##### 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, 2007
 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 0-33453
 PEERLESS MFG. CO.
  Texas
    
    75-0724417(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)14651 North Dallas Parkway, Suite 500, Dallas, Texas
    
    75254(Address of Principal Executive Offices)
    
    (Zip code)
 (214) 357-6181  (Registrants Telephone Number, Including Area Code)
 þ o
  o þ o
 o þ




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##### 



TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2007 (unaudited)
and June 30, 2007
    
    
    4Unaudited Condensed Consolidated Statements of Operations for the three months
ended September 30, 2007 and 2006
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2007 and 2006
    
    
    6Unaudited Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income for the three months ended September 30, 2007 and 2006
    
    
    7Notes to the Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30Rule 13a-14(a)/15d-14(a) Certification of Chief Executive OfficerRule 13a-14(a)/15d-14(a) Certification of Chief Financial OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Chief Financial Officer
  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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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 September 30
    
    
    June 30,2007
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,958
    
    
    $
    17,015Restricted cash
    
    
    2,865
    
    
    
    2,811Accounts receivable-principally trade  net of
allowance for doubtful accounts of $465 at
September 30, 2007 and $465 at June 30, 2007
    
    
    19,952
    
    
    
    21,329Inventories
    
    
    6,300
    
    
    
    3,919Costs and earnings in excess of billings
on uncompleted contracts
    
    
    16,871
    
    
    
    15,976Deferred income taxes
    
    
    1,410
    
    
    
    1,410Other current assets
    
    
    1,950
    
    
    
    1,646Total current assets
    
    
    73,306
    
    
    
    64,106Property, plant and equipment  net
    
    
    3,767
    
    
    
    3,747Other assets
    
    
    624
    
    
    
    818Total assets
    
    $
    77,697
    
    
    $
    68,671LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    18,308
    
    
    $
    17,217Billings in excess of costs and earnings
on uncompleted contracts
    
    
    12,246
    
    
    
    6,970Commissions payable
    
    
    1,500
    
    
    
    1,401Income taxes payable
    
    
    1,406
    
    
    
    1,576Product warranties
    
    
    947
    
    
    
    641Accrued liabilities and other
    
    
    4,518
    
    
    
    5,679Total current liabilities
    
    
    38,925
    
    
    
    33,484Deferred income taxes
    
    
    1,005
    
    
    
    1,010Other non current liabilities
    
    
    930
    
    
    
    640Commitments and contingenciesShareholders equity:Common stock  authorized, 10,000,000 shares
of $1 par value; issued and outstanding,
6,469,938 and 6,439,644 shares at September 30, 2007
and June 30, 2007, respectively
    
    
    6,470
    
    
    
    6,440Additional paid-in capital
    
    
    1,415
    
    
    
    1,359Accumulated other comprehensive income
    
    
    468
    
    
    
    431Retained earnings
    
    
    28,484
    
    
    
    25,307Total shareholders equity
    
    
    36,837
    
    
    
    33,537Total liabilities and shareholders equity
    
    $
    77,697
    
    
    $
    68,671
 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 30,2007
    
    
    2006Revenues
    
    $
    30,018
    
    
    $
    14,638Cost of goods sold
    
    
    19,633
    
    
    
    10,243Gross profit
    
    
    10,385
    
    
    
    4,395Operating expensesSales and marketing
    
    
    2,477
    
    
    
    1,722Engineering and project management
    
    
    1,072
    
    
    
    833General and administrative
    
    
    2,052
    
    
    
    1,1885,601
    
    
    
    3,743Operating income
    
    
    4,784
    
    
    
    652Other income (expense)Interest income
    
    
    367
    
    
    
    62Foreign exchange gain (loss)
    
    
    69
    
    
    
    (19
    )Other income (loss)  net
    
    
    (9
    )
    
    
    427
    
    
    
    43Earnings before income taxes
    
    
    5,211
    
    
    
