##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION    FORM 10-Q (Mark One) x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the Quarterly Period Ended March 31, 2004 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 
  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).  Yes o No x As of May 13, 2004, there were 3,005,284 shares of the registrants common
stock outstanding.    - 1 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  
 TABLE OF CONTENTS PART I:
    
    FINANCIAL INFORMATIONItem 1.
    
    
    
    Financial StatementsConsolidated Balance Sheets at March 31, 2004 (unaudited) and June 30, 2003
    
    
    3Unaudited Consolidated Statements of Operations for the three and nine months ended March 31, 2004 and 2003
    
    
    4Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003
    
    
    5Notes to the Consolidated Financial Statements
    
    
    6Item 2.
    
    
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    
    
    Controls and Procedures
    
    
    27PART II:
    
    OTHER INFORMATIONItem 1.
    
    
    
    Legal Proceedings
    
    
    27Item 2.
    
    
    
    Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
    
    
    27Item 3.
    
    
    
    Defaults Upon Senior Securities
    
    
    27Item 4.
    
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    
    
    Other Information
    
    
    27Item 6.
    
    
    
    Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    
    
    29Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  - 2 -




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements PEERLESS MFG. CO. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
 March 31,
    
    June 30,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    6,960
    
    
    $
    6,680Short term investments
    
    
    61
    
    
    
    309Accounts
receivable - principally trade - net of
allowance for doubtful accounts of $383 at
March 31, 2004 and $402 at June 30, 2003
    
    
    13,374
    
    
    
    14,916Inventories
    
    
    3,605
    
    
    
    3,215Costs and earnings in excess of billings
on uncompleted contracts
    
    
    9,714
    
    
    
    7,589Deferred income taxes
    
    
    1,445
    
    
    
    1,445Other
    
    
    733
    
    
    
    1,098Current assets of discontinued operations
    
    
    610
    
    
    
    2,760Total current assets
    
    
    36,502
    
    
    
    38,012Property, plant and equipment  net
    
    
    3,118
    
    
    
    3,400Other assets
    
    
    1,061
    
    
    
    989Other assets of discontinued operations
    
    
    9
    
    
    
    151$
    40,690
    
    
    $
    42,552LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable  trade
    
    $
    10,950
    
    
    $
    12,661Billings in excess of costs and earnings
on uncompleted contracts
    
    
    655
    
    
    
    2,027Commissions payable
    
    
    887
    
    
    
    1,041Income taxes payable
    
    
    727
    
    
    
    53Product warranties
    
    
    820
    
    
    
    846Accrued liabilities and other
    
    
    1,927
    
    
    
    2,749Current liabilities of discontinued operations
    
    
    430
    
    
    
    864Total current liabilities
    
    
    16,396
    
    
    
    20,241Shareholders equityCommon stock
    
    
    3,005
    
    
    
    2,999Additional paid-in capital
    
    
    1,814
    
    
    
    1,771Other
    
    
    242
    
    
    
    18Retained earnings
    
    
    19,233
    
    
    
    17,523Total shareholders equity
    
    
    24,294
    
    
    
    22,311Total liabilities and shareholders equity
    
    $
    40,690
    
    
    $
    42,552
 See accompanying notes to the consolidated financial statements. - 3 -




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PEERLESS MFG. CO. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS  (Dollars in thousands, except per share amounts)  (Unaudited)
 Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    13,491
    
    
    $
    12,822
    
    
    $
    46,727
    
    
    $
    46,109Cost of goods sold
    
    
    8,679
    
    
    
    9,185
    
    
    
    32,564
    
    
    
    34,723Gross profit
    
    
    4,812
    
    
    
    3,637
    
    
    
    14,163
    
    
    
    11,386Operating expensesSales and marketing
    
    
    1,648
    
    
    
    1,424
    
    
    
    4,660
    
    
    
    4,423Engineering and project
management
    
    
    1,041
    
    
    
    1,229
    
    
    
    3,172
    
    
    
    3,973General and administrative
    
    
    1,227
    
    
    
    1,135
    
    
    
    3,463
    
    
    
    3,636Restructuring expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4833,916
    
    
    
    3,788
    
    
    
    11,295
    
    
    
    12,515Operating income (loss)
    
    
    896
    
    
    
    (151
    )
    
    
    2,868
    
    
    
    (1,129
    )Other expense (income)Foreign exchange loss (gain)
    
    
    68
    
    
    
    (11
    )
    
    
    20
    
    
    
    81Other (income), net
    
    
    (14
    )
    
    
    (52
    )
    
    
    (45
    )
    
    
    (185
    )54
    
    
    
    (63
    )
    
    
    (25
    )
    
    
    (104
    )Earnings (loss) from continuing operations
before income taxes
    
    
    842
    
    
    
    (88
    )
    
    
    2,893
    
    
    
    (1,025
    )Income tax expense (benefit)
    
    
    287
    
    
    
    (32
    )
    
    
    989
    
    
    
    (382
    )Net earnings (loss) from continuing operations
    
    
    555
    
    
    
    (56
    )
    
    
    1,904
    
    
    
    (643
    )Discontinued operations
(Note 4 - Discontinued Operations)Loss from discontinued operations,
(including gain on disposal of $140 for the
nine months ended March 31, 2004)
    
    
    (179
    )
    
    
    (498
    )
    
    
    (297
    )
    
    
    (1,744
    )Income tax benefit
    
    
    (62
    )
    
    
    (179
    )
    
    
    (103
    )
    
    
    (643
    )Net loss from discontinued operations
    
    
    (117
    )
    
    
    (319
    )
    
    
    (194
    )
    
    
    (1,101
    )Net earnings (loss)
    
    $
    438
    
    
    $
    (375
    )
    
    $
    1,710
    
    
    $
    (1,744
    )BASIC EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.63
    
    
    $
    (0.21
    )Loss from discontinued operations
    
    
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.06
    )
    
    
    (0.37
    )Basic earnings (loss) per share
    
    $
    0.15
    
    
    $
    (0.13
    )
    
