PH 10-Q Quarter ended Sept. 30, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2011

OR

For the transition period from to

Commission File number 1-4982

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (216) 896-3000

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨

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 x No ¨

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):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x

Number of Common Shares outstanding at September 30, 2011            151,080,156

PARKER-HANNIFIN CORPORATION

(Dollars in thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 2 -

PARKER-HANNIFIN CORPORATION

(Dollars in thousands)

See accompanying notes to consolidated financial statements.

- 3 -

PARKER-HANNIFIN CORPORATION

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

- 4 -

PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION

(Dollars in thousands)

(Unaudited)

The Company operates in three reportable business segments: Industrial, Aerospace and Climate & Industrial Controls. The Industrial Segment is the largest and includes a significant portion of international operations.

Industrial - This segment produces a broad range of motion-control and fluid systems and components used in all kinds of manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. Sales are made directly to major original equipment manufacturers (OEMs) and through a broad distribution network to smaller OEMs and the aftermarket.

Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, business jet, military and general aviation aircraft, missile and spacecraft markets. The Aerospace Segment provides a full range of systems and components for hydraulic, pneumatic and fuel applications.

Climate & Industrial Controls - This segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries.

- 5 -

PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

1. Management representation

In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2011, the results of operations for the three months ended September 30, 2011 and 2010 and cash flows for the three months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2011 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. No subsequent events occurred that required either adjustment to or disclosure in these financial statements.

2. New accounting pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance to improve consistency with fair value measurement and disclosure requirements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not anticipate its fair value measurements or disclosures will significantly change as a result of applying this new guidance.

In June 2011, the FASB issued new accounting guidance requiring an entity to present net income and other comprehensive income (OCI) in either a single continuous statement or in separate consecutive statements. The guidance does not change the items reported in OCI or when an item of OCI must be reclassified to net income. The guidance, which must be presented retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

In September 2011, the FASB issued new accounting guidance related to testing goodwill for impairment. The new guidance allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether the entity should calculate the fair value of a reporting unit. It also expands the events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has not yet determined the effect, if any, that this new guidance will have on its goodwill impairment tests.

3. Product warranty

In the ordinary course of business, the Company warrants its products against defects in design, materials and workmanship over various time periods. The warranty accrual as of September 30, 2011 and June 30, 2011 is immaterial to the financial position of the Company and the change in the accrual for both the current-year quarter and prior-year quarter was immaterial to the Company’s results of operations and cash flows.

- 6 -

4. Earnings per share

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ended September 30, 2011 and 2010.

At September 30, 2011 and 2010, 435,146 and 4,566,836 common shares, respectively, subject to stock-based awards were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

5. Accounts receivable, net

The Accounts receivable, net caption in the Consolidated Balance Sheet is comprised of the following components:

Accounts receivable are initially recorded at their net collectible amount and, where applicable, are generally recorded at the time the revenue from the sales transaction is recorded. Receivables are written off to bad debt primarily when, in the judgment of the Company, the receivable is deemed to be uncollectible.

- 7 -

6. Share repurchase program

The Company has a program to repurchase its common shares. Under the program, the Company is authorized to repurchase an amount of common shares each fiscal year equal to the greater of 7.5 million shares or five percent of the shares of common stock outstanding as of the end of the prior fiscal year. Repurchases are funded primarily from operating cash flows and commercial paper borrowings, and the shares are initially held as treasury stock. The Company repurchased 4,354,822 shares of its common stock at an average price of $67.05 during the three-month period ended September 30, 2011 under this program.

7. Business realignment charges

During the first quarter of fiscal 2012, the Company recorded a $5.9 million charge for the costs to structure its businesses in light of current and anticipated customer demand. The charge primarily consists of severance costs related to plant closures as well as general work force reductions implemented by various operating units throughout the world. The Company believes the realignment actions will positively impact future results of operations but will have no material effect on liquidity and sources and uses of capital. The Industrial Segment recognized $5.7 million of the total charge primarily for severance costs related to approximately 170 employees and the Climate & Industrial Controls Segment recognized $0.2 million of the total charge primarily for severance costs related to approximately 5 employees. The charge is presented primarily in the cost of sales caption in the Consolidated Statement of Income for the three months ended September 30, 2011. As of September 30, 2011, $0.5 million of severance payments have been made with the majority of the remaining payments expected to be made by March 31, 2012.

