##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended March 31, 2008
 Commission File Number 001-33453
 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
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PageNumberPART I: FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at March 31, 2008 (unaudited)
and June 30, 2007
    
    
    4Unaudited Consolidated Statements of Earnings for the three and nine months
ended March 31, 2008 and 2007
    
    
    5Unaudited Consolidated Statements of Cash Flows for the
nine months ended March 31, 2008 and 2007
    
    
    6Unaudited Consolidated Statements of Shareholders Equity for the
nine months ended March 31, 2008 and 2007
    
    
    7Notes to the 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
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II: OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    39Rule 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;
    
    risks associated with our recent acquisition of Nitram Energy, Inc., including the
integration of Nitrams operations with those of Peerless and the significant
indebtedness that we incurred in connection with this acquisition;
    
    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
 
 CONSOLIDATED BALANCE SHEETS  (In thousands, except share amounts)
 March 31,
    
    
    June 30,2008
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,777
    
    
    $
    17,015Restricted cash
    
    
    2,778
    
    
    
    2,811Accounts receivable-principally trade  net of
allowance for doubtful accounts of $465 at
March 31, 2008 and June 30, 2007
    
    
    26,913
    
    
    
    21,329Inventories
    
    
    6,876
    
    
    
    3,919Costs and earnings in excess of billings
on uncompleted contracts
    
    
    15,548
    
    
    
    15,976Deferred income taxes
    
    
    1,393
    
    
    
    1,410Other current assets
    
    
    2,742
    
    
    
    1,646Total current assets
    
    
    80,027
    
    
    
    64,106Property, plant and equipment  net
    
    
    3,949
    
    
    
    3,747Other assets
    
    
    116
    
    
    
    818Total assets
    
    $
    84,092
    
    
    $
    68,671LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,297
    
    
    $
    17,217Billings in excess of costs and earnings
on uncompleted contracts
    
    
    3,741
    
    
    
    6,970Commissions payable
    
    
    2,600
    
    
    
    1,401Income taxes payable
    
    
    1,410
    
    
    
    1,576Product warranties
    
    
    1,006
    
    
    
    641Accrued liabilities and other
    
    
    8,280
    
    
    
    5,679Total current liabilities
    
    
    38,334
    
    
    
    33,484Deferred income taxes
    
    
    1,005
    
    
    
    1,010Other non current liabilities
    
    
    947
    
    
    
    640Commitments and contingenciesShareholders equity:Common stock  authorized, 10,000,000 shares
of $1 par value; issued and outstanding,
6,483,888 and 6,439,644 shares at March 31, 2008
and June 30, 2007, respectively
    
    
    6,484
    
    
    
    6,440Additional paid-in capital
    
    
    2,055
    
    
    
    1,359Accumulated other comprehensive income
    
    
    405
    
    
    
    431Retained earnings
    
    
    34,862
    
    
    
    25,307Total shareholders equity
    
    
    43,806
    
    
    
    33,537Total liabilities and shareholders equity
    
    $
    84,092
    
    
    $
    68,671
 See accompanying notes to consolidated financial statements.
 Page 4




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF EARNINGS  (In thousands, except per share amounts)
 Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    32,457
    
    
    $
    20,191
    
    
    $
    99,561
    
    
    $
    48,920Cost of goods sold
    
    
    22,038
    
    
    
    13,597
    
    
    
    66,339
    
    
    
    33,427Gross profit
    
    
    10,419
    
    
    
    6,594
    
    
    
    33,222
    
    
    
    15,493Operating expensesSales and marketing
    
    
    2,956
    
    
    
    2,198
    
    
    
    8,409
    
    
    
    5,464Engineering and project management
    
    
    1,446
    
    
    
    1,161
    
    
    
    3,897
    
    
    
    3,049General and administrative
    
    
    2,431
    
    
    
    1,814
    
    
    
    7,304
    
    
    
    4,3776,833
    
    
    
    5,173
    
    
    
    19,610
    
    
    
    12,890Operating income
    
    
    3,586
    
    
    
    1,421
    
    
    
    13,612
    
    
    
    2,603Other income (expense)Interest income
    
    
    217
    
    
    
    109
    
    
    
    899
    
    
    
    244Foreign exchange gain (loss)
    
    
    540
    
    
    
    (1
    )
    