    $
    0.57
    
    
    $
    (0.58
    )DILUTED EARNINGS (LOSS) PER SHAREEarnings (loss) from continuing operations
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.63
    
    
    $
    (0.21
    )Loss from discontinued operations
    
    
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.06
    )
    
    
    (0.37
    )Diluted earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.13
    )
    
    $
    0.56
    
    
    $
    (0.58
    )
 See accompanying notes to the consolidated financial statements. - 4 -




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PEERLESS MFG. CO. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)  (Unaudited)
 Nine Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    1,710
    
    
    $
    (1,744
    )Net loss from discontinued operations
    
    
    (194
    )
    
    
    (1,101
    )Net earnings (loss) from continuing operations
    
    
    1,904
    
    
    
    (643
    )Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:Depreciation and amortization
    
    
    583
    
    
    
    559Bad debt expense
    
    
    (11
    )
    
    
    90Foreign exchange loss
    
    
    20
    
    
    
    81Other
    
    
    
    
    
    
    (6
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    1,595
    
    
    
    9,670Inventories
    
    
    (383
    )
    
    
    84Costs and earnings in excess of billings on uncompleted contracts
    
    
    (2,125
    )
    
    
    3,517Other current assets
    
    
    450
    
    
    
    (893
    )Other assets
    
    
    (72
    )
    
    
    (347
    )Accounts payable
    
    
    (1,646
    )
    
    
    (1,774
    )Billings in excess of costs and earnings uncompleted contracts
    
    
    (1,372
    )
    
    
    (1,856
    )Commissions payable
    
    
    (154
    )
    
    
    (637
    )Product warranties
    
    
    (26
    )
    
    
    (14
    )Income taxes payable
    
    
    674
    
    
    
    (766
    )Accrued liabilities and other
    
    
    (810
    )
    
    
    (1,660
    )(3,277
    )
    
    
    6,048Net cash provided by (used in) operating activities of continuing operations
    
    
    (1,373
    )
    
    
    5,405Cash flow from investing activities:Net proceeds from short-term investments
    
    
    248
    
    
    
    Net purchases of property and equipment
    
    
    (301
    )
    
    
    (72
    )Net cash used in investing activities of continuing operations
    
    
    (53
    )
    
    
    (72
    )Cash flows from financing activities:Proceeds from sale of common stock
    
    
    51
    
    
    
    57Net cash provided by financing activities of continuing operations
    
    
    51
    
    
    
    57Net cash provided by (used in) discontinued operations
    
    
    1,664
    
    
    
    (309
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    (9
    )
    
    
    (16
    )Net increase in cash and cash equivalents
    
    
    280
    
    
    
    5,065Cash and cash equivalents at beginning of period
    
    
    6,680
    
    
    
    1,386Cash and cash equivalents at end of period
    
    $
    6,960
    
    
    $
    6,451
 See accompanying notes to the consolidated financial statements. - 5 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  1.
    
    Basis of Presentation The accompanying consolidated financial statements of Peerless Mfg.
Co. and Subsidiaries (hereafter referred to as the Company, we, us,
our) have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. The consolidated financial statements of the Company as of
March 31, 2004, and for the three and nine months ended March 31, 2004
and 2003 are unaudited and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial position
and results of operations of the Company for the interim periods. These
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the year ended June 30, 2003. The results of
operations for the three and nine months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the entire year
(see Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Our
Operating Results and Other Risk Factors). The Companys fiscal year
ends on June 30th. References herein to fiscal 2002, fiscal 2003 and
fiscal 2004 refer to our fiscal years ended June 30, 2002, 2003 and 2004,
respectively. In connection with the sale of our boiler operations (see Note 4 
Discontinued Operations), the current year financial information has
been presented, and the prior year financial information has been
restated, to report the discontinued operations in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Certain fiscal 2003 items have been reclassified to conform to the
fiscal 2004 presentation. All dollar and share amounts are in thousands,
except per share amounts.  2.
    
    Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market. Principal components of inventories are as follows: March 31,
    
    June 30,2004
    
    2003Raw materials
    
    $
    2,817
    
    
    $
    2,322Work in process
    
    
    515
    
    
    
    581Finished goods
    
    
    273
    
    
    
    312Total inventories
    
    $
    3,605
    
    
    $
    3,215
 - 6 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  3.
    
    Product Warranties The Company warrants that its products will be free from defects in
materials and workmanship and will conform to agreed upon specifications,
typically for a period of 12 months from installation or 18 months after
shipment, whichever occurs first. Typical warranties require the Company
to repair or replace defective products during the warranty period at no
cost to the customer. The Company attempts to obtain back-up concurrent
warranties for major component parts from its suppliers. The Company
provides for the estimated cost of product warranties, based upon
historical experience by product type, expectation of future conditions,
and the extent of back-up concurrent supplier warranties in place, at the
time the product revenue is recognized. If these factors, or other
factors affecting warranty costs, differ from its estimates, revisions to
the estimated product warranty liability are made accordingly. Product warranty activity for the three and nine months ended March
31, 2004 and 2003 is as follows: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Balance at the beginning of the period
    
    $
    771
    
    
    $
    668
    
    
    $
    846
    
    
    $
    627Provision for warranty expense
    
    
    144
    
    
    
    261
    
    
    
    499
    
    
    
    1,129Warranty charges
    
    
    (95
    )
    
    
    (316
    )
    
    
    (525
    )
    
    
    (1,143
    )Balance at the end of the period
    
    $
    820
    
    
    $
    613
    
    
    $
    820
    
    
    $
    613
  4.
    
    Discontinued Operations During the first quarter of fiscal 2004, the Board of Directors
authorized the divestiture and the Company sold some of the assets of its
boiler business segment. The Company sold boiler business assets with a
net book value of approximately $110, for $250, resulting in a gain on
disposal of $140. Please see Item 2 - Managements Discussion and
Analysis of Financial Condition and Results of Operations - Restructuring
and Organizational Realignment of this Report. - 7 -




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##### Table of Contents



PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  4.
    
