely affect Eaton’s results of operations.

Eaton engages in acquisitions and joint ventures, and may encounter unexpected difficulties identifying, pricing or integrating those businesses.

Eaton seeks to grow, in part, through strategic acquisitions and joint ventures, which are intended to complement or expand the Company’s businesses, and expects to continue to do so in the future. The success of this strategy will depend on Eaton’s ability to identify, price, finance and complete these transactions or arrangements. Success will also depend on the Company’s ability to integrate the businesses acquired in these transactions and to develop satisfactory working arrangements with the Company’s strategic partners in the joint ventures. Eaton may encounter unexpected difficulties in completing and integrating acquisitions with Eaton’s existing operations, and in managing strategic investments. Furthermore, the Company may not realize the degree, or timing, of benefits Eaton anticipated when it first entered into a transaction. Any of the foregoing could adversely affect the Company’s business and results of operations.

Eaton may be unable to adequately protect its intellectual property rights, which could affect the Company’s ability to compete.

Protecting Eaton’s intellectual property rights is critical to its ability to compete and succeed. The Company owns a large number of United States and foreign patents and patent applications, as well as trademark and copyright registrations that are necessary, and contribute significantly, to the preservation of Eaton’s competitive position in various markets. Although management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and other intellectual property will not be challenged, invalidated or circumvented by third parties. Eaton enters into confidentiality and invention assignment agreements with the Company’s employees, and into non-disclosure agreements with Eaton’s suppliers and appropriate customers so as to limit access to and disclosure of the Company’s proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Moreover, the protection provided to Eaton’s intellectual property by the laws and courts of foreign nations may not be as advantageous to Eaton as the remedies available under United States law.

Eaton is subject to litigation and environmental regulations that could adversely impact Eaton’s businesses.

At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the Company’s businesses, financial condition or results of operations. Information regarding the Company’s current legal proceedings is presented in “Protection of the Environment & Sustainability”, “Contingencies” and “Meritor Litigation” on pages 38 and 39.

Eaton participates in markets that are competitive and Eaton’s results could be adversely impacted by competitors’ actions.

Eaton’s businesses operate in competitive markets. The Company competes against other global manufacturers and service providers on the basis of product performance, quality and price, in addition to other factors. While Eaton’s product development and quality initiatives have been competitive strengths in the past, actions by Eaton’s competitors could lead to downward pressure on prices and/or a decline in the Company’s market share, either of which could adversely affect Eaton’s results.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Eaton’s world headquarters is located in Cleveland, Ohio. The Company maintains manufacturing facilities at 210 locations in 33 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which is material to its operations. Management believes that the existing manufacturing facilities are adequate for operations, and these facilities are maintained in good condition.

Item 3. Legal Proceedings.

Information regarding the Company’s current legal proceedings is presented in “Protection of the Environment & Sustainability”, “Contingencies” and “Meritor Litigation” on pages 38 and 39.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Registrant

Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report.

Part II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common shares are listed for trading on the New York and Chicago stock exchanges. Information regarding cash dividends paid, and the high and low market price per common share for each quarter in 2009 and 2008, is presented in “Quarterly Data” on page 73. At December 31, 2009, there were 8,452 holders of record of the Company’s common shares. Additionally, 17,960 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton Electrical de Puerto Rico Inc. Retirement Savings Plan.

Information regarding equity compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report.

Item 6. Selected Financial Data.

Information regarding selected financial data is presented in the “Ten-Year Consolidated Financial Summary” on page 74.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“Management’s Discussion & Analysis of Financial Condition & Results of Operations” is presented on pages 53 through 72.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Information regarding market risk is presented in “Market Risk Disclosure” on page 66.

Item 8. Financial Statements and Supplementary Data.

The report of the independent registered public accounting firm, consolidated financial statements, and notes to consolidated financial statements are presented on pages 14 through 52.

Information regarding selected quarterly financial information for 2009 and 2008 is presented in “Quarterly Data” on page 73.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures — Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Alexander M. Cutler — Chairman and Chief Executive Officer; President; and Richard H. Fearon — Vice Chairman and Chief Financial and Planning Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, Eaton’s management concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

“Management’s Report on Internal Control Over Financial Reporting” as of December 31, 2009 is presented on page 16.

“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, 2009 is presented on page 15.

During the fourth quarter of 2009, there was no change in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, Eaton’s internal control over financial reporting.

Item 9B. Other Information.

