UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2006

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer    x        Accelerated filer    ¨        Non-accelerated filer    ¨

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

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

BUSINESS SEGMENT INFORMATION BY INDUSTRY

(Dollars in thousands)

(Unaudited)

The Company operates in two principal business segments: Industrial and Aerospace. 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. Identifiable assets in the Industrial Segment increased significantly since June 30, 2005 due primarily to acquisitions.

Aerospace - This segment designs and manufactures products and provides aftermarket support for commercial, 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.

The Company also reports a Climate & Industrial Controls Segment. The Climate & Industrial Controls Segment manufactures motion-control systems and components for use primarily in the refrigeration and air conditioning and transportation industries. Identifiable assets in the Climate & Industrial Controls Segment increased significantly since June 30, 2005 due primarily to acquisitions.

In August 2005 and December 2004, the Company divested the two business units comprising the Other Segment which designed and manufactured custom-engineered buildings and developed and manufactured chemical car care products and maintenance equipment, respectively. The divested business units have been classified as discontinued operations for all periods presented.

Business Segment Results by Industry

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PARKER-HANNIFIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

In the opinion 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 March 31, 2006, the results of operations for the three and nine months ended March 31, 2006 and 2005 and cash flows for the nine months then ended. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s 2005 Annual Report on Form 10-K. Interim period results are not necessarily indicative of the results to be expected for the full fiscal year.

In order the bring the Consolidated Statement of Cash Flows presentation in compliance with FASB Statement No. 95, the Company has revised the Consolidated Statement of Cash Flows for the nine months ending March 31, 2005 to separately disclose the operating, investing, and financing portions of the cash flows attributable to discontinued operations. The Company had previously reported these amounts on a combined basis. The Company intends to revise the Consolidated Statement of Cash Flows for the years ended June 30, 2005 and 2004 in its 2006 Annual Report on Form 10-K. The revision will result in a decrease in net cash provided by operating activities of $10.9 million and an increase in net cash used in investing activities of $2.4 million for the year ended June 30, 2005. For the year ended June 30, 2004, as a result of this revision, net cash provided by operating activities will increase $24.9 million and net cash used in investing activities will increase $2.1 million.

Effective July 1, 2005, the Company adopted the provisions of FASB Statement No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” The implementation of this accounting pronouncement did not have a material effect on the Company’s results of operations, financial position or cash flows. Effective July 1, 2005, the Company adopted the provisions of FASB Statement No. 123 (revised 2004), “Share-Based Payment.” Refer to footnote 4 for further discussion of the adoption of this Statement.

On July 1, 2005, the Company adopted the provisions of FASB Statement No. 123 (revised 2004) and elected to use the modified prospective transition method. The modified prospective transition method requires that compensation cost be recognized in the financial statements for all awards granted after the date of adoption as well as for existing awards for which the requisite service has not been rendered as of the date of adoption and requires that prior periods not be restated. The Company’s stock incentive plans provide for the granting of nonqualified options and stock appreciation rights (SARs) to officers, directors and key employees of the Company. Outstanding options and SARs are exercisable from one to three years after the date of grant and expire no more than ten years after grant. The Company satisfies stock option and SAR exercises by issuing common shares out of treasury, which have been repurchased pursuant to the Company’s share repurchase program described in footnote 7, or through the issuance of previously unissued common shares. Prior to the adoption of FASB Statement No. 123 (revised 2004), the Company used the intrinsic-value based method to account for stock options and made no charges against earnings with respect to options granted. The Company has elected to use the “short-cut method” to calculate the historical pool of windfall tax benefits upon adoption of FASB Statement 123 (revised 2004). The election to use the “short-cut method” had no effect on the Company’s financial statements.

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The adoption of FASB Statement No. 123 (revised 2004) reduced income from continuing operations before income taxes for the third quarter of fiscal 2006 by $5.3 million, reduced net income for the third quarter of fiscal 2006 by $3.4 million ($.03 per basic and diluted share), reduced income from continuing operations before income taxes for the first nine months of fiscal 2006 by $28.1 million and reduced net income for the first nine months of fiscal 2006 by $18.3 million ($.16 per basic and diluted share). The adoption of this Statement had an immaterial effect on the Consolidated Statement of Cash Flows for the nine months ended March 31, 2006.