During the first quarter of fiscal 2011, the Company recorded a $3.1 million charge for the costs to structure its businesses in light of current and anticipated customer demand. The charge primarily consisted of severance costs related to plant closures as well as general work force reductions implemented by various operating units throughout the world. The Company believes the realignment actions will positively impact future results of operations but will have no material effect on liquidity and sources and uses of capital. The Industrial Segment recognized $2.8 million of the total charge primarily for severance costs related to approximately 170 employees and the Aerospace Segment recognized $0.3 million of the total charge primarily for severance costs related to approximately 20 employees. The charge is presented primarily in the cost of sales caption in the Consolidated Statement of Income for the three months ended September 30, 2010. All required severance payments have been made.

Additional charges to be recognized in future periods related to specific actions discussed above are not expected to be material.

- 8 -

8. Equity

Changes in equity for the three months ended September 30, 2011 and September 30, 2010 are as follows (net of taxes amounts relate to Shareholders’ Equity):

- 9 -

9. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the three months ended September 30, 2011 are as follows:

Goodwill is tested for impairment on an annual basis, as of December 31, and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may not exceed its fair value. No such events or circumstances occurred during the three months ended September 30, 2011.

Intangible assets are amortized on the straight-line method over their legal or estimated useful lives. The following summarizes the gross carrying value and accumulated amortization for each major category of intangible assets:

Total intangible amortization expense for the three months ended September 30, 2011 was $28,845. The estimated amortization expense for the five years ending June 30, 2012 through 2016 is $98,970, $92,296, $88,684, $85,081 and $81,519, respectively.

Intangible assets are evaluated for impairment whenever events or circumstances indicate that the undiscounted net cash flows to be generated by their use over their expected useful lives and eventual disposition may be less than their net carrying value. No such events or circumstances occurred during the three months ended September 30, 2011.

- 10 -

10. Retirement benefits

Net pension benefit cost recognized included the following components:

Net postretirement benefit cost recognized included the following components:

11. Income taxes

As of September 30, 2011, the Company had gross unrecognized tax benefits of $134,684, including approximately $50,000 of additions for tax positions related to the current fiscal year. The total amount of gross unrecognized tax benefits that, if recognized, would affect the effective tax rate was $85,700. If recognized, a significant portion of the gross unrecognized tax benefits would be offset against an asset recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $11,908.

The Company and its subsidiaries file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is no longer subject to examinations of its federal income tax returns by the Internal Revenue Service for fiscal years through 2007. All significant state and local and foreign tax returns have been examined for fiscal years through 2001. The Company does not anticipate that the total amount of gross unrecognized tax benefits will significantly change due to the settlement of examinations and the expiration of statutes of limitation within the next twelve months.

- 11 -

12. Financial instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, long-term investments, and accounts receivable as well as obligations under accounts payable, trade, notes payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, accounts receivable, accounts payable, trade and notes payable approximate fair value. The carrying value of long-term debt (excluding leases) was $1,746,797 and $1,765,892 at September 30, 2011 and June 30, 2011, respectively, and was estimated to have a fair value of $1,739,526 and $1,902,221 at September 30, 2011 and June 30, 2011, respectively. The fair value of long-term debt was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.

The Company utilizes derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts, cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges, to manage foreign currency transaction and translation risk. The derivative financial instrument contracts are with major investment grade financial institutions and the Company does not anticipate any material non-performance by any of the counterparties. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company’s Euro bonds and Japanese Yen credit facility have been designated as a hedge of the Company’s net investment in certain foreign subsidiaries. The translation of the Euro bonds and Japanese Yen credit facility into U.S. dollars is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.

Derivative financial instruments are recognized on the balance sheet as either assets or liabilities and are measured at fair value. Gains or losses on derivatives that are not hedges are adjusted to fair value through the cost of sales caption in the Consolidated Statement of Income. Gains or losses on derivatives that are hedges are adjusted to fair value through accumulated other comprehensive income (loss) in the Consolidated Balance Sheet until the hedged item is recognized in earnings.

The following summarizes the location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet as of September 30, 2011 and June 30, 2011:

The cross-currency swap contracts have been designated as hedging instruments. The costless collar contracts and forward exchange contracts have not been designated as hedging instruments and are considered to be economic hedges of forecasted transactions.

- 12 -

12. Financial instruments, cont’d

Gains (losses) on derivative financial instruments that were recorded in the Consolidated Statement of Income are as follows:

Gains (losses) on derivative and non-derivative financial instruments that were recorded in accumulated other comprehensive income (loss) in the Consolidated Balance Sheet are as follows:

There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor were any portion of these financial instruments excluded from the effectiveness testing, during the three months ending September 30, 2011 and 2010.