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

A listing of the Company’s executive officers, their ages, positions and offices held over the past five years, as of February 1, 2010, follows:

Name		Age		Position (Date elected to position)
Alexander M. Cutler		58		Chairman and Chief Executive Officer; President      (August 1, 2000 — present) Director (September 22, 1993 — present)
Richard H. Fearon		53		Vice Chairman and Chief Financial and Planning Officer      (April 24, 2002 — present)
Craig Arnold		49		Vice Chairman and Chief Operating Officer — Industrial Sector      (February 1, 2009 — present) Chief Executive Officer — Fluid Power Group      (October 25, 2000 — January 31, 2009)
Thomas S. Gross		55		Vice Chairman and Chief Operating Officer — Electrical Sector      (February 1, 2009 — present) President — Power Quality and Control Business      (April 1, 2008 — January 31, 2009) Vice President and President — Power Quality Solutions Operations      (May 16, 2005 — March 31, 2008) Vice President — Power Quality Solutions Operations      (July 29, 2004 — May 15, 2005) Vice President — Eaton Business System      (July 23, 2003 — July 28, 2004)
James W. McGill		54		Executive Vice President — Chief Human Resources Officer      (January 1, 2010 — present) President — Asia-Pacific Region      (April 1, 2008 — December 31, 2009) Vice President — Asia-Pacific      (April 1, 2006 — March 31, 2008) Vice President — Eaton Business System      (July 29, 2004 — March 31, 2006)

Name		Age		Position (Date elected to position)
Mark M. McGuire		52		Executive Vice President and General Counsel      (December 1, 2005 — present) Vice President and Deputy General Counsel,      International Paper Company (2003 — 2005)
Thomas E. Moran		45		Senior Vice President and Secretary      (October 1, 2008 — present) Assistant Secretary and Managing Counsel, The Dow      Chemical Company (2002 — 2008)
Billie K. Rawot		58		Senior Vice President and Controller      (March 1, 1991 — present)
Kurt B. McMaken		40		Senior Vice President — Corporate Development and Treasury      (February 1, 2009 — present) Vice President — Corporate Development and Planning      (January 1, 2008 — January 31, 2009) Director — Corporate Planning      (April 1, 2006 — December 31, 2007) Director — Corporate Development      (October 1, 2004 — March 30, 2006)

There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors.

Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

The Company has adopted a Code of Ethics, which applies to the Directors, officers and employees worldwide. This document is available on the Company’s website at http://www.eaton.com.

There were no changes during fourth quarter 2009 to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

Information related to the Company’s Audit Committee, and members of the Committee that are financial experts, is set forth under the caption “Board Committees — Audit Committee” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 11. Executive Compensation.

Information required with respect to executive compensation is set forth under the caption “Executive Compensation” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required with respect to securities authorized for issuance under equity compensation plans is set forth under the caption “Equity Compensation Plans” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share Ownership Tables” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required with respect to certain relationships and related transactions is set forth under the caption “Review of Related Person Transactions” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Information required with respect to director independence is set forth under the caption “Director Independence” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Item 14. Principal Accounting Fees and Services.

Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee Report” in the Company’s definitive Proxy Statement to be filed on or about March 19, 2010, and is incorporated by reference.

Part IV

Item 15. Exhibits, Financial Statement Schedules.

(a) (1)	The report of the independent registered public accounting firm, consolidated financial statements and notes to consolidated financial statements are included in Item 8 above:
	Report of Independent Registered Public Accounting Firm - Page 14
	Statements of Consolidated Income - Years ended December 31, 2009, 2008 and 2007 - Page 17
	Consolidated Balance Sheets - December 31, 2009 and 2008 - Page 18
	Statements of Consolidated Cash Flows - Years ended December 31, 2009, 2008 and 2007 - Page 19
	Statements of Consolidated Shareholders’ Equity - Years ended December 31, 2009, 2008 and 2007 - Pages 20 through 22
	Notes to Consolidated Financial Statements - Pages 23 through 52

		All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3)		Exhibits

	3(i)		Amended Articles of Incorporation (amended and restated as of April 24, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
	3(ii)		Amended Regulations (amended and restated as of April 23, 2008) - Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2008
	4(a)		Pursuant to Regulation S-K Item 601(b) (4), the Company agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt
	10		Material contracts

	(a)		Senior Executive Incentive Compensation Plan (effective January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
	(b)		Executive Incentive Compensation Plan (effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2005
	(c)		2005 Non-Employee Director Fee Deferral Plan (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(d)		Deferred Incentive Compensation Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(e)		Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