    Discontinued Operations  continued The following represents a summary of operating results and the gain
on disposition of the boiler segment presented as discontinued
operations: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    
    
    
    $
    742
    
    
    $
    360
    
    
    $
    2,651Cost of goods sold
    
    
    136
    
    
    
    1,000
    
    
    
    514
    
    
    
    3,046Gross margin loss
    
    
    (136
    )
    
    
    (258
    )
    
    
    (154
    )
    
    
    (395
    )Operating expenses
    
    
    43
    
    
    
    244
    
    
    
    283
    
    
    
    1,337Operating loss
    
    
    (179
    )
    
    
    (502
    )
    
    
    (437
    )
    
    
    (1,732
    )Other (income) expense
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    12Income tax benefit
    
    
    (62
    )
    
    
    (179
    )
    
    
    (151
    )
    
    
    (643
    )Net loss from operations
    
    
    (117
    )
    
    
    (319
    )
    
    
    (286
    )
    
    
    (1,101
    )Gain on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    Net loss
    
    $
    (117
    )
    
    $
    (319
    )
    
    $
    (194
    )
    
    $
    (1,101
    )Diluted loss per shareNet loss from operations
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.37
    )Net gain on disposal
    
    $
    
    
    
    $
    
    
    
    $
    0.03
    
    
    $
    Net loss
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.06
    )
    
    $
    (0.37
    )
 The current and non-current assets and liabilities of the
discontinued boiler segment as of March 31, 2004 and June 30, 2003 are as
follows: March 31,
    
    June 30,2004
    
    2003Accounts
receivable, principally trade - net of
allowance for uncollectible accounts of $11
at March 31, 2004 and $650 at June 30, 2003
    
    $
    547
    
    
    $
    2,631Costs and earnings in excess of billings
on uncompleted contracts
    
    
    63
    
    
    
    129Current assets of discontinued operations
    
    
    610
    
    
    
    2,760Equipment, net
    
    
    9
    
    
    
    30Other
    
    
    
    
    
    
    121Total assets of discontinued operations
    
    $
    619
    
    
    $
    2,911Accounts payable
    
    $
    
    
    
    $
    336Commissions payable
    
    
    15
    
    
    
    78Product warranties
    
    
    148
    
    
    
    148Accrued liabilities and other
    
    
    267
    
    
    
    302Total current liabilities of discontinued operations
    
    $
    430
    
    
    $
    864
 - 8 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  5.
    
    Contingencies The Company previously disclosed that a $2.2 million receivable (before
allowance for doubtful accounts) due from a customer that had filed a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code was
included in its discontinued operations. The Company obtained outside counsel
to assist with the collection of this receivable and filed a statutory lien on
the refinery where its equipment had been installed. Subsequent thereto, the
project owner and the Companys customer reached a settlement agreement with
respect to outstanding issues, and in connection therewith, the Companys
customer assigned all its rights, claims, duties and defenses under the
contract to the project owner. During the quarter, the Company and the project
owner reached a settlement agreement whereby the parties agreed to release each
other from any outstanding claims, the Company agreed to release its lien, and
the project owner paid the outstanding unreserved balance due on the contract. On March 19, 2004, the Company received notice that an adversary
proceeding was initiated by Enron Corp. and National Energy
Production Corporation (Plaintiffs) in the United States Bankruptcy
Court for the Southern District of New York against PMC Acquisition,
Inc., a subsidiary that operated the discontinued boiler business of
the Company under the name ABCO Industries (the Subsidiary). The
Plaintiffs allege that certain accounts receivable payments paid to
the Subsidiary were avoidable transfers under the Bankruptcy Code
(the Code). The Plaintiffs are seeking to recover approximately $1
million from the Subsidiary. The Company believes that all or a
majority of the payments fail to meet the applicable standards for
avoidance under the Code and otherwise applicable law, and that a
number of defenses can be asserted that will negate any recovery by
the Plaintiffs. The Company intends to vigorously defend against the
lawsuit. From time to time the Company is involved in various litigation matters
arising in the ordinary course of its business. The Company does not believe
the disposition of any current matter will have a material adverse effect on
its consolidated financial position or its results of operations. 6. Comprehensive Income (Loss) Comprehensive income (loss) is defined as all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The components of comprehensive income (loss)
were as follows: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) from continuing operations
    
    $
    555
    
    
    $
    (56
    )
    
    $
    1,904
    
    
    $
    (643
    )Net loss from discontinued operations
    
    
    (117
    )
    
    
    (319
    )
    
    
    (194
    )
    
    
    (1,101
    )Foreign currency translation adjustment
    
    
    60
    
    
    
    (21
    )
    
    
    222
    
    
    
    28Comprehensive income (loss)
    
    $
    498
    
    
    $
    (396
    )
    
    $
    1,932
    
    
    $
    (1,716
    )
 - 9 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  7.
    
    Earnings (Loss) Per Share Basic earnings (loss) per share have been computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share reflect the potential
dilution that could occur if options or other contracts to issue common shares
were exercised or converted into common stock. The following table sets forth
the computation for basic and diluted earnings (loss) per share for the periods
indicated. Certain earnings per share amounts may not total due to rounding. Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) from continuing operations
    
    $
    555
    
    
    $
    (56
    )
    
    $
    1,904
    
    
    $
    (643
    )Loss from discontinued operations
    
    
    (117
    )
    
    
    (319
    )
    
    
    (194
    )
    
    
    (1,101
    )Net earnings (loss)
    
    $
    438
    
    
    $
    (375
    )
    
    $
    1,710
    
    
    $
    (1,744
    )Basic weighted average common shares outstanding
    
    
    3,004
    
    
    
    2,999
    
    
    
    3,001
    
    
    
    2,995Effect of dilutive options
    
    
    44
    
    
    
    
    
    
    
    43
    
    
    
    Diluted weighted average common shares outstanding
    
    
    3,048
    
    
    
    2,999
    
    
    
    3,044
    
    
    
