UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2007

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

Number of Common Shares outstanding at March 31, 2007 115,827,150

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)

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 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, 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.

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 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 March 31, 2007, the results of operations for the three and nine months ended March 31, 2007 and 2006 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 2006 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 July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not yet determined the effect on the Company’s financial position or results of operations of complying with the provisions of FIN 48 but does not anticipate the effect to be material.

In August 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the effect on the Company’s financial position or results of operations of complying with the provisions of Statement No. 157.

In September 2006, the FASB issued FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Statement No. 158 amends FASB Statements No. 87, 88, 106 and 132R. Statement No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status recognition provision is effective for the Company as of the end of the fiscal year ending June 30, 2007. Statement No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The measurement date provision of Statement No. 158 is effective for the Company for the fiscal year ending June 30, 2009. At this time, the Company is unable to determine the effect on the Company’s financial position of complying with the funded status recognition provisions of Statement No. 158 as the effect is dependent on the fair value of plan assets as of June 30, 2007.

In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007. The Company has not yet determined whether it will elect to measure any of its financial assets or financial liabilities at fair value as permitted by Statement No. 159.

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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, 2007 and June 30, 2006 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 2007 is immaterial to the Company’s results of operations and cash flows.

The following table presents a reconciliation of the numerator and denominator of basic and diluted earnings per share from continuing operations for the three and nine months ended March 31, 2007 and 2006.

For the three months ended March 31, 2007 and 2006, 80,474 and 1,786,432 common shares subject to equity-based awards, 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, 2007 and 2006, 1,639,169 and 2,013,646 common shares subject to equity-based awards, 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 common shares of the Company. Under the program, the Company is authorized to repurchase an amount of common shares each fiscal year equal to the greater of 5 million shares or five percent of the shares outstanding as of the end of the prior fiscal year. Repurchases are funded primarily from operating cash flows, and the shares are initially held as treasury stock. The Company repurchased 237,327 shares of its common stock at an average price of $84.27 per share during the three-month period ended March 31, 2007. Fiscal year-to-date, the Company repurchased 5,237,327 shares at an average price of $78.87 per share.

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On January 25, 2007, the Board of Directors of the Company declared a dividend of one Shareholders’ Right for each common share outstanding on February 17, 2007 in relation to the Company’s Shareholders Protection Rights Agreement. As of March 31, 2007, 115,827,150 common shares were reserved for issuance under this agreement. Under certain conditions involving acquisition of, or an offer for, 15 percent or more of the Company’s common shares, all holders of Shareholders’ Rights would be entitled to purchase one common share at an exercise price of $240. In addition, in certain circumstances, all holders of Shareholders’ Rights (other than the acquiring entity) would be entitled to purchase a number of common shares equal to twice the exercise price, or at the option of the Board, to exchange each Shareholders’ Right for one common share. The Shareholders’ Rights remain in existence until February 17, 2017, unless extended by the Board of Directors or earlier redeemed (at one cent per Shareholders’ Right), exercised or exchanged under the terms of the agreement.

The Company’s primary item of other comprehensive income (loss) is foreign currency translation adjustments. Comprehensive income for the three and nine months ended March 31, 2007 and 2006 was as follows:

Foreign currency translation adjustments are net of taxes of $2,093 and $7,388 for the three and nine months ended March 31, 2007, respectively, and $404 and $2,329 for the three and nine months ended March 31, 2006, respectively. The realized (gain) on marketable equity securities is net of taxes of $14 for the nine months ended March 31, 2006, and is reflected in the Other (income) expense, net caption in the Consolidated Statement of Income. The unrealized (loss) on marketable equity securities is net of taxes of $2 for the nine months ended March 31, 2006. The realized loss on cash flow hedges is net of taxes of $37 and $110 for the three and nine months ended March 31, 2007, respectively, and $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. The unrealized gain on cash flow hedges is net of taxes of $3,116 for the nine months ended March 31, 2006.

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During the third quarter of fiscal 2007, the Company recorded a $6,090 charge ($3,759 after-tax or $.03 per diluted 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 primarily attributable to approximately 130 employees in the Industrial Segment. A portion of the severance payments have been made with 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, 2007 as follows: $3,564 in Cost of sales and $2,526 in Selling, general and administrative expenses.

During the first nine months of fiscal 2007, the Company recorded charges of $16,535 ($10,207 after-tax or $.08 per diluted 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, 2007 as follows: $12,524 in Cost of sales and $4,011 in Selling, general and administrative expenses.

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 consisted of severance costs and costs to relocate machinery and equipment. The severance costs were attributable to 150 employees in the Industrial Segment. All severance payments have been made. 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.

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 2007, the Company completed 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, 2007 are as follows:

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

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, 2007 was $35,189. The estimated amortization expense for the five years ending June 30, 2007 through 2011 is $39,809, $37,329, $35,994, $35,501 and $32,391, respectively.

Net periodic pension cost recognized included the following components:

Postretirement benefit cost recognized included the following components:

During the first nine months of fiscal 2007, the Company made $161 million in voluntary contributions to its qualified defined benefit plans. The Company expects to contribute a total of approximately $190 million to its qualified defined benefit plans in fiscal 2007.