	(f)		Incentive Compensation Deferral Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(g)		Limited Eaton Service Supplemental Retirement Income Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(h)		Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(i)		Form of Restricted Share Unit Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(j)		Form of Restricted Share Unit Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(k)		Form of Restricted Share Agreement (2 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(l)		Form of Restricted Share Agreement (4 year vesting) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(m)		Form of Restricted Share Agreement (Non-Employee Directors) - Incorporated by reference to the Form 8-K Report filed February 1, 2010
	(n)		Form of Stock Option Agreement for Executives (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(o)		Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
	(p)		Form of Stock Option Agreement for Non-Employee Directors (2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(q)		2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002
	(r)		2004 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 19, 2004
	(s)		2008 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
	(t)		2009 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 2009
	(u)		Plan for the Deferred Payment of Directors’ Fees (originally adopted in 1985 and amended effective September 24, 1996, January 28, 1998, January 23, 2002, February 24, 2004, December 8, 2004 and, in certain respects, January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007
	(v)		1996 Non-Employee Director Fee Deferral Plan (amended and restated effective January 1, 2005) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2006
	(w)		Form of Change of Control Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008

	(x)		Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(y)		Form of Indemnification Agreement entered into with directors of Eaton Corporation - Incorporated by reference to the Form 8-K Report filed January 26, 2007
	(z)		Executive Strategic Incentive Plan (amended and restated January 1, 2008) - Incorporated by reference to the definitive Proxy Statement dated March 14, 2008
	(aa)		Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(bb)		Supplemental Executive Strategic Incentive Plan (effective as of June 25, 2008) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2008
	(cc)		Deferred Incentive Compensation Plan (amended and restated effective November 1, 2007) - Filed in conjunction with this Form 10-K Report*
	(dd)		1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998
	(ee)		Incentive Compensation Deferral Plan (amended and restated October 1, 1997) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2000
	(ff)		Trust Agreement - Officers and Employees (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(gg)		Trust Agreement - Non-employee Directors (dated December 6, 1996) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(hh)		Group Replacement Insurance Plan (GRIP) (effective June 1, 1992) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 1992
	(ii)		1991 Stock Option Plan - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(jj)		Excess Benefits Plan (amended and restated effective January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(kk)		Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2002
	(ll)		Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other Equity Grants upon the Restatement of Financial Results - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2007

	12		Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report *
	14		Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14, 2008
	21		Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K Report *

	23		Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report *
	24		Power of Attorney - Filed in conjunction with this Form 10-K Report *
	31.1		Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
	31.2		Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report *
	32.1		Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *
	32.2		Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report *

	101.INS		XBRL Instance Document *
	101.SCH		XBRL Taxonomy Extension Schema Document *
	101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *
	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *
	101.LAB		XBRL Taxonomy Extension Label Linkbase Document *
	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

		Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, (ii) Consolidated Balance Sheets at December 31, 2009 and 2008, (iii) Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007 (iv) Notes to Consolidated Financial Statements for the year ended December 31, 2009.
		In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
(b)		Exhibits
		Certain exhibits required by this portion of Item 15 are filed as a separate section of this Form 10-K Report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date: February 26, 2010

Signature		Title
*
Alexander M. Cutler		Chairman and Chief Executive Officer; President; Principal Executive Officer; Director
*
Billie K. Rawot		Senior Vice President and Controller; Principal Accounting Officer
*
Todd M. Bluedorn		Director
*
Michael J. Critelli		Director
*
Ernie Green		Director
*
Ned C. Lautenbach		Director
*
John R. Miller		Director
*
Victor A. Pelson		Director
*
Christopher M. Connor		Director
*
Charles E. Golden		Director
*
Arthur E. Johnson		Director
*
Deborah L. McCoy		Director
*
Gregory R. Page		Director
Gary L. Tooker		Director

*By		/s/ Richard H. Fearon   Richard H. Fearon, Attorney-in-Fact for the officers and directors signing in the capacities indicated

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Eaton Corporation

We have audited the accompanying consolidated balance sheets of Eaton Corporation as of December 31, 2009 and 2008, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eaton Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio
February 26, 2010

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Eaton Corporation

We have audited Eaton Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Eaton Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Eaton Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eaton Corporation as of December 31, 2009 and 2008, and the related statements of consolidated income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Cleveland, Ohio
February 26, 2010

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Eaton Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)).

Under the supervision and with the participation of Eaton’s management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on this evaluation under the framework referred to above, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009.

The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This report is included herein.

