##### 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, 2005
 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 þ
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
 o þ




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 TABLE OF CONTENTS
  
 PageNumberPART I:FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2005 (unaudited) and June 30, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2005 and 2004
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37Rule 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 CEO
  2




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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, 2005
    
    
    June 30, 2005(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    5,937
    
    
    $
    8,277Accounts receivable  principally trade  net of
allowance of uncollectible accounts of $466 at
September 30, 2005 and $352 at June 30, 2005
    
    
    13,996
    
    
    
    11,613Inventories
    
    
    4,045
    
    
    
    3,297Costs and earnings in excess of billings
on uncompleted contracts
    
    
    8,157
    
    
    
    10,140Deferred income taxes
    
    
    1,163
    
    
    
    1,163Other  net
    
    
    1,873
    
    
    
    1,206Total current assets
    
    
    35,171
    
    
    
    35,696Property, plant and equipment  net
    
    
    3,172
    
    
    
    3,315Other assets
    
    
    811
    
    
    
    784Other assets of discontinued operations
    
    
    9
    
    
    
    9$
    39,163
    
    
    $
    39,804LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccount payable  trade
    
    $
    8,782
    
    
    $
    8,572Billings in excess of costs and earnings
on uncompleted contracts
    
    
    1,541
    
    
    
    2,081Commissions payable
    
    
    793
    
    
    
    762Product warranties
    
    
    916
    
    
    
    845Accrued liabilities and other
    
    
    3,394
    
    
    
    3,058Liabilities of discontinued operations
    
    
    58
    
    
    
    106Total current liabilities
    
    
    15,484
    
    
    
    15,424Deferred income taxes, net
    
    
    90
    
    
    
    90Shareholders equityCommon stock
    
    
    3,037
    
    
    
    3,036Additional paid-in capital
    
    
    2,139
    
    
    
    2,114Other
    
    
    133
    
    
    
    171Retained earnings
    
    
    18,280
    
    
    
    18,969Total shareholders equity
    
    
    23,589
    
    
    
    24,290Total liabilities and shareholders equity
    
    $
    39,163
    
    
    $
    39,804
 See accompanying notes to the consolidated financial statements.
 3




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 Three months endedSeptember 30,2005
    
    
    2004Revenues
    
    $
    11,642
    
    
    $
    11,218Cost of goods sold
    
    
    9,289
    
    
    
    8,003Gross profit
    
    
    2,353
    
    
    
    3,215Operating expensesSales and marketing
    
    
    1,542
    
    
    
    1,475Engineering and project management
    
    
    826
    
    
    
    951General and administrative
    
    
    1,138
    
    
    
    1,0553,506
    
    
    
    3,481Operating loss
    
    
    (1,153
    )
    
    
    (266
    )Other incomeForeign exchange gain
    
    
    28
    
    
    
    61Other income  net
    
    
    85
    
    
    
    40113
    
    
    
    101Loss from continuing operations before income taxes
    
    
    (1,040
    )
    
    
    (165
    )Income tax benefit
    
    
    351
    
    
    
    56Net loss from continuing operations
    
    
    (689
    )
    
    
    (109
    )Discontinued operations (Note 9)Loss from discontinued operations
    
    
    
    
    
    
    (30
    )Income tax benefit
    
    
    
    
    
    
    10Net loss from discontinued operations
    
    
    
    
    
    
    (20
    )Net loss
    
    $
    (689
    )
    
    $
    (129
    )BASIC LOSS PER SHARELoss from continuing operations
    
    $
    (0.23
    )
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Basic loss per share
    
    $
    (0.23
    )
    
    $
    (0.04
    )DILUTED LOSS PER SHARELoss from continuing operations
    
    $
    (0.23
    )
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Diluted loss per share
    
    $
    (0.23
    )
    
    $
    (0.04
    )
 See accompanying notes to the consolidated financial statements.
 4




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three months ended September 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (689
    )
    
    $
    (129
    )Net loss from discontinued operations
    
    
    
    
    
    
    (20
    )Net loss from continuing operations
    
    
    (689
    )
    
    
    (109
    )Adjustments to reconcile net loss from continuing operations
to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    162
    