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In December 2005, the Company divested the 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 diluted share) and is reflected in Other (income) expense, net in the Consolidated Statement of Income

In August 2005, the Company divested the Astron Building business. This business was part of the Other Segment for segment reporting purposes. The results of operations for this business unit have been presented as discontinued operations for all periods presented. Included in the income from discontinued operations is an after-tax gain on disposal of $27,753.

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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, 2007

AND COMPARABLE PERIODS ENDED MARCH 31, 2006

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 provide a near-term perspective of the Company’s outlook particularly when viewed in the context of prior and future order rates. The Company currently publishes its order rates on a monthly basis. However, as previously announced, beginning with fiscal year 2008, the Company will publish order rates on a quarterly basis in order to more effectively characterize the longer term trends of the Company’s markets. 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 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:

An ISM and PMI 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 positive year-over-year. The ISM index at the end of March 2007 was 50.9 and the most recent PMI for the Eurozone countries was 55.6. With respect to the aerospace market, aircraft miles flown and revenue passenger miles continue to show improvement over comparable fiscal 2006 levels while Department of Defense spending in fiscal 2007 is expected to increase slightly from its fiscal 2006 level.

The Company also believes that there is a high correlation between interest rates and industrial manufacturing activity. The Federal Reserve has not raised the federal funds rate during fiscal 2007 but did raise the federal funds rate eight times during fiscal 2006. Additional 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:

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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 23.8 percent, ample borrowing capabilities and strong credit ratings. Cash flows from operations for the first nine months of fiscal 2007 were $536.9 million or 6.8 percent of sales after making $161 million in voluntary contributions to the Company’s qualified defined benefit plans.

Many acquisition opportunities remain available to the Company within its target markets. During the first nine months of fiscal 2007, the Company completed eight acquisitions whose aggregate annual revenues were approximately $134 million. 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.

The Company routinely faces challenges regarding improving premier customer service levels, managing changes in raw material prices and the rising expenses related to employee retirement and health care benefits. The Company is currently focused on maintaining its financial strength through the current Industrial North American slowdown, especially in the automotive and heavy-duty truck markets. 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 enterprise and business realignments.

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

CONSOLIDATED STATEMENT OF INCOME

Net sales for the current-year quarter and first nine months of fiscal 2007 increased 11.3 percent and 15.9 percent, respectively, over the comparable prior year net sales amounts reflecting higher volume experienced in all Segments, except for the Industrial North American Segment in the current-year quarter. Acquisitions in the last 12 months contributed about 35 percent of the net sales increase in the current-year quarter and about 43 percent of the increase for the first nine months of fiscal 2007. The effect of currency rate changes increased net sales by approximately $64 million and $182 million in the current-year quarter and first nine months of fiscal 2007, respectively.

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Gross profit margin increased in the current-year quarter and first nine months of fiscal 2007 primarily due to a combination of the increase in sales as well as the effects of the Company’s financial performance initiatives, especially with respect to lean manufacturing. Also included in gross profit are business realignment charges of $3.6 million and $4.3 million in the current-year quarter and prior-year quarter, respectively, and $12.5 million and $10.1 million for the first nine months of fiscal 2007 and 2006, respectively.

Selling, general and administrative expenses increased for the current-year quarter and first nine months of fiscal 2007 primarily due to the higher sales volume, higher research and development expenses and higher incentive compensation.

Interest expense for the current-year quarter and first nine months of fiscal 2007 increased primarily due to higher average debt outstanding as well as higher interest rates, primarily on commercial paper borrowings.

Other (income) expense, net in the current-year quarter and first nine months of fiscal 2007 included $6.5 million and $9.9 million, respectively, of income related to the sale of real estate. Other (income) expense, net for the first nine months of fiscal 2007 included $6.2 million of income related to the final accounting for a divestiture completed in fiscal 2002, $4.6 million of income related to a litigation settlement and $4.8 million of losses from minority interests. Other (income) expense, net for the prior-year quarter and first nine months of fiscal 2006 included income of $6.3 million related to a litigation settlement. Other (income) expense, net for the first nine months of fiscal 2006 included a loss of $11.0 million resulting from the divestiture of the Thermoplastics division.

Effective tax rate from continuing operations for the current-year quarter and first nine months of fiscal 2007 reflects a $13.4 million benefit, $5.6 million of which relates to fiscal 2006, resulting from the renewal of the Federal Tax Credit for Increasing Research Activities.

Income from continuing operations for the current-year quarter and first nine months of fiscal 2007 was positively affected by a decrease in expense of approximately $5.7 million and $17.6 million, respectively, related to qualified defined benefit plans, resulting primarily from changes in actuarial assumptions and the amortization of actuarial losses.

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. Included in discontinued operations for the nine months ended March 31, 2006 is an after-tax gain on the sale of Astron of approximately $27.8 million. The gain is primarily attributable to foreign currency translation adjustments.