/s/ Alexander M. Cutler		/s/ Richard H. Fearon		/s/ Billie K. Rawot
Chairman and Chief		Vice Chairman and		Senior Vice President and
Executive Officer;		Chief Financial and Planning		Controller
President		Officer

February 26, 2010

STATEMENTS OF CONSOLIDATED INCOME

		Year ended December 31
(Millions except for per share data)		2009				2008				2007
Net sales		$	11,873			$	15,376			$	13,033
Cost of products sold			8,782				11,191				9,382
Selling & administrative expense			2,252				2,513				2,139
Research & development expense			395				417				335
Interest expense-net			150				157				147
Other (income) expense-net			(9	)			(42	)			(25	)
Income from continuing operations before income taxes			303				1,140				1,055
Income tax (benefit) expense			(82	)			73				82
Income from continuing operations			385				1,067				973
Income from discontinued operations							3				35
Net income			385				1,070				1,008
Adjustment of net income for noncontrolling interests			(2	)			(12	)			(14	)
Net income attributable to common shareholders		$	383			$	1,058			$	994
Net income per common share – diluted
Continuing operations		$	2.27			$	6.50			$	6.38
Discontinued operations							.02				.24
Total		$	2.27			$	6.52			$	6.62
Average number of common shares outstanding – diluted			167.9				162.3				150.3
Net income per common share – basic
Continuing operations		$	2.31			$	6.58			$	6.51
Discontinued operations							.02				.24
Total		$	2.31			$	6.60			$	6.75
Average number of common shares outstanding – basic			166.4				160.2				147.3
Cash dividends paid per common share		$	2.00			$	2.00			$	1.72
Amounts attributable to common shareholders
Income from continuing operations		$	383			$	1,055			$	959
Income from discontinued operations							3				35
Total		$	383			$	1,058			$	994

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

		December 31
(Millions)		2009				2008
Current assets
Cash		$	340			$	188
Short-term investments			433				342
Accounts receivable			1,899				2,295
Inventories			1,326				1,554
Deferred income taxes			377				239
Other current assets			149				177
Total current assets			4,524				4,795
Property, plant & equipment
Land & buildings			1,459				1,425
Machinery & equipment			4,241				4,142
Gross property, plant & equipment			5,700				5,567
Accumulated depreciation			(3,255	)			(2,928	)
Net property, plant & equipment			2,445				2,639
Goodwill			5,435				5,232
Other intangible assets			2,441				2,518
Deferred income taxes			973				971
Other assets			464				500
Total assets		$	16,282			$	16,655
Current liabilities
Short-term debt		$	113			$	812
Current portion of long-term debt			5				269
Accounts payable			1,057				1,121
Accrued compensation			256				297
Other current liabilities			1,258				1,246
Total current liabilities			2,689				3,745
Long-term debt			3,349				3,190
Pension liabilities			1,586				1,650
Other postretirement benefits liabilities			754				703
Deferred income taxes			550				543
Other liabilities			536				459
Equity
Common shares (166.2 million outstanding in 2009 and 165.0 million in 2008)			83				82
Capital in excess of par value			3,957				3,879
Retained earnings			3,966				3,917
Accumulated other comprehensive loss			(1,208	)			(1,538	)
Deferred compensation plans			(21	)			(23	)
Eaton shareholders’ equity			6,777				6,317
Noncontrolling interests			41				48
Total equity			6,818				6,365
Total liabilities & equity		$	16,282			$	16,655

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

STATEMENTS OF CONSOLIDATED CASH FLOWS

		Year ended December 31
(Millions)		2009				2008				2007
Net cash provided by (used in) operating activities
Net income		$	385			$	1,070			$	1,008
Adjustments to reconcile to net cash provided by operating activities
Depreciation & amortization			573				571				439
Deferred income taxes			(191	)			(225	)			(51	)
Pension liabilities, net of contributions			(1	)			5				26
Gains on sales of businesses			(9	)			(19	)			(46	)
Other long-term liabilities			(16	)			(40	)			(25	)
Other non-cash items in income			(15	)			44				60
Changes in working capital, excluding acquisitions & sales of businesses
Accounts receivable			440				128				(72	)
Inventories			292				118				(79	)
Accounts payable			(73	)			(208	)			27
Accrued income & other taxes			30				(31	)			(41	)
Other working capital accounts			56				(206	)			21
Cash received from termination of interest rate swaps			15				85				19
Other-net			(78	)			149				(128	)
Net cash provided by operating activities			1,408				1,441				1,158
Net cash provided by (used in) investing activities
Expenditures for property, plant & equipment			(195	)			(448	)			(354	)
Cash paid for acquisitions of businesses			(10	)			(2,807	)			(1,433	)
Proceeds from sales of businesses			24				25				119
(Purchases) sales of short-term investments-net			(64	)			100				247
Other-net			20				(60	)			(35	)
Net cash used in investing activities			(225	)			(3,190	)			(1,456	)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than three months – proceeds			558				1,656				1,652
Borrowings with original maturities of more than three months – payments			(887	)			(984	)			(979	)
Borrowings with original maturities of less than three months-net, primarily commercial paper			(424	)			(5	)			62
Cash dividends paid			(334	)			(320	)			(251	)
Proceeds from sale of common shares							1,522
Proceeds from exercise of employee stock options			27				47				141
Income tax benefit from exercise of employee stock options			4				13				42
Purchase of common shares							(100	)			(340	)
Other-net			(5	)			(14	)			(7	)
Net cash (used in) provided by financing activities			(1,061	)			1,815				320
Effect of foreign exchange rate changes on cash			30				(20	)			6
Total increase in cash			152				46				28
Cash at the beginning of the year			188				142				114
Cash at the end of the year		$	340			$	188			$	142