    2,995Net earnings (loss) per share - basic:Earnings (loss) from continuing operations
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.63
    
    
    $
    (0.21
    )Loss from discontinued operations
    
    
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.06
    )
    
    
    (0.37
    )Net earnings (loss) per share
    
    $
    0.15
    
    
    $
    (0.13
    )
    
    $
    0.57
    
    
    $
    (0.58
    )Net earnings (loss) per share - diluted:Earnings (loss) from continuing operations
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.63
    
    
    $
    (0.21
    )Loss from discontinued operations
    
    $
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.06
    )
    
    
    (0.37
    )Net earnings (loss) per share
    
    $
    0.14
    
    
    $
    (0.13
    )
    
    $
    0.56
    
    
    $
    (0.58
    )
 Diluted weighted average common shares outstanding excluded 97 and 87
outstanding stock options for the three and nine months ended March 31, 2004,
because their impact would be anti-dilutive. Likewise, diluted weighted
average common shares outstanding excluded 191 and 199 outstanding stock
options for the three and nine months ended March 31, 2003, respectively,
because their impact would be anti-dilutive.  8.
    
    Line of Credit On October 31, 2003, the Company entered into a $12.5 million revolving
credit facility that expires on October 31, 2006. The facility carries a
floating interest rate based on the prime or Euro rate plus or minus an
applicable margin (Euro plus 1.75% at March 31, 2004), and is secured by
substantially all the Companys domestic assets. At March 31, 2004, the
Company had $3.9 million outstanding under letters of credit and no outstanding
loans, leaving a maximum availability under the credit facility of $8.6
million. The facility contains financial covenants, certain restrictions on capital
expenditures, acquisitions, asset dispositions, dividends, share repurchases
and additional debt, as well as other customary covenants. As of March 31,
2004, the Company was in compliance with all financial and other covenants
under this credit facility. - 10 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  9.
    
    Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148) which amends
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and requires disclosures in annual and
interim financial statements of the effects of stock-based compensation as
reflected below. The Company continues to account for its stock options under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 Accounting for Stock Issued to Employees, and related interpretations.
No stock-based employee compensation expense related to the Companys stock
options is reflected in the net earnings (loss), as all options granted under
the plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net earnings (loss) and earnings (loss) per share if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based compensation. Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss), as reported
    
    $
    438
    
    
    $
    (375
    )
    
    $
    1,710
    
    
    $
    (1,744
    )Less total stock-based employee compensation expense determined
using the fair value based method for all awards, net of tax
    
    
    (23
    )
    
    
    (31
    )
    
    
    (146
    )
    
    
    (104
    )Pro forma net earnings (loss)
    
    $
    415
    
    
    $
    (406
    )
    
    $
    1,564
    
    
    $
    (1,848
    )Net earnings (loss) per share:Basic  as reported
    
    $
    0.15
    
    
    $
    (0.13
    )
    
    $
    0.57
    
    
    $
    (0.58
    )Basic  pro forma
    
    $
    0.14
    
    
    $
    (0.14
    )
    
    $
    0.52
    
    
    $
    (0.62
    )Diluted  as reported
    
    $
    0.14
    
    
    $
    (0.13
    )
    
    $
    0.56
    
    
    $
    (0.58
    )Diluted  pro forma
    
    $
    0.14
    
    
    $
    (0.14
    )
    
    $
    0.51
    
    
    $
    (0.62
    )
  10.
    
    Supplemental Cash Flow Information Net cash flows from operating activities reflects cash payments for
interest and income taxes as follows: Nine Months EndedMarch 31,2004
    
    2003Interest paid
    
    $
    
    
    
    $
    Income taxes paid
    
    $
    251
    
    
    $
    421
 - 11 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004  11.
    
    Segment Information The Company identifies reportable segments based on management
responsibility within the corporate structure. The Company has two reportable
industry segments: Environmental Systems and Separation Filtration Systems.
The main product of the Environmental Systems segment is Selective Catalytic
Reduction Systems, referred to as SCR Systems. These environmental control
systems are used for air pollution abatement and convert nitrogen oxide (NOx)
emissions from exhaust gases caused by burning hydrocarbon fuels such as coal,
gasoline, natural gas and oil. Along with the SCR Systems, this segment also
offers systems to reduce other pollutants such as carbon monoxide (CO) and
particulate matter. These systems are totally integrated, complete with
instruments, controls and related valves and piping. The Separation Filtration
Systems segment produces specialized products known as separators or
filters which are used for a variety of purposes in cleaning gases and
liquids as they move through piping systems. These products are used primarily
to remove solid and liquid contaminants from natural gas and saltwater aerosols
from combustion intake air of shipboard gas turbine and diesel engines. In
addition, separators are also used in nuclear power plants to remove water from
saturated steam. The Company previously had three reportable segments; its
third segment  Boilers  was discontinued during the first quarter of fiscal
2004. Please see Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations  Restructuring and Organizational
Realignment and Note 4  Discontinued Operations of this Report. Segment profit and loss is based on revenue less direct expenses of the
segment before allocation of general and administrative costs. All
inter-company transfers between segments have been eliminated. Segment
information and reconciliation to operating profit (loss) for the three and
nine months ended March 31, 2004 and 2003 are presented below. The Company
does not allocate general and administrative and restructuring expenses
(unallocated overhead), assets, expenditures for assets or depreciation
expense on a segment basis for internal management reporting, and therefore
such information is not presented. Certain information for the three and nine
months ended March 31, 2003 has been restated to be on a comparable basis with
the three and nine months ended March 31, 2004. SeparationEnvironmental
    
    Filtration
    
    UnallocatedSystems
    
    Systems
    
    overhead
    
    ConsolidatedThree months ended
March 31, 2004Revenue from customers
    
    $
    4,937
    
    
    $
    8,554
    
    
    $
    
    
    
    $
    13,491Segment profit (loss)
    
    $
    694
    
    
    $
    1,429
    
    
    $
    (1,227
    )
    
    $
    896Three months ended
March 31, 2003Revenue from customers
    
    $
    6,173
    
    
    $
    6,649
    
    
    $
    
    
    
