10.

Retirement Benefits

Pensions - The Company has noncontributory defined benefit pension plans covering eligible employees, including certain employees in foreign countries. Plans for most salaried employees provide pay-related benefits based on years of service. Plans for hourly employees generally provide benefits based on flat-dollar amounts and years of service. The Company also has arrangements for certain key employees which provide for supplemental retirement benefits. In general, the Company’s policy is to fund these plans based on legal requirements, tax considerations, local practices and investment opportunities. The Company also sponsors defined contribution plans and participates in government-sponsored programs in certain foreign countries.

A summary of the Company’s defined benefit pension plans follows:


	2011			2010			2009
Benefit cost
Service cost	$	87,676		$	70,977		$	71,187
Interest cost		176,081			178,562			172,321
Expected return on plan assets		(200,303	)		(177,559	)		(186,417	)
Amortization of prior service cost		12,636			13,974			11,787
Amortization of unrecognized actuarial loss		109,436			65,823			31,507
Amortization of initial net (asset)		(63	)		(55	)		(53	)

Net periodic benefit cost	$	185,463		$	151,722		$	100,332


	2011			2010
Change in benefit obligation
Benefit obligation at beginning of year	$	3,430,835		$	2,952,297
Service cost		87,676			70,977
Interest cost		176,081			178,562
Actuarial (gain) loss		(101,806	)		440,941
Benefits paid		(146,779	)		(150,176	)
Plan amendments		9,735			11,902
Foreign currency translation and other		113,818			(73,668	)

Benefit obligation at end of year	$	3,569,560		$	3,430,835

Change in plan assets
Fair value of plan assets at beginning of year	$	2,020,186		$	1,807,479
Actual gain on plan assets		384,848			261,820
Employer contributions		461,243			153,291
Benefits paid		(146,779	)		(150,176	)
Foreign currency translation and other		78,919			(52,228	)

Fair value of plan assets at end of year	$	2,798,417		$	2,020,186

Funded status	$	(771,143	)	$	(1,410,649	)


	2011			2010
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities	$	(14,815	)	$	(12,866	)
Pensions and other postretirement benefits		(756,328	)		(1,397,783	)

Net amount recognized	$	(771,143	)	$	(1,410,649	)

Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss	$	1,133,411		$	1,496,209
Prior service cost		69,337			70,810
Transition obligation		161			105

Net amount recognized	$	1,202,909		$	1,567,124

The presentation of the amounts recognized on the Consolidated Balance Sheet and in Accumulated Other Comprehensive (Loss) is on a debit (credit) basis and excludes the effect of income taxes.

The estimated amount of net actuarial loss, prior service cost and transition asset that will be amortized from accumulated other comprehensive (loss) into net periodic benefit pension cost in 2012 is $102,182, $13,877 and $66, respectively.

The accumulated benefit obligation for all defined benefit plans was $3,219,403 and $3,096,603 at June 30, 2011 and 2010, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $3,119,540, $2,798,701 and $2,353,730, respectively, at June 30, 2011, and $3,401,504, $3,072,016 and $1,991,174, respectively, at June 30, 2010. The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $3,557,563 and $2,783,349, respectively, at June 30, 2011, and $3,420,234 and $2,007,629, respectively, at June 30, 2010.

The Company expects to make cash contributions of approximately $67 million to its defined benefit pension plans in 2012, the majority of which relate to non-U.S. defined benefit plans. Estimated future benefit payments in the five years ending June 30, 2012 through 2016 are $153,694, $199,048, $164,605, $176,455 and $190,524, respectively and $1,177,675 in the aggregate for the five years ending June 30, 2017 through June 30, 2021.

The assumptions used to measure net periodic benefit cost for the Company’s significant defined benefit plans are:


	2011			2010			2009
U.S. defined benefit plans
Discount rate		5.3	%		6.25	%		6.8	%
Average increase in compensation		5.21	%		4.34	%		4.7	%
Expected return on plan assets		8.5	%		8.5	%		8.5	%
Non-U.S. defined benefit plans
Discount rate		1.75 to 6.0	%		2.0 to 6.78	%		2.25 to 6.9	%
Average increase in compensation		2.0 to 4.5	%		2.0 to 4.7	%		1.0 to 4.25	%
Expected return on plan assets		1.0 to 8.0	%		1.0 to 8.0	%		1.0 to 8.0	%

The assumptions used to measure the benefit obligation for the Company’s significant defined benefit plans are:


	2011			2010
U.S. defined benefit plans
Discount rate		5.45	%		5.3	%
Average increase in compensation		5.21	%		5.21	%
Non-U.S. defined benefit plans
Discount rate		2.0 to 5.87	%		1.75 to 6.0	%
Average increase in compensation		2.0 to 5.0	%		2.0 to 4.5	%

The discount rate assumption is based on current rates of high-quality long-term corporate bonds over the same estimated time period that benefit payments will be required to be made. The expected return on plan assets assumption is based on the weighted-average expected return of the various asset classes in the plans’ portfolio. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance.

The weighted-average allocation of the majority of the assets related to defined benefit plans is as follows:


	2011			2010
Equity securities		59	%		56	%
Debt securities		33	%		37	%
Other		8	%		7	%

		100	%		100	%

The weighted-average target asset allocation as of June 30, 2011 is 55 percent equity securities, 39 percent debt securities and 6 percent other. The investment strategy for the Company’s worldwide defined benefit pension plan assets focuses on achieving prudent actuarial funding ratios while maintaining acceptable levels of risk in order to provide adequate liquidity to meet immediate and future benefit requirements. This strategy requires an investment portfolio that is broadly diversified across various asset classes and external investment managers. Assets held in the U.S. defined benefit plans account for approximately 75 percent of the Company’s total defined benefit plan assets. The Company’s overall investment strategy with respect to the Company’s U.S. defined benefit plans is to opportunistically migrate from its current mix between growth seeking assets (primarily consisting of global public equities in developed and emerging countries and hedge fund of fund strategies) and income generating assets (primarily consisting of high quality bonds, both domestic and global, emerging market bonds, high yield bonds and Treasury Inflation Protected Securities) to an allocation more heavily weighted toward income generating assets. Over time, long duration fixed income assets will be added to the portfolio. These securities will be highly correlated with the Company’s pension liabilities and will serve to hedge a portion of the Company’s interest rate risk.

The fair values of pension plan assets at June 30, 2011 and at June 30, 2010, by asset class, are as follows:

Total

Quoted Prices
In Active
Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Cash and cash equivalents

112,080

58,511

53,569

Equity securities

665,107

Fixed income securities

Corporate bonds

120,136

Government issued securities

137,618

79,536

58,082

Mutual funds

Equity funds

220,312

219,816

496

Fixed income funds

138,314

135,620

2,694

Common/Collective trusts

Equity funds

766,847

Fixed income funds

513,365

Limited Partnerships

128,470

Miscellaneous

(3,832

)

(3,920

)

Total at June 30, 2011

2,798,417

1,158,678

1,639,739


	Total		Quoted Prices In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	74,302	$	74,302	$		$
Equity securities		605,067		605,067
Fixed income securities
Corporate bonds		116,571				116,571
Government issued securities		130,070				130,070
Mutual funds
Equity funds		10,370				10,370
Fixed income funds		131,777				131,777
Common/Collective trusts
Equity funds		613,246				613,246
Fixed income funds		245,229				245,229
Limited Partnerships		68,648				68,648
Miscellaneous		24,906				24,906

Total at June 30, 2010	$	2,020,186	$	679,369	$	1,340,817	$

Cash and cash equivalents, which include repurchase agreements and other short-term investments, are valued at cost, which approximates fair value.

Equity securities consist of common stock of both U.S. and foreign corporations and are valued at the closing price reported on the active market on which the individual securities are traded. Equity securities include Company stock with a fair value of $119,856 as of June 30, 2011 and $74,000 as of June 30, 2010.

Fixed income securities are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded.

Mutual funds are valued using both the closing market price reported on the active market on which the fund is traded and market observable inputs for similar assets that are traded on an active market and primarily consist of equity and fixed income funds. The equity funds primarily provide exposure to U.S. and international equities and fixed income securities, real estate and commodities. The fixed income funds primarily provide exposure to high-yield securities and emerging market fixed income instruments.

Common/Collective trusts primarily consist of equity and fixed income funds and are valued using a net asset value per share. Common/Collective trust investments can be redeemed daily and without restriction. Redemption of the entire investment balance generally requires a 30-day notice period. The equity funds provide exposure to large, mid and small cap U.S. equities, international large and small cap equities and emerging market equities. The fixed income fund provides exposure to U.S., international and emerging market debt securities.

Limited Partnerships primarily consist of small cap equity and hedge funds and are valued using a net asset value per share. Limited Partnership investments can be redeemed daily and without restriction. Redemption of the entire investment balance generally requires a 30-day notice period. Small cap equity funds provide exposure to domestic small cap equities and hedge funds provide exposure to a variety of hedging strategies including long/short equity, relative value, event driven and global macro.

Miscellaneous primarily includes net payables for securities purchased but not settled in the asset portfolio of the Company’s U.S. defined benefit pension plans and insurance contracts held in the asset portfolio of the Company’s non-U.S. defined benefit pension plans. Insurance contracts are valued at the present value of future cash flows promised under the terms of the insurance contracts.

The primary investment objective of equity securities and equity funds, within both the mutual fund and common/collective trust asset class, is to obtain capital appreciation in an amount that at least equals various market-based benchmarks. The primary investment objective of fixed income securities and fixed income funds, within both the mutual fund and common/collective trust asset class, is to provide for a constant stream of income while preserving capital. The primary investment objective of limited partnerships is to achieve capital appreciation through an investment program focused on specialized investment strategies. The primary investment objective of insurance contracts, included in the miscellaneous asset class, is to provide a stable rate of return over a specified period of time.

Employee Savings Plan - The Company sponsors an employee stock ownership plan (ESOP) as part of its existing savings and investment 401(k) plan. The ESOP is available to eligible domestic employees. Parker Hannifin common stock is used to match contributions made by employees to the ESOP up to a maximum of 4.0 percent of an employee’s annual compensation.


	2011		2010		2009
Shares held by ESOP		10,308,032		10,950,349		11,189,598
Company contributions to ESOP	$	52,627	$	48,336	$	51,593

Company contributions to the ESOP are generally made in the form of cash and are recorded as compensation expense. In 2010 and 2009, in lieu of cash, the Company issued 510,984 and 49,422 of its common shares, respectively, out of treasury for the matching contribution.

The Company has a retirement income account (RIA) within the employee savings plan. The Company makes a contribution to the participant’s RIA account each year, the amount of which is based on the participant’s age and years of service. Participants do not contribute to the RIA. The Company recognized $16,844, $12,598 and $14,489 in expense related to the RIA in 2011, 2010 and 2009, respectively.

In addition to shares within the ESOP, as of June 30, 2011, employees have elected to invest in 3,297,412 shares of common stock within the Company Stock Fund of the Parker Retirement Savings Plan.

Other Postretirement Benefits - The Company provides postretirement medical and life insurance benefits to certain retirees and eligible dependents. Most plans are contributory, with retiree contributions adjusted annually. The plans are unfunded and pay stated percentages of covered medically necessary expenses incurred by retirees, after subtracting payments by Medicare or other providers and after stated deductibles have been met. For most plans, the Company has established cost maximums to more effectively control future medical costs. The Company has reserved the right to change these benefit plans.

Certain employees are covered under benefit provisions that include prescription drug coverage for Medicare eligible retirees. The impact of the subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on the Company’s other postretirement benefits was immaterial.

A summary of the Company’s other postretirement benefit plans follows:


	2011			2010			2009
Benefit cost
Service cost	$	675		$	545		$	1,034
Interest cost		3,579			3,920			5,193
Net amortization and deferral		524			(461	)		(753	)

Net periodic benefit cost	$	4,778		$	4,004		$	5,474


				2011			2010
Change in benefit obligation
Benefit obligation at beginning of year				$	69,868		$	64,434
Service cost					675			545
Interest cost					3,579			3,920
Actuarial loss					5,002			8,689
Benefits paid					(5,985	)		(7,720	)

Benefit obligation at end of year				$	73,139		$	69,868

Funded status				$	(73,139	)	$	(69,868	)

	2011			2010
Amounts recognized on the Consolidated Balance Sheet
Other accrued liabilities	$	(5,670	)	$	(5,176	)
Pensions and other postretirement benefits		(67,469	)		(64,692	)

Net amount recognized	$	(73,139	)	$	(69,868	)

Amounts recognized in Accumulated Other Comprehensive (Loss)
Net actuarial loss	$	10,324		$	5,870
Prior service (credit)		(1,068	)		(1,113	)

Net amount recognized	$	9,256		$	4,757

The presentation of the amounts recognized on the Consolidated Balance Sheet and in Accumulated Other Comprehensive (Loss) is on a debit (credit) basis and is before the effect of income taxes. The amount of prior service (credit) and net actuarial loss that will be amortized from accumulated other comprehensive (loss) into net periodic postretirement cost in 2012 is $45 and $624, respectively.

Historically, the Company has provided self-insured retiree medical plan benefits for non-union employees upon their retirement. The retiree was responsible for paying the premiums for the medical coverage but the Company paid the costs of administering the plans (i.e., claims processing costs). Absorbing the administration costs was considered a benefit under the postretirement benefit accounting rules as the employees who elected to enroll in the retiree medical plans paid a lower premium since the Company was paying the costs to administer the plan. In 2009, the Company discontinued its self-insured retiree medical plans for non-union employees and therefore eliminated the cost associated with administering the plans. The Company recognized $22.4 million in income in 2009 as a result of eliminating the liability related to this benefit.

The assumptions used to measure the net periodic benefit cost for postretirement benefit obligations are:


	2011			2010			2009
Discount rate		5.01	%		6.1	%		6.71	%
Current medical cost trend rate		8.0	%		8.5	%		9.25	%
Ultimate medical cost trend rate		5.0	%		5.0	%		5.0	%
Medical cost trend rate decreases to ultimate in year		2018			2018			2014

The discount rate assumption used to measure the benefit obligation was 5.0 percent in 2011 and 5.01 percent in 2010.

Estimated future benefit payments for other postretirement benefits in the five years ending June 30, 2012 through 2016 are $5,686, $5,840, $5,940, $6,027 and $5,820, respectively, and $27,099 in the aggregate for the five years ending June 30, 2017 through June 30, 2021.

A one percentage point change in assumed health care cost trend rates would have the following effects:


	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	218	$	(188	)
Effect on postretirement benefit obligation		3,381		(2,932	)

Other - The Company has established nonqualified deferred compensation programs, which permit officers, directors and certain management employees annually to elect to defer a portion of their compensation, on a pre-tax basis, until their retirement. The retirement benefit to be provided is based on the amount of compensation deferred, Company match, and earnings on the deferrals. During 2011, 2010 and 2009, the Company recorded expense (income) relating to deferred compensation of $28,720, $21,553 and $(27,167), respectively.

The Company has invested in corporate-owned life insurance policies to assist in meeting the obligation under these programs. The policies are held in a rabbi trust and are recorded as assets of the Company.