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

																		Accumulated
										Capital in								other				Deferred				Eaton
		Common stock								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(Millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at January 1, 2007			146.3			$	73			$	2,114			$	2,796			$	(849	)		$	(28	)		$	4,106			$	50			$	4,156
Net income															994												994				14				1,008
Foreign currency translation and related hedging hedging instruments (including income tax expense of $14)																			212								212								212
Deferred loss on cash flow hedges (net of income income tax benefit of $3)																			(5	)							(5	)							(5	)
Pensions (net of income tax expense of $101)																			214								214								214
Other postretirement benefits (net of income tax expense of $8)																			5								5								5
Other comprehensive income																											426								426
Total comprehensive income																											1,420				14				1,434
Cash dividends paid															(251	)											(251	)			(7	)			(258	)
Issuance of shares under employee benefit plans (including income tax benefit of $51)			3.7				2				237				(5	)							8				242								242
Purchase of shares by trust																							(5	)			(5	)							(5	)
Purchase of shares			(4.0	)			(2	)			(61	)			(277	)											(340	)							(340	)
Other																															2				2
Balance at December 31, 2007			146.0				73				2,290				3,257				(423	)			(25	)			5,172				59				5,231

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

																		Accumulated
										Capital in								other				Deferred				Eaton
		Common stock								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(Millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at December 31, 2007			146.0				73				2,290				3,257				(423	)			(25	)			5,172				59				5,231
Net income															1,058												1,058				12				1,070
Foreign currency translation and related hedging instruments (including income tax benefit of $68)																			(722	)							(722	)							(722	)
Deferred loss on cash flow hedges (net of income tax benefit of $12)																			(23	)							(23	)							(23	)
Pensions (net of income tax benefit of $227)																			(419	)							(419	)							(419	)
Other postretirement benefits (net of income tax expense of $31)																			49								49								49
Other comprehensive loss																											(1,115	)							(1,115	)
Total comprehensive loss																											(57	)			12				(45	)
Effects of changing retirement benefits plans measurement date (net of income tax benefit of $8)															(11	)											(11	)							(11	)
Cash dividends paid															(320	)											(320	)			(13	)			(333	)
Issuance of shares under employee benefit plans (including income tax benefit of $16)			1.7				1				109				(1	)							5				114								114
Sale of shares			18.7				9				1,513																1,522								1,522
Purchase of shares by trust																							(3	)			(3	)							(3	)
Purchase of shares			(1.4	)			(1	)			(33	)			(66	)											(100	)							(100	)
Decrease in noncontrolling interests due to sale of business																															(10	)			(10	)
Balance at December 31, 2008			165.0				82				3,879				3,917				(1,538	)			(23	)			6,317				48				6,365

STATEMENTS OF CONSOLIDATED SHAREHOLDERS’ EQUITY

																		Accumulated
										Capital in								other				Deferred				Eaton
		Common stock								excess of				Retained				comprehensive				compensation				shareholders’				Noncontrolling				Total
(Millions)		Shares				Dollars				par value				earnings				loss				plans				equity				interests				equity
Balance at December 31, 2008			165.0				82				3,879				3,917				(1,538	)			(23	)			6,317				48				6,365
Net income															383												383				2				385
Foreign currency translation and related hedging instruments (including income taxes of $45)																			349								349								349
Deferred gain on cash flow hedges (including income taxes of $19)																			36								36								36
Pensions (net of income taxes of $42)																			1								1								1
Other postretirement benefits (net of income tax benefit of $14)																			(56	)							(56	)							(56	)
Other comprehensive income																											330								330
Total comprehensive income																											713				2				715
Cash dividends paid															(334	)											(334	)			(5	)			(339	)
Issuance of shares under employee benefit plans (including income tax benefit of $3)			1.2				1				78												2				81								81
Decrease in noncontrolling interests due to sale of business																															(4	)			(4	)
Balance at December 31, 2009			166.2			$	83			$	3,957			$	3,966			$	(1,208	)		$	(21	)		$	6,777			$	41			$	6,818

The notes on pages 23 to 52 are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Millions of dollars and shares unless indicated otherwise (per share data assume dilution)

DESCRIPTION OF COMPANY

Eaton Corporation (Eaton or Company) is a diversified power management company with 2009 sales of $11.9 billion. Eaton is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 70,000 employees in over 50 countries, and sells products to customers in more than 150 countries.