    
    
    171Provision for bad debt
    
    
    114
    
    
    
    22Provision for warranty expense
    
    
    142
    
    
    
    159Inventory valuation reserve
    
    
    52
    
    
    
    6Foreign exchange gain
    
    
    (28
    )
    
    
    (61
    )Stock based compensation
    
    
    22
    
    
    
    Other
    
    
    
    
    
    
    70Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,497
    )
    
    
    (103
    )Inventories
    
    
    (800
    )
    
    
    (218
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    1,980
    
    
    
    554Other current assets
    
    
    (667
    )
    
    
    (139
    )Other assets
    
    
    (27
    )
    
    
    200Accounts payable
    
    
    209
    
    
    
    420Billings in excess of costs and earnings on uncompleted contracts
    
    
    (540
    )
    
    
    477Commissions payable
    
    
    31
    
    
    
    3Product warranties
    
    
    (71
    )
    
    
    (161
    )Income taxes payable
    
    
    
    
    
    
    (557
    )Accrued liabilities and other
    
    
    336
    
    
    
    (695
    )Net cash provided by (used in) operating activities of continuing operations
    
    
    (2,271
    )
    
    
    39Cash flow from investing activities:Purchases of property and equipment
    
    
    (19
    )
    
    
    (119
    )Net cash used in investing activities of continuing operations
    
    
    (19
    )
    
    
    (119
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    4
    
    
    
    97Net cash provided by financing activities of continuing operations
    
    
    4
    
    
    
    97Net cash used in discontinued operations
    
    
    (48
    )
    
    
    (102
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (6
    )
    
    
    (1
    )Net decrease in cash and cash equivalents
    
    
    (2,340
    )
    
    
    (86
    )Cash and cash equivalents at beginning of period
    
    
    8,277
    
    
    
    4,119Cash and cash equivalents at end of period
    
    $
    5,937
    
    
    $
    4,033
 See accompanying notes to consolidated financial statements.
 5




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.    Basis of Presentation
   Unless otherwise noted, all dollar and share amounts are in thousands, except per share amounts.
 2.    Accounts Receivable
  6




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2.    Accounts Receivable  Continued
  Three months ended September 30,2005
    
    
    2004Balance at beginning of period
    
    $
    352
    
    
    $
    431Bad debt expense
    
    
    114
    
    
    
    22Accounts written off, net
    
    
    
    
    
    
    (222
    )Balance at end of period
    
    $
    466
    
    
    $
    231
 3.    Inventories
   September 30,
    
    
    June 30,2005
    
    
    2005Raw materials
    
    $
    3,654
    
    
    $
    3,027Work in progress
    
    
    442
    
    
    
    232Finished goods
    
    
    319
    
    
    
    3564,415
    
    
    
    3,615Reserve for obsolete and slow-moving inventory
    
    
    (370
    )
    
    
    (318
    )$
    4,045
    
    
    $
    3,297
  Three months endedSeptember 30,2005
    
    
    2004Balance at beginning of period
    
    $
    318
    
    
    $
    196Additions
    
    
    52
    
    
    
    6Amounts written off
    
    
    
    
    
    
    Balance at end of period
    
    $
    370
    
    
    $
    202
 7




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 4.    Revenue Recognition and Cost and Earnings on Uncompleted Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
   September 30,
    
    
    June 30,2005
    
    
    2005Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    32,089
    
    
    $
    34,978Less billings to date
    
    
    (25,473
    )
    
    
    (26,919
    )$
    6,616
    
    
    $
    8,059
  September 30,
    
    
    June 30,2005
    
    
    2005Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    8,157
    
    
    $
    10,140Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (1,541
    )
    
    
    (2,081
    )$
    6,616
    
    
    $
    8,059
 8




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 5.    Product Warranties
  Three months endedSeptember 30,2005
    
    
    2004Balance at beginning of period
    
    $
    845
    
    
    $
    982Provision for warranty expenses
    
    
    142
    
    
    
    159Warranty charges
    
    
    (71
    )
    
    
    (161
    )Balance at end of period
    
    $
    916
    
    
    $
    980
 6.    Contingencies
    9




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7.    Accrued Liabilities
  September 30,
    