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and nonvested awards in the period. The total stock-based employee compensation expense for the three months and nine months period ending March 31, 2005 were calculated using the non-substantive vesting period approach.

The fair values for the significant stock-based awards granted during the nine months ended March 31, 2006 and 2005 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

The expected volatility of stock was derived by referring to changes in the Company’s historical common stock prices over a timeframe similar to the expected life of the award. The Company has no reason to believe that future stock volatility is likely to differ from historical volatility.

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Stock-based award activity during the nine months ended March 31, 2006 is as follows (aggregate intrinsic value in millions):

The total intrinsic value of stock options exercised during the nine months ended March 31, 2006 and 2005 was $47.4 million and $50.3 million, respectively. Net cash proceeds from the exercise of stock options were $22.2 million and $32.8 million for the nine months ended March 31, 2006 and 2005, respectively. An income tax benefit of $15.2 million and $16.1 million was realized from stock option exercises during the nine months ending March 31, 2006 and 2005, respectively.

As of March 31, 2006, $19.1 million of expense with respect to nonvested stock-based awards has yet to be recognized and will be amortized into expense over the employee’s remaining requisite service period.

Stock-based award activity for nonvested awards during the nine months ended March 31, 2006 is as follows:

In the ordinary course of business, the Company warrants its products against defect in design, materials and workmanship over various time periods. The warranty accrual as of March 31, 2006 and June 30, 2005 is immaterial to the financial position of the Company and the change in the accrual for the current quarter and first nine months of fiscal 2006 is immaterial to the Company’s results of operations and cash flows.

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The following table presents a reconciliation of the denominator of basic and diluted earnings per share for the three and nine months ended March 31, 2006 and 2005.

For the three months ended March 31, 2006 and 2005, 1,786,432 and 80,802 common shares subject to stock options, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended March 31, 2006 and 2005, 2,013,646 and 219,916 common shares subject to stock options, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

The Company has a program to repurchase up to 3.4 million of the Company’s common shares per year on the open market, at prevailing prices, including the systematic repurchase of up to $20 million in common shares each fiscal quarter. Repurchases are primarily funded from operating cash flows and the shares are initially held as treasury stock. During the three-month period ended March 31, 2006, the Company repurchased 122,600 shares of its common stock at an average price of $77.01 per share. Year-to-date, the Company has repurchased 498,000 shares at an average price of $66.48 per share.

In fiscal 2006, the Company issued EUR 400 million Eurobonds in the European debt capital market. EUR 200 million Eurobonds bear interest of 3.5 percent per annum and will mature in a balloon payment in November 2010 and EUR 200 million Eurobonds bear interest of 4.125 percent per annum and will mature in a balloon payment in November 2015. The proceeds from the Eurobonds were used to retire EUR 300 million of Euro Notes that became due in November 2005 and the balance of the proceeds were used for general corporate purposes.

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The Company’s items of other comprehensive income (loss) are foreign currency translation adjustments and unrealized gains (losses) on marketable equity securities and cash flow hedges. Comprehensive income for the three and nine months ended March 31, 2006 and 2005 was as follows:

The unrealized (losses) on marketable equity securities are net of taxes of $5 for the nine months ended March 31, 2006, and $3 and $6,453 for the three and nine months ended March 31, 2005, respectively. The realized (gains) losses on marketable equity securities are net of taxes of $11 for the nine months ended March 31, 2006, and $6 and $15 for the three and nine months ended March 31, 2005, respectively and are reflected in the Other (income) expense, net caption in the Consolidated Statement of Income.

The unrealized gain on cash flow hedges is net of taxes of $3,116 for the nine months ended March 31, 2006. The realized loss on cash flow hedges is net of taxes of $36 and $60 for the three and nine months ended March 31, 2006, respectively and is reflected in the Interest expense caption in the Consolidated Statement of Income.