    
    507
    
    
    
    81Other income (expense)  net
    
    
    12
    
    
    
    (16
    )
    
    
    3
    
    
    
    (16
    )769
    
    
    
    92
    
    
    
    1,409
    
    
    
    309Earnings before income taxes
    
    
    4,355
    
    
    
    1,513
    
    
    
    15,021
    
    
    
    2,912Income tax expense
    
    
    (1,527
    )
    
    
    (531
    )
    
    
    (5,257
    )
    
    
    (1,022
    )Net earnings
    
    $
    2,828
    
    
    $
    982
    
    
    $
    9,764
    
    
    $
    1,890Earnings per share  basic
    
    $
    0.44
    
    
    $
    0.15
    
    
    $
    1.52
    
    
    $
    0.30Earnings per share  diluted
    
    $
    0.43
    
    
    $
    0.15
    
    
    $
    1.50
    
    
    $
    0.29
 Note: March 31, 2007 earnings per share amounts adjusted for
June 2007 two-for-one stock split in the form of a dividend.
 See accompanying notes to consolidated financial statements.
 Page 5




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Nine months ended March 31,2008
    
    
    2007Cash flows from operating activities:Net earnings
    
    $
    9,764
    
    
    $
    1,890Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    588
    
    
    
    481Deferred income taxes
    
    
    (10
    )
    
    
    (23
    )Deferred rent expense
    
    
    84
    
    
    
    Provision for warranty expenses
    
    
    381
    
    
    
    97Inventory valuation reserve
    
    
    331
    
    
    
    127Gain on sale of property
    
    
    (12
    )
    
    
    Foreign exchange gain
    
    
    (507
    )
    
    
    (81
    )Stock based compensation
    
    
    688
    
    
    
    179Excess tax benefits from stock-based payment arrangements
    
    
    (19
    )
    
    
    (248
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,350
    )
    
    
    (7,933
    )Inventories
    
    
    (3,285
    )
    
    
    (470
    )Costs and earnings in excess of billings on uncompleted contracts
    
    
    428
    
    
    
    2,517Other current assets
    
    
    (1,091
    )
    
    
    (350
    )Other assets
    
    
    724
    
    
    
    (175
    )Accounts payable
    
    
    4,158
    
    
    
    (2,621
    )Billings in excess of costs and earnings on uncompleted contracts
    
    
    (3,229
    )
    
    
    5,187Commissions payable
    
    
    1,199
    
    
    
    (100
    )Product warranties
    
    
    (16
    )
    
    
    (166
    )Income taxes payable
    
    
    (147
    )
    
    
    855Accrued liabilities and other
    
    
    2,735
    
    
    
    250Net cash provided by (used in) operating activities:
    
    
    7,414
    
    
    
    (584
    )Cash flow from investing activities:Increase in restricted cash
    
    
    
    
    
    
    (2,755
    )Purchases of property and equipment
    
    
    (790
    )
    
    
    (348
    )Proceeds from sale of property
    
    
    12
    
    
    
    Net cash used in investing activities:
    
    
    (778
    )
    
    
    (3,103
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    33
    
    
    
    887Excess tax benefits from stock-based payment arrangements
    
    
    19
    
    
    
    248Net cash provided by financing activities
    
    
    52
    
    
    
    1,135Effect of exchange rate changes on cash and cash equivalents
    
    
    74
    
    
    
    71Net increase (decrease) in cash and cash equivalents
    
    
    6,762
    
    
    
    (2,481
    )Cash and cash equivalents at beginning of period
    
    
    17,015
    
    
    
    6,411Cash and cash equivalents at end of period
    
    $
    23,777
    
    
    $
    3,930
 See accompanying notes to the consolidated financial statements.
 Page 6




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  (In thousands)
 Nine months ended March 31,2008
    
    
    2007Common stockBalance at beginning of period
    
    $
    6,440
    
    
    $
    6,268Common stock issued
    
    
    41
    
    
    
    16Stock options exercised
    
    
    3
    
    
    
    136Balance at end of period
    
    
    6,484
    
    
    
    6,420Additional paid-in capitalBalance at beginning of period
    
    
    1,359
    
    
    
    9Common stock issued
    
    
    376
    
    
    
    Stock options exercised
    
    
    30
    
    
    