    
    June 30,2005
    
    
    2005Accrued start-up expense
    
    $
    1,348
    
    
    $
    974Accrued compensation
    
    
    513
    
    
    
    691Sales and use tax payable
    
    
    755
    
    
    
    523Accrued property tax expense
    
    
    166
    
    
    
    111Other
    
    
    612
    
    
    
    759$
    3,394
    
    
    $
    3,058
 8.    Stock Based Compensation
    10
    Table of Contents   PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.    Stock Based Compensation  Continued
  Three months endedSeptember 30, 2004Net loss, as reported
    
    $
    (129
    )Deduct: Total stock-based employee compensation
expense determined using the fair value based
method for all awards, net of tax
    
    
    (24
    )Pro forma net loss
    
    $
    (153
    )Loss per share:Basic  as reported
    
    $
    (0.04
    )Basic  pro forma
    
    $
    (0.05
    )Diluted  as reported
    
    $
    (0.04
    )Diluted  pro forma
    
    $
    (0.05
    )
  WeightedWeighted
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    Intrinsic# of Options
    
    
    Exercise
    
    
    Term
    
    
    Value(exact quantity)
    
    
    Price
    
    
    (in years)
    
    
    (in thousands)Balance at July 1, 2005
    
    
    237,950
    
    
    $
    11.22Granted
    
    
    
    
    
    $
    Exercised
    
    
    (250
    )
    
    $
    12.64Canceled
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Balance at September 30, 2005
    
    
    237,700
    
    
    $
    11.22
    
    
    
    6.03
    
    
    $
    1,275Exercisable at September 30, 2005
    
    
    170,600
    
    
    $
    10.36
    
    
    
    4.99
    
    
    $
    873
   11




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.    Stock Based Compensation  Continued
   9.    Discontinued Operations
   Three months endedSeptember 30,2005
    
    
    2004Revenues
    
    $
    
    
    
    $
    Cost of goods sold
    
    
    
    
    
    
    25Gross loss
    
    
    
    
    
    
    (25
    )Operating expenses
    
    
    
    
    
    
    5Operating loss
    
    
    
    
    
    
    (30
    )Income tax benefit
    
    
    
    
    
    
    10Net loss from operations
    
    $
    
    
    
    $
    (20
    )Diluted loss per share
    
    $
    
    
    
    $
    (0.01
    )
  September 30,
    
    
    June 30,2005
    
    
    2005AssetsEquipment  net of accumulated depreciation of $11
at September 30, 2005 and June 30, 2005.
    
    $
    9
    
    
    $
    9Total assets of discontinued operations
    
    $
    9
    
    
    $
    9LiabilitiesProduct warranties and other reserves
    
    $
    58
    
    
    $
    106Total current liabilities of discontinued operations
    
    $
    58
    
    
    $
    106
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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.    Comprehensive Loss
  Three Months EndedSeptember 30,2005
    
    
    2004Net loss from continuing operations
    
    $
    (689
    )
    
    $
    (109
    )Net loss from discontinued operations
    
    
    
    
    
    
    (20
    )Foreign currency translation adjustment
    
    
    (38
    )
    
    
    (9
    )Comprehensive loss
    
    $
    (727
    )
    
    $
    (138
    )
 11.    Loss Per Share
 Certain loss per share amounts may not total
due to rounding.
 Three months endedSeptember 30,2005
    
    
    2004Net loss from continuing operations
    
    $
    (689
    )
    
    $
    (109
    )Loss from discontinued operations
    
    
    
    
    
    
    (20
    )Net loss
    
    $
    (689
    )
    
    $
    (129
    )Basic weighted average common shares outstanding
    
    
    3,037
    
    
    
    3,015Effect of dilutive options
    
    
    
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,037
    
    
    
    3,015BASIC LOSS PER SHARELoss from continuing operations
    
    $
    (0.23
    )
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net loss per share
    
    $
    (0.23
    )
    
    $
    (0.04
    )DILUTED LOSS PER SHARELoss from continuing operations
    
    $
    (0.23
    )
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Net loss per share
    