During the third quarter of fiscal 2006, the Company recorded a $5,117 charge ($3,193 after-tax or $.03 per share) for the costs to structure its businesses in light of current and anticipated customer demand. 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 charge primarily consists of severance costs and costs to relocate machinery and equipment. The severance costs are attributable to employees in the Industrial Segment. Some of the severance payments have been made with the majority of the remaining payments expected to be made within the next twelve months. The business realignment costs are presented in the Consolidated Statement of Income for the three months ended March 31, 2006 as follows: $4,286 in Cost of sales and $831 in Selling, general and administrative expenses.

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During the first nine months of fiscal 2006, the Company recorded charges of $11,801 ($7,367 after-tax or $.06 per share) for business realignment costs related to the Industrial Segment and Climate & Industrial Controls Segment. The business realignment costs are presented in the Consolidated Statement of Income for the nine months ended March 31, 2006 as follows: $10,062 in Cost of sales and $1,739 in Selling, general and administrative expenses.

During the third quarter of fiscal 2005, the Company recorded a $6,267 charge ($4,168 after-tax or $.03 per share) for the costs to structure its businesses in light of current and anticipated customer demand. 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 charge primarily related to severance costs attributable to 300 employees in the Industrial Segment. The majority of severance payments have been made with the remaining payments expected to be made by June 30, 2006. The business realignment costs are primarily presented in the Cost of sales caption in the Consolidated Statement of Income for the three months ended March 31, 2005. A significant portion of the third quarter fiscal 2005 charge related to the closure of a manufacturing facility in Hilden, Germany. The facility was acquired as part of the February 2004 acquisition of Denison International. The decision to close the facility resulted from the completion of the Company’s acquisition integration analysis.

During the first nine months of fiscal 2005, the Company recorded charges of $8,782 ($5,785 after-tax or $.05 per share) for business realignment costs primarily related to the Industrial Segment. The business realignment costs are presented in the Consolidated Statement of Income for the nine months ended March 31, 2005 as follows: $8,217 in Cost of sales and $565 in Selling, general and administrative expenses.

The Company conducted its annual goodwill impairment test required by FASB Statement No. 142. No goodwill impairment loss was required to be recognized.

The changes in the carrying amount of goodwill for the nine months ended March 31, 2006 are as follows:

“Goodwill adjustments” primarily represent final adjustments to the purchase price allocation for acquisitions completed within the last twelve months.

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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 nine months ended March 31, 2006 was $26,918. The estimated amortization expense for the five years ending June 30, 2006 through 2010 is $41,291, $45,025 $43,474, $42,284 and $41,902, respectively. At this time, the estimated amortization expense does not include all amortization expense related to fiscal 2006 acquisitions as all purchase price allocations have not been completed.

Net periodic pension cost recognized included the following components:

Postretirement benefit cost included the following components:

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In December 2005, the Company completed its acquisition of Kenmore International, a manufacturer and distributor of components for global refrigeration and air conditioning markets. In November 2005, the Company completed its purchase of the domnick hunter group, plc. The domnick hunter group specializes in the design and manufacture of filtration, separation, and purification products and technologies for a wide range of markets. In August 2005, the Company acquired SSD, a manufacturer of AC and DC drives, as well as servo drives, motors and systems for leading original equipment manufacturers, end users, and integrators in automated industrial process applications. Aggregate annual sales for these and other businesses acquired during the first nine months of fiscal 2006, for their most recent fiscal year prior to acquisition, were approximately $759 million. Total purchase price for all businesses acquired during the first nine months of fiscal 2006 was approximately $810 million in cash and $232 million in assumed debt. The purchase price allocations for fiscal 2006 acquisitions are preliminary and will require subsequent adjustment.

In December 2005, the Company completed the divestiture of its Thermoplastics division. The Thermoplastics division was part of the Industrial Segment for segment reporting purposes. This divestiture resulted in a loss of $11,018 ($9,770 after-tax or $.08 per share) and is reflected in Other (income) expense, net in the Consolidated Statement of Income. The results of operations and net assets of the Thermoplastics division were immaterial to the consolidated results of operations and financial position of the Company.

In August 2005, the Company divested a business unit which manufactured custom-engineered buildings. In December 2004, the Company divested a business unit which develops and manufactures chemical car care products and maintenance equipment. These businesses were part of the Other Segment for segment reporting purposes. The following results of operations for these business units have been presented as discontinued operations for all periods presented.