    695Income tax expense
    
    
    (1,825
    )
    
    
    (244
    )Net earnings
    
    $
    3,386
    
    
    $
    451Earnings per share  basic
    
    $
    0.53
    
    
    $
    0.07Earnings per share  diluted
    
    $
    0.52
    
    
    $
    0.07
 Note: September 30, 2006 earnings per share amounts adjusted for  June 2007 two-for-one stock split in the form of a dividend.
 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 30,2007
    
    
    2006Cash flows from operating activities:Net earnings
    
    $
    3,386
    
    
    $
    451Adjustments to reconcile net earnings from operations to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    199
    
    
    
    168Deferred income taxes
    
    
    (5
    )
    
    
    (9
    )Deferred rent expense
    
    
    81
    
    
    
    Bad debt expense
    
    
    
    
    
    
    56Provision for warranty expenses
    
    
    316
    
    
    
    69Inventory valuation reserve
    
    
    159
    
    
    
    56Foreign exchange (gain) loss
    
    
    (69
    )
    
    
    19Excess tax benefits from stock-based payment arrangements
    
    
    
    
    
    
    (109
    )Stock based compensation
    
    
    86
    
    
    
    36Changes in operating assets and liabilities of operations:Accounts receivable
    
    
    1,425
    
    
    
    2,906Inventories
    
    
    (2,535
    )
    
    
    (842
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    (848
    )
    
    
    904Other current assets
    
    
    (301
    )
    
    
    307Other assets
    
    
    194
    
    
    
    (4
    )Accounts payable
    
    
    1,143
    
    
    
    (3,176
    )Billings in excess of costs and earnings on uncompleted contracts
    
    
    5,276
    
    
    
    548Commissions payable
    
    
    99
    
    
    
    10Income taxes payable
    
    
    (170
    )
    
    
    237Product warranties
    
    
    (10
    )
    
    
    (56
    )Accrued liabilities and other
    
    
    (1,145
    )
    
    
    (531
    )Net cash provided by operating activities of operations
    
    
    7,281
    
    
    
    1,040Cash flow from investing activities of operations:Increase in restricted cash
    
    
    
    
    
    
    (2,621
    )Purchases of property and equipment
    
    
    (219
    )
    
    
    (106
    )Net cash used in investing activities of operations
    
    
    (219
    )
    
    
    (2,727
    )Cash flows from financing activities of operations:Proceeds from exercise of stock options
    
    
    
    
    
    
    446Excess tax benefits from stock-based payment arrangements
    
    
    
    
    
    
    109Net cash provided by financing activities of operations
    
    
    
    
    
    
    555Effect of exchange rate changes on cash and cash equivalents
    
    
    (119
    )
    
    
    18Net increase (decrease) in cash and cash equivalents
    
    
    6,943
    
    
    
    (1,114
    )Cash and cash equivalents at beginning of period
    
    
    17,015
    
    
    
    6,411Cash and cash equivalents at end of period
    
    $
    23,958
    
    
    $
    5,297
 See accompanying notes to condensed consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 AND COMPREHENSIVE INCOME
 (In thousands)
  Three months ended September 30,2007
    
    
    2006Common stockBalance at beginning of period
    
    $
    6,440
    
    
    $
    6,268Common stock issued
    
    
    30
    
    
    
    64Balance at end of period
    
    
    6,470
    
    
    
    6,332Additional paid-in capitalBalance at beginning of period
    
    
    1,359
    
    
    
    9Common stock issued with restrictions
    
    
    (30
    )
    
    
    Stock option exercised
    
    
    
    
    
    
    382Income tax benefit related to stock options exercised
    
    
    
    
    
    
    109Stock-based compensation expense
    
    
    86
    
    
    
    36Balance at end of period
    
    
    1,415
    
    
    
    536Accumulated other comprehensive incomeBalance at beginning of period
    
    
    431
    
    
    
