##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the Quarterly Period Ended September 30, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the Transition Period from  to
 Commission File Number 0-5214
 PEERLESS MFG. CO.
  Texas
    
    75-0724417(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)2819 Walnut Hill Lane, Dallas, Texas
    
    75229(Address of Principal Executive Offices)
    
    (Zip code)
 (214) 357-6181
 þ o
  o o þ
  o þ




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##### 



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED September 30, 2006
  
 TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2006 (unaudited)
and June 30, 2006
    
    4Unaudited Condensed Consolidated Statements of Operations for the three
months ended September 30, 2006 and 2005
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2006 and 2005
    
    6Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income (Loss) for the three months ended September 30, 2006 and 2005
    
    7Notes to the Condensed Consolidated Financial Statements
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    31PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    32Item 1A. Risk Factors
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    32Item 3. Defaults Upon Senior Securities
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    32Item 5. Other Information
    
    32Item 6. Exhibits
    
    33SIGNATURES
    
    34Rule 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
  Page 2




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FORWARD-LOOKING STATEMENTS
  
    
    changes in the power generation 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.
  Page 3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 September 30
    
    
    June 30,2006
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,297
    
    
    $
    6,411Restricted cash
    
    
    2,621
    
    
    
    Accounts receivable-principally trade  net of
allowance for doubtful accounts of $518 at
September 30, 2006 and $462 at June 30, 2006
    
    
    13,501
    
    
    
    16,463Inventories
    
    
    5,657
    
    
    
    4,871Costs and earnings in excess of billings
on uncompleted contracts
    
    
    12,986
    
    
    
    13,891Assets held for sale
    
    
    767
    
    
    
    767Deferred income taxes
    
    
    1,338
    
    
    
    1,338Other current assets
    
    
    1,124
    
    
    
    1,431Total current assets
    
    
    43,291
    
    
    
    45,172Property, plant and equipment  net
    
    
    2,078
    
    
    
    2,140Other assets
    
    
    849
    
    
    
    845Deferred income taxes
    
    
    11
    
    
    
    2Total assets
    
    $
    46,229
    
    
    $
    48,159LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,685
    
    
    $
    13,860Billings in excess of costs and earnings
on uncompleted contracts
    
    
    3,149
    
    
    
    2,601Commissions payable
    
    
    1,248
    
    
    
    1,238Income taxes payable
    
    
    203
    
    
    
    75Product warranties
    
    
    639
    
    
    
    626Accrued liabilities and other
    
    
    3,316
    
    
    
    3,842Total current liabilities
    
    
    19,240
    
    
    
    22,242Commitments and contingenciesShareholders equity:Common stock
    
    
    3,166
    
    
    
    3,134Additional paid-in capital
    
    
    3,702
    
    
    
    3,143Accumulated other comprehensive income
    
    
    275
    
    
    
    245Retained earnings
    
    
    19,846
    
    
    
    19,395Total shareholders equity
    
    
    26,989
    
    
    
    25,917Total liabilities and shareholders equity
    
    $
    46,229
    
    
    $
    48,159
 See accompanying notes to condensed consolidated financial statements.
 Page 4




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
  Three months ended September 30,2006
    
    
    2005Revenues
    
    $
    14,638
    
    
    $
    11,642Cost of goods sold
    
    
    10,243
    
    
    
    9,289Gross profit
    
    
    4,395
    
    
    
    2,353Operating expensesSales and marketing
    
    
    1,722
    
    
    
    1,542Engineering and project management
    
    
    833
    
    
    
    826General and administrative
    
    
    1,188
    
    
    
    1,1383,743
    
    
    
    3,506Operating income (loss)
    
    
    652
    
    
    
    (1,153
    )Other income (expense)Interest income
    
    
    62
    
    
    
    53Foreign exchange gain (loss)
    
    
    (19
    )
    
    
    28Other income  net
    
    
    
    
    
    
    3243
    
    
    
    113Earnings (loss) from continuing operations before income taxes
    
    
    695
    
    
    
    (1,040
    )Income tax benefit (expense)
    