    751Income tax benefit related to stock options exercised
    
    
    19
    
    
    
    248Stock-based compensation expense
    
    
    271
    
    
    
    163Balance at end of period
    
    
    2,055
    
    
    
    1,171Accumulated other comprehensive incomeBalance at beginning of period
    
    
    431
    
    
    
    245Foreign currency translation adjustment
    
    
    (26
    )
    
    
    144Balance at end of period
    
    
    405
    
    
    
    389Retained earningsBalance at beginning of period
    
    
    25,307
    
    
    
    19,395Cumulative effect of a change in accounting principle

(adoption of FIN No. 48)
    
    
    (209
    )
    
    
    Net earnings
    
    
    9,764
    
    
    
    1,890Balance at end of period
    
    
    34,862
    
    
    
    21,285Total shareholders equity
    
    $
    43,806
    
    
    $
    29,265
 Note: March 31, 2007 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 consolidated financial statements.
 Page 7




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PEERLESS MFG. CO. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 1. Basis of Presentation
   2. New Accounting Standards
 Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Fair Value
Measurements Effective Date of FASB Statement No. 157
 The Fair
Value Option for Financial Assets and Financial Liabilities
 Page 8




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 2. New Accounting Standards  Continued
  Business Combinations
 Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133
 3. Accounts Receivable
  4. Inventories
  Page 9




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 4. Inventories  Continued
   March 31,
    
    
    June 30,2008
    
    
    2007Raw material and component parts
    
    $
    5,242
    
    
    $
    3,652Work in progress
    
    
    2,129
    
    
    
    613Finished goods
    
    
    274
    
    
    
    1867,645
    
    
    
    4,451Inventory reserves
    
    
    (769
    )
    
    
    (532
    )$
    6,876
    
    
    $
    3,919
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    642
    
    
    $
    528
    
    
    $
    532
    
    
    $
    434Additions
    
    
    127
    
    
    
    33
    
    
    
    331
    
    
    
    127Amounts written off
    
    
    
    
    
    
    
    
    
    
    (94
    )
    
    
    Balance at end of period
    
    $
    769
    
    
    $
    561
    
    
    $
    769
    
    
    $
    561
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts
 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
 Page 10




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 5. Revenue Recognition and Cost and Earnings on Uncompleted Contracts  Continued
    March 31,
    
    
    June 30,2008
    
    
    2007Costs incurred on uncompleted contracts and
estimated earnings
    
    $
    132,573
    
    
    $
    70,527Less billings to date
    
    
    (120,766
    )
    
    
    (61,521
    )$
    11,807
    
    
    $
    9,006
  March 31,
    
    
    June 30,2008
    
    
    2007Costs and earnings in excess of billings on
uncompleted contracts
    
    $
    15,548
    
    
    $
    15,976Billings in excess of costs and earnings on
uncompleted contracts
    
    
    (3,741
    )
    
    
    (6,970
    )$
    11,807
    
    
    $
    9,006
 6. Product Warranties
   Page 11




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 6. Product Warranties  Continued
 Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    960
    
    
    $
    658
    
    
    $
    641
    
    
    $
    626Provision for warranty expenses
    
    
    46
    
    
    
    (27
    )
    
    
    381
    
    
    
    97Warranty charges
    
    
    
    
    
    
    (74
    )
    
    
    (16
    )
    
    
    (166
    )Balance at end of period
    
    $
    1,006
    
    
    $
    557
    
    
    $
    1,006
    
    
    $
    557
 7. Accrued Liabilities and Other
  March 31,
    
    
    June 30,2008
    
    
    2007Accrued start-up expense
    
    $
    3,459
    
    
    $
    2,095Accrued compensation
    
    
    2,162
    
    
    
    1,755Accrued professional, legal and other expenses
    
    
    363
    
    
    
    1,555Customer Advance Payments
    
    
    1,941
    
    
    
    88Other
    
    
    355
    
    
    
    186$
    8,280
    
    
    $
    5,679
 8. Income Taxes
  Page 12




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 9. Comprehensive Income
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings from continuing operations
    
    $
    2,828
    
    
    $
    982
    
    
    $
    9,764
    
    
    $
    1,890Foreign currency translation adjustment
    
    
    (3
    )
    
    
    13
    
    
    
    (26
    )
    