    245Foreign currency translation adjustment
    
    
    37
    
    
    
    30Balance at end of period
    
    
    468
    
    
    
    275Retained earningsBalance at beginning of period
    
    
    25,307
    
    
    
    19,395Cumulative effect of a change in accounting principle
(adoption of FIN 48)
    
    
    (209
    )
    
    
    Net earnings
    
    
    3,386
    
    
    
    451Balance at end of period
    
    
    28,484
    
    
    
    19,846Total shareholders equity
    
    $
    36,837
    
    
    $
    26,989
 Note: September 30, 2006 common stock and additional paid-in capital amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.
 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, 2007
 (Amounts in thousands, except share and per share amounts)
 1. Basis of Presentation
   2. New Accounting Standards
  Fair Value
Measurements
 The Fair
Value Option for Financial Assets and Financial Liabilities
 Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 3. Accounts Receivable
   Three months ended September 30,2007
    
    
    2006Balance at beginning of period
    
    $
    465
    
    
    $
    462Bad debt expense
    
    
    
    
    
    
    56Accounts written off, net
    
    
    
    
    
    
    Balance at end of period
    
    $
    465
    
    
    $
    518
 4. Inventories
   September 30,
    
    
    June 30,2007
    
    
    2007Material and component parts
    
    $
    5,819
    
    
    $
    3,652Work in progress
    
    
    920
    
    
    
    613Finished goods
    
    
    252
    
    
    
    1866,991
    
    
    
    4,451Reserve for obsolete and slow-moving inventory
    
    
    (691
    )
    
    
    (532
    )$
    6,300
    
    
    $
    3,919
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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 4. Inventories  Continued
  Three months ended September 30,2007
    
    
    2006Balance at beginning of period
    
    $
    532
    
    
    $
    434Additions
    
    
    159
    
    
    
    56Amounts written off
    
    
    
    
    
    
    Balance at end of period
    
    $
    691
    
    
    $
    490
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
    September 30,
    
    
    June 30,2007
    
    
    2007Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    87,467
    
    
    $
    70,527Less billings to date
    
    
    (82,842
    )
    
    
    (61,521
    )$
    4,625
    
    
    $
    9,006
 Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 5.
Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
  September 30,
    
    
    June 30,2007
    
    
    2007Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    16,871
    
    
    $
    15,976Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (12,246
    )
    
    
    (6,970
    )$
    4,625
    
    
    $
    9,006
 6. Product Warranties
   Three months ended September 30,2007
    
    
    2006Balance at beginning of period
    
    $
    641
    
    
    $
    626Provision for warranty expenses
    
    
    316
    
    
    
    69Warranty charges
    
    
    (10
    )
    
    
    (56
    )Balance at end of period
    
    $
    947
    
    
    $
    639
 Page 11




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 7. Accrued Liabilities and Other
  September 30,
    
    
    June 30,2007
    
    
    2007Accrued start-up expense
    
    $
    2,519
    
    
    $
    2,095Accrued compensation
    
    
    881
    
    
    
    1,755Accrued professional, legal and other expenses
    
    
    427
    
    
    
    1,555Sales and use taxes payable
    
    
    28
    
    
    
    24Other
    
    
    663
    
    
    
    250$
    4,518
    
    
    $
    5,679
 8. Income Taxes
  9. Stock Based Compensation
    Page 12




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 9.
Stock Based Compensation  Continued
   Three months ended September 30,2007
    
    2006Earnings before income taxes
    
    
    
    $
    14
    
    
    $
    26Net earnings
    
    
    
    
    9
    
    
    
    17Basic and diluted net earnings per common share
    
    
    
    $
    0.00
    
    
    $
    0.00
    Summary of Stock Option Activity2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNo. of Options
    
    Price
    
    No. of Options
    
    PriceBalance at June 30
    
    
    147,874
    
    
    $
    7.68
    
    
    