ADOPTION OF NEW ACCOUNTING STANDARDS

Financial Accounting Standards Board Accounting Standards Codification

In 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standards Codification, which establishes a sole source of U.S. authoritative generally accepted accounting principles (GAAP). The Codification is meant to simplify user access to all authoritative accounting standards by reorganizing U.S. GAAP pronouncements into approximately ninety accounting topics within a consistent structure; its purpose is not to create new accounting and reporting standards. Pursuant to the provisions of the Codification, Eaton has updated references to U.S. GAAP in these consolidated financial statements. The adoption of the Codification did not have an effect on Eaton’s financial position, results of operations or cash flows.

Business Combinations

In 2009, Eaton adopted the revised Business Combinations Standard, which addresses accounting for the acquisitions of businesses. Under the revised standard, acquisition costs will be expensed as incurred; restructuring costs associated with the acquisition will generally be expensed subsequent to the acquisition date; in-process research and development will be recognized at fair value as an indefinite-lived asset at the acquisition date; changes in deferred income tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense, including changes related to acquisitions of businesses completed prior to 2009; and noncontrolling interests will be valued at fair value at the acquisition date. The adoption of this standard did not have a material effect on Eaton’s financial position, results of operations or cash flows in 2009 because no businesses were acquired in 2009 that were material. The standard could have a material effect in 2010, and future years, based on the specific conditions related to future acquisitions.

Subsequent Events

In 2009, Eaton adopted the new Subsequent Events Standard, as amended, which established general guidance for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. Eaton has evaluated subsequent events through the date the financial statements were issued, noting no events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended December 31, 2009.

Noncontrolling Interests in Consolidated Financial Statements

In 2009, Eaton adopted the revised standard related to noncontrolling interests in consolidated financial statements. This standard clarifies accounting and disclosures related to noncontrolling interests, sometimes referred to as minority interest, which is the portion of equity in a subsidiary not owned, directly or indirectly, by Eaton. As a result of the adoption of this standard, prior period amounts were reclassified to conform to the current period presentation. The adoption of this standard did not have a material effect on Eaton’s financial position, results of operations or cash flows.

Fair Value Measurements & Disclosures

In 2009, Eaton adopted the additional required guidance of the Fair Value Measurements and Disclosures Standard. This standard addresses accounting and disclosures related to non-financial assets and liabilities, primarily goodwill, intangible assets, non-financial assets and liabilities related to acquired businesses, and impairment and restructuring activities. In 2009, Eaton also adopted the revised guidance for measuring liabilities at fair value. This guidance addresses circumstances in which a quoted price in an active market for the identical liability is not available. The adoption of these standards did not have a material effect on Eaton’s financial position, results of operations or cash flows.

ACCOUNTING POLICIES

Consolidation & Basis of Presentation

The consolidated financial statements include accounts of Eaton and all subsidiaries and other controlled entities. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has a 20% to 50% ownership interest. These associate companies are not material either individually, or in the aggregate, to Eaton’s financial position, results of operations or cash flows.

Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in “Lease Commitments” in the Notes below.

Revenue Recognition

Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers and title has transferred in accordance with shipping terms (FOB shipping point, FOB destination or equivalent International Commercial (INCO) Terms), the selling price is fixed and determinable and collectability is reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Although the majority of the sales agreements contain standard terms and conditions, there are also agreements that contain multiple elements or non-standard terms and conditions. As a result, judgement is sometimes required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for sales recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales are recognized only when the delivered elements have standalone value, fair values of undelivered elements are known, there are no uncertainties regarding customer acceptance, and there are no customer-negotiated refund or return rights affecting the sales recognized for delivered elements. Sales for service contracts are generally recognized as the services are provided.

Foreign Currency Translation

The functional currency for all subsidiaries outside the United States is primarily the local currency. Financial statements for these subsidiaries are translated into United States dollars at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive income (loss) in Equity. Gains and losses related to foreign currency transactions are recognized in Other (income) expense-net in the Statements of Consolidated Income.

Inventories

Inventories are carried at lower of cost or market. Inventories in the United States are generally accounted for using the last-in, first-out (LIFO) method. Remaining United States and all other inventories are accounted for using the first-in, first-out (FIFO) method. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and costs of the distribution network.