    
    144Comprehensive income
    
    $
    2,825
    
    
    $
    995
    
    
    $
    9,738
    
    
    $
    2,034
 10. Stock Based Compensation
      Page 13




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 10. Stock Based Compensation  Continued
  2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseNo. of Options
    
    
    Price
    
    
    No. of Options
    
    
    PriceBalance at July 1,
    
    
    147,874
    
    
    $
    7.68
    
    
    
    143,650
    
    
    $
    7.01Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    
    
    
    $
    
    
    
    
    (32,400
    )
    
    $
    6.89Forfeited before vesting
    
    
    (8,900
    )
    
    $
    7.66
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at September 30,
    
    
    138,974
    
    
    $
    7.68
    
    
    
    111,250
    
    
    $
    7.05Granted
    
    
    
    
    
    $
    
    
    
    
    5,000
    
    
    $
    11.90Exercised
    
    
    (2,400
    )
    
    $
    11.54
    
    
    
    (27,488
    )
    
    $
    5.42Forfeited before vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    (1,700
    )
    
    $
    6.60
    
    
    
    
    
    
    $
    Balance at December 31,
    
    
    134,874
    
    
    $
    7.62
    
    
    
    88,762
    
    
    $
    7.82Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (750
    )
    
    $
    7.26
    
    
    
    (8,500
    )
    
    $
    8.47Forfeited before vesting
    
    
    (1,500
    )
    
    $
    8.55
    
    
    
    
    
    
    $
    Forfeited after vesting
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Balance at March 31,
    
    
    132,624
    
    
    $
    7.61
    
    
    
    80,262
    
    
    $
    7.76Exercisable at end of period
    
    
    109,602
    
    
    $
    7.42
    
    
    
    50,612
    
    
    $
    7.64
   Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Total cash received
    
    $
    5
    
    
    $
    143
    
    
    $
    33
    
    
    $
    887Income tax benefits
    
    $
    4
    
    
    $
    19
    
    
    $
    19
    
    
    $
    248Total intrinsic value of options exercised
    
    $
    16
    
    
    $
    87
    
    
    $
    80
    
    
    $
    794
  Page 14




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 10. Stock Based Compensation  Continued
 Summary of Unvested Stock OptionsThree months ended March 31, 2008
    
    
    Nine months ended March 31, 2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Options
    
    
    Fair Value
    
    
    No. of Options
    
    
    Fair ValueUnvested at beginning of period
    
    
    40,550
    
    
    $
    8.41
    
    
    
    59,300
    
    
    $
    7.95Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    (16,028
    )
    
    
    8.23
    
    
    
    (25,878
    )
    
    
    7.50Forfeited
    
    
    (1,500
    )
    
    
    8.55
    
    
    
    (10,400
    )
    
    
    7.79Unvested at end of period
    
    
    23,022
    
    
    $
    8.52
    
    
    
    23,022
    
    
    $
    8.52
   Summary of Restricted Stock AwardsThree months ended March 31, 2008
    
    
    Nine months March 31, 2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageGrant Date
    
    
    
    
    
    
    Grant DateNo. of Shares
    
    
    Fair Value
    
    
    No. of Shares
    
    
    Fair ValueBalance at beginning of period
    
    
    79,894
    
    
    $
    17.06
    
    
    
    37,600
    
    
    $
    12.17Granted
    
    
    
    
    
    
    
    
    
    
    43,094
    
    
    
    25.69Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (1,200
    )
    
    
    12.49
    
    
    
    (2,000
    )
    
    
    12.49Balance at end of period
    
    
    78,694
    
    
    
    17.06
    
    
    
    78,694
    
    
    
    17.06
  11. Earnings Per Share
 (the
number of shares and earnings per share have been adjusted for our two-for-one stock split in June
2007):
 Page 15




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 11. Earnings Per Share  Continued
 Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net earnings
    
    $
    2,828
    
    
    $
    982
    
    
    $
    9,764
    
    
    $
    1,890Basic weighted average common shares outstanding
    
    
    6,425
    
    
    
    6,379
    
    
    
    6,412
    
    
    
    6,325Effect of dilutive options and restricted stock awards
    
    
    152
    
    
    
    69
    
    
    
    103
    
    
    
    86Diluted weighted average common shares outstanding
    
    
    6,577
    
    
    
    6,448
    
    
    
    6,515
    
    
    