    $
    (0.23
    )
    
    $
    (0.04
    )
  13




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12.    Segment Information
   Separation
    
    
    General &Environmental
    
    
    Filtration
    
    
    AdministrativeThree months ended September 30, 2005
    
    Systems
    
    
    Systems
    
    
    Expenses
    
    
    ConsolidatedNet revenues from customers
    
    $
    3,266
    
    
    $
    8,376
    
    
    $
    
    
    
    $
    11,642Segment profit (loss)
    
    
    (269
    )
    
    
    254
    
    
    
    (1,138
    )
    
    
    (1,153
    )Three months ended
September 30, 2004Net revenues from customers
    
    $
    3,990
    
    
    $
    7,228
    
    
    $
    
    
    
    $
    11,218Segment profit (loss)
    
    
    64
    
    
    
    725
    
    
    
    (1,055
    )
    
    
    (266
    )
 14




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13.    Industry Segment and Geographic Information
  United
    
    
    UnitedStates
    
    
    Kingdom
    
    
    Eliminations
    
    
    ConsolidatedThree months ended September 30, 2005Net sales to unaffiliated customers
    
    $
    9,344
    
    
    $
    2,298
    
    
    $
    
    
    
    $
    11,642Transfers between geographic areas
    
    
    31
    
    
    
    
    
    
    
    (31
    )
    
    
    Total
    
    $
    9,375
    
    
    $
    2,298
    
    
    $
    (31
    )
    
    $
    11,642Identifiable long-lived assets
    
    $
    3,109
    
    
    $
    63
    
    
    $
    
    
    
    $
    3,172Three months ended September 30, 2004Net sales to unaffiliated customers
    
    $
    8,981
    
    
    $
    2,237
    
    
    $
    
    
    
    $
    11,218Transfers between geographic areas
    
    
    760
    
    
    
    
    
    
    
    (760
    )
    
    
    Total
    
    $
    9,741
    
    
    $
    2,237
    
    
    $
    (760
    )
    
    $
    11,218Identifiable long-lived assets
    
    $
    2,922
    
    
    $
    79
    
    
    $
    
    
    
    $
    3,001
   15




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.    Lines of Credit
   16.    Supplemental cash flow Information
  Three months endedSeptember 30.2005
    
    
    2004Income taxes paid
    
    $
    
    
    
    $
    510Tax benefit of stock option exercises
    
    $
    
    
    
    $
    32
 16




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
   Overview
  Environmental Systems.
 Separation Filtration Systems.
 17




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Critical Accounting Policies
   Revenue Recognition
  18




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Product Warranties.
 Allowance for Doubtful Accounts.
 Reserve for Obsolete and Slow-Moving Inventory.
 Deferred Tax Asset  Valuation Allowance.
 19




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Results of Operations
  Three Months EndedSeptember 30,2005
    
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    79.8
    
    
    
    71.3Gross profit
    
    
    20.2
    
    
    
    28.7Operating expenses
    
    
    30.1
    
    
    
    31.0Operating loss
    
    
    (9.9
    )
    
    
    (2.3
    )Other income
    
    
    1.0
    
    
    
    0.9Net loss from continuing
operations before income taxes
    
    
    (8.9
    )
    
    
    (1.4
    )Income tax benefit
    
    
    3.0
    
    
    
    0.5Net loss from continuing operations
    
    
    (5.9
    )
    
    
    (0.9
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (0.2
    )Net loss
    
    
    (5.9
    )%
    
    
    (1.1
    )%
 Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
 Results of Operations  Consolidated
 Revenues.
 Three months ended September 30,2005
    
    
    % of Total
    
    2004
    
    
    % of TotalDomestic
    
    $
    6,571
    
    
    
    56.4
    %
    
    $
    7,373
    
    
    
    65.7
    %International
    
    $
    5,071
    
    
    
    43.6
    %
    
    $
    3,845
    
    
    
    34.3
    %Total
    
    $
    11,642
    
    
    
    100.0
    %
    
    $
    11,218
    
    
    
    100.0
    %
  20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Gross Profit Margin .
 Three months ended September 30,2005
    