Depreciation & Amortization

Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and are included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings is depreciated over principally 40 years and machinery and equipment over principally 3 to 10 years. At December 31, 2009, the weighted-average amortization period for intangible assets subject to amortization was 18 years for patents and technology and 17 years for customer relationships, primarily as a result of the long life of aircraft platforms. Software is amortized over a period up to 7 years.

Long-lived assets, except goodwill and indefinite life intangible assets as described in the Notes below, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or

circumstances that would result in an impairment review include operations reporting losses, a significant adverse change in the use of an asset, the planned disposal or sale of the asset, a significant adverse change in the business climate or legal factors related to the asset, or a significant decrease in the estimated fair value of an asset. Upon indications of impairment, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. In instances where the carrying amount of the asset group exceeded the undiscounted cash flows, the fair value of the asset group would be determined and an impairment loss would be recognized based on the amount by which the carrying value of the asset group exceeds its fair value. Determining asset groups and underlying cash flows requires the use of significant judgments and estimates.

Goodwill & Indefinite Life Intangible Assets

Goodwill and indefinite life intangible assets recognized in connection with business acquisitions are not amortized to expense. Indefinite life intangible assets primarily consist of trademarks.

Goodwill and indefinite life intangible assets are tested annually for impairment. Further, goodwill and indefinite life intangible assets are reviewed for impairment whenever events or changes in circumstances indicate there may be a possible permanent loss of value. Eaton completed annual impairment tests for goodwill and indefinite life intangible assets as of July 1 of each year presented using discounted cash flow and other valuation techniques. These tests confirmed that the fair value of Eaton’s reporting units and indefinite life intangible assets exceed their respective carrying values and that no impairment loss was required to be recognized in 2009 or for any prior periods.

Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton’s operating segments, and is based on the net assets for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment as this represents the lowest level that constitutes a business and for which discrete financial information is available and segment management regularly reviews the operating results. A discounted cash flow model is used to estimate the fair value of each operating segment, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The Company selected the discounted cash flow methodology as it believes that it is comparable to what would be used by other market participants. The forecasted cash flows are based on the Company’s long-term operating plan, and a terminal value is used to estimate the operating segment cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective operating segment. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.

Derivative Financial Instruments

In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, foreign currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, foreign currency forward exchange contracts, foreign currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The derivative financial instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these financial instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such derivative financial instruments are not purchased and sold for trading purposes.

Derivative financial instruments are measured at fair value and recognized as assets or liabilities in the Consolidated Balance Sheet. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, on the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:

	•		Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge). For these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
	•		Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge). For these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Eaton shareholders’ equity and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
	•		Hedges of the foreign currency exposure related to a net investment in a foreign operation (a net investment hedge). For these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Eaton shareholders’ equity and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.

The gain or loss from a derivative financial instrument designated as a hedge that is effective as a hedge is included in the same line of the Statement of Consolidated Income as the offsetting loss or gain on the hedged item.

The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.

For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency that arise in the normal course of business.

Warranty Expenses

Estimated product warranty expenses are accrued in Cost of products sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on historical warranty claim experience and specific customer contracts. Warranty expenses include accruals for basic warranties for products sold, as well as accruals for product recalls and other related events when they are known and estimable.

Asset Retirement Obligations

A conditional asset retirement obligation is recognized at fair value when incurred, if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value.

Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates.

Financial Presentation Changes

Certain amounts for prior years have been reclassified to conform to the current year presentation.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Consolidation of Variable Interest Entities

In 2009, the FASB issued a revised standard for accounting and disclosure related to the consolidation of variable interest entities. The standard will require enterprises involved with these types of entities to provide more information about these entities in their financial statements. The standard is effective for Eaton in 2010. The Company expects the adoption of this standard will not have a material effect on Eaton’s financial position, results of operations or cash flows.

Revenue Recognition for Multiple-Deliverable Arrangements

In 2009, the FASB issued a revised standard for accounting and disclosures of revenues related to arrangements with customers to provide multiple products and services at different points in time or over different time periods. This standard is effective for Eaton in 2011. The Company expects the adoption of this standard will not have a material effect on Eaton’s financial position, results of operations or cash flows.

ACQUISITIONS OF BUSINESSES

Eaton acquired certain businesses and entered into joint ventures in separate transactions for combined net cash purchase prices of $10 in 2009, $2,807 in 2008, and $1,433 in 2007. The Statements of Consolidated Income include the results of these businesses from the dates of acquisition or formation. A summary of these transactions follows:

Date of

Business

Acquired business

acquisition

segment

Annual sales

Micro Innovation Holding AG

September 1,

Electrical

$33 for 2008

A Switzerland-based manufacturer of human

2009

Rest of

machine interfaces, programmable logic

World

controllers and input/output devices. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.