    $
    12,822Segment profit (loss)
    
    $
    603
    
    
    $
    381
    
    
    $
    (1,135
    )
    
    $
    (151
    )Nine months ended
March 31, 2004Revenue from customers
    
    $
    23,946
    
    
    $
    22,781
    
    
    $
    
    
    
    $
    46,727Segment profit (loss)
    
    $
    3,923
    
    
    $
    2,408
    
    
    $
    (3,463
    )
    
    $
    2,868Nine months ended
March 31, 2003Revenue from customers
    
    $
    25,622
    
    
    $
    20,487
    
    
    $
    
    
    
    $
    46,109Segment profit (loss)
    
    $
    979
    
    
    $
    2,011
    
    
    $
    (4,119
    )
    
    $
    (1,129
    )
 - 12 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Forward-Looking Statements From time to time, we make oral and written statements that may constitute
forward-looking statements (rather than historical facts) as defined in the
Private Securities Litigation Reform Act of 1996 or by the Securities and
Exchange Commission in its rules, regulations and releases, including
statements regarding our expectations, hopes, beliefs, intentions or strategies
regarding the future. We desire to take advantage of the safe harbor
provisions in the Private Securities Litigation Reform Act of 1996 for
forward-looking statements made from time to time, including, but not limited
to, the forward-looking statements made in this Report, as well as those made
in our other filings with the SEC. Forward-looking statements contained in
this Report are based on managements current plans and expectations and are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements.
In the preparation of this Report, where such forward-looking statements
appear, we have sought to accompany such statements with meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those described in the forward-looking statements. Such
factors include, but are not limited to, the Factors That May Affect Our
Operating Results and Other Risk Factors, as set forth starting on page 23 of
this Report. All forward-looking statements included in this Report are based on
information available to us on the date hereof, and we expressly disclaim any
obligation to release publicly any updates or changes in the forward-looking
statements, whether as a result of changes in events, conditions, or
circumstances on which any forward-looking statement is based. Overview We are a global company providing environmental, separation and filtration
products for the abatement of air pollution and the removal of contaminants
from gases and liquids through our two business segments  Environmental
Systems and Separation Filtration Systems. During the first quarter of fiscal
2003, we suspended the operations of our boiler business, sold assets used in
this business and therefore, in connection with its sale, we discontinued this
business unit during the first quarter of fiscal 2004. See Restructuring and
Organizational Realignment for additional discussion on the suspension and
discontinuance of this business unit. Environmental Systems. In this business segment, which represented 51.2%
of our consolidated year-to-date revenues from continuing operations, we
design, engineer, manufacture and sell environmental control systems, which are
used for air pollution abatement. Our main product, Selective Catalytic
Reduction Systems, referred to as SCR Systems, is used to convert nitrogen
oxide (NOx) emissions from exhaust gases, caused by burning hydrocarbon fuels,
such as coal, gasoline, natural gas and oil, into harmless nitrogen and water
vapor. These systems are totally integrated, complete with instruments,
controls and related valves and piping. In this segment, we also offer systems
to reduce other pollutants, such as carbon monoxide (CO) and particulate matter
(PM). - 13 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004

Separation Filtration Systems.In this business segment, which
represented 48.8% of our consolidated year-to-date revenues from continuing
operations, we design, engineer, manufacture and sell specialized products
known as separators or filters which are used for a variety of purposes in
cleaning gases and liquids as they move through piping systems. These products
are used primarily to remove solid and liquid contaminants from natural gas and
saltwater aerosols from combustion intake air of shipboard gas turbine and
diesel engines. Separators are also used in nuclear power plants to remove
water from saturated steam. Restructuring and Organizational Realignment During fiscal 2002, the actual demand for electricity started to decline
and the United States economy weakened. As a result, a considerable slowdown
in the construction of new power plants occurred. In addition, regulatory
uncertainties caused NOx reduction initiatives relating to retrofit projects to
be delayed. As a response to the slowdown of new merchant power plants,
continued weakness in the United States and global economies, and regulatory
and political uncertainties, in July 2002 we initiated a restructuring and
organizational realignment initiative. The goal of this initiative was to
reduce costs, streamline operations, and identify and exit certain
non-critical, marginally performing operating activities, thereby positioning
us with a more competitive cost structure vital for our overall long-term
success. In connection therewith, we identified our boiler unit as a
non-critical, marginally performing business segment and suspended new orders
during fiscal 2003. The assets of this segment were sold during the first part
of fiscal 2004, and in connection therewith the financial information has been
restated to present this operation as a discontinued business unit. We believe that the result of these initiatives, including the redirection
of our resources to focus on our two principal segments, has positioned us to
maximize our current operational efficiencies and allow us the flexibility to
meet our customers current and anticipated needs, without sacrificing our
ability to expand our business to meet future demand. While the initial phase
of our restructuring and organizational realignment initiatives have been
completed, we continue to look for ways to improve our operational efficiencies
and performance. Critical Accounting Policies The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates. Certain of our accounting policies require a higher degree of judgment
than others in their application. These include revenue recognition on
long-term contracts, accrual for estimated warranty costs and allowance for
doubtful accounts. Our policies and related procedures for revenue recognition
on long-term contracts, accrual of warranty costs and allowance for doubtful
accounts are summarized below. - 14 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004