    
    (244
    )
    
    
    351Net earnings (loss) from continuing operations
    
    
    451
    
    
    
    (689
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    Income tax benefit
    
    
    
    
    
    
    Net loss from discontinued operations
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    451
    
    
    $
    (689
    )BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.23
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    0.00Basic earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.23
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.23
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    0.00Diluted earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.23
    )
 See
accompanying notes to condensed consolidated financial statements.
 Page 5




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
  Three months ended September 30,2006
    
    
    2005Cash flows from operating activities:Net earnings (loss)
    
    $
    451
    
    
    $
    (689
    )Adjustments to reconcile net earnings (loss) from operations to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    168
    
    
    
    162Deferred income taxes
    
    
    (9
    )
    
    
    Provision for bad debts
    
    
    56
    
    
    
    114Provision for warranty expense
    
    
    69
    
    
    
    142Inventory valuation reserve
    
    
    57
    
    
    
    52Foreign exchange (gain) loss
    
    
    19
    
    
    
    (28
    )Stock based compensation
    
    
    36
    
    
    
    22Changes in operating assets and liabilities of continuing operations:Accounts receivable
    
    
    2,906
    
    
    
    (2,497
    )Inventories
    
    
    (843
    )
    
    
    (800
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    904
    
    
    
    1,980Other current assets
    
    
    307
    
    
    
    (667
    )Other assets
    
    
    (4
    )
    
    
    (27
    )Accounts payable
    
    
    (3,176
    )
    
    
    209Billings in excess of costs and earnings on uncompleted contracts
    
    
    548
    
    
    
    (540
    )Commissions payable
    
    
    10
    
    
    
    31Product warranties
    
    
    (56
    )
    
    
    (71
    )Excess tax benefits from stock-based payment arrangements
    
    
    (109
    )
    
    
    Income taxes payable
    
    
    237
    
    
    
    Accrued liabilities and other
    
    
    (531
    )
    
    
    336Net cash provided by (used in) operating activities of continuing operations:
    
    
    1,040
    
    
    
    (2,271
    )Cash flow from investing activities of continuing operations:Increase in restricted cash
    
    
    (2,621
    )
    
    
    Purchases of property and equipment
    
    
    (106
    )
    
    
    (19
    )Net cash used in investing activities of continuing operations
    
    
    (2,727
    )
    
    
    (19
    )Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options
    
    
    446
    
    
    
    4Excess tax benefits from stock-based payment arrangements
    
    
    109
    
    
    
    Net cash provided by financing activities of continuing operations
    
    
    555
    
    
    
    4Cash flow from discontinued operations:Cash used in operating activities
    
    
    
    
    
    
    (48
    )Cash provided by investing activities
    
    
    
    
    
    
    Net cash used in discontinued operations
    
    
    
    
    
    
    (48
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    18
    
    
    
    (6
    )Net increase (decrease) in cash and cash equivalents
    
    
    (1,114
    )
    
    
    (2,340
    )Cash and cash equivalents at beginning of period
    
    
    6,411
    
    
    
    8,277Cash and cash equivalents at end of period
    
    $
    5,297
    
    
    $
    5,937
 See accompanying notes to consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (In thousands)
  AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalNo. of
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at July 1, 2006
    
    
    3,134
    
    
    $
    3,134
    
    
    $
    3,143
    
    
    $
    245
    
    
    $
    19,395
    
    
    $
    25,917Comprehensive incomeNet earnings from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    451Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481Restricted stock grant amortization
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Stock options expense
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Stock options exercised
    
    
    32
    
    
    
    32
    
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    446Income tax benefit related to stock
options exercised
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    109Balance at September 30, 2006
    
    
    3,166
    
    
    $
    3,166
    
    
    $
    3,702
    
    
    $
    275
    
    
    $
    19,846
    
    
    $
    26,989Balance at July 1, 2005
    
    
    3,036
    
    
    $
    3,036
    
    
    $
    2,114
    
    
    $
    171
    
    
    $
    18,969
    
    
    $
    24,290Comprehensive lossNet loss from continuing operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (689
    )
    