    143,650
    
    
    $
    7.01Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (32,400
    )
    
    
    6.89Forfeited before vesting
    
    
    (8,000
    )
    
    
    7.75
    
    
    
    
    
    
    
    Forfeited after vesting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at September 30
    
    
    139,874
    
    
    
    7.67
    
    
    
    111,250
    
    
    
    7.05Exercisable at September 30
    
    
    88,574
    
    
    
    7.49
    
    
    
    65,964
    
    
    
    6.54
  Page 13




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 9.
Stock Based Compensation  Continued
  Summary of Unvested Stock Options2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Options
    
    Fair Value
    
    No. of Options
    
    Fair ValueUnvested at June 30
    
    
    59,300
    
    
    $
    3.41
    
    
    
    45,286
    
    
    $
    3.38New Grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    Unvested at September 30
    
    
    51,300
    
    
    
    3.43
    
    
    
    45,286
    
    
    
    3.38
    Summary of Restricted Stock Awards2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    Grant DateNo. of Shares
    
    Fair Value
    
    No. of Shares
    
    Fair ValueBalance at June 30
    
    
    37,600
    
    
    $
    12.17
    
    
    
    10,000
    
    
    $
    17.06Granted
    
    
    31,094
    
    
    
    21.71
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (800
    )
    
    
    12.49
    
    
    
    
    
    
    
    Balance at September 30
    
    
    67,894
    
    
    
    16.53
    
    
    
    10,000
    
    
    
    17.06
  Page 14




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 10. Earnings Per Share
 (the
number of shares and earnings per share have been adjusted for our two-for-one stock split in June
2007):
 Three months ended September 30,2007
    
    
    2006Net earnings
    
    $
    3,386
    
    
    $
    451Basic weighted average common shares outstanding
    
    
    6,402,044
    
    
    
    6,256,531Effect of dilutive options and restricted stock awards
    
    
    63,800
    
    
    
    124,521Diluted weighted average common shares outstanding
    
    
    6,465,844
    
    
    
    6,381,052Earnings per share  basic
    
    $
    0.53
    
    
    $
    0.07Earnings per share  diluted
    
    $
    0.52
    
    
    $
    0.07
  Page 15




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 11. Segment Information
   Three months ended September 30,2007
    
    
    2006RevenuesEnvironmental
    
    $
    16,295
    
    
    $
    4,614Separation / Filtration
    
    
    13,723
    
    
    
    10,024Consolidated
    
    $
    30,018
    
    
    $
    14,638Operating income (loss)Environmental
    
    $
    4,649
    
    
    $
    932Separation / Filtration
    
    
    2,187
    
    
    
    908Reconciling items
    
    
    (2,052
    )
    
    
    (1,188
    )Consolidated
    
    $
    4,784
    
    
    $
    652
 Page 16




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 12. Supplemental Cash Flow Information
  Three months ended September 30,2007
    
    2006Income taxes paid
    
    $
    2,000
    
    
    $
    310Income taxes refunded
    
    $
    
    
    
    $
    (297
    )
 13. Lines of Credit
    Page 17




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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and 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 18




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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
   Product Warranties
 Allowance for Doubtful Accounts
 Reserve for Obsolete and Slow-Moving Inventory
 Page 19




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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Results of Operations
  Three months ended September 30,2007
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    65.4
    
    
    
    70.0Gross profit
    
    
    34.6
    
    
    
    30.0Operating expenses
    
    
    18.7
    
    
    
    25.6Operating Income
    
    
    15.9
    
    
    
    4.4Other income
    
    
    1.40
    
    
    
    0.3Earnings before income tax
    
    
    17.3
    
    
    
    4.7Income tax expense
    
    
    (6.0
    )
    
    
    (1.6
    )Net earnings
    
    
    11.3
    %
    
    
    3.1
    %
      Page 20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Results
of Operations  Consolidated
 Revenues
 
 Three months ended September 302007
    
    
    % of Total
    
    
    2006
    
    
    % of TotalDomestic
    
    $
    21,052
    
    
    
    70.1
    %
    
    $
    7,605
    
    
    
    52.0
    %International
    
    
    8,966
    
    
    
    29.9
    %
    
    
    7,033
    
    
    
    48.0
    %Total revenues
    
    $
    30,018
    
    
    
    100.0
    %
    
    $
    14,638
    
    
    
    100.0
    %
   Gross Profit
  Three months ended September 30,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesRevenues
    
    $
    30,018
    
    
    
    100.0
    %
    
    $
    14,638
    
    
    
    100.0
    %Cost of goods sold
    
    
    19,633
    
    
    
    65.4
    %
    
    
    10,243
    
    
    
    70.0
    %Gross profit
    
    $
    10,385
    
    
    
    34.6
    %
    
    $
    4,395
    
    
    
    30.0
    %
  Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Operating Expenses
  Three months ended September 30,% of
    
    
    
    
    
    
    % of2007
    
    
    Revenues
    
    
    2006
    
    
    RevenuesSales and marketing
    
    $
    2,477
    
    
    
    8.3
    %
    
    $
    1,722
    
    
    
    11.8
    %Engineering and project
management
    
    
    1,072
    
    
    
    3.6
    %
    
    
    833
    
    
    
    5.7
    %General and administrative
    
    
    2,052
    
    
    
    6.8
    %
    
    
    1,188
    
    
    
    8.1
    %Total operating expenses
    
    $
    5,601
    
    
    
    18.7
    %
    
    $
    3,743
    
    
    
    25.6
    %
  Other Income and Expense
  Three months ended September 30,2007
    
    
    % of Revenues
    
    
    2006
    
    
    % of RevenuesInterest income
    
    $
    367
    
    
    
    1.2
    %
    
    $
    62
    
    
    
    0.4
    %Foreign
exchange gain (loss)
    
    
    69
    
    
    
    0.2
    %
    
    
    (19
    )
    
    
    -0.1
    %Other expense, net
    
    
    (9
    )
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Total other income
    
    $
    427
    
    
    
    1.4
    %
    
    $
    43
    
    
    
    0.3
    %
  Income Taxes
  Page 22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Net Earnings
  Results
of Operations  Segments
  Environmental Systems
   Three months ended September 30,2007
    
    2006Revenues
    
    $
    16,295
    
    
    $
    4,614Operating income
    
    
    4,649
    
    
    
    932Operating income as % of revenue
    
    
    28.5
    %
    
    
    20.2
    %
    Page 23




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
  Separation Filtration Systems
  :
 Three months ended September 30,2007
    
    2006Revenues
    
    $
    13,723
    
    
    $
    10,024Operating income
    
    
    2,187
    
    
    
    908Operating income as % of
revenue
    
    
    15.9
    %
    
    
    9.1
    %
    Page 24




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Corporate Level Expenses
  Three months ended September 30,2007
    
    2006Corporate level expenses
    
    $
    2,052
    
    
    $
    1,188
  Contingencies
   Backlog
  Financial Position
 Assets.
 Page 25




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 Liabilities and Shareholders Equity.
 Liquidity and Capital Resources
       Page 26




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
    New Accounting Standards
  Fair
Value Measurements
 The
Fair Value Option for Financial Assets and Financial Liabilities
 Page 27




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
    Page 28




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and 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.
 
 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 29




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PEERLESS MFG. CO. AND SUBSIDIARIES
SEPTEMBER 30, 2007  (Amounts in thousands, except share and per share amounts)
 
 Signatures
  PEERLESS MFG. CO.Date: November 6, 2007
    /s/ Peter J. BurlagePeter J. BurlagePresident and Chief Executive Officer
(Principal Executive Officer)Date:  November 6, 2007
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) Page 30