Revenue Recognition.We provide products under long-term, generally
fixed-priced, contracts that may extend up to 18 months, or longer, in
duration. In connection with these contracts, we follow the guidance contained
in AICPA Statement of Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. SOP 81-1 requires
the use of percentage-of-completion accounting for long-term contracts that
contain enforceable rights regarding services to be provided and received by
the contracting parties, consideration to be exchanged, and the manner and
terms of settlement, assuming reasonably dependable estimates of revenues and
expenses can be made. The percentage-of-completion methodology generally
results in the recognition of reasonably consistent profit margins over the
life of a contract. Amounts recognized in revenue are calculated using the
percentage of construction cost completed, generally on a cumulative cost to
total cost basis. Cumulative revenues recognized may be less or greater than
cumulative costs and profits billed at any point in time during a contracts
term. The resulting difference is recognized as costs and earnings in excess
of billings on uncompleted contracts or billings in excess of costs and
earnings on uncompleted contracts. When using the percentage-of-completion method, we must be able to
accurately estimate the total costs we expect to incur on a project in order to
record the proper amount of revenues for that period. We continually update
our estimates of costs and status of each project with our subcontractors and
our manufacturing plants. If it is determined that a loss will result from the
performance of a contract, the entire amount of the loss is charged against
income when it is determined. The impact of revisions in contract estimates
are recognized on a cumulative basis in the period in which the revisions are
made. In addition, significant portions of our costs are subcontracted under
fixed-price arrangements, thereby reducing the risk of significant cost
overruns on any given project. However, a number of internal and external
factors, including labor rates, plant utilization factors, future material
prices, customer change specifications and other factors can affect our cost
estimates. While we attempt to reduce the risk relating to revenue and cost
estimates in percentage-of-completion models through corporate policy and
approval and monitoring processes, any estimation process, including that used
in preparing contract accounting models, involves inherent risk. Product Warranties. We offer warranty periods of various lengths to our
customers depending upon the specific product and terms of the customer
agreement, typically for a period of 12 months from installation or 18 months
after shipment, whichever occurs first. We negotiate varying terms regarding
warranty coverage and length of warranty dependent upon the product involved
and customary practices. In general, our warranties require us to repair or
replace defective products during the warranty period at no cost to the
customer. We attempt to obtain back-up concurrent warranties for major
component parts from our suppliers. As of each balance sheet date, we record
an estimate for warranty related costs for products sold based on historical
experience, expectation of future conditions and the extent of back-up
concurrent supplier warranties in place. While we believe that our estimated
warranty reserve is adequate and the judgment applied is appropriate, due to a
number of factors, our estimated liability for product warranties could differ
from future actual warranty costs incurred. Allowance for Doubtful Accounts.We maintain an allowance for doubtful
accounts to reflect estimated losses resulting from the inability of customers
to make required payments. On an ongoing basis, we evaluate the collectibility
of accounts receivable based upon historical collection trends, current
economic factors and the assessment of the collectibility of specific accounts.
We evaluate the collectibility of specific accounts using a combination of
factors, including the age of the outstanding balances, evaluation of
customers current and past financial condition and credit scores, recent
payment history, current economic environment and discussions with our project
managers and with the customers directly. - 15 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 Results of Operations The following table displays our statements of operations as a percentage
of net revenues: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    64.4
    
    
    
    71.6
    
    
    
    69.7
    
    
    
    75.3Gross profit
    
    
    35.6
    
    
    
    28.4
    
    
    
    30.3
    
    
    
    24.7Operating expenses
    
    
    29.0
    
    
    
    29.5
    
    
    
    24.2
    
    
    
    26.1Restructuring expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.029.0
    
    
    
    29.5
    
    
    
    24.2
    
    
    
    27.1Operating income (loss)
    
    
    6.6
    
    
    
    (1.1
    )
    
    
    6.1
    
    
    
    (2.4
    )Other expense (income)
    
    
    0.4
    
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.2
    )Earnings (loss) from continuing
operations before income taxes
    
    
    6.2
    
    
    
    (0.6
    )
    
    
    6.2
    
    
    
    (2.2
    )Income tax expense (benefit)
    
    
    2.1
    
    
    
    (0.2
    )
    
    
    2.1
    
    
    
    (0.8
    )Earnings (loss) from continuing operations,
net of tax
    
    
    4.1
    
    
    
    (0.4
    )
    
    
    4.1
    
    
    
    (1.4
    )Loss from discontinued operations,
net of tax
    
    
    (0.9
    )
    
    
    (2.5
    )
    
    
    (0.4
    )
    
    
    (2.4
    )Net earnings (loss)
    