13. Fair value measurement

The fair value of financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2011 follows:

- 13 -

13. Fair value measurement, cont’d

The fair value of financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2011 follows:

Derivatives consists of costless collar and cross-currency swap contracts the fair value of which is calculated using market observable inputs including both spot and forward prices for the same underlying currencies. The fair value of the cross-currency swap contracts is calculated using a present value cash flow model that has been adjusted to reflect the credit risk of either the Company or the counterparty.

- 14 -

PARKER-HANNIFIN CORPORATION

FORM 10-Q

AND RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011

AND COMPARABLE PERIOD ENDED SEPTEMBER 30, 2010

OVERVIEW

The Company is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets.

The Company’s order rates provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company publishes its order rates on a quarterly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for mobile and industrial orders and from one day to 18 months for aerospace orders. The Company believes the leading economic indicators of these markets that have a strong correlation to the Company’s future order rates are as follows:

A PMI above 50 indicates that the manufacturing activity specific to a region around the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. The PMI at the end of September 2011 for the United States, the Eurozone countries and China was 51.6, 48.5 and 49.9, respectively. Since June 30, 2011, the PMI for the United States, the Eurozone countries and China have all declined from 55.3, 52.0 and 50.1, respectively.

Global aircraft miles flown have increased approximately six percent and global revenue passenger miles have increased approximately five percent from their comparable fiscal 2011 levels. The Company anticipates that U.S. Department of Defense spending with regards to appropriations, and operations and maintenance for the U.S. Government’s fiscal year 2012 will be about three percent higher than the comparable fiscal 2011 level.

Housing starts in September 2011 were approximately 10 percent higher than housing starts in September 2010 and were approximately 5 percent higher than housing starts in June 2011.

- 15 -

The Company has remained focused on maintaining its financial strength by adjusting its cost structure to reflect changing demand levels, maintaining a strong balance sheet and managing its cash. The Company continues to generate substantial cash flows from operations, has controlled capital spending and has proactively managed working capital. The Company has been able to borrow needed funds at affordable interest rates and has a debt to debt-shareholders’ equity ratio of 25.8 percent at September 30, 2011 compared to 24.7 percent at June 30, 2011.

The Company believes many opportunities for growth are available. The Company intends to focus primarily on business opportunities in the areas of energy, water, agriculture, environment, defense, life sciences, infrastructure and transportation.

The Company believes it can meet its strategic objectives by:

During the first quarter of fiscal 2012, the Company completed two acquisitions. Acquisitions will continue to be considered from time to time to the extent there is a strong strategic fit, while at the same time, maintaining the Company’s strong financial position. The Company will also continue to assess its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term strategic fit for the Company. Future business divestitures could have a negative effect on the Company’s results of operations.

The discussion below is structured to separately discuss the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

CONSOLIDATED STATEMENT OF INCOME

- 16 -

Net sales for the first quarter of fiscal 2012 increased 14.3 percent over the prior-year first quarter reflecting higher volume experienced in all Segments, with the largest increase in net sales occurring in the Industrial Segment. Acquisitions made in the last 12 months contributed approximately $22 million in sales in the first quarter of fiscal 2012. The effect of currency rate changes increased net sales by approximately $86 million in the first quarter of fiscal 2012.

Gross profit margin increased primarily due to the higher sales volume as well as manufacturing efficiencies.

Selling, general and administrative expenses increased primarily due to the higher sales volume as well as higher expenses associated with the Company’s deferred compensation programs.

Interest expense for the current-year quarter decreased 5.7 percent from the prior-year first quarter primarily due to lower average debt outstanding in the current-year quarter.

Effective tax rate for the current-year quarter was higher than the prior-year quarter primarily due to discrete tax items in the prior-year quarter having a more favorable impact on the tax rate than those recorded in the current-year quarter. Discrete tax items primarily relate to the settlement of tax audits. The Company expects the effective tax rate for fiscal 2012 to be approximately 28 percent.

RESULTS BY BUSINESS SEGMENT

Industrial Segment

The Industrial Segment operations experienced the following percentage changes in net sales in the current-year compared to the equivalent prior-year period:

- 17 -

The above presentation reconciles the percentage changes in net sales of the Industrial operations reported in accordance with U.S. GAAP to percentage changes in net sales adjusted to remove the effects of acquisitions made within the prior four fiscal quarters as well as the effects of currency exchange rates. The effects of acquisitions and currency exchange rates are removed to allow investors and the Company to meaningfully evaluate the percentage changes in net sales on a comparable basis from period to period.

