10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 1-4982

LOGO

PARKER-HANNIFIN CORPORATION

(Exact name of registrant as specified in its charter)


OHIO		34-0451060
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

6035 Parkland Blvd., Cleveland, Ohio		44124-4141
(Address of principal executive offices)		(Zip Code)

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 March 31, 2012 151,051,111

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2012		2011			2012			2011
Net sales	$	3,393,563	$	3,240,103		$	9,734,276		$	8,936,040
Cost of sales		2,590,315		2,463,083			7,386,079			6,796,685

Gross profit		803,248		777,020			2,348,197			2,139,355
Selling, general and administrative expenses		377,479		375,069			1,132,635			1,054,332
Interest expense		22,313		24,619			69,303			74,883
Other expense (income), net		2,629		(12,385	)		(5,100	)		(22,191	)

Income before income taxes		400,827		389,717			1,151,359			1,032,331
Income taxes		88,138		108,069			298,169			269,835

Net income	$	312,689	$	281,648		$	853,190		$	762,496
Less: Noncontrolling interests		615		2,059			3,332			5,556

Net income attributable to common shareholders	$	312,074	$	279,589		$	849,858		$	756,940

Earnings per share attributable to common shareholders:
Basic	$	2.07	$	1.72		$	5.61		$	4.68
Diluted	$	2.01	$	1.68		$	5.49		$	4.58
Cash dividends per common share	$	.39	$	.32		$	1.13		$	.88

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands)


	(Unaudited) March 31, 2012			June 30, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	773,459		$	657,466
Accounts receivable, net		2,061,501			1,977,856
Inventories:
Finished products		562,422			584,683
Work in process		720,188			670,588
Raw materials		146,404			156,882

		1,429,014			1,412,153
Prepaid expenses		100,336			111,934
Deferred income taxes		132,991			145,847

Total current assets		4,497,301			4,305,256
Plant and equipment		4,876,378			4,944,735
Less accumulated depreciation		3,154,408			3,147,556

		1,721,970			1,797,179
Goodwill		2,926,311			3,009,116
Intangible assets, net		1,096,306			1,177,722
Other assets		647,236			597,532

Total assets	$	10,889,124		$	10,886,805

LIABILITIES
Current liabilities:
Notes payable and long-term debt payable within one year	$	273,907		$	75,271
Accounts payable, trade		1,148,939			1,173,851
Accrued payrolls and other compensation		412,997			467,043
Accrued domestic and foreign taxes		193,907			232,774
Other accrued liabilities		459,550			442,104

Total current liabilities		2,489,300			2,391,043

Long-term debt		1,515,217			1,691,086
Pensions and other postretirement benefits		848,521			862,938
Deferred income taxes		141,467			160,035
Other liabilities		308,151			293,367

Total liabilities		5,302,656			5,398,469
EQUITY
Shareholders’ equity:
Serial preferred stock, $.50 par value; authorized 3,000,000 shares; none issued		—			—
Common stock, $.50 par value; authorized 600,000,000 shares; issued 181,046,128 shares at March 31 and June 30		90,523			90,523
Additional capital		625,730			668,332
Retained earnings		7,551,260			6,891,407
Accumulated other comprehensive (loss)		(599,160	)		(450,990	)
Treasury shares, at cost; 29,995,017 shares at March 31 and 25,955,619 shares at June 30		(2,090,761	)		(1,815,418	)

Total shareholders’ equity		5,577,592			5,383,854
Noncontrolling interests		8,876			104,482

Total equity		5,586,468			5,488,336

Total liabilities and equity	$	10,889,124		$	10,886,805

See accompanying notes to consolidated financial statements.

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PARKER-HANNIFIN CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	853,190		$	762,496
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		159,505			172,469
Amortization		84,898			81,656
Share incentive plan compensation		64,102			56,792
Deferred income taxes		(54,928	)		7,557
Foreign currency transaction loss		8,626			2,324
(Gain) on sale of plant and equipment		(2,921	)		(8,191	)

Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(138,796	)		(255,673	)
Inventories		(55,329	)		(134,256	)
Prepaid expenses		11,367			27,927
Other assets		(26,360	)		(40,926	)
Accounts payable, trade		3,054			149,961
Accrued payrolls and other compensation		(40,216	)		9,608
Accrued domestic and foreign taxes		(33,478	)		47,365
Other accrued liabilities		52,368			(20,070	)
Pensions and other postretirement benefits		89,078			(95,379	)
Other liabilities		32,301			36,273

Net cash provided by operating activities		1,006,461			799,933

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (less cash acquired of $6,802 in 2012 and $385 in 2011)		(31,004	)		(60,227	)
Capital expenditures		(154,097	)		(158,455	)
Proceeds from sale of plant and equipment		15,560			23,818
Other		(16,381	)		(8,251	)

Net cash (used in) investing activities		(185,922	)		(203,115	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options		8,451			22,982
(Payments for) common shares		(333,545	)		(56,235	)
Tax benefit from share incentive plan compensation		12,549			37,451
Acquisition of noncontrolling interests		(147,441	)		—
Proceeds from (payments for) notes payable, net		48,102			(18,901	)
Proceeds from long-term borrowings		73,066			291,688
(Payments for) long-term borrowings		(73,405	)		(257,752	)
Dividends		(178,606	)		(142,906	)

Net cash (used in) financing activities		(590,829	)		(123,673	)
Effect of exchange rate changes on cash		(113,717	)		59,284

Net increase in cash and cash equivalents		115,993			532,429
Cash and cash equivalents at beginning of year		657,466			575,526

Cash and cash equivalents at end of period	$	773,459		$	1,107,955

See accompanying notes to consolidated financial statements.

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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.


	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011
Net sales
Industrial:
North America	$	1,315,357	$	1,178,714	$	3,703,526	$	3,289,098
International		1,286,751		1,293,047		3,794,678		3,533,259
Aerospace		542,760		503,806		1,536,757		1,400,116
Climate & Industrial Controls		248,695		264,536		699,315		713,567

Total	$	3,393,563	$	3,240,103	$	9,734,276	$	8,936,040

Segment operating income
Industrial:
North America	$	226,986	$	189,463	$	645,951	$	538,254
International		195,065		199,798		569,224		551,374
Aerospace		65,925		68,984		204,824		176,404
Climate & Industrial Controls		23,203		22,577		52,818		53,630

Total segment operating income		511,179		480,822		1,472,817		1,319,662
Corporate general and administrative expenses		38,377		41,734		142,529		112,681

Income before interest expense and other expense		472,802		439,088		1,330,288		1,206,981
Interest expense		22,313		24,619		69,303		74,883
Other expense		49,662		24,752		109,626		99,767

Income before income taxes	$	400,827	$	389,717	$	1,151,359	$	1,032,331

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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 March 31, 2012, the results of operations for the three and nine months ended March 31, 2012 and 2011 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 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 incorrectly presented the acquisition of a noncontrolling interest in the investing activities section of the Consolidated Statement of Cash Flows for the three months ended September 30, 2011 and the six months ended December 31, 2011. Such amounts have been corrected through reclassification to the financing activities section in the Consolidated Statement of Cash Flows for the nine months ended March 31, 2012.

The Company has evaluated subsequent events that have occurred through the date these financial statements were issued. No subsequent events have occurred that required adjustment to these financial statements. On April 19, 2012, the Board of Directors of the Company modified the share repurchase program described in Note 5 such that for the fourth quarter of fiscal 2012 the fiscal year limitation was eliminated and the number of shares authorized for repurchase under the program was increased to up to 16 million, exclusive of any shares previously repurchased under the program during fiscal 2012.

2. New accounting pronouncements

In June 2011, the Financial Accounting Standards Board (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 retrospectively, 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 March 31, 2012 and June 30, 2011 is immaterial to the financial position of the Company and the change in the accrual for the current and prior-year quarter and first nine months of fiscal 2012 and fiscal 2011 is immaterial to the Company’s results of operations and cash flows.

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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 and nine months ended March 31, 2012 and 2011.


	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011
Numerator:
Net income attributable to common shareholders	$	312,074	$	279,589	$	849,858	$	756,940
Denominator:
Basic - weighted average common shares		151,017,910		162,160,426		151,472,380		161,711,394
Increase in weighted average common shares from dilutive effect of equity-based awards		3,926,336		4,529,921		3,432,169		3,559,088

Diluted - weighted average common shares, assuming exercise of equity-based awards		154,944,246		166,690,347		154,904,549		165,270,482

Basic earnings per share	$	2.07	$	1.72	$	5.61	$	4.68
Diluted earnings per share	$	2.01	$	1.68	$	5.49	$	4.58

For the three months ended March 31, 2012 and 2011, 74,554 and 33,129 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, 2012 and 2011, 764,508 and 2,046,685 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.

5. 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 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. During the three-month period ended March 31, 2012, the Company repurchased 235,046 shares at an average price, including commissions, of $85.09 per share. Fiscal year-to-date, the Company repurchased 4,850,573 shares at an average price, including commissions, of $68.44 per share.

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6. Accounts receivable, net

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


	March 31, 2012			June 30, 2011
Accounts receivable, trade	$	1,843,990		$	1,780,137
Allowance for doubtful accounts		(13,235	)		(10,472	)
Non-trade accounts receivable		82,525			75,550
Notes receivable		148,221			132,641

Total	$	2,061,501		$	1,977,856

Accounts receivable, trade are initially recorded at their net collectible amount and 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 due to the insolvency of the debtor.

7. Business realignment charges

To structure its businesses in light of current and anticipated customer demand, the Company incurred business realignment charges in fiscal 2012 and fiscal 2011.

Business realignment charges by business segment are as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011
Industrial	$	3,133	$	5,310	$	10,031	$	9,747
Aerospace								320
Climate & Industrial Controls		192				340

Work force reductions by business segment are as follows:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011
Industrial		152		149		356		357
Aerospace								22
Climate & Industrial Controls		8				12

The charges primarily consist of severance costs related to plant closures as well as general work force reductions implemented by various operating units throughout the world. The business realignment charges for the three and nine months ended March 31, 2012 also included charges related to enhanced retirement benefits. The Company believes the realignment actions will positively impact future results of operations but will not have a material effect on liquidity and sources and uses of capital. The charges are presented primarily in the Cost of sales caption in the Consolidated Statement of Income for the three and nine months ended March 31, 2012 and March 31, 2011. As of March 31, 2012, approximately $7 million in severance payments have been made relating to charges incurred during fiscal 2012, with the majority of the remaining payments expected to be made by June 30, 2012. All required severance payments have been made relating to charges incurred in fiscal 2011. Additional charges to be recognized in future periods related to the realignment actions described above are not expected to be material.

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8. Equity

Changes in equity for the three months ended March 31, 2012 and March 31, 2011 are as follows (net of tax amounts relate to Shareholders’ Equity):


	Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2011	$	5,158,126		$	97,777		$	5,255,903
Net income		312,074			615			312,689
Other comprehensive income (loss):
Foreign currency translation (net of tax of $3,983)		147,042			(27,101	)		119,941
Retirement benefits plan activity (net of tax of $11,244)		19,096						19,096
Realized loss (net of tax of $25)		51						51

Total comprehensive income (loss)		478,263			(26,486	)		451,777
Dividends paid		(59,015	)		(560	)		(59,575	)
Stock incentive plan activity		28,912						28,912
Acquisition activity		(8,694	)		(61,855	)		(70,549	)
Shares purchased at cost		(20,000	)					(20,000	)

Balance March 31, 2012	$	5,577,592		$	8,876		$	5,586,468


	Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance December 31, 2010	$	5,113,261		$	101,332		$	5,214,593
Net income		279,589			2,059			281,648
Other comprehensive income (loss):
Foreign currency translation (net of tax of $9,584)		124,570			(1,570	)		123,000
Retirement benefits plan activity (net of tax of $11,516)		19,659						19,659
Realized loss (net of tax of $25)		52						52

Total comprehensive income		423,870			489			424,359
Dividends paid		(51,999	)					(51,999	)
Stock incentive plan activity		23,011						23,011
Shares purchased at cost		(26,235	)					(26,235	)

Balance March 31, 2011	$	5,481,908		$	101,821		$	5,583,729

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8. Equity, cont’d

Changes in equity for the nine months ended March 31, 2012 and March 31, 2011 are as follows (net of tax amounts relate to Shareholders’ Equity):


	Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance June 30, 2011	$	5,383,854		$	104,482		$	5,488,336
Net income		849,858			3,332			853,190
Other comprehensive income (loss):
Foreign currency translation (net of tax of $15,583)		(204,717	)		(25,609	)		(230,326	)
Retirement benefits plan activity (net of tax of $33,768)		56,392						56,392
Realized loss (net of tax of $75)		153						153

Total comprehensive income (loss)		701,686			(22,277	)		679,409
Dividends paid		(171,106	)		(7,500	)		(178,606	)
Stock incentive plan activity		68,744						68,744
Acquisition activity		(73,614	)		(65,829	)		(139,443	)
Shares purchased at cost		(331,972	)					(331,972	)

Balance March 31, 2012	$	5,577,592		$	8,876		$	5,586,468


	Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance June 30, 2010	$	4,367,965		$	91,435		$	4,459,400
Net income		756,940			5,556			762,496
Other comprehensive income:
Foreign currency translation (net of tax of $27,071)		413,271			5,105			418,376
Retirement benefits plan activity (net of tax of $33,805)		57,721						57,721
Realized loss (net of tax of $93)		162						162

Total comprehensive income		1,228,094			10,661			1,238,755
Dividends paid		(142,631	)		(275	)		(142,906	)
Stock incentive plan activity		84,715						84,715
Shares purchased at cost		(56,235	)					(56,235	)

Balance March 31, 2011	$	5,481,908		$	101,821		$	5,583,729

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9. Goodwill and intangible assets

The changes in the carrying amount of goodwill for the nine months ended March 31, 2012 are as follows:


	Industrial Segment			Aerospace Segment			Climate & Industrial Controls Segment			Total
Balance June 30, 2011	$	2,595,989		$	98,914		$	314,213		$	3,009,116
Acquisitions		7,876			(192	)					7,684
Foreign currency translation		(83,684	)		(31	)		(3,516	)		(87,231	)
Goodwill adjustments		(3,258	)								(3,258	)

Balance March 31, 2012	$	2,516,923		$	98,691		$	310,697		$	2,926,311

Acquisitions represent the original goodwill allocation and any changes in the purchase price for the acquisitions during the measurement period subsequent to the applicable acquisition dates.

Goodwill adjustments primarily represent final adjustments to the purchase price allocation for acquisitions during the measurement period subsequent to the applicable acquisition dates. The Company’s previously reported results of operations and financial position would not be materially different had the goodwill adjustments recorded during the first nine months of fiscal 2012 been reflected in the same reporting period that the initial purchase price allocations for those acquisitions were made.

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:


	March 31, 2012				June 30, 2011
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents	$	120,441	$	65,547	$	124,015	$	61,061
Trademarks		310,722		127,882		319,158		116,995
Customer lists and other		1,244,312		385,740		1,251,271		338,666

Total	$	1,675,475	$	579,169	$	1,694,444	$	516,722

Total intangible amortization expense for the nine months ended March 31, 2012 was $81,559. The estimated amortization expense for the five years ending June 30, 2012 through 2016 is $100,529, $94,556, $90,943, $87,143 and $83,328, 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 nine months ended March 31, 2012.

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10. Retirement benefits

Net pension benefit cost recognized included the following components:

		$137,544			$137,544			$137,544			$137,544
	Three Months Ended March 31,						Nine Months Ended March 31,
	2012			2011			2012			2011
Service cost	$	21,350		$	21,139		$	63,974		$	63,029
Interest cost		45,981			43,852			138,720			130,697
Expected return on plan assets		(50,225	)		(49,196	)		(150,495	)		(147,130	)
Amortization of prior service cost		3,505			3,137			10,512			9,463
Amortization of net actuarial loss		26,706			27,370			79,166			81,529
Amortization of initial net (asset)		(15	)		(15	)		(45	)		(44	)

Net pension benefit cost	$	47,302		$	46,287		$	141,832		$	137,544

Net postretirement benefit cost recognized included the following components:

		$137,544		$137,544		$137,544		$137,544
	Three Months Ended March 31,				Nine Months Ended March 31,
	2012		2011		2012		2011
Service cost	$	183	$	233	$	545	$	508
Interest cost		838		724		2,600		2,686
Net amortization and deferral and other		92		621		350		393

Net postretirement benefit cost	$	1,113	$	1,578	$	3,495	$	3,587

11. Income taxes

As of March 31, 2012, the Company had gross unrecognized tax benefits of $121,097, including $65,305 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 $72,005. If recognized, a significant portion of the gross unrecognized tax benefits would be offset against an asset currently recorded in the Consolidated Balance Sheet. The accrued interest related to the gross unrecognized tax benefits, excluded from the amounts above, was $5,563.

The Company and its subsidiaries file income tax returns in the United States and in various 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 United States Internal Revenue Service for fiscal years through 2010. All significant state, local and foreign tax returns have been examined for fiscal years through 2003. 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 limitations within the next twelve months.

- 12 -

12. Financial instruments and fair value measurement

In May 2011, the FASB issued new accounting guidance to improve consistency with fair value measurement disclosure requirements. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company’s fair value measurements and disclosures did not significantly change as a result of applying this new guidance.

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 $1,740,528 and $1,765,892 at March 31, 2012 and June 30, 2011, respectively, and was estimated to have a fair value of $1,966,552 and $1,902,221 at March 31, 2012 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 Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Derivatives consist 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.

The following summarizes the location and fair value of derivative financial instruments reported in the Consolidated Balance Sheet as of March 31, 2012 and June 30, 2011:

Balance Sheet Caption

March 31,
2012

June 30,
2011

Net investment hedges

Cross-currency swap contracts

Other liabilities

$19,292

36,582

Cash flow hedges

Costless collar contracts

Accounts receivable

3,180

638

Forward exchange contracts

Accounts receivable

2,615

Costless collar contracts

Other accrued liabilities

894

2,979

- 13 -

12. Financial instruments and fair value measurement, cont’d

The fair values at March 31, 2012 and June 30, 2011 are classified within level 2 of the fair value hierarchy. There are no other financial assets or financial liabilities that are marked to market on a recurring basis. Fair values are transferred between levels of the fair value hierarchy when facts and circumstances indicate that a change in the method of estimating the fair value of a financial asset or financial liability is warranted.

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 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.

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


	Three Months Ended March 31,						Nine Months Ended March 31,
	2012			2011			2012			2011
Forward exchange contracts	$	11,031		$			$	(3,557	)	$	19,048
Costless collar contracts		(1,252	)		(1,212	)		4,598			(5,766	)

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:


	Three Months Ended March 31,						Nine Months Ended March 31,
	2012			2011			2012		2011
Cross-currency swap contracts	$	(6,633	)	$	(7,317	)	$	10,682	$	(18,894	)
Foreign denominated debt		(1,268	)		(8,353	)		15,397		(44,687	)

There was no ineffectiveness of the cross-currency swap contracts or foreign denominated debt, nor was any portion of these financial instruments excluded from the effectiveness testing, during the nine months ended March 31, 2012 and 2011.

- 14 -

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, 2012

AND COMPARABLE PERIODS ENDED MARCH 31, 2011

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:

•

Purchasing Managers Index (PMI) on manufacturing activity specific to regions around the world with respect to most mobile and industrial markets;

•

Global aircraft miles flown and global revenue passenger miles for commercial aerospace markets and Department of Defense spending for military aerospace markets; and

•

Housing starts with respect to the North American residential air conditioning market and certain mobile construction markets.

A PMI above 50 indicates that the manufacturing activity specific to a region of the world in the mobile and industrial markets is expanding. A PMI below 50 indicates the opposite. The PMI at the end of March 2012 for the United States, the Eurozone countries and China was 53.4, 47.7 and 48.3, respectively. Since June 30, 2011 and December 31, 2011, the PMI for China has decreased, while the PMI for the United States and the Eurozone countries have declined since June 30, 2011 but have increased since December 31, 2011.

Global aircraft miles flown have increased approximately three percent from the comparable fiscal 2011 level and global revenue passenger miles have increased approximately four percent from the comparable fiscal 2011 level. 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 slightly up from the comparable fiscal 2011 level.

Housing starts in March 2012 were approximately 10 percent higher than housing starts in March 2011 and remained at essentially the same level of housing starts in December 2011.

The Company remains 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 funds at affordable interest rates and had a debt to debt-shareholders’ equity ratio of 24.3 percent at March 31, 2012 compared to 25.2 percent at December 31, 2011 and 24.7 percent at June 30, 2011.

The Company believes many opportunities for profitable 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.

- 15 -

The Company believes it can meet its strategic objectives by:

•

Serving the customer;

•

Empowering its employees to become successful in its lean enterprise and fostering an entrepreneurial culture;

•

Successfully executing its Win Strategy initiatives relating to premier customer service, financial performance and profitable growth;

•

Engineering innovative systems and products to provide superior customer value through improved service, efficiency and productivity;

•

Delivering products, systems and services that have demonstrable savings to customers and are priced by the value they deliver;

•

Maintaining its decentralized division and sales company structure;

•

Acquiring strategic businesses;

•

Organizing around targeted regions, technologies and markets; and

•

Advancing business practices to achieve corporate sustainability goals.

During the first nine months of fiscal 2012, the Company completed three acquisitions and purchased the outstanding shares not previously owned by the Company in two majority-owned subsidiaries. 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


	Three Months Ended March 31,						Nine Months Ended March 31,
(dollars in millions)	2012			2011			2012			2011
Net sales	$	3,393.6		$	3,240.1		$	9,734.3		$	8,936.0
Gross profit	$	803.2		$	777.0		$	2,348.2		$	2,139.3
Gross profit margin		23.7	%		24.0	%		24.1	%		23.9	%
Selling, general and administrative expenses	$	377.5		$	375.1		$	1,132.6		$	1,054.3
Selling, general and administrative expenses, as a percent of sales		11.1	%		11.6	%		11.6	%		11.8	%
Interest expense	$	22.3		$	24.6		$	69.3		$	74.9
Other expense (income), net	$	2.6		$	(12.4	)	$	(5.1	)	$	(22.2	)
Effective tax rate		22.0	%		27.7	%		25.9	%		26.1	%
Net income	$	312.7		$	281.6		$	853.2		$	762.5
Net income, as a percent of sales		9.2	%		8.7	%		8.8	%		8.5	%

- 16 -

Net sales increased 4.7 percent for the current-year quarter and 8.9 percent for the first nine months of fiscal 2012, over the comparable prior-year net sales amounts. The increase in net sales for the current-year quarter reflects higher sales in both the Industrial North American businesses and the Aerospace Segment. The increase in net sales for the first nine months of fiscal 2012 reflects higher sales in the Industrial North American businesses and the Aerospace Segment as well as the Industrial International businesses. Acquisitions made in the last 12 months contributed approximately $7 million and $39 million in sales in the current-year quarter and first nine months of fiscal 2012, respectively. The effect of currency rate changes decreased net sales by approximately $42 million in the current-year quarter and increased net sales by approximately $44 million for the first nine months of fiscal 2012.

Gross profit margin declined slightly in the current-year quarter from the comparable prior-year period primarily due to operating inefficiencies in the Industrial International businesses and higher engineering development costs in the Aerospace Segment. Gross profit margin for the first nine months of fiscal 2012 improved from the first nine months of fiscal 2011 due to a combination of the higher sales volume in the Industrial North American businesses, resulting in operating efficiencies, as well as favorable product mix in the Aerospace Segment.

Selling, general and administrative expenses increased for the first nine months of fiscal 2012 over the comparable prior period primarily due to the higher sales volume as well as higher expenses associated with the Company’s incentive and deferred compensation programs.

Interest expense for the current-year quarter and first nine months of fiscal 2012 decreased from the comparable prior-year periods primarily due to lower average debt outstanding.

Other expense (income), net for the prior-year quarter and first nine months of fiscal 2011 included income of $14.6 million related to insurance recoveries.

Effective tax rate for the current-year quarter was lower than the prior-year quarter primarily due to discrete tax items in the current-year quarter having a more favorable impact on the tax rate than those recorded in the prior-year quarter. The discrete tax items in both periods relate primarily to the settlement of tax audits. The Company expects the effective tax rate for fiscal 2012 will be approximately 27 percent.

RESULTS BY BUSINESS SEGMENT

Industrial Segment


	Three Months Ended March 31,						Nine Months Ended March 31,
(dollars in millions)	2012			2011			2012			2011
Net sales
North America	$	1,315.4		$	1,178.7		$	3,703.5		$	3,289.1
International		1,286.8			1,293.0			3,794.7			3,533.3
Operating income
North America		227.0			189.5			646.0			538.3
International	$	195.1		$	199.8		$	569.2		$	551.4
Operating margin
North America		17.3	%		16.1	%		17.4	%		16.4	%
International		15.2	%		15.5	%		15.0	%		15.6	%
Backlog	$	1,887.8		$	1,855.8		$	1,887.8		$	1,855.8

- 17 -

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


	Period Ending March 31
	Three Months			Nine Months
Industrial North America – as reported		11.6	%		12.6	%
Acquisitions		0.3	%		0.6	%
Currency		(0.3	)%		(0.1	)%

Industrial North America – without acquisitions and currency		11.6	%		12.1	%


Industrial International – as reported		(0.5	)%		7.4	%
Acquisitions		0.3	%		0.5	%
Currency		(2.7	)%		1.3	%

Industrial International – without acquisitions and currency		1.9	%		5.6	%


Total Industrial Segment – as reported		5.3	%		9.9	%
Acquisitions		0.3	%		0.6	%
Currency		(1.6	)%		0.6	%

Total Industrial Segment – without acquisitions and currency		6.6	%		8.7	%

The above presentation reconciles the percentage changes in net sales of the Industrial Segment 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 changes in currency exchange rates, the increase in Industrial North American sales for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily the result of higher demand from distributors and end-users in a number of markets, particularly in the heavy-duty truck, construction equipment, oil and gas, farm and agriculture equipment and machine tool markets. The increase in Industrial International sales for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily attributable to higher volume across most markets in all regions with the largest increase in volume experienced in Europe.

The increase in operating margins in the Industrial North American businesses for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to the higher sales volume, resulting in operating efficiencies. The decrease in operating margins in the Industrial International businesses for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to operating inefficiencies resulting from a decline in the rate of sales growth between the current year and comparable prior-year periods, especially in Europe and the Asia Pacific region.

- 18 -

Included in Industrial North American operating income are business realignment charges of $2.0 million and $0.6 million for the current-year quarter and prior-year quarter, respectively, and $3.0 million and $4.1 million for the first nine months of fiscal 2012 and fiscal 2011, respectively. Included in Industrial International operating income are business realignment charges of $1.1 million and $4.7 million for the current-year quarter and prior-year quarter, respectively, and $7.0 million and $5.7 million for the first nine months of fiscal 2012 and fiscal 2011, respectively. The business realignment charges consist primarily of severance costs resulting from plant closures as well as general reductions in work force. The Industrial North American business realignment charges for the current-year quarter also include expenses associated with enhanced retirement benefits. The Company does not anticipate that cost savings realized from the work force reductions taken during the first nine months 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 has not been finalized.

The increase in backlog from the prior-year quarter is primarily due to higher order rates in the Industrial North American businesses more than offsetting lower order rates in the Industrial International businesses, primarily in the Asia Pacific region. The decline in backlog from the June 30, 2011 amount of $1,907.0 million is primarily due to lower order rates in virtually all of the Industrial International businesses more than offsetting higher order rates in the Industrial North American businesses. The Company anticipates Industrial North American sales for fiscal 2012 will increase between 11.0 percent and 11.5 percent from the fiscal 2011 level and Industrial International sales for fiscal 2012 will increase between 3.3 percent and 4.1 percent from the fiscal 2011 level. Industrial North American operating margins in fiscal 2012 are expected to range from 17.3 percent to 17.5 percent and Industrial International operating margins are expected to range from 14.9 percent to 15.1 percent.

Aerospace Segment


	Three Months Ended March 31,						Nine Months Ended March 31,
(dollars in millions)	2012			2011			2012			2011
Net sales	$	542.8		$	503.8		$	1,536.8		$	1,400.1
Operating income	$	65.9		$	69.0		$	204.8		$	176.4
Operating margin		12.1	%		13.7	%		13.3	%		12.6	%
Backlog	$	1,925.7		$	1,755.3		$	1,925.7		$	1,755.3

The increase in net sales in the Aerospace Segment for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to higher volume in both the commercial original equipment manufacturer (OEM) and aftermarket businesses as well as higher volume in both the military OEM and aftermarket businesses. The lower margins in the current-year quarter compared to the prior-year quarter were primarily due to the benefits from the higher sales volume being more than offset by higher engineering development costs. Margins for the first nine months of fiscal 2012 were higher compared to the prior-year first nine months primarily due to the higher sales volume and a favorable product mix.

The increase in backlog from the prior-year quarter and the June 30, 2011 amount of $1,702.3 million is primarily due to higher order rates in both the commercial and military OEM businesses as well as the military aftermarket business. For fiscal 2012, sales are expected to increase between 8.0 percent and 9.0 percent from the fiscal 2011 level and operating margins are expected to range from 13.2 percent to 13.4 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.

- 19 -

Climate & Industrial Controls Segment


	Three Months Ended March 31,						Nine Months Ended March 31,
(dollars in millions)	2012			2011			2012			2011
Net sales	$	248.7		$	264.5		$	699.3		$	713.6
Operating income	$	23.2		$	22.6		$	52.8		$	53.6
Operating margin		9.3	%		8.5	%		7.6	%		7.5	%
Backlog	$	178.0		$	189.6		$	178.0		$	189.6

The Climate & Industrial Controls (CIC) Segment operations experienced the following percentage changes in net sales in the current-year period compared to the comparable prior-year period:


	Period Ending March 31
	Three Months			Nine Months
CIC Segment – as reported		(6.0	)%		(2.0	)%
Acquisitions		0.0	%		0.1	%
Currency		(0.9	)%		0.1	%

CIC Segment – without acquisitions and currency		(5.1	)%		(2.2	)%

The above presentation reconciles the percentage changes in net sales of the Climate & Industrial Controls Segment 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 changes in currency exchange rates, the decrease in net sales in the Climate & Industrial Controls Segment for the current-year quarter and first nine months of fiscal 2012 from the comparable prior-year periods is primarily due to lower end-user demand in the residential air conditioning market partially offset by higher end-user demand in the heavy-duty truck and automotive markets. Operating margins in both the current-year quarter and first nine months of fiscal 2012 were higher from the comparable prior-year periods primarily due to spending control efforts more than offsetting the impact of the decrease in sales volume. Business realignment charges recorded by the Climate & Industrial Controls Segment in fiscal 2012 and fiscal 2011 were not significant. The Company may take further 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.

For fiscal 2012, sales are expected to decrease between 3.9 percent and 2.8 percent from the fiscal 2011 level and operating margins are expected to range from 8.0 percent to 8.2 percent, reflecting continued spending control efforts.

Corporate general and administrative expenses

Corporate general and administrative expenses were $38.4 million in the current-year quarter compared to $41.7 million in the prior-year quarter and were $142.5 million for the first nine months of fiscal 2012 compared to $112.7 million for the first nine months of fiscal 2011. As a percent of sales, corporate general and administrative expenses for the current-year quarter were 1.1 percent compared to 1.3 percent for the prior-year quarter and were 1.5 percent and 1.3 percent for the first nine months of fiscal 2012 and fiscal 2011, respectively. The lower expenses for the current-year quarter are primarily due to market value fluctuations related to investments associated with the Company’s deferred compensation program more than offsetting an increase in incentive compensation expenses. The higher expenses for the first nine months of fiscal 2012 are primarily due to higher deferred and incentive compensation expenses.

- 20 -

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


	Three Months Ended March 31,						Nine Months Ended March 31,
(in millions)	2012			2011			2012			2011
Expense (income)
Currency transaction	$	8.4		$	(3.1	)	$	4.3		$	(0.9	)
Stock-based compensation		9.5			9.2			37.3			42.4
Pensions		17.8			17.6			53.7			54.6
Asset sales and writedowns		(1.6	)		.9			(2.9	)		(2.0	)
Other items, net		15.6			.2			17.2			5.7

	$	49.7		$	24.8		$	109.6		$	99.8

Included in Other items, net in the prior-year quarter and first nine months of fiscal 2011 was income of $14.6 million related to insurance recoveries.

CONSOLIDATED BALANCE SHEET


(dollars in millions)	March 31, 2012		June 30, 2011
Accounts receivable, net	$	2,061.5	$	1,977.9
Inventories		1,429.0		1,412.2
Notes payable		273.9		75.3
Shareholders’ equity		5,577.6		5,383.9
Noncontrolling interests		8.9		104.5
Working capital	$	2,008.0	$	1,914.2
Current ratio		1.81		1.80

Accounts receivable, net is primarily receivables due from customers for sales of product ($1,844 million at March 31, 2012 and $1,780 million at June 30, 2011). Days sales outstanding relating to trade accounts receivable was 50 days at March 31, 2012 and 48 days at June 30, 2011. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Inventories increased $17 million ($55 million excluding the effect of foreign currency translation of $38 million) primarily in the Industrial North American businesses and Aerospace Segment, in response to positive order trends. Days’ supply of inventory was 57 days at March 31, 2012 and 55 days at June 30, 2011.

Notes payable at March 31, 2012 included $225 million of long-term debt repayable within one year.

Shareholders’ equity activity during the first nine months of fiscal 2012 included a decrease of approximately $332 million related to share repurchases, a decrease of approximately $74 million related to the acquisition of the remaining ownership interest in two majority-owned subsidiaries, and a decrease of approximately $205 million related to foreign currency translation adjustments, primarily affecting Accounts receivable, Inventories, Plant and equipment, Goodwill, Intangible assets, Accounts payable, trade, Other accrued liabilities, and Long-term debt.

Noncontrolling interests decreased from June 30, 2011 primarily as a result of the Company’s purchase of outstanding shares not previously owned by the Company in two majority-owned subsidiaries.

- 21 -

CONSOLIDATED STATEMENT OF CASH FLOWS


	Nine months ended March 31,
(in millions)	2012			2011
Cash provided by (used in):
Operating activities	$	1,006.5		$	799.9
Investing activities		(185.9	)		(203.1	)
Financing activities		(590.8	)		(123.7	)
Effect of exchange rates		(113.8	)		59.3
Net increase in cash and cash equivalents	$	116.0		$	532.4

Cash flows from operating activities increased compared to the first nine months of fiscal 2011 primarily due to a lower amount of cash used for working capital needs, especially Accounts receivable and Inventory, as well as an increase in Net income. The Company continues to focus on managing its inventory and other working capital requirements. The Company made a $200 million voluntary contribution to its domestic qualified defined benefit pension plan during the first nine months of fiscal 2011.

Cash flows used in financing activities in fiscal 2012 included the repurchase of approximately 4.9 million common shares for $332 million as compared to the repurchase of approximately 0.7 million common shares for $56 million in the prior year. During the first nine months of fiscal 2012, the Company purchased the outstanding shares not previously owned by the Company in two majority- owned subsidiaries. Cash flow activities in the current-year include a borrowing and a repayment, each for 6 billion Japanese Yen (approximately $73 million), under the terms of separate credit facilities. Cash flow activities in the prior year included the issuance of $300 million aggregate principal amount of Medium-Term Notes and payments of approximately $257 million related to the Euro bonds which matured in November 2010.

The Company’s goal is to maintain no less than an “A” rating on senior debt to ensure availability and reasonable cost of external funds. As a means of achieving this objective, the Company has established a financial goal of maintaining a ratio of debt to debt-shareholders’ equity of no more than 37 percent.


(dollars in millions) Debt to Debt-Shareholders’ Equity Ratio	March 31, 2012			June 30, 2011
Debt	$	1,789		$	1,766
Debt & Shareholders’ equity	$	7,367		$	7,150
Ratio		24.3	%		24.7	%

The Company has a line of credit totaling $1,500 million through a multi-currency revolving credit agreement with a group of banks, of which $1,452 million was available as of March 31, 2012. The credit agreement expires in March 2016; however, the Company has the right to request a one-year extension of the expiration date on an annual basis, which request may result in changes to the current terms and conditions of the credit agreement. A portion of the credit agreement supports the Company’s commercial paper note program, which is rated A-1 by Standard & Poor’s, P-1 by Moody’s and F-1 by Fitch Ratings. These ratings are considered investment grade. The revolving credit agreement requires the payment of an annual facility fee, the amount of which would increase in the event the Company’s credit ratings are lowered. Although a lowering of the Company’s credit ratings would likely increase the cost of future debt, it would not limit the Company’s ability to use the credit agreement nor would it accelerate the repayment of any outstanding borrowings.

The Company is currently authorized to sell up to $1,350 million of short-term commercial paper notes. As of March 31, 2012, $48 million of commercial paper notes were outstanding and the largest amount of commercial paper notes outstanding during the third quarter of fiscal 2012 was $692 million.

- 22 -

During the current-year quarter, the Company entered into a five-year JPY (Japanese Yen) 6 billion credit facility. Based on the Company’s rating level at March 31, 2012, the credit facility bears interest of JPY LIBOR (reset semi-annually) plus 55 basis points. Interest is paid semi-annually and any principal borrowings are due to be repaid in March 2017. The Company borrowed the full JPY 6 billion during the current-year quarter, equivalent to approximately $73 million as of March 31, 2012, and used the funds to repay the balance due on the Company’s previous JPY credit facility.

The Company’s credit agreements and indentures governing certain debt agreements contain various covenants, the violation of which would limit or preclude the use of the credit agreements for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. Based on the Company’s rating level at March 31, 2012, the most restrictive financial covenant provides that the ratio of secured debt to net tangible assets be less than 10 percent. However, the Company currently does not have secured debt in its debt portfolio. The Company is in compliance with all covenants and expects to remain in compliance during the term of the credit agreements and indentures.

The Company’s principal sources of liquidity are its cash flows provided from operating activities and borrowings either from or directly supported by its line of credit. The Company’s ability to borrow has not been affected by a lack of general credit availability and the Company does not foresee any impediments to borrow funds at favorable interest rates in the near future. The Company expects that its ability to generate cash from its operations and ability to borrow directly from its line of credit or sources directly supported by its line of credit should be sufficient to support working capital needs, planned growth, repayment of maturing debt, benefit plan funding, dividend payments and share repurchases in the near term.

CRITICAL ACCOUNTING POLICIES

Impairment of Goodwill and Long-Lived Assets - Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. For the Company, a reporting unit is one level below the operating segment level. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistently estimated using a discounted cash flow model. The Company believes that the use of a discounted cash flow model results in the most accurate calculation of a reporting unit’s fair value because the market value for a reporting unit is not readily available. The discounted cash flow analysis requires several assumptions, including future sales growth and operating margin levels, as well as assumptions regarding future industry specific market conditions. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analyses. The Company has consistently used a discount rate commensurate with its cost of capital, adjusted for inherent business risks and has consistently used a terminal growth factor of 2.5 percent. The Company also reconciles the estimated aggregate fair value of its reporting units as derived from the discounted cash flow analyses to the Company’s overall market capitalization.

The results of the Company’s fiscal 2012 annual goodwill impairment test performed as of December 31, 2011 indicated that no goodwill impairment existed and all reporting units had an estimated fair value that the Company determined, from a quantitative or qualitative perspective, was significantly in excess of their carrying value.

The Company continually monitors its reporting units for impairment indicators and updates assumptions used in the most recent calculation of the fair value of a reporting unit as appropriate. The Company is unaware of any current market trends that are contrary to the assumptions made in the estimation of its reporting unit’s fair value. If the recovery of the current economic environment is not consistent with the Company’s current expectations, it is possible that the estimated fair value of certain reporting units could fall below their carrying value resulting in the necessity to conduct additional goodwill impairment tests.

Long-lived assets held for use, which primarily includes finite lived intangible assets and property, plant and equipment, 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

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disposition are less than their net carrying value. The long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test. During the first nine months of fiscal 2012, there were no events or circumstances that indicated that the net carrying value of the Company’s long-lived assets held for use was not recoverable.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 to the Consolidated Financial Statements for discussion of recently issued accounting pronouncements.

FORWARD-LOOKING STATEMENTS

Forward-looking statements contained in this and other written and oral reports are made based on known events and circumstances at the time of release, and as such, are subject in the future to unforeseen uncertainties and risks. All statements regarding future performance, earnings projections, events or developments are forward-looking statements. It is possible that the future performance and earnings projections of the Company, including its individual segments, may differ materially from current expectations, depending on economic conditions within its mobile, industrial and aerospace markets, and the Company’s ability to maintain and achieve anticipated benefits associated with announced realignment activities, strategic initiatives to improve operating margins, actions taken to combat the effects of the current economic environment, and growth, innovation and global diversification initiatives. A change in the economic conditions in individual markets may have a particularly volatile effect on segment performance.

Among other factors which may affect future performance are:

•

changes in business relationships with and purchases by or from major customers, suppliers or distributors, including delays or cancellations in shipments, disputes regarding contract terms or significant changes in financial condition, changes in contract cost and revenue estimates for new development programs, and changes in product mix,

•

ability to identify acceptable strategic acquisition targets,

•

uncertainties surrounding timing, successful completion or integration of acquisitions,

•

ability to realize anticipated cost savings from business realignment activities,

•

threats associated with and efforts to combat terrorism,

•

uncertainties surrounding the ultimate resolution of outstanding legal proceedings, including the outcome of any appeals,

•

competitive market conditions and resulting effects on sales and pricing,

•

increases in raw material costs that cannot be recovered in product pricing,

•

the Company’s ability to manage costs related to insurance and employee retirement and health care benefits, and

•

global economic factors, including manufacturing activity, air travel trends, currency exchange rates, difficulties entering new markets and general economic conditions such as inflation, deflation, interest rates and credit availability.

The Company makes these statements as of the date of this disclosure, and undertakes no obligation to update them unless otherwise required by law.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages foreign currency transaction and translation risk by utilizing derivative and non-derivative financial instruments, including forward exchange contracts, costless collar contracts and cross-currency swap contracts and certain foreign denominated debt designated as net investment hedges. 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.

Derivative financial instruments are recognized on the Consolidated Balance Sheet as either assets or liabilities and are measured at fair value. Further information on the fair value of these contracts is provided in Note 12 to the Consolidated Financial Statements. Gains or losses on derivatives that are not hedges are adjusted to fair value through 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 translation of the foreign denominated debt that has been designated as a net investment hedge is recorded in accumulated other comprehensive income (loss) and remains there until the underlying net investment is sold or substantially liquidated.

The Company’s debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. The Company’s objective is to maintain a 60/40 mix between fixed rate and variable rate debt thereby limiting its exposure to changes in near-term interest rates.

ITEM 4.

CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the third quarter of fiscal 2012. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PARKER-HANNIFIN CORPORATION

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings. Parker ITR S.r.l. (Parker ITR), a subsidiary acquired on January 31, 2002, has been the subject of a number of lawsuits and regulatory investigations. The lawsuits and investigations relate to allegations that for a period of up to 21 years, the Parker ITR business unit that manufactures and sells marine hose, typically used in oil transfer, conspired with competitors in unreasonable restraint of trade to artificially raise, fix, maintain or stabilize prices, rig bids and allocate markets and customers for marine oil and gas hose in the United States and in other jurisdictions. Parker ITR and the Company have cooperated with all of the regulatory authorities investigating the activities of the Parker ITR business unit that manufactures and sells marine hose and continue to cooperate with the investigations that remain ongoing. Several of the investigations and all but one of the lawsuits have concluded. The following investigations and lawsuit remain pending.

Brazilian competition authorities commenced their investigations on November 14, 2007. Parker ITR filed a procedural defense in January 2008. The Brazilian authorities appear to be investigating the period from 1999 through May 2007. In June 2011, the Brazilian competition authorities issued a report and Parker ITR filed a response to that report. The potential outcome of the investigation in Brazil is uncertain and will depend on the resolution of numerous issues not known at this stage of the investigation.

On May 15, 2007, the European Commission issued its initial Request for Information to the Company and Parker ITR. On January 28, 2009, the European Commission announced the results of its investigation of the alleged cartel activities. As part of its decision, the European Commission found that Parker ITR infringed Article 81 of the European Commission treaty from April 1986 to May 2, 2007 and fined Parker ITR 25.61 million euros. The European Commission also determined that the Company was jointly and severally responsible for 8.32 million euros of the total fine which related to the period from January 2002, when the Company acquired Parker ITR, to May 2, 2007, when the cartel activities ceased. Parker ITR and the Company filed an appeal to the Court of First Instance of the European Communities on April 10, 2009.

A lawsuit was filed against the Company and Parker ITR on May 25, 2010 under the False Claims Act in the Central District of California: The United States of America ex rel. Douglas Farrow v. Trelleborg, AB et al. The United States declined to intervene against the Company or Parker ITR in the case. Plaintiff generally seeks treble damages, penalties for each false claim and attorneys’ fees. The court dismissed the complaint with prejudice as to the Company, but it remains pending against Parker ITR.

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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)

Unregistered Sales of Equity Securities. Not applicable.

(b)

Use of Proceeds. Not applicable.

(c)

Issuer Purchases of Equity Securities.


Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2012 through January 31, 2012		79,800	$	80.41		79,800		10,376,473
February 1, 2012 through February 29, 2012		75,300	$	86.62		75,300		10,301,173
March 1, 2012 through March 31, 2012		79,946	$	88.26		79,946		10,221,227
Total:		235,046	$	85.07		235,046		10,221,227

(1)

On August 16, 1990, the Company publicly announced that its Board of Directors authorized the repurchase by the Company of up to 3.0 million shares of its common stock. From time to time, the Board of Directors has adjusted the number of shares authorized for repurchase under this program. On August 3, 2011, the Board of Directors of the Company approved an increase in the number of shares authorized for repurchase under this program so that, beginning on such date, the aggregate number of shares authorized for repurchase was equal to 15 million. Subject to this overall limitation, each fiscal year the Company is authorized to repurchase an amount of common shares equal to the greater of 7.5 million shares or five percent of the shares outstanding as of the end of the prior fiscal year. On April 19, 2012, the Board of Directors of the Company modified the repurchase program such that for the fourth quarter of fiscal year 2012 the fiscal year limitation was eliminated and the number of shares authorized for repurchase under the program was increased to up to 16 million, exclusive of any shares previously repurchased under the program during fiscal year 2012. There is no expiration date for this program.

ITEM 6. Exhibits.

The following documents are furnished as exhibits and are numbered pursuant to Item 601 of Regulation S-K:


Exhibit No.		Description of Exhibit

10(a)		Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan.*

12		Computation of Ratio of Earnings to Fixed Charges as of March 31, 2012.*

31(i)(a)		Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*

31(i)(b)		Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*

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32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. *

101.INS		XBRL Instance Document.*

101.SCH		XBRL Taxonomy Extension Schema Document.*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

*	Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Income for the three months ended March 31, 2012 and 2011, (ii) Consolidated Statement of Income for the nine months ended March 31, 2012 and 2011, (iii) Consolidated Balance Sheet at March 31, 2012 and June 30, 2011, (iv) Consolidated Statement of Cash Flows for the nine months ended March 31, 2012 and 2011 and (v) Notes to Consolidated Financial Statements for the nine months ended March 31, 2012.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PARKER-HANNIFIN CORPORATION

(Registrant)

/s/ Jon P. Marten

Jon P. Marten

Executive Vice President - Finance and Administration and Chief Financial Officer

Date: May 9, 2012

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EXHIBIT INDEX


Exhibit No.		Description of Exhibit

10(a)		Parker-Hannifin Corporation Long-Term Incentive Performance Plan Under the Performance Bonus Plan.*

12		Computation of Ratio of Earnings to Fixed Charges as of March 31, 2012.*

31(i)(a)		Certification of the Principal Executive Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*

31(i)(b)		Certification of the Principal Financial Officer Pursuant to 17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002.*

32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002. *

101.INS		XBRL Instance Document.*

101.SCH		XBRL Taxonomy Extension Schema Document.*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

*	Submitted electronically herewith.