    
    3.2
    %
    
    
    (2.9
    )%
    
    
    3.7
    %
    
    
    (3.8
    )%
 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Revenues.Net revenues from continuing operations increased by
approximately $700,000, or 5.5%, from $12.8 million for the three months ended
March 31, 2003 to $13.5 million for the three months ended March 31, 2004. The
increase in revenues related primarily to our Separation Filtration Systems
revenues, which increased from $6.6 million to $8.6 million, or 30.3%. This
was offset by a decrease in our Environmental Systems revenues, which decreased
from $6.2 million to $4.9 million, or 21.0%. Gross Profit.Our gross profit increased approximately $1.2 million, or
33.3%, from $3.6 million for the three months ended March 31, 2003 to $4.8
million for the three months ended March 31, 2004. Our gross profit, as a
percentage of sales, increased from 28.4% for the three months ended March 31,
2003 to 35.6% for the three months ended March 31, 2004. Our reported
margins, during a particular period, may be impacted by three primary factors:
(i) sales volume, (ii) lower start-up and warranty costs and (iii) shifts in
our product mix. Further, since we manufacture a significant portion of our
products, fluctuations in revenues, from quarter to quarter or year to year,
may impact our manufacturing absorption factors, which will directly impact our
reported margins. During the quarter, in comparison to the same quarter last year and as a
percentage of revenue, we experienced a favorable variance in our manufacturing
absorption of approximately .2%, and a favorable variance in our start-up and
warranty costs of approximately 1.2%. In addition, our reported margins in any
given quarter can be impacted by shifts in our product mix. Certain of our
products have higher
margins than others, and certain of our products have a much higher
internally manufactured cost component; as a result, shifts in the composition
of our sales can have a significant impact on our reported - 16 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 margins either at
the selling margin level or through a negative or positive impact on our
manufacturing absorption. All of these factors, to some degree, impacted our
margins in the current quarter. Operating Expenses.For the third quarter of fiscal 2004, operating
expenses from continuing operations increased by approximately $100,000, or
2.6%, to approximately $3.9 million, compared to $3.8 million for the third
quarter of fiscal 2003. Operating expenses, as a percentage of sales, were
29.0% for the third quarter of fiscal 2004, compared to 29.5% for the third
quarter of fiscal 2003. On a comparative basis and as a percentage of
revenues, our sales and marketing expenses increased from 11.1% to 12.2%, our
engineering and project management expenses decreased from 9.6% to 7.7%, and
our general and administrative expenses increased from 8.9% to 9.1%. The
increase in our sales and marketing expenses related primarily to an increase
in our commission expense, which is attributed to the change in our sales mix
during the period. The decrease in engineering and project management expenses
is attributed to our restructuring and realignment initiative started last
year. The increase in general and administrative expenses related primarily to
the increased costs associated with regulatory compliance. See also Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of
Operation  Restructuring and Organizational Realignment of this Report. Other Income and Expense.Other income and expense items decreased by
approximately $117,000, from income of approximately $63,000 for the third
quarter of fiscal 2003, to expense of $54,000 for the third quarter of fiscal
2004. We realized foreign currency exchange losses of approximately $68,000
during the current quarter, compared to exchange gains of $11,000 for the same
quarter last year, or a negative impact on our operations of approximately
$79,000. In addition when compared with the same quarter last year, our
combined interest and rental incomes were lower by approximately $38,000. Income Taxes.The Companys effective income tax rate was approximately
34% and 36% for the three months ended March 31, 2004 and 2003, respectively.
The decrease in our effective tax rate for the current quarter, compared to the
same quarter last year, resulted from an increased portion of our income
subject to either a lower foreign tax rate or foreign sales income exclusions. Net Earnings (Loss) from Continuing Operations.Net earnings from
continuing operations for the three months ended March 31, 2004 were
approximately $555,000, or 4.1% of sales, compared to a net loss of
approximately $56,000, or (.4%) of sales, for the same period last year. Basic
earnings per share from continuing operations increased from a loss of ($0.02)
per share for the three months ended March 31, 2003, to earnings of $0.18 per
share for three months ended March 31, 2004. Diluted earnings per share from
continuing operations increased from a loss of ($0.02) per share for the three
months ended March 31, 2003, to earnings of $0.18 per share for the three
months ended March 31, 2004. Discontinued Operations.Net loss from discontinued operations for the
three months ended March 31, 2004 was $117,000, compared to a net loss of
$319,000 for the same period last year. The expenses during the current period
related primarily to costs associated with the start-up and commissioning of
projects that have not been closed out. The Company has established a reserve
based on its estimate of these costs based on the most current information
available and historical experience. While we believe our reserve is adequate
and judgment applied is appropriate, due to a number of factors, our estimated
liability could differ from actual costs incurred (see Critical Accounting
Policies  Product Warranties of this Report). Loss per basic share from
discontinued operations was ($0.04) per share for the three months ended March
31, 2004, compared to a loss of ($0.11) per share for the same period last
year. Diluted loss per share from discontinued operations was ($0.04) per
share for the three months ended March 31, 2004, compared to a loss of ($0.11)
per share for the same period last year. - 17 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 Net Earnings (Loss).As a result of the above factors, net earnings
were approximately $438,000, or 3.2% of sales, for the three months ended March
31, 2004, compared to a net loss of approximately $375,000, or (2.9%) of sales,
for the same period last year. Basic earnings per share increased from a loss
of ($0.13) per share for the three months ended March 31, 2003, to earnings of
$0.15 per share for the same quarter this fiscal year. Diluted earnings per
share increased from a loss of ($0.13) per share, for the three months ended
March 31, 2003, to earnings of $0.14 per share for the same quarter this fiscal
year. Nine months ended March 31, 2004 Compared to Nine months ended March 31, 2003 Revenues.Net revenues from continuing operations increased by
approximately $600,000, or 1.3%, from $46.1 million for the nine months ended
March 31, 2003, to $46.7 million for the nine months ended March 31, 2004. The
increase in revenues related primarily to our Separation Filtration Systems,
which revenues increased from $20.5 million to $22.8 million, or 11.2%. This
was offset by a decrease in our Environmental Systems revenue, which decreased
from $25.6 million to $23.9 million, or 6.6%. Gross Profit.Our gross profit increased $2.8 million, or 24.6%, from
$11.4 million for the nine months ended March 31, 2003, to $14.2 million for
the nine months ended March 31, 2004. Our gross profit, as a percentage of
sales, increased from 24.7% for the nine months ended March 31, 2003 to 30.3%
for the nine months ended March 31, 2004. Our reported margins during the
period were impacted by three primary factors: (i) sales volume, (ii) lower
start-up and warranty costs and (iii) shifts in our product mix. Further,
since we manufacture a significant portion of our products, fluctuations in
revenues, from quarter to quarter or year to year, may impact our manufacturing
absorption factors, which will directly impact our reported margins. During the period, in comparison to the same period last year and as a
percentage of sales, we experienced an unfavorable variance in our
manufacturing absorption of approximately 1.4%, and a favorable variance in our
start-up and warranty costs of 3.3%. In addition, our reported margins in any
given period can be impacted by shifts in our product mix. Certain of our
products have higher margins than others, and certain of our products have a
much higher internally manufactured cost component; as a result, shifts in the
composition of our sales can have a significant impact on our reported margins
either at the selling margin level or through a negative or positive impact on
our manufacturing absorption. All of these factors, to some degree, impacted
our margins in the current quarter. Operating Expenses.For the nine months ended March 31, 2004, operating
expenses from continuing operations decreased by $1.2 million, or 9.6%, to
$11.3 million, compared to $12.5 million for the same period last year.
Operating expenses, as a percentage of sales, were 24.2% for the nine months
ended March 31, 2004, compared to 27.1% for the same period last year. The
decrease in the amount of operating expenses during the current fiscal year was
due to the implementation of our restructuring and organization realignment
initiative, which began in fiscal 2003. As a result of this initiative, on a
comparable basis and as a percentage of revenues, our selling and marketing
expenses have remained relatively constant, our engineering and project
management expenses have decreased from 8.6% to 6.8%, and our general,
administrative and restructuring expenses have decreased from 8.9% to 7.4% for
the nine months ended March 31, 2003 and 2004, respectively. See also Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of
Operation  Restructuring and Organizational Realignment of this Report. Other Income and Expense.Other income and expense items decreased by
approximately $79,000, from income of approximately $104,000 for the nine
months ended March 31, 2003, to income of $25,000 for the nine months ended
March 31, 2004. We realized foreign currency losses of approximately $20,000,
compared to losses of approximately $81,000 for the nine months ended March 31,
2003, or a - 18 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 positive impact on our operations of approximately $61,000. This was
offset by a decrease in rental, interest and miscellaneous income of
approximately $140,000, compared to the same period last year. Income Taxes.The Companys effective income tax rate was approximately
34% and 37% for the nine months ended March 31, 2004 and 2003, respectively.
The decrease in our effective tax rate for the current period, compared to the
same period last year, resulted from an increased portion of our income subject
to either a lower foreign tax rate or foreign sales income exclusions. Net Earnings (Loss) from Continuing Operations.Net income from
continuing operations was approximately $1.9 million, or 4.1% of sales, for the
nine months ended March 31, 2004, compared to a net loss of approximately
$643,000, or (1.4%) sales, for the same period last year. Basic earnings per
share from continuing operations increased from a loss of ($0.21) per share for
the nine months ended March 31, 2003, to earnings of $0.63 per share for nine
months ended March 31, 2004. Diluted earnings per share from continuing
operations increased from a loss of ($0.21) per share for the nine months ended
March 31, 2003, to earnings of $0.63 per share for the nine months ended March
31, 2004. Discontinued Operations.Net loss from discontinued operations for the
nine months ended March 31, 2004 was approximately $194,000, compared to a net
loss of $1.1 million for the same period last year. Included in our net loss
for the nine months ended March 31, 2004 was a net gain related to the disposal
of our boiler operations of approximately $92,000 ($140,000 gain less taxes of
$48,000). Basic and diluted loss per share from discontinued operations was
($0.06) per share for the period ended March 31, 2004, compared to a loss of
($0.37) per share for the same period last year. Net Earnings (Loss).As a result of the above factors, net earnings
were approximately $1.7 million, or 3.7% of sales, for the nine months ended
March 31, 2004, compared to a net loss of approximately $1.7 million, or (3.8%)
sales, for the same period last year. Basic earnings per share increased from
a loss of ($0.58) per share for the nine months ended March 31, 2003, to
earnings of $0.57 per share for the same period this fiscal year. Diluted
earnings per share increased from a loss of ($0.58) per share for the nine
months ended March 31, 2003, to earnings of $0.56 per share for the same period
this fiscal year. Results of Operations  Segments We are organized on a global basis along two lines of business:
Environmental Systems and Separation Filtration Systems. The Company had three
reportable segments for fiscal 2003: Environmental Systems, Separation
Filtration Systems and Boilers. The boiler operation was sold during the first
quarter of fiscal 2004 and has therefore been classified as a discontinued
operation in the Companys financial statements. Revenues.The following table displays revenues by reportable segment
(dollars in thousands): Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    %
    