SEG Middle East Power Solutions & Switchboard

July 2,

Electrical

$10 for 2008

Manufacture LLC

2009

Rest of

A 49%-owned joint venture to manufacture low

World

voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets

Integ Holding Limited

October 2,

Hydraulics

$52 for 2007

The parent company of Integrated Hydraulics

2008

Ltd., a U.K.-based manufacturer of screw-in cartridge valves, custom-engineered hydraulic valves and manifold systems

Nittan Global Tech Co. Ltd.

Operational

Automotive

Joint

A 49%-owned joint venture to manage the global

October 1,

Venture

design, manufacture and supply of engine valves

2008

and valve actuation products to Japanese and Korean automobile and engine manufacturers. In addition, during the second half of 2008, several related manufacturing joint ventures were established.

Engine Valves Business of Kirloskar Oil Engines Ltd.

July 31, 2008

Automotive

$5 for 2007

An India-based designer, manufacturer and distributor of intake and exhaust valves for diesel and gasoline engines

PK Electronics

July 31, 2008

Electrical

$9 for 2007

A Belgium-based distributor and service provider

Rest of

of single phase and three-phase uninterruptible

World

power supply (UPS) systems

The Moeller Group

April 4, 2008

Electrical

€1.02 billion for

A Germany-based supplier of electrical

Rest of

2007

components for commercial and residential

World

building applications and industrial controls for industrial equipment applications

Balmen Electronic, S.L.

March 31,

Electrical

$6 for 2007

A Spain-based distributor and service provider

2008

Rest of

of uninterruptible power supply (UPS) systems

World

Phoenixtec Power Company Ltd.

February 26,

Electrical

$515 for 2007

A Taiwan-based manufacturer of single and

2008

Rest of

three-phase uninterruptible power supply (UPS)

World

systems

Arrow Hose & Tubing Inc.

November 8,

Hydraulics

$12 for 2006

A Canada-based manufacturer of thermoplastic

2007

hose and tubing for the industrial, food and beverage, and agricultural markets

MGE small systems UPS business from

October 31,

Electrical

$245 for 2007

Schneider Electric

2007

Rest of

A France-based global provider of power quality

World

solutions including uninterruptible power supply (UPS) systems, power distribution units, static transfer switches and surge suppressors

Babco Electric Group

October 19,

Electrical

$11 for 2007

A Canada-based manufacturer of specialty low-

2007

Americas

and medium-voltage switchgear and electrical housings for use in the Canadian oil and gas industry and other harsh environments

Pulizzi Engineering

June 19, 2007

Electrical

$12 for 2006

A U.S. manufacturer of alternating current (AC)

Americas

power distribution, AC power sequencing, redundant power and remote-reboot power management systems

Technology and related assets of SMC Electrical

May 18, 2007

Electrical

None

Products, Inc.’s industrial medium-voltage adjustable

Americas

frequency drive business

Fuel components division of Saturn Electronics &

May 2, 2007

Automotive

$28 for 2006

Engineering, Inc. A U.S. designer and manufacturer of fuel containment and shutoff valves, emissions control valves and specialty actuators

Aphel Technologies Limited

April 5, 2007

Electrical

$12 for 2006

A U.K.-based global supplier of high density,

Rest of

fault-tolerant power distribution solutions for

World

datacenters, technical offices, laboratories and retail environments

Argo-Tech Corporation

March 16,

Aerospace

$206 for 2006

A U.S.-based manufacturer of high-performance

2007

aerospace engine fuel pumps and systems, airframe fuel pumps and systems, and ground fueling systems for commercial and military aerospace markets

Power Protection Business of Power Products Ltd.

February 7,

Electrical

$3 for 2006

A Czech Republic distributor and service provider

2007

Rest of

of Powerware® products and other uninterruptible

World

power supply (UPS) systems

As described above, in 2008 Eaton acquired The Moeller Group electrical business and the Phoenixtec electrical business for combined cash purchase prices of $2,696. In 2008, the assets and liabilities for these businesses were recognized at estimated fair values as determined by Eaton’s management based on available information and on assumptions as to future operations. As completed in 2009, the final allocations of the purchase prices, which did not differ materially from the preliminary estimates, are summarized below:

Current assets		$	759
Property, plant & equipment			432
Goodwill			1,710
Other intangible assets			1,071
Other assets			104
Total assets acquired			4,076
Total liabilities assumed			1,380
Net assets acquired		$	2,696