    
    % of Sales
    
    2004
    
    
    % of SalesSelling margin
    
    $
    3,622
    
    
    
    31.1
    %
    
    $
    3,796
    
    
    
    33.8
    %Unabsorbed manufacturing
    
    $
    (646
    )
    
    
    -5.5
    %
    
    $
    (341
    )
    
    
    -3.0
    %Warranty and start up costs
    
    $
    (623
    )
    
    
    -5.4
    %
    
    $
    (240
    )
    
    
    -2.1
    %Gross profit margin
    
    $
    2,353
    
    
    
    20.2
    %
    
    $
    3,215
    
    
    
    28.7
    %
   Operating Expenses.
 Three months ended September 30,2005
    
    
    % of Sales
    
    2004
    
    
    % of SalesSales and marketing
    
    $
    1,542
    
    
    
    13.2
    %
    
    $
    1,475
    
    
    
    13.1
    %Engineering & project management
    
    
    826
    
    
    
    7.1
    %
    
    
    951
    
    
    
    8.5
    %General and administrative
    
    
    1,138
    
    
    
    9.8
    %
    
    
    1,055
    
    
    
    9.4
    %Total operating expenses
    
    $
    3,506
    
    
    
    30.1
    %
    
    $
    3,481
    
    
    
    31.0
    %
 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
  Other Income and Expense
  Income Taxes
  Net Loss from Continuing Operations
  Discontinued Operations
  22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Net Loss
  Results of Operations  Segments
  Environmental Systems
 Separation Filtration Systems
 Revenue .
 Three months endedSeptember 30,2005
    
    
    %
    
    2004
    
    
    %RevenuesEnvironmental Systems
    
    $
    3,266
    
    
    
    28.1
    %
    
    $
    3,990
    
    
    
    35.6
    %Separation Filtration Systems
    
    
    8,376
    
    
    
    71.9
    %
    
    
    7,228
    
    
    
    64.4
    %Total
    
    $
    11,642
    
    
    
    100.0
    %
    
    $
    11,218
    
    
    
    100.0
    %
  23




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
   Segment Profit
 Three months endedSeptember 30,2005
    
    
    2004Segment profitEnvironmental Systems
    
    $
    (269
    )
    
    $
    64Separation Filtration Systems
    
    
    254
    
    
    
    725Total
    
    
    (15
    )
    
    
    789General and administrative expenses
    
    
    (1,138
    )
    
    
    (1,055
    )Operating loss
    
    $
    (1,153
    )
    
    $
    (266
    )
  Environmental Systems.
 24




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 1.
    
    Start-up and warranty expenses, as a percentage of sales.
Actual start-up and warranty expenses were approximately $310,000, or 9.5% of
revenue in the first quarter of fiscal 2006 compared to $223,000, or 5.6% of
revenue in the first quarter of fiscal 2005. The increase in expense during
the first quarter of fiscal 2006 relates predominately to the operation of mechanical equipment outside the
customary operating parameters. The solution required changes to the operating
procedures to ensure the problem does not recur. Although, not all of the units
installed in these unique operating conditions have failed, the modified
operating procedures will be circulated to all installed systems to ensure the
project owners are aware of the potential risk of future claims that may not
fall within our warranty period.2.
    
    Decrease in selling margin. Our selling margin decreased by
approximately 2.2% of sales in the first quarter of fiscal 2006, compared to
the first quarter of fiscal 2005. This decrease is primarily attributable to
increased competitive market conditions, combined with increased cost of
component parts.3.
    
    Operational expenses, as a percentage of sales. As part of our
on-going cost control monitoring, our operational expenses have continued to
decline from approximately $886,000 in the first quarter of fiscal 2005, to
$770,000 in the first quarter of fiscal 2006. However, due to declines in this
segments revenue that exceeded its expense reductions over these periods,
expenses, as a percentage of sales, have actually increased from 22.2% in the
first quarter of fiscal 2005, to 23.6% in the first quarter of fiscal 2006.
 Separation Filtration Systems
 1.
    
    Decrease in selling margin.Our selling margin decreased by
approximately 3.4% of sales in the first quarter of fiscal 2006, compared to
the first quarter of fiscal 2005. This decrease is primarily attributable to
increased competitive market conditions encountered with the sales of gas
separation and filtration equipment though our U.K. subsidiary.2.
    