    
    (689
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (38
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (727
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Stock options exercised
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    4Balance at September 30, 2005
    
    
    3,037
    
    
    $
    3,037
    
    
    $
    2,139
    
    
    $
    133
    
    
    $
    18,280
    
    
    $
    23,589
 See accompanying notes to condensed consolidated financial statements.
 Page 7




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2006
 (Amounts in thousands, except per share amounts)
 1. Basis of Presentation
    2. New Accounting Standards
    Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 3. Accounts Receivable
   Three months ended September 30,2006
    
    
    2005Balance at beginning of period
    
    $
    462
    
    
    $
    352Bad debt expense
    
    
    56
    
    
    
    114Accounts written off, net
    
    
    
    
    
    
    Balance at end of period
    
    $
    518
    
    
    $
    466
 4. Inventories
   September 30,
    
    
    June 30,2006
    
    
    2006Material and component parts
    
    $
    4,925
    
    
    $
    4,417Work in progress
    
    
    966
    
    
    
    626Finished goods
    
    
    256
    
    
    
    2626,147
    
    
    
    5,305Reserve for obsolete and slow-moving inventory
    
    
    (490
    )
    
    
    (434
    )$
    5,657
    
    
    $
    4,871
 Page 9




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 4. Inventories  Continued
  Three months ended September 30,2006
    
    
    2005Balance at beginning of period
    
    $
    434
    
    
    $
    318Additions
    
    
    56
    
    
    
    52Amounts written off
    
    
    
    
    
    
    Balance at end of period
    
    $
    490
    
    
    $
    370
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
   September 30,
    
    
    June 30,2006
    
    
    2006Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    45,107
    
    
    $
    43,448Less billings to date
    
    
    (35,270
    )
    
    
    (32,158
    )$
    9,837
    
    
    $
    11,290
 Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
  September 30,
    
    
    June 30,2006
    
    
    2006Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    12,986
    
    
    $
    13,891Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (3,149
    )
    
    
    (2,601
    )$
    9,837
    
    
    $
    11,290
 6 Assets Held for Sale
   September 30,
    
    
    June 30,2006
    
    
    2006Buildings & improvements
    
    $
    2,768
    
    
    $
    2,768Equipment
    
    
    152
    
    
    
    152Furniture and fixtures
    
    
    13
    
    
    
    132,933
    
    
    
    2,933Less accumulated depreciation
    
    
    (2,794
    )
    
    
    (2,794
    )139
    
    
    
    139Land
    
    
    628
    
    
    
    628$
    767
    
    
    $
    767
 7. Product Warranties
  Page 11




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 7. Product Warranties  Continued
  Three months ended September 30,2006
    
    
    2005Balance at beginning of period
    
    $
    626
    
    
    $
    645Provision for warranty expenses
    
    
    69
    
    
    
    142Warranty charges
    
    
    (56
    )
    
    
    (71
    )Balance at end of period
    
    $
    639
    
    
    $
    716
 8. Contingencies
   9. Accrued Liabilities and Other
  September 30,
    
    
    June 30,2006
    
    
    2006Accrued start-up expense
    
    $
    1,700
    
    
    $
    1,717Accrued compensation
    
    
    565
    
    
    
    1,094Accrued professional, legal and other expenses
    
    
    599
    
    
    
    531Sales and use taxes payable
    
    
    26
    
    
    
    3Other
    
    
    426
    
    
    
    497$
    3,316
    
    
    $
    3,842
 Page 12




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 10. Stock Based Compensation
      Page 13




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 10.
Stock Based Compensation  Continued
  Three months ended September 30,2006
    
    
    2005Income from continuing operations before income taxes
    
    $
    26
    
    
    $
    22Income from continuing operations
    
    
    17
    
    
    
    15Net income
    
    
    17
    
    
    
    15Basic and diluted net earnings (loss) per common share
    
    $
    0.01
    
    
    $
    0.00
  2006
    
    
    2005Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseNo. of Options
    
    
    Price
    
    
    No. of Options
    
    
    PriceBalance at beginning of period
    
    
    143,650
    
    
    $
    14.02
    
    
    