    6,411Earnings per share  basic
    
    $
    0.44
    
    
    $
    0.15
    
    
    $
    1.52
    
    
    $
    0.30Earnings per share  diluted
    
    $
    0.43
    
    
    $
    0.15
    
    
    $
    1.50
    
    
    $
    0.29
  12. Segment Information
   Page 16




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 12. Segment Information   Continued
  Three months ended,
    
    
    Nine months ended,March 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007RevenuesEnvironmental
    
    $
    15,109
    
    
    $
    8,847
    
    
    $
    51,273
    
    
    $
    16,011Separation / Filtration
    
    
    17,348
    
    
    
    11,344
    
    
    
    48,288
    
    
    
    32,909Consolidated
    
    $
    32,457
    
    
    $
    20,191
    
    
    $
    99,561
    
    
    $
    48,920Operating income (loss)Environmental
    
    $
    2,476
    
    
    $
    1,457
    
    
    $
    12,352
    
    
    $
    2,251Separation / Filtration
    
    
    3,541
    
    
    
    1,778
    
    
    
    8,564
    
    
    
    4,729Reconciling items
    
    
    (2,431
    )
    
    
    (1,814
    )
    
    
    (7,304
    )
    
    
    (4,377
    )Consolidated
    
    $
    3,586
    
    
    $
    1,421
    
    
    $
    13,612
    
    
    $
    2,603
 13. Supplemental Cash Flow Information
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Income tax paid
    
    $
    3,400
    
    
    $
    21
    
    
    $
    5,400
    
    
    $
    481Income tax refunds received
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (297
    )
 14. Lines of Credit
  Page 17




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 14. Lines of Credit  Continued
   15. Subsequent Events
    Page 18




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PEERLESS MFG. CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008  (Amounts in thousands, except per share amounts)
 15. Subsequent Events  Continued
   Page 19




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES

March 31, 2008  (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.
 Recent Developments
    Page 20




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Critical Accounting Policies
  Results of Operations
  Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    67.9
    
    
    
    67.3
    
    
    
    66.6
    
    
    
    68.3Gross profit
    
    
    32.1
    
    
    
    32.7
    
    
    
    33.4
    
    
    
    31.7Operating expenses
    
    
    21.1
    
    
    
    25.7
    
    
    
    19.7
    
    
    
    26.4Operating income
    
    
    11.0
    
    
    
    7.0
    
    
    
    13.7
    
    
    
    5.3Other income
    
    
    2.4
    
    
    
    0.5
    
    
    
    1.4
    
    
    
    0.7Earnings before income taxes
    
    
    13.4
    
    
    
    7.5
    
    
    
    15.1
    
    
    
    6.0Income tax expense
    
    
    (4.7
    )
    
    
    (2.6
    )
    
    
    (5.3
    )
    
    
    (2.1
    )Net earnings
    
    
    8.7
    %
    
    
    4.9
    %
    
    
    9.8
    %
    
    
    3.9
    %
      Page 21




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
   Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Results of Operations  Consolidated
 Revenues
  Three months ended March 31,2008
    
    
    % of Total
    
    
    2007
    
    
    % of TotalDomestic
    
    $
    17,612
    
    
    
    54.3
    %
    
    $
    13,931
    
    
    
    69.0
    %International
    
    
    14,845
    
    
    
    45.7
    %
    
    
    6,260
    
    
    
    31.0
    %Total revenues
    
    $
    32,457
    
    
    
    100.0
    %
    
    $
    20,191
    
    
    
    100.0
    %
  Gross Profit
  Three months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesRevenues
    
    $
    32,457
    
    
    
    100.0
    %
    
    $
    20,191
    
    
    
    100.0
    %Cost of goods sold
    
    
    22,038
    
    
    
    67.9
    %
    
    
    13,597
    
    
    
    67.3
    %Gross profit
    
    $
    10,419
    
    
    
    32.1
    %
    
    $
    6,594
    
    
    
    32.7
    %
  Page 22




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  Operating Expenses
  Three months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesSales and marketing
    
    $
    2,956
    
    
    
    9.1
    %
    
    $
    2,198
    
    
    
    10.9
    %Engineering & project management
    
    
    1,446
    
    
    
    4.5
    %
    
    
    1,161
    
    
    