The (loss) gain on disposal is net of taxes of $3,429 for the nine months ended March 31, 2006 and $5,767 and $16,941 for the three and nine months ended March 31, 2005, respectively.

As of March 31, 2006, there were no assets or liabilities remaining from the discontinued operations. The net assets of the discontinued operations as of June 30, 2005 primarily consisted of the following:

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PARKER-HANNIFIN CORPORATION

FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2006

AND COMPARABLE PERIODS ENDED MARCH 31, 2005

OVERVIEW

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

The Company’s order rates are highly indicative of the Company’s future revenues and thus a key metric for future performance. The Company publishes its order rates on a monthly basis. The lead time between the time an order is received and revenue is realized generally ranges from one day to 12 weeks for commercial, mobile and industrial orders and three 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 the Institute of Supply Management (ISM) index of manufacturing activity with respect to commercial, mobile and industrial markets and aircraft miles flown, revenue passenger miles and Department of Defense spending for aerospace markets. An ISM index above 50 indicates that the manufacturing economy is expanding resulting in the expectation that the Company’s order rates in the commercial, mobile and industrial markets should be increasing. The ISM index at the end of March 2006 was 55.2 compared to 54.0 at the end of June 2005. With respect to the aerospace market, aircraft miles flown and revenue passenger miles continue to show improvement over comparable fiscal 2005 levels while Department of Defense spending for the balance of calendar 2006 is expected to increase in the mid-single-digit range over comparable calendar 2005 levels.

The Company also believes that there is a high correlation between interest rates and industrial manufacturing activity. The Federal Reserve raised the federal funds rate six times during fiscal 2006 and eight times during fiscal 2005. Recent and future increases in interest rates could have a negative impact on industrial production thereby lowering future order rates.

The Company’s major opportunities for growth are as follows:

The financial condition of the Company remains strong as evidenced by the continued generation of substantial cash flows from operations, a debt to debt-equity ratio of 27.1 percent, ample borrowing capabilities and strong credit ratings. Cash flow from operations for the first nine months of fiscal 2006 were $610 million or 9% of sales.

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Many acquisition opportunities remain available to the Company within its target markets. During the first nine months of fiscal 2006, the Company completed 11 acquisitions whose aggregate annual revenues were approximately $759 million. The Company believes that future financial results will reflect the benefit of a fast and efficient integration of the companies recently acquired. 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 the strategic fit of its existing businesses and initiate efforts to divest businesses that are not considered to be a good long-term fit for the Company, as evidenced by the divestitures completed in the first nine months of fiscal 2006.

Current challenges facing the Company include maintaining premier customer service levels while benefiting from strong customer demand, successfully matching price increases to raw material price increases and the managing rising expenses related to employee retirement and health care benefits. The Company has implemented a number of strategic financial performance initiatives relating to growth and margin improvement in order to meet these challenges, including strategic procurement, strategic pricing, lean manufacturing and business realignments. The Company is also challenged with trying to minimize the potential adverse impact of the weakening financial condition of its automotive market customers.

The discussion below is structured to provide a separate analysis of the Consolidated Statement of Income, Results by Business Segment, Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

CONSOLIDATED STATEMENT OF INCOME

Net sales for the third quarter and first nine months of fiscal 2006 increased 18.3 percent and 14.8 percent, respectively, over the comparable prior year net sales amounts reflecting higher volume experienced in all Segments. Acquisitions in the last 12 months contributed about 53 percent of the net sales increase in the current-year quarter and about 57 percent of the increase for the first nine months of fiscal 2006. The effect of currency rate changes reduced net sales by approximately $37 million and $67 million in the current-year quarter and first nine months of fiscal 2006, respectively.

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Gross profit margin increased in the third quarter and first nine months of fiscal 2006 primarily due to a combination of the increase in sales as well as the effects of the Company’s financial performance initiatives, especially in the areas of strategic procurement and lean manufacturing. Included in the current-year quarter and first nine months of fiscal 2006 gross profit is $1.9 million and $8.4 million, respectively, of expense related to stock-based compensation awards. Also included in gross profit are business realignment charges of $4.3 million and $6.1 million in the current-year quarter and prior-year quarter, respectively, and $10.1 million and $8.2 million for the first nine months of fiscal 2006 and 2005, respectively (see Note 10 on page 10 for further discussion).