    237,950
    
    
    $
    11.22Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (32,400
    )
    
    $
    13.77
    
    
    
    (250
    )
    
    $
    12.64Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    (2,800
    )
    
    $
    14.02Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at end of period
    
    
    111,250
    
    
    $
    14.09
    
    
    
    234,900
    
    
    $
    11.18Exercisable at end of period
    
    
    65,964
    
    
    $
    13.08
    
    
    
    170,600
    
    
    $
    10.36
   Page 14




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 10.
Stock Based Compensation  Continued
  2006
    
    2005Total cash received
    
    $
    446
    
    
    $
    4Income tax benefits
    
    $
    109
    
    
    $
    Total intrinsic value of options exercised
    
    $
    322
    
    
    $
    1
  WeightedAverageGrant DateNo. of Options
    
    Fair ValueUnvested at beginning of period
    
    
    45,286
    
    
    $
    6.75New Grants
    
    
    
    
    
    $
    Vested
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Unvested at end of period
    
    
    45,286
    
    
    $
    6.75
    WeightedAverageGrant DateNo. of Shares
    
    Fair ValueBalance at July 1, 2006
    
    
    10,000
    
    
    $
    17.06Granted
    
    
    
    
    
    $
    Vested
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Balance at September 30, 2006
    
    
    10,000
    
    
    $
    17.06
 Page 15




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 10.
Stock Based Compensation  Continued
  11. Discontinued Operations
   Page 16




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 12. Earnings (Loss) Per Share
  Three months ended September 30,2006
    
    
    2005Net earnings (loss) from continuing operations
    
    $
    451
    
    
    $
    (689
    )Loss from discontinued operations
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    451
    
    
    $
    (689
    )Basic weighted average common shares outstanding
    
    
    3,128
    
    
    
    3,037Effect of dilutive options and restricted stock
    
    
    63
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,191
    
    
    
    3,037Net earnings (loss) per share  basic:Earnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.23
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    0.00Net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.23
    )Net earnings (loss) per share  diluted:Earnings (loss) from continuing operations
    
    $
    0.14
    
    
    $
    (0.23
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    0.00Net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.23
    )
  Page 17




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 13. Segment Information
   Three months ended September 30,2006
    
    
    2005RevenuesEnvironmental
    
    $
    4,614
    
    
    $
    3,266Separation / Filtration
    
    
    10,024
    
    
    
    8,376Consolidated
    
    $
    14,638
    
    
    $
    11,642Operating income (loss)Environmental
    
    $
    932
    
    
    $
    (281
    )Separation / Filtration
    
    
    908
    
    
    
    266Reconciling items
    
    
    (1,188
    )
    
    
    (1,138
    )Consolidated
    
    $
    652
    
    
    $
    (1,153
    )
 Page 18




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 14. Lines of Credit
   15. Supplemental Cash Flow Information
  Three months ended September 30,2006
    
    2005Income taxes paid
    
    $
    310
    
    
    $
    Income taxes refunded
    
    $
    (297
    )
    
    $
    
 Page 19




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
  Environmental Systems.
 Separation / Filtration Systems.
 Critical Accounting Policies
   Revenue Recognition
 Page 20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
   Product Warranties
 Allowance for Doubtful Accounts
 Reserve for Obsolete and Slow-Moving Inventory
 Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
  Deferred
Tax Asset  Valuation Allowance
 Page 22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 Results of Operations
  Three months ended September 30,2006
    
    
    2005Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    70.0
    
    
    
    79.8Gross profit
    
    
    30.0
    
    
    
    20.2Operating expenses
    
    
    25.6
    
    
    
    30.1Operating earnings (loss)
    
    
    4.4
    
    
    
    (9.9
    )Other income
    
    
    0.3
    
    
    
    1.0Net earnings (loss) from continuing
operations before income taxes
    
    
    4.7
    
    
    
    (8.9
    )Income tax benefit (expense)
    
    
    (1.6
    )
    
    
    3.0Net earnings (loss) from continuing operations
    
    
    3.1
    
    
    