    5.7
    %General and administrative
    
    
    2,431
    
    
    
    7.5
    %
    
    
    1,814
    
    
    
    9.0
    %Total operating expenses
    
    $
    6,833
    
    
    
    21.1
    %
    
    $
    5,173
    
    
    
    25.6
    %
  Other Income and Expense
  Three months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesInterest income
    
    $
    217
    
    
    
    0.7
    %
    
    $
    109
    
    
    
    0.5
    %Foreign exchange gain (loss)
    
    
    540
    
    
    
    1.7
    %
    
    
    (1
    )
    
    
    0.0
    %Other income (expense), net
    
    
    12
    
    
    
    0.0
    %
    
    
    (16
    )
    
    
    0.0
    %Total other income
    
    $
    769
    
    
    
    2.4
    %
    
    $
    92
    
    
    
    0.5
    %
  Page 23




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Income Taxes
  Net Earnings
  Results of Operations  Segments
  Environmental Systems
   Three months ended March 31,2008
    
    2007Revenues
    
    $
    15,109
    
    
    $
    8,847Operating income
    
    $
    2,476
    
    
    $
    1,457Operating income as % of revenues
    
    
    16.4
    %
    
    
    16.5
    %
   Page 24




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  Separation Filtration Systems
  :
 Three months ended March 31,2008
    
    2007Revenues
    
    $
    17,348
    
    
    $
    11,344Operating income
    
    $
    3,541
    
    
    $
    1,778Operating income as % of revenues
    
    
    20.4
    %
    
    
    15.7
    %
    Page 25




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PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Corporate Level Expenses
  Nine Months Ended March 31, 2008 Compared to Nine Months Ended March 31, 2007
 Results of Operations  Consolidated
 Revenues
  Nine months ended March 31,2008
    
    
    % of Total
    
    
    2007
    
    
    % of TotalDomestic
    
    $
    60,636
    
    
    
    60.9
    %
    
    $
    29,362
    
    
    
    60.0
    %International
    
    
    38,925
    
    
    
    39.1
    %
    
    
    19,558
    
    
    
    40.0
    %Total revenues
    
    $
    99,561
    
    
    
    100.0
    %
    
    $
    48,920
    
    
    
    100.0
    %
  Gross Profit
  Nine months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesRevenues
    
    $
    99,561
    
    
    
    100.0
    %
    
    $
    48,920
    
    
    
    100.0
    %Cost of goods sold
    
    
    66,339
    
    
    
    66.6
    %
    
    
    33,427
    
    
    
    68.3
    %Gross profit
    
    $
    33,222
    
    
    
    33.4
    %
    
    $
    15,493
    
    
    
    31.7
    %
  Page 26




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  Operating Expenses
  Nine months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesSales and marketing
    
    $
    8,409
    
    
    
    8.5
    %
    
    $
    5,464
    
    
    
    11.2
    %Engineering & project management
    
    
    3,897
    
    
    
    3.9
    %
    
    
    3,049
    
    
    
    6.2
    %General and administrative
    
    
    7,304
    
    
    
    7.3
    %
    
    
    4,377
    
    
    
    8.9
    %Total operating expenses
    
    $
    19,610
    
    
    
    19.7
    %
    
    $
    12,890
    
    
    
    26.3
    %
  Other Income and Expense
  Nine months ended March 31,2008
    
    
    % of Revenues
    
    
    2007
    
    
    % of RevenuesInterest income
    
    $
    899
    
    
    
    0.9
    %
    
    $
    244
    
    
    
    0.5
    %Foreign exchange gain
    
    
    507
    
    
    
    0.5
    %
    
    
    81
    
    
    
    0.1
    %Other income (expense), net
    
    
    3
    
    
    
    0.0
    %
    
    
    (16
    )
    
    
    0.0
    %Total other income
    
    $
    1,409
    
    
    
    1.4
    %
    
    $
    309
    
    
    
    0.6
    %
  Page 27




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Income Taxes
  Net Earnings
  Results of Operations  Segments
 Environmental Systems
   Nine months ended March 31,2008
    
    2007Revenues
    
    $
    51,273
    
    
    $
    16,011Operating income
    
    $
    12,352
    
    
    $
    2,251Operating income as % of revenues
    
    
    24.1
    %
    
    
    14.1
    %
    Page 28




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  Separation Filtration Systems
  :
 Nine months ended March 31,2008
    