    Material price increases. Our component and raw material
prices for this segments product line have increased steadily over the past
year. Most of the contracts governing the sale of these products are
long-term, fixed-priced contracts which, in a volatile environment, increase
our risks to margin deterioration. We attempt to stabilize our costs by
ordering materials at the time an order is received. However, on long-term
deliverable contracts, it is not always possible. To mitigate our risk under
these contracts, we attempt to negotiate escalation provisions. However, such
provisions do not always cover our full exposure. See Factors That May Affect
Our Operating Results and Other Risk Factors  We enter into fixed-priced
contracts. If our actual costs exceed our original estimates, our profits will
be reduced. page 30 of this Report.3.
    
    Start-up and warranty expenses, as a percentage of sales.
Actual start-up and warranty expenses were approximately $313,000, or 3.7% of
revenue in the first quarter of fiscal 2006 compared to approximately $17,000,
or 0.2% of revenue in the first quarter of fiscal 2005. The increase in expense during the first
quarter of fiscal 2006 is predominantly attributable to a specific mechanical
component failure supplied to operate in high temperature conditions.
 25




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 Market Outlook
 Environmental Systems.
 Separation Filtration Systems.
 Contingencies
   26




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
  Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
  27




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
       28




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
   Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
  Factors That May Affect Our Operating Results and Other Risk Factors
  Changes in the power generation industry and/or the economy could have an adverse impact on sales
of our Environmental Systems and our operating results.
  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.
  29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 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 margin.
  We enter into fixed-priced contracts. If our actual costs exceed our original estimates, our
profits will be reduced.
  Our backlog may not be indicative of our future revenue.
  30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
  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.
  Our gross profit margin is affected by shifts in our product mix.
  Our products are covered by warranties. Unanticipated warranty costs for defective products could
adversely affect our financial condition and results of operations and reputation.
  31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
  Product liability claims not covered by insurance could adversely affect our financial condition
and results of operations.
  Large contracts represent a significant portion of our accounts receivable, 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. We may not
be able to raise additional capital, if needed.
  32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
  Our business is subject to risks of terrorist acts, acts of war and natural disasters.
  Our common stock is thinly traded, which may result in low liquidity.
  The inability of our engineering and/or manufacturing operations to sufficiently scale up
operations in the short term, in response to unexpected spikes in orders with short cycle times,
directly impacts our ability to optimize absorption of our manufacturing overhead expense.
  Our customers may require us to execute portions of our projects in their local countries.
  33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures
     34




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Items 2, 3, 4, and 5 are not applicable and have been omitted.
 35




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 Item 6. Exhibits
   ExhibitNumber
    
    Exhibit3(a)
    
    Articles of Incorporation, as amended to date (filed as Exhibit 3(a) to
our Quarterly Report on Form 10-Q (file No. 0-5214) for the fiscal
quarter ended December 31, 1997, and incorporated herein by reference).3(b)
    
    Bylaws, as amended to date (filed as Exhibit 3(b) to our Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2004, and
incorporated herein by reference).4(a)
    
    Rights Agreement dated May 22, 1997 between Peerless Mfg. Co. and Mellon
Investor Services, LLC (formerly ChaseMellon Shareholder Services,
L.L.C.), as Rights Agent (filed as Exhibit 1 to our Registration
Statement on Form 8-A (file No. 0-5214), dated May 22, 1997, and
incorporated herein by reference).4(b)
    
    Amendment to Rights Agreement dated August 23, 2001, between Peerless
Mfg. Co. and Mellon Investor Services, LLC, as Rights Agent (filed as
Exhibit 2 to our Registration Statement on Form 8-A dated August 30,
2001, and incorporated herein by reference).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. **
 
 *
    
    Filed herewith**
    
    Furnished herewith 36




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005
 
 Signatures
  PEERLESS MFG. CO.Date: November 14, 2005
    /s/ Sherrill StoneSherrill StoneChairman and Chief Executive OfficerDate: November 14, 2005
    /s/Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) 37