    (5.9
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    Net earnings (loss)
    
    
    3.1
    %
    
    
    (5.9
    )%




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Results
of Operations  Consolidated
 Revenues
  Three months ended September 30,2006
    
    
    % of Total
    
    
    2005
    
    
    % of TotalDomestic
    
    $
    7,605
    
    
    
    52.0
    %
    
    $
    6,571
    
    
    
    56.4
    %International
    
    $
    7,033
    
    
    
    48.0
    %
    
    $
    5,071
    
    
    
    43.6
    %Total revenues
    
    $
    14,638
    
    
    
    100.0
    %
    
    $
    11,642
    
    
    
    100.0
    %
  Gross Profit
  Three months ended September 30,2006
    
    
    % of Sales
    
    
    2005
    
    
    % of SalesRevenues
    
    $
    14,638
    
    
    
    100.0
    %
    
    $
    11,642
    
    
    
    100.0
    %Cost of goods sold
    
    
    10,243
    
    
    
    70.0
    %
    
    
    9,289
    
    
    
    79.8
    %Gross Profit
    
    $
    4,395
    
    
    
    30.0
    %
    
    $
    2,353
    
    
    
    20.2
    %




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 Operating Expenses
  Three months ended September 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Revenues
    
    
    2005
    
    
    RevenuesSales and marketing
    
    $
    1,722
    
    
    
    11.8
    %
    
    $
    1,542
    
    
    
    13.2
    %Engineering and project management
    
    
    833
    
    
    
    5.7
    %
    
    
    826
    
    
    
    7.1
    %General and administrative
    
    
    1,188
    
    
    
    8.1
    %
    
    
    1,138
    
    
    
    9.8
    %Total operating expenses
    
    $
    3,743
    
    
    
    25.6
    %
    
    $
    3,506
    
    
    
    30.1
    %
  Other Income and Expense
  Three months ended September 30,2006
    
    
    % of Sales
    
    
    2005
    
    
    % of SalesInterest income
    
    $
    62
    
    
    
    0.4
    %
    
    $
    53
    
    
    
    0.4
    %Foreign exchange gain (loss)
    
    
    (19
    )
    
    
    -0.1
    %
    
    
    28
    
    
    
    0.3
    %Other income, net
    
    
    
    
    
    
    0.0
    %
    
    
    32
    
    
    
    0.3
    %Total other income
    
    $
    43
    
    
    
    0.3
    %
    
    $
    113
    
    
    
    1.0
    %
  Income Taxes




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 Net Earnings (Loss) from Continuing Operations
  Discontinued Operations
  Net Earnings (Loss)
  Results
of Operations  Segments
  Environmental Systems
   Three months ended September 30,2006
    
    2005Revenue
    
    $
    4,614
    
    
    $
    3,266Operating income (loss)
    
    
    932
    
    
    
    (281
    )Operating income (loss)
as % of revenue
    
    
    20.2
    %
    
    
    (8.6
    )%




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
    Separation / Filtration Systems
   Three months ended September 30,2006
    
    2005Revenue
    
    $
    10,024
    
    
    $
    8,376Operating income
    
    
    908
    
    
    
    266Operating income as% of revenue
    
    
    9.1
    %
    
    
    3.2
    %




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
    Corporate Level Expenses
  Three months ended September 30,2006
    
    2005Corporate level expenses
    
    $
    1,188
    
    
    $
    1,138
  Contingencies




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
    Page 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
        New Accounting Standards
   Page 30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
   
 Item 4. Controls and Procedures
   Page 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Items 2, 3, 4, and 5 are not applicable and have been omitted.
 Page 32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 
 Item 6. Exhibits
   ExhibitNumber
    
    Exhibit31(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.
 Page 33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2006  (Amounts in thousands, except per share amounts)
 
 Signatures
  PEERLESS MFG. CO.Date: November 13, 2006
    /s/ Peter J. BurlagePeter J. Burlage President and Chief Executive Officer(Principal Executive Officer)Date:  November 13, 2006
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) Page 34