Backlog increased from the prior-year quarter due to an increase in order rates throughout most businesses in all Segments, especially in Industrial International. Backlog increased slightly from the June 30, 2006 amount of $2,695.9 million primarily due to an increase in order rates in the Industrial International businesses.

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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 foreign currency changes, the lower sales in Industrial North America for the current-year quarter reflect lower end-user demand experienced in several markets, most notably in automotive and heavy-duty truck. The higher Industrial North American sales for the first nine months of fiscal 2007 reflect higher end-user demand experienced in the first half of the current fiscal year across most of the Industrial North American markets, particularly in the construction, mining, semi-conductor, oil and gas and general industrial machinery markets. The increase in Industrial International sales for the current-year quarter and first nine months of fiscal 2007 is primarily attributed to higher volume across most markets in all regions, particularly in Europe and the Asia Pacific region.

The decrease in Industrial North American margins for the current-year quarter is primarily due to the lower sales volume, underabsorption of overhead resulting from a reduction in inventory during the current-year quarter and higher raw material costs. The increase in Industrial International margins for the current-year quarter and first nine months of fiscal 2007 is primarily due to the higher sales volume, benefits realized from the Company’s financial performance initiatives and benefits from past business realignments. Industrial North American and Industrial International margins were negatively impacted by higher business realignment costs in the current-year quarter and first nine months of fiscal 2007 as compared to the prior-year quarter and first nine months of fiscal 2006. Also, acquisitions, not yet fully integrated, negatively impacted both Industrial North American and Industrial International margins for the current-year quarter and first nine months of fiscal 2007.

The increase in backlog from a year ago is primarily due to higher order rates experienced in virtually all of the markets of the Industrial Segment with the largest portion of the increase being experienced in the Industrial International businesses. Backlog increased from the June 30, 2006 amount of $1,177.8 million primarily due to higher order rates in the Industrial International businesses.

The Company anticipates Industrial North American sales for fiscal 2007 will exceed their fiscal 2006 level by 1.8 percent and Industrial International sales for fiscal 2007 will exceed their fiscal 2006 level by approximately 33.0 percent. Industrial North American operating margins in fiscal 2007 are expected to range from 14.3 percent to 14.5 percent and Industrial International operating margins are expected to range from 13.8 percent to 14.0 percent. 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 fiscal 2007.

Aerospace Segment

The increase in sales in the Aerospace Segment for the current-year quarter and first nine months of fiscal 2007 is primarily due to an increase in both commercial original equipment manufacturer (OEM) and aftermarket volume. The higher margins were primarily due to a higher concentration of sales occurring in the aftermarket businesses in the current-year quarter and first nine months of fiscal 2007.

Shipments during the first nine months of fiscal 2007 were about the same as order rates resulting in a slight change in the backlog from the prior-year quarter and the June 30, 2006 amount of $1,328.3 million. For fiscal 2007, sales are expected to increase 10.6 percent from their fiscal 2006 level and operating margins are expected to range from 15.8 percent to 16.0 percent. Heavier commercial OEM volume in future product mix could result in lower margins.

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Climate & Industrial Controls Segment

The Climate & Industrial Controls 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 Climate & Industrial Controls Segment 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 foreign currency changes, the increase in sales in the Climate & Industrial Controls Segment for the current-year quarter is primarily due to new business on certain automotive platforms. The sales increase for the first nine months of fiscal 2007 was also due to higher end-user demand in the residential air conditioning market. The lower margins in the current-year quarter and first nine months of fiscal 2007 are primarily due to product mix, increased raw material costs as well as costs incurred to integrate recent acquisitions. Margins for the current-year quarter were adversely affected by the underabsorption of overhead resulting from a reduction in inventory during the current-year quarter. Margins for the first nine months of fiscal 2007 benefited from the absence of business realignment costs incurred in the first nine months of fiscal 2006.

The decline in backlog from the prior-year quarter and the June 30, 2006 amount of $189.8 million is primarily due to shipments exceeding new orders in the residential air conditioning market. For fiscal 2007, sales are expected to increase by 7.4 percent from their fiscal 2006 level and operating margins are expected to be in a range of 7.3 percent to 7.5 percent. The Company expects to continue to take the actions necessary to structure appropriately the Climate & Industrial Controls Segment to operate in their current economic environment. Such actions may include the necessity to record additional business realignment charges in fiscal 2007.

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Corporate general and administrative expenses were $40.5 million in the current-year quarter compared to $36.2 million in the prior-year quarter and were $121.2 million for the first nine months of fiscal 2007 compared to $93.5 million for the first nine months of fiscal 2006. As a percent of sales, corporate general and administrative expenses for the current-year quarter and first nine months of fiscal 2007 was 1.5 percent compared to 1.4 percent for the prior-year quarter and first nine months of fiscal 2006. The higher expense in the current-year quarter and first nine months of fiscal 2007 is primarily due to higher research and development expenses, fees for professional services and employee welfare and benefit expenses.

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

DISCONTINUED OPERATIONS

In August 2005, the Company divested its Astron Buildings business. The following results of operations for this business unit have been presented as discontinued operations for the nine months ended March 31, 2006.