Selling, general and administrative expenses increased for the current-year quarter and first nine months of fiscal 2006 primarily due to the higher sales volume, expenses related to stock-based compensation awards, which amounted to $3.4 million in the current-year quarter and $19.7 million in the first nine months of fiscal 2006, higher amortization expense related to intangible assets and higher incentive compensation.

Interest expense for the current-year quarter increased 23.2 percent from the prior-year quarter and increased 13.1 percent from the first nine months of fiscal 2005. The increase in interest expense is primarily due to higher average debt outstanding resulting from an increase in borrowings used to fund the higher level of acquisition activity in fiscal 2006.

Other (income) expense, net for the current-year quarter and first nine months of fiscal 2006 includes income of $6.3 million related to a litigation settlement. Other (income) expense, net for the first nine months of fiscal 2006 also includes a loss of $11.0 million resulting from the sale of the Thermoplastics division. Other (income) expense, net for the first nine months of fiscal 2005 includes an $8.8 million expense related to the writedown of a real estate investment.

Effective tax rate from continuing operations for the current-year quarter and first nine months of fiscal 2006 increased over the comparable prior year periods primarily due to a higher concentration of income being earned in foreign countries with a higher tax rate in the current year periods. The effective tax rate for the prior year periods also included a higher research and development tax credit.

Income from continuing operations for the current-year quarter and first nine months of fiscal 2006 was adversely affected by an additional expense of approximately $4.2 million and $9.2 million, respectively, related to domestic qualified defined benefit plans, resulting primarily from changes in actuarial assumptions and the amortization of actuarial losses. The additional pension expense for the first nine months of fiscal 2005 includes the recognition of a one-time curtailment loss of $4.6 million.

Discontinued operations represents the operating results and related gain on the sale, net of tax of the Astron Buildings business which was divested in August 2005 and the Wynn’s Specialty Chemical business which was divested in December 2004.

Backlog increased from the prior year due to an increase in order rates throughout most businesses in the Industrial North American, Aerospace and Climate & Industrial Controls Segments as well as the effect of acquisitions. Backlog increased from the June 30, 2005 amount of $2,304.2 million due to order rates exceeding shipments during the first nine months of fiscal 2006 in all Segments.

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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:

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.

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Excluding the effects of acquisitions and currency-rate changes, the increase in Industrial North American sales for the current-year quarter and first nine months of fiscal 2006 reflects higher end-user demand experienced across most of the Industrial North American markets, particularly in the heavy-duty truck, construction, industrial machine tool, oil and gas and mobile equipment markets. Current-year quarter sales also benefited from higher demand in the microelectronics market. Excluding the effects of acquisitions and currency-rate changes, the increase in Industrial International sales for the current-year quarter and first nine months of fiscal 2006 is attributed to higher volume across most markets in Europe and the Asia Pacific region partially offset by lower volume in Latin America.

Industrial North American and Industrial International margins for the current-year quarter and first nine months of fiscal 2006 benefited from the higher sales volume and the execution of the Company’s financial performance initiatives, especially in the area of strategic procurement and lean manufacturing. Acquisitions, not yet fully integrated, negatively impacted Industrial North American and Industrial International margins in the current-year quarter and first nine months of fiscal 2006.

The increase in backlog from a year ago and the June 30, 2005 amount of $943.9 million is primarily due to acquisitions and higher order rates throughout most businesses.

The Company anticipates sales volume in the Industrial North American and Industrial International operations for the remainder of fiscal 2006 to exceed comparable fiscal 2005 levels at the same rate as the first nine months of fiscal 2006. For the balance of fiscal 2006, Industrial North American margins are expected to remain at their current fiscal year-to-date level and Industrial International operating margins are expected to remain approximately the same. The Company expects to continue to take the actions necessary to structure appropriately the Industrial Segment operations to operate in their current economic environment. Such actions may include the necessity to record additional business realignment charges in the fourth quarter of fiscal 2006.

Aerospace Segment