    2007Revenues
    
    $
    48,288
    
    
    $
    32,909Operating income
    
    $
    8,564
    
    
    $
    4,729Operating income as % of revenues
    
    
    17.7
    %
    
    
    14.4
    %
    Corporate Level Expenses
  Page 29




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Contingencies
    Backlog
  Financial Position
 Assets.
 Liabilities and Shareholders Equity.
 Page 30




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 Liquidity and Capital Resources
       Page 31




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
        Page 32




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 New Accounting Standards
 Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
 Fair
Value Measurements Effective Date of FASB Statement No. 157
 The
Fair Value Option for Financial Assets and Financial Liabilities
 Business Combinations
 Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133
 Page 33




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 Item 4. Controls and Procedures
    Page 34




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
    
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  The acquisition of Nitram was significantly larger than any other acquisition we have made.
This acquisition could disrupt our business and harm our financial condition if we are not able to
successfully integrate the acquired business or if we are not able to achieve the expected benefits
of this transaction.
   Page 35




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
 We incurred substantial debt in connection with our acquisition of Nitram. Our substantial
indebtedness and related debt service obligations could have a negative impact on our business.
  
    
    limit the availability of our cash flow to fund working capital, capital expenditures,
acquisitions, investments and other general corporate purposes;
 
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate;
 
    
    limit our ability to obtain additional financing for working capital, capital expenditures,
acquisitions, investments and other general corporate purposes;
 
    
    limit our ability to refinance our indebtedness on terms acceptable to us or at all;
 
    
    limit our ability to pay cash dividends;
 
    
    limit our ability to dispose of subsidiaries and other
assets; and
 
    
    make us more vulnerable to economic downturns, increased competition and adverse industry
conditions, which places us at a disadvantage compared to our competitors that have less
indebtedness.
 Restrictions in our debt agreements limit our operating and strategic flexibility.
  
    
    incur additional debt;
 
    
    create additional liens;
 
    
    redeem and/or prepay certain debt;
 
    
    pay cash dividends, make other distributions or repurchase stock;
 
    
    make acquisitions and other investments;
 
    
    engage in specified asset sales;
 
    
    enter into transactions with affiliates;
 
    
    engage in mergers and acquisitions; and
 
    
    make capital expenditures.
 Page 36




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PEERLESS MFG. CO. AND SUBSIDIARIES
March 31, 2008  (Amounts in thousands, except per share amounts)
  A portion of our debt is subject to variable interest rates. If interest rates increase, our
interest expense will also increase.
  Page 37




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##### Table of Contents



Item 6. Exhibits
   ExhibitNumber
    
    Exhibit2.1
    
    Stock Purchase Agreement dated April 7, 2008, by and among Peerless
Mfg. Co., Nitram Energy, Inc. and the shareholders of Nitram Energy,
Inc. (filed as Exhibit 2.1 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 9, 2008, and
incorporated herein by reference)10.1
    
    Revolving Credit and Term Loan Agreement, dated April 30, 2008,
between Peerless Mfg. Co., PMC Acquisition, Inc., PMFG, Inc.,
Comerica Bank and other lenders a party thereto (filed as Exhibit
10.1 to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 5, 2008, and incorporated herein by
reference)10.2
    
    Senior Subordinated Loan Agreement, dated April 30, 2008, between
Peerless Mfg. Co., PMC Acquisition, Inc., PMFG, Inc. and Prospect
Capital Corporation (filed as Exhibit 10.2 to our Current Report on
Form 8-K filed with the Securities and Exchange Commission on May 5,
2008, and incorporated herein by reference)31.1
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a  14(a)/15d  14(a) Certification of Chief Financial Officer.32.1
    
    Section 1350 Certification of Chief Executive Officer.32.2
    
    Section 1350 Certification of Chief Financial Officer.
 Page 38




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##### Table of Contents



Signatures
  PEERLESS MFG. CO.Date:  May 9, 2008
    /s/ Peter J. BurlagePeter J. BurlagePresident and Chief Executive Officer
(Principal Executive Officer)Date:  May 9, 2008
    /s/ Henry G. Schopfer, IIIHenry G. Schopfer, IIIChief Financial Officer
(Principal Financial and Accounting Officer) Page 39