Excluding the effects of acquisitions and currency exchange rates, the increase in Industrial North American sales reflects higher demand experienced from distributors and end-users in virtually all markets, particularly in the construction equipment, heavy-duty truck, mining, farm and agriculture equipment and machine tool markets. A decrease in demand in the semiconductor market partially offset the sales increase. The increase in Industrial International sales is primarily attributed to higher end-user demand experienced across most markets, with the largest increase in volume occurring in Europe and in the Asia-Pacific region.

The increase in both Industrial North American and Industrial International operating margin is primarily due to the higher sales volume and manufacturing efficiencies.

Included in Industrial North American operating income are business realignment charges of $0.5 million and $2.3 million in the current-year quarter and prior-year quarter, respectively. Included in Industrial International operating income are business realignment charges of $5.2 million and $0.5 million in the current-year quarter and prior-year quarter, respectively. The business realignment expenses consist primarily of severance costs resulting from plant closures as well as general reductions in the work force. The Company does not anticipate that cost savings realized from the work force reductions taken in the Industrial Segment during the first quarter of fiscal 2012 will have a material impact on future operating margins. The Company expects to continue to take the actions necessary to structure appropriately the operations of the Industrial Segment. Such actions may include the necessity to record additional business realignment charges in fiscal 2012, the timing and amount of which have not been finalized at this time.

The increase in backlog from the prior-year quarter is primarily due to higher order rates in both the Industrial North American and Industrial International businesses with the largest portion of the increase occurring in the Industrial North American businesses. The slight decline in backlog from the June 30, 2011 amount of $1,907.0 million is primarily due to lower order rates in the Industrial International businesses. The Company anticipates Industrial North American sales for fiscal 2012 will increase between 6.5 percent and 10.0 percent from the fiscal 2011 level and Industrial International sales for fiscal 2012 will increase between 5.9 percent and 9.4 percent from the fiscal 2011 level. Industrial North American operating margins for fiscal 2012 are expected to range from 17.2 percent to 17.5 percent and Industrial International operating margins are expected to range from 15.5 percent to 15.9 percent.

Aerospace Segment

- 18 -

The increase in net sales in the Aerospace Segment is primarily due to an increase in both commercial original equipment manufacturer (OEM) and aftermarket volume as well as higher military aftermarket volume. The increase in operating margin was primarily due to the higher sales volume and favorable product mix partially offset by higher engineering development and operating costs.

The increase in backlog from the prior-year quarter and the June 30, 2011 amount of $1,702.3 million was primarily due to higher order rates in the commercial OEM and aftermarket businesses. For fiscal 2012, sales are expected to increase between 7.1 percent and 10.1 percent from the fiscal 2011 level and operating margins are expected to range from 13.2 percent to 13.5 percent. A higher concentration of commercial OEM volume in future product mix and higher than expected new product development costs could result in lower margins.

Climate & Industrial Controls Segment

The increase in net sales in the Climate & Industrial Controls Segment is primarily due to higher end-user demand in the heavy-duty truck and automotive markets partially offset by lower demand in the residential air conditioning market. Operating margin in the current-year quarter was lower than the prior-year level primarily due to unfavorable product mix, higher raw material prices and higher new product development expenses. Included in Climate & Industrial Controls operating income in the current-year quarter are business realignment charges of $0.2 million. The Company may take actions to structure appropriately the operations of the Climate & Industrial Controls Segment. Such actions may include the necessity to record business realignment charges in fiscal 2012.

The decrease in backlog from the prior-year quarter and the June 30, 2011 amount of $171.0 million is primarily due to lower order rates in the residential and commercial air conditioning markets. For fiscal 2012, sales are expected to increase between 1.1 percent and 4.6 percent from the fiscal 2011 level and operating margins are expected to range from 8.1 percent to 8.5 percent.

Corporate and Other

Corporate general and administrative expenses increased to $58.0 million in the current-year quarter compared to $33.4 million in the prior-year quarter. As a percent of sales, corporate general and administrative expenses for the current-year quarter was 1.8 percent compared to 1.2 percent for the prior-year quarter. The increase in expense in the current-year quarter is primarily due to market value fluctuations related to investments associated with the Company’s deferred compensation programs.

- 19 -

Other expense (in the Business Segment Results) included the following: