##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 2007
 Commission File No. 001-33453
 
 PEERLESS MFG. CO.
  Texas
    
    75-0724417(State of incorporation)
    
    (I.R.S. employer identification no.)
 14651 North Dallas Parkway, Suite 500, Dallas, Texas 75254   (214) 357-6181
  (Title of Class)
    
    (Name of each exchange where registered)Common Stock, $1.00 par value per share
    
    The NASDAQ Stock Market LLCCommon Share Purchase Right
    
    The NASDAQ Stock Market LLC
 None
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



PageForward Looking Statements
    
    
    3PART I
    
    
    4Item 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    14Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART II
    
    
    15Item 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    16Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 8. Financial Statements and Supplementary Data
    
    
    29Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    60Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    61PART III
    
    
    62Item 10. Directors, Executive Officers and Corporate Governance
    
    
    62Item 11. Executive Compensation
    
    
    62Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
    
    
    62Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    62Item 14. Principal Accountant Fees and Services
    
    
    63PART IV
    
    
    63Item 15. Exhibits and Financial Statement Schedules
    
    
    63Signatures
    
    
    64Index to Exhibits
    
    
    65Form of Director and Officer Indemnification AgreementSubsidiariesConsent of Grant Thornton LLPPowers of Attorney for Directors and Certain Executive OfficersRule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOSection 1350 Certification of CEOSection 1350 Certification of CFO




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FORWARD-LOOKING STATEMENTS
  
    
    changes in the power generation industry, the petroleum industry and/or the economy;
    
    changes in the price, supply or demand for natural gas;
    
    changes in current environmental legislation;
    
    increased competition;
    
    changes in our ability to conduct business outside the United States, including changes
in foreign laws and regulations;
    
    decreased demand for our products;
    
    the effects of U.S. involvement in hostilities with other countries and large-scale acts
of terrorism, or the threat of hostilities or terrorist acts;
    
    the effects of natural disasters; and
    
    loss of the services of any of our senior management or other key employees.
  3




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PART I
 
 ITEM 1. BUSINESS.
 General
 As used in this Report, references to the Company, the Registrant, we, us and our refers
to the consolidated business operations of Peerless Mfg. Co. and its subsidiaries, unless the
context indicates otherwise.
  www.peerlessmfg.com
  Operating Segments and Products
   4




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Patents, Licenses and Product Development
   Manufacturing and Outsourcing
   5




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Raw Materials
  Customers
       Backlog
  6




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Competition
  Environmental Regulation
  Employees
  Executive Officers of the Registrant
  Name
    
    Age
    
    Position with the CompanyPeter J. Burlage
    
    
    43
    
    
    Chief Executive OfficerSean P. McMenamin
    
    
    42
    
    
    Vice President, Environmental SystemsHenry G. Schopfer, III
    
    
    60
    
    
    Chief Financial OfficerJon P. Segelhorst
    
    
    37
    
    
    Vice President, Pressure ProductsDavid Taylor
    
    
    42
    
    
    Vice President, Separation Systems and Asia Pacific Operations
   7




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##### Table of Contents



ITEM 1A. RISK FACTORS.
  Changes in the price, supply or demand for natural gas could have an adverse impact on our
sales of Separation Filtration Systems and our operating results.
  Changes in the power generation industry could have an adverse impact on sales of our Environmental
Systems and our operating results.
  8




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Changes in current environmental legislation could have an adverse impact on the sale of our
Environmental Systems and on our operating results.
  Competition could result in lower sales and decreased margins.
  If actual costs for our projects with fixed-price contracts exceed our original estimates, our
profits will be reduced or we may suffer losses.
  
    
    increases in cost or shortages of components, materials or labor;
    
    unanticipated technical problems;
    
    required project modifications not initiated by the customer; and
    
    suppliers or subcontractors failure to perform.
  Customers may cancel or delay projects. As a result, our backlog may not be indicative of our
future revenue.
  9




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Our ability to conduct business outside the United States may be adversely affected by factors
outside of our control and our revenues and profits from international sales could be adversely
impacted.
  Our financial performance may vary significantly from period to period, making it difficult to
estimate future revenue.
  Changes in our product mix can have a significant impact on our profit margins.
  Our products are covered by warranties. Unanticipated warranty costs for defective products
could adversely affect our financial condition and results of operations and reputation.
  10




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Product liability claims not covered by insurance could adversely affect our financial
condition and results of operations.
  A significant portion of our accounts receivable are related to large contracts from customers
in the same industry, which increases our exposure to credit risk.
  Changes in billing terms can increase our exposure to working capital and credit risk.
  The terms and conditions of our credit facility impose restrictions on our operations,
including restrictions on our ability to raise additional capital, if needed.
   11




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Our business is subject to risks of terrorist acts, acts of war and natural disasters.
  The inability of our engineering and/or manufacturing operations to sufficiently scale up
operations in response to unexpected spikes in orders with short cycle times directly impacts our
ability to absorb our manufacturing overhead expense.
  Our ability to operate effectively could be impaired if we fail to attract and retain key
personnel.
  Our customers may require us to perform portions of our projects in their local countries.
  The implementation of enterprise resource planning software will require substantial resources and
could initially have a negative impact on our manufacturing capabilities.
  Our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of
2002 may be inadequate.
  12




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Our common stock is thinly traded, which may make it difficult to sell our common stock and
may make our stock price more volatile.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  13




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ITEM 2. PROPERTIES.
  ApproximateLocation
    
    Sq. Footage
    
    General UseOwned:Abilene, Texas
    
    
    78,000
    
    
    Manufacturing  Environmental products and Separation Filtration productsDenton, Texas
    
    
    22,000
    
    
    Manufacturing   Separation Filtration productsLeased:Dallas, Texas
    
    
    26,886
    
    
    Corporate officeDallas, Texas
    
    
    7,560
    
    
    Research and developmentDenton, Texas
    
    
    16,000
    
    
    Manufacturing  Separation Filtration productsEssex, U.K.
    
    
    4,090
    
    
    Sales, engineering and administration officeSingapore
    
    
    2,300
    
    
    Sales, engineering and administration office
   
 ITEM 3. LEGAL PROCEEDINGS
   14




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 Unless otherwise indicated, the share, per share and dividend per share information reflected in
this report have been adjusted to reflect the Registrants two-for-one stock split in the form of a
stock dividend in June 2007.
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 .
 Fiscal Year
    
    
    
    High
    
    Low2006
    
    
    First Quarter
    
    $
    9.53
    
    
    $
    7.06Second Quarter
    
    
    8.75
    
    
    
    7.56Third Quarter
    
    
    9.88
    
    
    
    7.96Fourth Quarter
    
    
    11.98
    
    
    
    9.202007
    
    
    First Quarter
    
    $
    13.30
    
    
    $
    10.11Second Quarter
    
    
    13.41
    
    
    
    11.03Third Quarter
    
    
    16.25
    
    
    
    11.48Fourth Quarter
    
    
    22.27
    
    
    
    15.42
  15




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ITEM 6. SELECTED FINANCIAL DATA
  Year ended June 30,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Amounts in thousands, except per share amounts)Operating results:Revenues
    
    $
    75,141
    
    
    $
    63,411
    
    
    $
    51,063
    
    
    $
    59,761
    
    
    $
    64,854Cost of goods sold
    
    
    51,343
    
    
    
    45,978
    
    
    
    37,356
    
    
    
    40,959
    
    
    
    47,842Gross profit
    
    
    23,798
    
    
    
    17,433
    
    
    
    13,707
    
    
    
    18,802
    
    
    
    17,012Operating expenses
    
    
    15,547
    
    
    
    16,687
    
    
    
    14,409
    
    
    
    14,929
    
    
    
    16,429Operating income (loss)
    
    
    8,251
    
    
    
    746
    
    
    
    (702
    )
    
    
    3,873
    
    
    
    583Other income (expense)
    
    
    589
    
    
    
    455
    
    
    
    63
    
    
    
    (24
    )
    
    
    727Income tax benefit (expense)
    
    
    (2,928
    )
    
    
    (660
    )
    
    
    113
    
    
    
    (1,447
    )
    
    
    (399
    )Net earnings (loss) from continuing operations
    
    
    5,912
    
    
    
    541
    
    
    
    (526
    )
    
    
    2,402
    
    
    
    911Net loss from discontinued operations
    
    
    
    
    
    
    (115
    )
    
    
    (66
    )
    
    
    (364
    )
    
    
    (1,290
    )Net earnings (loss)
    
    $
    5,912
    
    
    $
    426
    
    
    $
    (592
    )
    
    $
    2,038
    
    
    $
    (379
    )Diluted earnings (loss) per shareEarnings (loss) from continuing operations
    
    $
    0.92
    
    
    $
    0.09
    
    
    $
    (0.09
    )
    
    $
    0.39
    
    
    $
    0.15Loss from discontinued operations
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.21
    )Earnings (loss)
    
    $
    0.92
    
    
    $
    0.07
    
    
    $
    (0.10
    )
    
    $
    0.33
    
    
    $
    (0.06
    )Weighted average shares outstanding:Diluted
    
    
    6,427
    
    
    
    6,269
    
    
    
    6,057
    
    
    
    6,088
    
    
    
    6,026(Certain earnings per share amounts may not total due to rounding.)
 As of June 30,2007
    
    2006
    
    2005
    
    2004
    
    2003(Amounts in thousands)Financial position:Working capital
    
    $
    30,622
    
    
    $
    22,930
    
    
    $
    20,272
    
    
    $
    20,529
    
    
    $
    17,771Current assets
    
    
    64,106
    
    
    
    45,172
    
    
    
    35,696
    
    
    
    35,331
    
    
    
    39,223Total assets
    
    
    68,671
    
    
    
    48,159
    
    
    
    39,804
    
    
    
    39,475
    
    
    
    43,763Current liabilities
    
    
    33,484
    
    
    
    22,242
    
    
    
    15,424
    
    
    
    14,802
    
    
    
    21,452Total liabilities
    
    
    35,134
    
    
    
    22,242
    
    
    
    15,514
    
    
    
    14,802
    
    
    
    21,452Shareholders equity
    
    
    33,537
    
    
    
    25,917
    
    
    
    24,290
    
    
    
    24,673
    
    
    
    22,311
 16




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Results of Operations
  Year ended June 30,2007
    
    2006
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    68.3
    
    
    
    72.5
    
    
    
    73.2Gross profit
    
    
    31.7
    
    
    
    27.5
    
    
    
    26.8Operating expenses
    
    
    20.7
    
    
    
    26.3
    
    
    
    28.2Operating income (loss)
    
    
    11.0
    
    
    
    1.2
    
    
    
    (1.4
    )Other income
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.1Earnings (loss) from continuing
operations before income taxes
    
    
    11.8
    
    
    
    1.9
    
    
    
    (1.3
    )Income tax (expense) benefit
    
    
    (3.9
    )
    
    
    (1.0
    )
    
    
    0.2Net earnings (loss) from continuing operations
    
    
    7.9
    
    
    
    0.9
    
    
    
    (1.1
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.1
    )Net earnings (loss)
    
    
    7.9
    %
    
    
    0.7
    %
    
    
    (1.2
    )%
      17




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Results of Operations  Consolidated
 Revenues . (dollars in thousands)
 Year ended June 30,2007
    
    
    % of Total
    
    
    2006
    
    
    % of Total
    
    
    2005
    
    
    % of TotalDomestic
    
    $
    47,080
    
    
    
    62.7
    %
    
    $
    32,513
    
    
    
    51.3
    %
    
    $
    30,248
    
    
    
    59.3
    %International
    
    
    28,061
    
    
    
    37.3
    %
    
    
    30,898
    
    
    
    48.7
    %
    
    
    20,815
    
    
    
    40.7
    %Total
    
    $
    75,141
    
    
    
    100.0
    %
    
    $
    63,411
    
    
    
    100.0
    %
    
    $
    51,063
    
    
    
    100.0
    %
    Gross Profit . (dollars in thousands)
 Year ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    2005
    
    
    RevenuesRevenues
    
    $
    75,141
    
    
    
    100.0
    %
    
    $
    63,411
    
    
    
    100.0
    %
    
    $
    51,063
    
    
    
    100.0
    %Cost of goods sold
    
    
    51,343
    
    
    
    68.3
    %
    
    
    45,978
    
    
    
    72.5
    %
    
    
    37,356
    
    
    
    73.2
    %Gross profit
    
    $
    23,798
    
    
    
    31.7
    %
    
    $
    17,433
    
    
    
    27.5
    %
    
    $
    13,707
    
    
    
    26.8
    %
   18




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Operating Expenses. (dollars in
thousands)
 Year ended June 30,% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    2005
    
    
    RevenuesSales and marketing
    
    $
    8,127
    
    
    
    10.8
    %
    
    $
    6,645
    
    
    
    10.5
    %
    
    $
    6,031
    
    
    
    11.8
    %Engineering and project management
    
    
    4,094
    
    
    
    5.5
    %
    
    
    3,480
    
    
    
    5.5
    %
    
    
    3,608
    
    
    
    7.1
    %General and administrative
    
    
    6,827
    
    
    
    9.1
    %
    
    
    6,562
    
    
    
    10.3
    %
    
    
    4,770
    
    
    
    9.3
    %Gain on sale
of property
    
    
    (3,501
    )
    
    
    (4.7
    )%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    15,547
    
    
    
    20.7
    %
    
    $
    16,687
    
    
    
    26.3
    %
    
    $
    14,409
    
    
    
    28.2
    %
   Other Income and Expense (dollars in thousands)
  19




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Income Taxes (dollars in thousands)
  Net Earnings (Loss) from Continuing Operations (dollars in thousands, except per share
amounts)
   Discontinued Operations (dollars in thousands, except per share amounts)
   Net Earnings (Loss) (dollars in thousands, except per share amounts)
   20




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Results of Operations  Segments
  Separation Filtration Systems
  (dollars in thousands)
 Year ended June 30,2007
    
    2006
    
    2005Revenue
    
    $
    47,256
    
    
    $
    43,644
    
    
    $
    30,472Operating income
    
    $
    6,609
    
    
    $
    5,253
    
    
    $
    1,759Operating income as % of revenue
    
    
    14.0
    %
    
    
    12.0
    %
    
    
    5.8
    %
   Environmental Systems
  21




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(dollars in thousands)
 Year ended June 30,2007
    
    2006
    
    2005Revenue
    
    $
    27,885
    
    
    $
    19,767
    
    
    $
    20,591Operating income
    
    $
    4,968
    
    
    $
    2,055
    
    
    $
    2,309Operating income as % of revenue
    
    
    17.8
    %
    
    
    10.4
    %
    
    
    11.2
    %
   Corporate Level Expenses
 (dollars in thousands)
 Year ended June 30,2007
    
    2006
    
    2005Corporate
level expenses (excluding the gain on sale of property of $3,501)
    
    $
    6,827
    
    
    $
    6,562
    
    
    $
    4,770
  Market Outlook
 Separation Filtration Systems
 Environmental Systems
 22




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Contingencies
   Backlog
  Financial Position (dollars in thousands)
 Assets
 Liabilities and Shareholders Equity
 23




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Liquidity and Capital Resources (dollars in thousands)
        24




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Off-Balance Sheet Arrangements
  Aggregate Contractual Obligations (dollars in thousands)
  Payments Due by PeriodLess Than
    
    
    1 to 3
    
    
    3 to 5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating lease obligations
    
    $
    5,302
    
    
    $
    731
    
    
    $
    1,271
    
    
    $
    1,102
    
    
    $
    2,198Purchase obligations (1)
    
    
    44,293
    
    
    
    44,293
    
    
    
    
    
    
    
    
    
    
    
    Stand-by letters of credit (2)
    
    
    9,249
    
    
    
    6,602
    
    
    
    2,507
    
    
    
    140
    
    
    
    Total contractual obligations
    
    $
    58,844
    
    
    $
    51,626
    
    
    $
    3,778
    
    
    $
    1,242
    
    
    $
    2,198
 
 1)
    
    Purchase obligations in the table above represent the value of open purchase
orders as of June 30, 2007. We believe that some of these obligations could be canceled
for payment of a nominal penalty, or no penalty. However, the amount of open purchase
orders that could be canceled in this manner is difficult to quantify. In addition, we
generally have contracts with our customers that minimize our exposure to losses for
materials purchased within lead-times necessary to meet customer forecasts.2)
    
    The stand-by letters of credit includes $5,379 issued under our $9,000 revolving
credit facility and $3,870 outstanding under the debenture agreement in the U.K. Critical Accounting Policies
   25




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Revenue Recognition Accounting for
Performance of Construction-Type and Certain Production-Type Contracts
  Product Warranties
 Allowance for Doubtful Accounts
 26




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Reserve for Obsolete and Slow-Moving Inventory
 New Accounting Standards
 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair
Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities
  27




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  28




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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 Report of Independent Registered Public Accounting Firm
 
    Internal ControlIntegrated
Framework
 /s/ Grant Thornton LLPDallas, TexasSeptember 11, 2007
 29




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Report of Independent Registered Public Accounting Firm
 
 Internal
ControlIntegrated Framework
    Internal Control  Integrated Framework
  /s/ Grant Thornton LLPDallas, TexasSeptember 11, 2007
 30




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Peerless Mfg. Co. and Subsidiaries
 
 Consolidated Balance Sheets  (Amounts in thousands)
 ASSETS
 June 30,2007
    
    
    2006Current assets:Cash and cash equivalents
    
    $
    17,015
    
    
    $
    6,411Restricted cash
    
    
    2,811
    
    
    
    Accounts receivable-principally trade  net of
allowance for doubtful accounts of $465 at
June 30, 2007 and $462 at June 30, 2006
    
    
    21,329
    
    
    
    16,463Inventories
    
    
    3,919
    
    
    
    4,871Costs and earnings in excess of billings
on uncompleted contracts
    
    
    15,976
    
    
    
    13,891Assets held for sale
    
    
    
    
    
    
    767Deferred income taxes
    
    
    1,410
    
    
    
    1,338Other current assets
    
    
    1,646
    
    
    
    1,431Total current assets
    
    
    64,106
    
    
    
    45,172Property, plant and equipment  net
    
    
    3,747
    
    
    
    2,140Other assets
    
    
    818
    
    
    
    845Deferred income taxes
    
    
    
    
    
    
    2Total assets
    
    $
    68,671
    
    
    $
    48,159
 See accompanying notes to consolidated financial statements.
 31




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Peerless Mfg. Co. and Subsidiaries
Consolidated Balance Sheets  (Amounts in thousands, except share data)
 LIABILITIES AND SHAREHOLDERS EQUITY
 June 30,2007
    
    
    2006Current liabilities:Accounts payable
    
    $
    17,217
    
    
    $
    13,860Billings in excess of costs and earnings
on uncompleted contracts
    
    
    6,970
    
    
    
    2,601Commissions payable
    
    
    1,401
    
    
    
    1,238Income taxes payable
    
    
    1,576
    
    
    
    75Product warranties
    
    
    641
    
    
    
    626Accrued liabilities and other
    
    
    5,679
    
    
    
    3,842Total current liabilities
    
    
    33,484
    
    
    
    22,242Deferred income taxes
    
    
    1,010
    
    
    
    Other non current liabilities
    
    
    640
    
    
    
    Commitments and contingenciesShareholders equity:Common stock  authorized, 10,000,000
shares of $1 par value; issued and
outstanding, 6,439,644 and 6,267,618
shares at June 30, 2007 and 2006, respectively
    
    
    6,440
    
    
    
    6,268Additional paid-in capital
    
    
    1,359
    
    
    
    9Accumulated other comprehensive income
    
    
    431
    
    
    
    245Retained earnings
    
    
    25,307
    
    
    
    19,395Total shareholders equity
    
    
    33,537
    
    
    
    25,917Total liabilities and shareholders equity
    
    $
    68,671
    
    
    $
    48,159
 See accompanying notes to consolidated financial statements.
 32




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
 
 Consolidated Statements of Operations (Amounts in thousands, except per share amounts)
 Year ended June 30,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    75,141
    
    
    $
    63,411
    
    
    $
    51,063Cost of goods sold
    
    
    51,343
    
    
    
    45,978
    
    
    
    37,356Gross profit
    
    
    23,798
    
    
    
    17,433
    
    
    
    13,707Operating expensesSales and marketing
    
    
    8,127
    
    
    
    6,645
    
    
    
    6,031Engineering and project management
    
    
    4,094
    
    
    
    3,480
    
    
    
    3,608General and administrative
    
    
    6,827
    
    
    
    6,562
    
    
    
    4,770Gain on sale
of property
    
    
    (3,501
    )
    
    
    
    
    
    
    15,547
    
    
    
    16,687
    
    
    
    14,409Operating income (loss)
    
    
    8,251
    
    
    
    746
    
    
    
    (702
    )Other income (expense)Interest income
    
    
    433
    
    
    
    248
    
    
    
    158Foreign exchange gain (loss)
    
    
    171
    
    
    
    101
    
    
    
    (22
    )Other income (expense)  net
    
    
    (15
    )
    
    
    106
    
    
    
    (73
    )589
    
    
    
    455
    
    
    
    63Earnings (loss) from continuing operations before income taxes
    
    
    8,840
    
    
    
    1,201
    
    
    
    (639
    )Income tax benefit (expense)
    
    
    (2,928
    )
    
    
    (660
    )
    
    
    113Net earnings (loss) from continuing operations
    
    
    5,912
    
    
    
    541
    
    
    
    (526
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (183
    )
    
    
    (80
    )Income tax benefit
    
    
    
    
    
    
    68
    
    
    
    14Net loss from discontinued operations
    
    
    
    
    
    
    (115
    )
    
    
    (66
    )Net earnings (loss)
    
    $
    5,912
    
    
    $
    426
    
    
    $
    (592
    )BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.93
    
    
    $
    0.09
    
    
    $
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Basic earnings (loss) per share
    
    $
    0.93
    
    
    $
    0.07
    
    
    $
    (0.10
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.92
    
    
    $
    0.09
    
    
    $
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Diluted earnings (loss) per share
    
    $
    0.92
    
    
    $
    0.07
    
    
    $
    (0.10
    )
 See accompanying notes to consolidated financial statements.
 33




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)  (Amounts in thousands)
 Additional
    
    
    AccumulatedOther
    
    
    
    
    
    
    TotalNo. of
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at July 1, 2004
    
    
    3,014
    
    
    $
    3,014
    
    
    $
    1,884
    
    
    $
    214
    
    
    $
    19,561
    
    
    $
    24,673Comprehensive lossNet loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (526
    )
    
    
    (526
    )Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    (66
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (635
    )Stock options expense
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    69Stock options exercised
    
    
    22
    
    
    
    22
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    140Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43Balance at June 30, 2005
    
    
    3,036
    
    
    
    3,036
    
    
    
    2,114
    
    
    
    171
    
    
    
    18,969
    
    
    
    24,290Comprehensive incomeNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    541
    
    
    
    541Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    (115
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    74Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Restricted stock grants
    
    
    10
    
    
    
    10
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    29Stock options expense
    
    
    
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Stock options exercised
    
    
    88
    
    
    
    88
    
    
    
    586
    
    
    
    
    
    
    
    
    
    
    
    674Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    306Balance at June 30, 2006
    
    
    3,134
    
    
    
    3,134
    
    
    
    3,143
    
    
    
    245
    
    
    
    19,395
    
    
    
    25,917Comprehensive incomeNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,912
    
    
    
    5,912Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    186Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,098Restricted stock grants
    
    
    11
    
    
    
    11
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    72Stock options expense
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158Stock options exercised
    
    
    77
    
    
    
    77
    
    
    
    921
    
    
    
    
    
    
    
    
    
    
    
    998Stock split in the form of a stock dividend
    
    
    3,218
    
    
    
    3,218
    
    
    
    (3,218
    )
    
    
    
    
    
    
    
    
    
    
    Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    294Balance at June 30, 2007
    
    
    6,440
    
    
    $
    6,440
    
    
    $
    1,359
    
    
    $
    431
    
    
    $
    25,307
    
    
    $
    33,537
 See accompanying notes to consolidated financial statements.
 34




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
 
 Consolidated Statements of Cash Flows (Amounts in thousands)
 Year ended June 30,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    5,912
    
    
    $
    426
    
    
    $
    (592
    )Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    664
    
    
    
    688
    
    
    
    636Deferred income taxes
    
    
    940
    
    
    
    (354
    )
    
    
    100Deferred rent expense
    
    
    62
    
    
    
    
    
    
    
    Bad debt expense
    
    
    3
    
    
    
    427
    
    
    
    318Provision for warranty expenses
    
    
    186
    
    
    
    365
    
    
    
    341Inventory valuation reserve
    
    
    217
    
    
    
    271
    
    
    
    161Foreign exchange (gain) loss
    
    
    (171
    )
    
    
    (101
    )
    
    
    22Gain on sale
of property
    
    
    (3,501
    )
    
    
    (22
    )
    
    
    Excess tax benefits from stock-based payment arrangements
    
    
    (294
    )
    
    
    (306
    )
    
    
    Stock based compensation
    
    
    158
    
    
    
    118
    
    
    
    Restricted stock grants
    
    
    72
    
    
    
    29
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    69Changes in operating assets and liabilities of continuing operations:Accounts receivable
    
    
    (4,844
    )
    
    
    (5,227
    )
    
    
    1,661Inventories
    
    
    738
    
    
    
    (1,833
    )
    
    
    (359
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    (2,051
    )
    
    
    (3,653
    )
    
    
    2,288Other current assets
    
    
    (215
    )
    
    
    (221
    )
    
    
    (348
    )Other assets
    
    
    27
    
    
    
    (61
    )
    
    
    138Accounts payable
    
    
    3,406
    
    
    
    5,300
    
    
    
    (1,236
    )Billings in excess of costs and earnings on uncompleted contracts
    
    
    4,369
    
    
    
    520
    
    
    
    1,682Commissions payable
    
    
    163
    
    
    
    476
    
    
    
    (82
    )Income taxes payable
    
    
    1,795
    
    
    
    467
    
    
    
    (557
    )Product warranties
    
    
    (171
    )
    
    
    (584
    )
    
    
    (678
    )Accrued liabilities and other
    
    
    1,957
    
    
    
    787
    
    
    
    1,323Net cash provided by (used in) operating activities of continuing operations:
    
    
    9,422
    
    
    
    (2,488
    )
    
    
    4,887Cash flow from investing activities of continuing operations:Increase in restricted cash
    
    
    (2,811
    )
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (1,662
    )
    
    
    (315
    )
    
    
    (897
    )Proceeds from the sale of property and equipment
    
    
    4,237
    
    
    
    57
    
    
    
    Net cash used in investing activities of continuing operations
    
    
    (236
    )
    
    
    (258
    )
    
    
    (897
    )Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options
    
    
    998
    
    
    
    674
    
    
    
    140Excess tax benefits from stock-based payment arrangements
    
    
    294
    
    
    
    306
    
    
    
    Net cash provided by financing activities of continuing operations
    
    
    1,292
    
    
    
    980
    
    
    
    140Cash flow from discontinued operations  revised:Cash provided by (used in) operating activities
    
    
    
    
    
    
    (106
    )
    
    
    25Cash provided by investing activities
    
    
    
    
    
    
    9
    
    
    
    Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    (97
    )
    
    
    25Effect of exchange rate changes on cash and cash equivalents
    
    
    126
    
    
    
    (3
    )
    
    
    3Net increase (decrease) in cash and cash equivalents
    
    
    10,604
    
    
    
    (1,866
    )
    
    
    4,158Cash and cash equivalents at beginning of period
    
    
    6,411
    
    
    
    8,277
    
    
    
    4,119Cash and cash equivalents at end of period
    
    $
    17,015
    
    
    $
    6,411
    
    
    $
    8,277Supplemental information on cash flow:Income taxes paid
    
    $
    481
    
    
    $
    45
    
    
    $
    730Income taxes refunded
    
    $
    (297
    )
    
    $
    (237
    )
    
    $
    (14
    )Leasehold improvements incentive allowance
    
    $
    578
    
    
    $
    
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 35




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
 
 Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE A.
    
    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
   Consolidation
  Cash Equivalents
   Accounts Receivable
   36




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE A.
    
    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
  Year ended June 30,2007
    
    
    2006
    
    
    2005Balance at beginning of year
    
    $
    462
    
    
    $
    352
    
    
    $
    431Bad debt expense
    
    
    3
    
    
    
    427
    
    
    
    318Accounts written off, net of recoveries
    
    
    
    
    
    
    (317
    )
    
    
    (397
    )Balance at end of year
    
    $
    465
    
    
    $
    462
    
    
    $
    352
 Inventories
  Depreciable Assets
  Long-Lived Assets
 Accounting for
the Impairment or Disposal of Long-Lived Assets
 37




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE A.
    
    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 Revenue Recognition
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
  Warranty Costs
  Share-Based Compensation
 Share-Based
Payments
 Shipping and Handling Policy
  38




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE A.
    
    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 Advertising Costs
  Design, Research and Development
  Revenues Presented Net of Taxes
  Income Taxes
 Accounting for
Income Taxes
 Earnings (Loss) Per Share
  Foreign Currency
  Financial Instruments
  39




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE A.
    
    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  CONTINUED
 Use of Estimates
  Stock Split
  Reclassification
  NOTE B. NEW ACCOUNTING PRONOUNCEMENTS
 Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value
Measurements
 40




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE B. NEW ACCOUNTING PRONOUNCEMENTS  CONTINUED
 The Fair
Value Option for Financial Assets and Financial Liabilities
  NOTE C. CONCENTRATIONS OF CREDIT RISK
   41




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE D. DISCONTINUED OPERATIONS
   Year ended June 30,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    
    
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    75Gross margin (loss)
    
    
    
    
    
    
    
    
    
    
    (75
    )Operating expenses
    
    
    
    
    
    
    183
    
    
    
    5Operating loss
    
    
    
    
    
    
    (183
    )
    
    
    (80
    )Other income
    
    
    
    
    
    
    
    
    
    
    Income tax benefit
    
    
    
    
    
    
    68
    
    
    
    14Net loss from operations
    
    
    
    
    
    
    (115
    )
    
    
    (66
    )Gain on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    
    
    
    $
    (115
    )
    
    $
    (66
    )Diluted loss per shareNet loss from operations
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )Net gain on disposal
    
    $
    
    
    
    $
    
    
    
    $
    Net loss
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.01
    )
 NOTE E. INVENTORIES
  Year ended June 30,2007
    
    
    2006Raw materials
    
    $
    3,652
    
    
    $
    4,417Work in progress
    
    
    613
    
    
    
    626Finished goods
    
    
    186
    
    
    
    2624,451
    
    
    
    5,305Reserve for obsolete and slow-moving inventory
    
    
    (532
    )
    
    
    (434
    )$
    3,919
    
    
    $
    4,871
 42




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE E. INVENTORIES  CONTINUED
  Year ended June 30,2007
    
    
    2006
    
    
    2005Balance at beginning of year
    
    $
    434
    
    
    $
    318
    
    
    $
    196Additions
    
    
    217
    
    
    
    271
    
    
    
    161Amounts written off
    
    
    (119
    )
    
    
    (155
    )
    
    
    (39
    )Balance at end of year
    
    $
    532
    
    
    $
    434
    
    
    $
    318
 NOTE F. ASSETS HELD FOR SALE
  June 30, 2006Buildings & improvements
    
    $
    2,768Equipment
    
    
    152Furniture and fixtures
    
    
    132,933Less accumulated depreciation
    
    
    (2,794
    )139Land
    
    
    628$
    767
 43




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE G. PROPERTY, PLANT AND EQUIPMENT
  June 30,2007
    
    
    2006Buildings & improvements
    
    $
    2,134
    
    
    $
    1,329Equipment
    
    
    4,972
    
    
    
    4,642Furniture and fixtures
    
    
    3,379
    
    
    
    3,35610,485
    
    
    
    9,327Less accumulated depreciation
    
    
    (6,884
    )
    
    
    (7,302
    )3,601
    
    
    
    2,025Land
    
    
    146
    
    
    
    115$
    3,747
    
    
    $
    2,140
  NOTE H. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
  June 30,2007
    
    
    2006Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    70,527
    
    
    $
    43,448Less billings to date
    
    
    (61,521
    )
    
    
    (32,158
    )$
    9,006
    
    
    $
    11,290
  June 30,2007
    
    
    2006Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    15,976
    
    
    $
    13,891Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (6,970
    )
    
    
    (2,601
    )$
    9,006
    
    
    $
    11,290
 44




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE I. LINE OF CREDIT
    NOTE J. PRODUCT WARRANTIES
  Year ended June 30,2007
    
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    626
    
    
    $
    645
    
    
    $
    982Provision for warranty expenses
    
    
    186
    
    
    
    365
    
    
    
    341Warranty charges
    
    
    (171
    )
    
    
    (384
    )
    
    
    (678
    )Balance at end of period
    
    $
    641
    
    
    $
    626
    
    
    $
    645
 45




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE K. COMMITMENTS AND CONTINGENCIES
   Fiscal
Year
    
    Amount2008
    
    $
    7312009
    
    
    6562010
    
    
    6152011
    
    
    5512012
    
    
    551Thereafter
    
    
    2,198$
    5,302
   NOTE L. STOCK BASED COMPENSATION
 Share-Based Payment
  46




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE L. STOCK BASED COMPENSATION  CONTINUED
  Accounting for Stock Issued to
Employees
  Year endedJune 30, 2005Net earnings (loss), as reported
    
    $
    (592
    )Deduct: Total stock-based employee compensation
expense determined using the
fair value based method
for all awards, net of tax
    
    
    (161
    )Pro forma net earnings (loss)
    
    $
    (753
    )Earnings (loss) per share:Basic  as reported
    
    $
    (0.10
    )Basic  pro forma
    
    $
    (0.13
    )Diluted  as reported
    
    $
    (0.10
    )Diluted  pro forma
    
    $
    (0.13
    )
 47




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE L. STOCK BASED COMPENSATION  CONTINUED
     Year ended June 30,2007
    
    2006Earnings from continuing operations before
income taxes
    
    $
    158
    
    
    $
    118Net earnings from continuing operations
    
    
    102
    
    
    
    75Net earnings
    
    
    102
    
    
    
    75Basic and diluted earnings per common share
    
    $
    0.02
    
    
    $
    0.01
  48




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE L. STOCK BASED COMPENSATION  CONTINUED
 (the number of options and weighted average
exercise price has been adjusted for our two-for-one stock split in June 2007)
 Year ended June 30,2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNo. of Options
    
    Price
    
    No. of Options
    
    PriceBalance at July 1
    
    
    287,300
    
    
    $
    7.01
    
    
    
    475,900
    
    
    $
    5.61Granted
    
    
    10,000
    
    
    
    11.90
    
    
    
    44,000
    
    
    
    9.07Exercised
    
    
    (149,426
    )
    
    
    6.67
    
    
    
    (174,750
    )
    
    
    3.86Forfeited before vesting
    
    
    
    
    
    
    
    
    
    
    (56,850
    )
    
    
    6.53Forfeited after vesting
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    9.75Balance at June 30
    
    
    147,874
    
    
    
    7.68
    
    
    
    287,300
    
    
    
    7.01Exercisable at June 30
    
    
    88,574
    
    
    
    7.49
    
    
    
    196,728
    
    
    
    6.66
   Year ended June 30,2007
    
    2006
    
    2005Expected volatility
    
    44.5%
    
    47.7 % - 52.6%
    
    36.8% - 46.4%Expected term (years)
    
    4.92
    
    4.05 - 5.66
    
    5.00Risk free interest rate
    
    5.11%
    
    4.12% - 4.63%
    
    4.00%Dividend yield
    
    
    
    
    
    Weighted average grant date
fair value
    
    $5.45
    
    $4.04
    
    $2.88
 49




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE L. STOCK BASED COMPENSATION  CONTINUED
  Year ended June 30,2007
    
    2006
    
    2005Total cash received
    
    $
    998
    
    
    $
    674
    
    
    $
    140Income tax benefits
    
    
    294
    
    
    
    306
    
    
    
    43Total intrinsic
value of options
exercised
    
    
    943
    
    
    
    899
    
    
    
    195
  Year ended June 30,2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Options
    
    Fair Value
    
    No. of Options
    
    Fair ValueUnvested at beginning of period
    
    
    90,572
    
    
    $
    3.38
    
    
    
    140,200
    
    
    $
    2.99New Grants
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    3.94Vested
    
    
    (31,272
    )
    
    
    3.30
    
    
    
    (28,778
    )
    
    
    3.00Forfeited
    
    
    
    
    
    
    
    
    
    
    (56,850
    )
    
    
    2.97Unvested at end of period
    
    
    59,300
    
    
    
    3.41
    
    
    
    90,572
    
    
    
    3.38
    Year ended June 30,2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Shares
    
    Fair Value
    
    No. of Shares
    
    Fair ValueBalance at July 1
    
    
    20,000
    
    
    $
    8.53
    
    
    
    
    
    
    $
    New Grants
    
    
    22,600
    
    
    
    14.58
    
    
    
    20,000
    
    
    
    8.53Vested
    
    
    (5,000
    )
    
    
    8.53
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30
    
    
    37,600
    
    
    
    12.17
    
    
    
    20,000
    
    
    
    8.53
 50




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE L. STOCK BASED COMPENSATION  CONTINUED
  NOTE M. SHAREHOLDER RIGHTS PLAN
    NOTE N. EMPLOYEE BENEFIT PLANS
  51




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE O. INCOME TAXES
  June 30,2007
    
    
    2006Deferred tax assetsInventories
    
    $
    184
    
    
    $
    203Accrued liabilities
    
    
    1,072
    
    
    
    937Accounts receivable
    
    
    154
    
    
    
    170Net operating loss carry-forwards
    
    
    227
    
    
    
    195Stock based compensation
    
    
    83
    
    
    
    46Other
    
    
    25
    
    
    
    181,745
    
    
    
    1,569Less valuation allowance
    
    
    
    
    
    
    (149
    )1,745
    
    
    
    1,420Deferred tax liabilitiesProperty, plant and equipment
    
    
    (130
    )
    
    
    (76
    )Gain on sale of property
    
    
    (1,214
    )
    
    
    Other
    
    
    (1
    )
    
    
    (4
    )(1,345
    )
    
    
    (80
    )Net deferred tax asset
    
    $
    400
    
    
    $
    1,340
  June 30,2007
    
    
    2006Current deferred tax asset
    
    $
    1,410
    
    
    $
    1,338Non-current deferred tax asset, net
    
    
    
    
    
    
    2Non-current deferred tax liability, net
    
    
    (1,010
    )
    
    
    $
    400
    
    
    $
    1,340
 52




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE O. INCOME TAXES  CONTINUED
   Year ended June 30,2007
    
    
    2006
    
    
    2005Current tax (expense) benefitFederal
    
    $
    (1,895
    )
    
    $
    (746
    )
    
    $
    332State
    
    
    (93
    )
    
    
    (180
    )
    
    
    (33
    )Foreign
    
    
    
    
    
    
    66
    
    
    
    (72
    )(1,988
    )
    
    
    (860
    )
    
    
    227Deferred tax (expense) benefit
    
    
    (940
    )
    
    
    268
    
    
    
    (100
    )$
    (2,928
    )
    
    $
    (592
    )
    
    $
    127Income tax (expense) benefit  continuing operations
    
    $
    (2,928
    )
    
    $
    (660
    )
    
    $
    113Income tax benefit  discontinued operations
    
    
    
    
    
    
    68
    
    
    
    14Income tax (expense) benefit
    
    $
    (2,928
    )
    
    $
    (592
    )
    
    $
    127
  Year ended June 30,2007
    
    
    2006
    
    
    2005Income tax (expense) benefit at federal statutory rate
    
    $
    (2,991
    )
    
    $
    (346
    )
    
    $
    244Decrease (increase) in income tax expense
resulting from
State tax, net of federal benefit
    
    
    (108
    )
    
    
    (218
    )
    
    
    (38
    )Foreign sales income exclusions
    
    
    6
    
    
    
    13
    
    
    
    67Effect of lower tax rate on foreign income
    
    
    9
    
    
    
    6
    
    
    
    15Change in valuation allowance
    
    
    149
    
    
    
    
    
    
    
    (149
    )Other
    
    
    7
    
    
    
    (47
    )
    
    
    (12
    )Income tax (expense) benefit
    
    $
    (2,928
    )
    
    $
    (592
    )
    
    $
    127
 53




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE P. EARNINGS (LOSS) PER SHARE
 (the number of shares and earnings (loss) per share have been adjusted for our
two-for-one stock split in June 2007)
 Year ended June 30,2007
    
    
    2006
    
    
    2005Net earnings (loss) from continuing operations
    
    $
    5,912
    
    
    $
    541
    
    
    $
    (526
    )Loss from discontinued operations
    
    
    
    
    
    
    (115
    )
    
    
    (66
    )Net earnings (loss)
    
    $
    5,912
    
    
    $
    426
    
    
    $
    (592
    )Basic weighted average common shares outstanding
    
    
    6,342
    
    
    
    6,133
    
    
    
    6,057Effect of dilutive options and restricted stock
    
    
    85
    
    
    
    136
    
    
    
    Diluted weighted average common shares outstanding
    
    
    6,427
    
    
    
    6,269
    
    
    
    6,057Net earnings (loss) per share  basic:Earnings (loss) from continuing operations
    
    $
    0.93
    
    
    $
    0.09
    
    
    $
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Basic earnings (loss) per share
    
    $
    0.93
    
    
    $
    0.07
    
    
    $
    (0.10
    )Net earnings (loss) per share  diluted:Earnings (loss) from continuing operations
    
    $
    0.92
    
    
    $
    0.09
    
    
    $
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.01
    )Diluted earnings (loss) per share
    
    $
    0.92
    
    
    $
    0.07
    
    
    $
    (0.10
    )
  54




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE Q. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
   Year ended June 30,2007
    
    
    2006
    
    
    2005RevenuesEnvironmental
    
    $
    27,885
    
    
    $
    19,767
    
    
    $
    20,591Separation Filtration
    
    
    47,256
    
    
    
    43,644
    
    
    
    30,472Consolidated
    
    $
    75,141
    
    
    $
    63,411
    
    
    $
    51,063Operating income (loss)Environmental
    
    $
    4,968
    
    
    $
    2,055
    
    
    $
    2,309Separation Filtration
    
    
    6,609
    
    
    
    5,253
    
    
    
    1,759Reconciling items
    
    
    (3,326
    )
    
    
    (6,562
    )
    
    
    (4,770
    )Consolidated
    
    $
    8,251
    
    
    $
    746
    
    
    $
    (702
    )
 55




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE Q. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION  CONTINUED
  United
    
    
    UnitedStates
    
    
    Kingdom
    
    
    Eliminations
    
    
    Consolidated2007Net sales to unaffiliated customers
    
    $
    66,679
    
    
    $
    8,462
    
    
    $
    
    
    
    $
    75,141Transfers between geographic areas
    
    
    435
    
    
    
    
    
    
    
    (435
    )
    
    
    Total
    
    $
    67,114
    
    
    $
    8,462
    
    
    $
    (435
    )
    
    $
    75,141Identifiable long-lived assets
    
    $
    3,542
    
    
    $
    205
    
    
    $
    
    
    
    $
    3,7472006Net sales to unaffiliated customers
    
    $
    53,281
    
    
    $
    10,130
    
    
    $
    
    
    
    $
    63,411Transfers between geographic areas
    
    
    503
    
    
    
    
    
    
    
    (503
    )
    
    
    Total
    
    $
    53,784
    
    
    $
    10,130
    
    
    $
    (503
    )
    
    $
    63,411Identifiable long-lived assets
    
    $
    2,088
    
    
    $
    52
    
    
    $
    
    
    
    $
    2,1402005Net sales to unaffiliated customers
    
    $
    40,261
    
    
    $
    10,802
    
    
    $
    
    
    
    $
    51,063Transfers between geographic areas
    
    
    2,230
    
    
    
    
    
    
    
    (2,230
    )
    
    
    Total
    
    $
    42,491
    
    
    $
    10,802
    
    
    $
    (2,230
    )
    
    $
    51,063Identifiable long-lived assets
    
    $
    3,247
    
    
    $
    68
    
    
    $
    
    
    
    $
    3,315
    Fiscal Year
    
    United States
    
    International
    
    Consolidated2007
    
    $
    47,080
    
    
    $
    28,061
    
    
    $
    75,1412006
    
    $
    32,513
    
    
    $
    30,898
    
    
    $
    63,4112005
    
    $
    30,248
    
    
    $
    20,815
    
    
    $
    51,063
  56




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE R. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION  UNAUDITED
  Year ended June 30, 2007First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter
    
    TotalRevenues
    
    $
    14,638
    
    
    $
    14,091
    
    
    $
    20,191
    
    
    $
    26,221
    
    
    $
    75,141Gross profit
    
    
    4,395
    
    
    
    4,504
    
    
    
    6,594
    
    
    
    8,305
    
    
    
    23,798Operating
expenses *
    
    
    3,743
    
    
    
    3,974
    
    
    
    5,173
    
    
    
    2,657
    
    
    
    15,547Operating income
    
    
    652
    
    
    
    530
    
    
    
    1,421
    
    
    
    5,648
    
    
    
    8,251Net earnings from
continuing operations
    
    
    451
    
    
    
    457
    
    
    
    982
    
    
    
    4,022
    
    
    
    5,912Net earnings from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    
    451
    
    
    
    457
    
    
    
    982
    
    
    
    4,022
    
    
    
    5,912Basic
earnings per share **Net earnings from
continuing operations
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.63
    
    
    $
    0.93Net earnings from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.63
    
    
    $
    0.93Diluted
earnings per share **Net earnings from
continuing operations
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.62
    
    
    $
    0.92Net earnings from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.15
    
    
    $
    0.62
    
    
    $
    0.92
 
 *
    
    Includes gain on sale of property of $3,501.**
    
    Certain earnings per share amounts may not total due to rounding. 57




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Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE R. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION  UNAUDITED
 Year ended June 30, 2006First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter
    
    TotalRevenues
    
    $
    11,642
    
    
    $
    11,534
    
    
    $
    18,121
    
    
    $
    22,114
    
    
    $
    63,411Gross profit
    
    
    2,353
    
    
    
    3,146
    
    
    
    5,343
    
    
    
    6,591
    
    
    
    17,433Operating expenses
    
    
    3,506
    
    
    
    4,472
    
    
    
    3,890
    
    
    
    4,819
    
    
    
    16,687Operating income (loss)
    
    
    (1,153
    )
    
    
    (1,326
    )
    
    
    1,453
    
    
    
    1,772
    
    
    
    746Net earnings (loss) from
continuing operations
    
    
    (689
    )
    
    
    (792
    )
    
    
    1,003
    
    
    
    1,019
    
    
    
    541Net earnings (loss) from
discontinued operations
    
    
    
    
    
    
    (33
    )
    
    
    (88
    )
    
    
    6
    
    
    
    (115
    )Net earnings (loss)
    
    
    (689
    )
    
    
    (825
    )
    
    
    915
    
    
    
    1,025
    
    
    
    426Basic earnings (loss) per share *Net earnings (loss) from
continuing operations
    
    ($
    0.11
    )
    
    ($
    0.13
    )
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.09Net earnings (loss) from
discontinued operations
    
    $
    0.00
    
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    $
    0.00
    
    
    ($
    0.02
    )Net earnings (loss)
    
    ($
    0.11
    )
    
    ($
    0.14
    )
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    0.07Diluted earnings (loss) per share *Net earnings (loss) from
continuing operations
    
    ($
    0.11
    )
    
    ($
    0.13
    )
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.09Net earnings (loss) from
discontinued operations
    
    $
    0.00
    
    
    ($
    0.01
    )
    
    ($
    0.01
    )
    
    $
    0.00
    
    
    ($
    0.02
    )Net earnings (loss)
    
    ($
    0.11
    )
    
    ($
    0.14
    )
    
    $
    0.15
    
    
    $
    0.16
    
    
    $
    0.07
 
 *
    
    Certain earnings per share amounts may not total due to rounding. 58




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##### Table of Contents



Peerless Mfg. Co. and Subsidiaries
Notes to Consolidated Financial Statements  (Amounts in thousands, except share and per share amounts.)
 NOTE S. OTHER INFORMATION
  Year ended June 30,2007
    
    2006Accrued start-up expense
    
    $
    2,095
    
    
    $
    1,717Accrued compensation
    
    
    1,755
    
    
    
    1,194Accrued professional, legal and other expenses
    
    
    1,555
    
    
    
    531Sales and use tax payable
    
    
    24
    
    
    
    3Other
    
    
    250
    
    
    
    397$
    5,679
    
    
    $
    3,842
  Year ended June 30,2007
    
    
    2006
    
    
    2005Continuing operationsUnited States
    
    $
    9,032
    
    
    $
    1,404
    
    
    $
    (886
    )United Kingdom
    
    
    (192
    )
    
    
    (203
    )
    
    
    2478,840
    
    
    
    1,201
    
    
    
    (639
    )Discontinued operations
    
    
    
    
    
    
    (183
    )
    
    
    (80
    )$
    8,840
    
    
    $
    1,018
    
    
    $
    (719
    )
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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control Over Financial Reporting
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##### Table of Contents



Limitations on Controls
  
 ITEM 9B. OTHER INFORMATION.
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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
    www.peerlessmfg.com
 
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
  Financial Statements:
 Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets at June 30, 2007 and 2006Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended June 30, 2007, 2006 and 2005Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005Notes to Consolidated Financial Statements
 Financial Statement Schedules:
  Exhibits:
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##### Table of Contents



SIGNATURES
  Date: September 11, 2007
    
    PEERLESS MFG. CO.By:
    
    /s/ Peter J. Burlage

Peter J. Burlage
Chief Executive Officer
  /s/ Sherrill Stone

Sherrill Stone
    
    Chairman of the Board/s/ Peter J. Burlage

Peter J. Burlage
    
    Chief Executive Officer and Director
(Principal Executive Officer)/s/ Henry G. Schopfer, III

Henry G. Schopfer, III
    
    Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)/s/ Kenneth R. Hanks

Kenneth R. Hanks
    
    Director/s/ Robert McCashin

Robert McCashin
    
    Director/s/ R. Clayton Mulford

R. Clayton Mulford
    
    Director/s/ Howard G. Westerman, Jr.

Howard G. Westerman, Jr.
    
    Director
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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit Description3(a)
    
    Articles of Incorporation, as amended to date (filed as Exhibit 3(a)
to our Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1997, Commission File No. 000-05214, and incorporated
herein by reference).3(b)
    
    Bylaws (filed as Exhibit 3(b) to our Quarterly Report on Form 10-Q,
for the quarter ended December 31, 2003, and incorporated herein by
reference).3(c)
    
    Amendment to the Bylaws (filed as Exhibit 3.2 to our Current Report
on Form 8-K filed with the Commission on May 23, 2006, and
incorporated herein by reference).4(a)
    
    Rights Agreement dated May 4, 2007 between Peerless Mfg. Co. and
Mellon Investor Services, LLC, as Rights Agent (filed as Exhibit 4.1
to our Registration Statement on Form 8-A, dated May 8, 2007, and
incorporated herein by reference).10(a)*
    
    Incentive Compensation Plan effective January 1, 1981, as amended
January 23, 1991 (filed as Exhibit 10(b) to our Annual Report on Form
10-K for the fiscal year ended June 30, 1991, Commission File No.
000-05214, and incorporated herein by reference).10(b)*
    
    Peerless Mfg. Co. 1995 Stock Option and Restricted Stock Plan (filed
as Exhibit 10(h) to our Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, Commission File No. 000-05214, and
incorporated herein by reference).10(c)*
    
    Amendment to Peerless Mfg. Co. 1995 Stock Option and Restricted Stock
Plan dated November 11, 1999 (filed as Exhibit 10(h) to our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1999,
Commission File No. 000-05214, and incorporated herein by reference).10(d)*
    
    Peerless Mfg. Co. 2001 Stock Option and Restricted Stock Plan (filed
as Appendix B to our Proxy Statement on Schedule 14A dated October
24, 2001, and incorporated herein by reference).10(e)
    
    Credit Agreement dated as of October 30, 2003, by and between
Peerless Mfg. Co. and Comerica Bank (filed as Exhibit 10(a) to our
Quarterly Report on Form 10-Q, for the fiscal quarter ended December
31, 2003, and incorporated herein by reference).10(f)
    
    First Amendment to Credit Agreement, dated as of September 30, 2006,
by and between Peerless Mfg. Co. and Comerica Bank (filed as Exhibit
10.2 to our Current Report on Form 8-K filed with the Commission on
September 22, 2006, and incorporated herein by reference).10(g)
    
    Master Revolving Note dated as of October 30, 2003, by Peerless Mfg.
Co. in favor of Comerica Bank (filed as Exhibit 10(c) to our
Quarterly Report on Form 10-Q, for the fiscal quarter ended December
31, 2003, and incorporated herein by reference).10(h)
    
    Master Revolving Note dated September 30, 2006, by Peerless Mfg. Co.
in favor of Comerica Bank (filed as Exhibit 10.3 to our Current
Report on Form 8-K filed with the Commission on September 22, 2006,
and incorporated herein by reference).10(i)*
    
    Amended and Restated Employment Agreement, dated March 21, 2007
between Peerless Mfg. Co. and Peter J. Burlage (filed as Exhibit 10.1
to our Current Report on Form 8-K filed with the Commission on March
26, 2007, and incorporated herein by reference).10(j)*
    
    Employment Agreement dated January 11, 2006, by and between Peerless
Mfg. Co. and Sean P. McMenamin (filed as Exhibit 10(a) to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2007, and incorporated herein by reference).10(k)*
    
    Employment Agreement dated October 10, 2006, by and between Peerless
Mfg. Co. and David Taylor (filed as Exhibit 10 (a) to our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2007, and
incorporated herein by reference).10(l)*
    
    Consulting Agreement dated June 29, 2006, by and between Peerless
Mfg. Co. and Sherrill Stone (filed as Exhibit 10.1 to our Current
Report on Form 8-K filed with the Commission on July 7, 2006, and
incorporated herein by reference).10(m)*
    
    Key Employee Bonus Plan effective as of January 4, 2005 (filed as
Exhibit 10.4 to our Current Report on Form 8-K filed with the
Commission on February 9, 2005, and
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Exhibit No.
    
    Exhibit Descriptionincorporated herein by reference).10(n)*
    
    Description of Compensation Payable to Non-Employee Directors (filed
as Exhibit 10(b) to our Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2005, and incorporated herein by reference).10(o)*
    
    Form of Non-Employee Director Stock Option Agreement (filed as
Exhibit 10.1 to our Current Report on Form 8-K filed with the
Commission on February 9, 2005, and incorporated herein by
reference).10(p)*
    
    Form of Executive Stock Option Agreement (filed as Exhibit 10.3 to
our Current Report on Form 8-K filed with the Commission on February
9, 2005, and incorporated herein by reference).10(q)*
    
    Form of Restricted Stock Agreement (filed as Exhibit 10.1 to our
Current Report on Form 8-K filed with the Commission on November 4,
2005, and incorporated herein by reference).10(r)
    
    Agreement for Purchase between Peerless Mfg. Co. and Dallas Rapid
Area Transit (Filed as Exhibit 10(a) to our Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 2006, and incorporated
herein by reference).10(s)*
    
    Form of Director and Officer Indemnification Agreement21
    
    Subsidiaries of Peerless Mfg. Co.23
    
    Consent of Grant Thornton LLP.24.1
    
    Powers of Attorney for our directors and certain executive officers.31(a)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer.31(b)
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer.32(a)
    
    Section 1350 Certification of Chief Executive Officer.32(b)
    
    Section 1350 Certification of Chief Financial Officer.
 
 
    
    Management contract, compensatory plan or arrangement 66