    2003
    
    %
    
    2004
    
    %
    
    2003
    
    %RevenuesEnvironmental Systems
    
    $
    4,937
    
    
    
    36.6
    
    
    $
    6,173
    
    
    
    48.1
    
    
    $
    23,946
    
    
    
    51.2
    
    
    $
    25,622
    
    
    
    55.6Separation Filtration Systems
    
    
    8,554
    
    
    
    63.4
    
    
    
    6,649
    
    
    
    51.9
    
    
    
    22,781
    
    
    
    48.8
    
    
    
    20,487
    
    
    
    44.4Total
    
    $
    13,491
    
    
    
    100.0
    %
    
    $
    12,822
    
    
    
    100.0
    %
    
    $
    46,727
    
    
    
    100.0
    %
    
    $
    46,109
    
    
    
    100.0
    %
 - 19 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 Revenues from our Environmental Systems decreased by approximately $1.3
million, or 21.0%, from $6.2 million for the three months ended March 31, 2003,
to $4.9 million for the three months ended March 31, 2004. Revenues from our
Environmental Systems decreased by approximately $1.7 million, or 6.6%, from
$25.6 million for the nine months ended March 31, 2003, to $23.9 million for
the nine months ended March 31, 2004. Our Environmental Systems segment
continues to feel the effects of the slow down in new power plant construction.
We expect that spending for NOx reduction systems will increase in 2005  2006
as users prepare their compliance plans and compliance deadlines approach, and
we are beginning to see an increase in proposals relating to such initiatives.
In addition, while the construction of new power plants has seen a significant
decline, we believe this portion of the Environmental Systems business will
begin to improve beginning in 2006  2007. Revenues from our Separation Filtration Systems for the three months ended
March 31, 2004 increased by approximately $2.0 million, or 30.3% from $6.6
million in fiscal 2003 to $8.6 million. Revenues from our Separation
Filtration Systems increased by approximately $2.3 million, or 11.2%, from
$20.5 million for the nine months ended March 31, 2003 to $22.8 million for the
nine months ended March 31, 2004. The increase, during the quarter and for the
nine months ended March 31, 2004, is primarily due to the increase in our
nuclear / marine sales, which have increased by approximately $1.9 million, or
79% on a year-to-date basis. The market for nuclear and marine products
remains strong as nuclear power plants continue to invest in life extension
projects and increased military spending occurs. The shortage of natural gas
supplies is also creating new opportunities for our separators and filters; for
example, the production of Liquified Natural Gas (LNG) and its associated gas
processing facilities. Segment Profit (Loss).Management uses segment profits (loss), which
consists of segment revenues less segment costs and expenses before allocation
of general and administrative costs, to measure segment profits or loss. The
Company does not allocate its general and administrative expenses to its
individual segments. The following table displays segment profits (loss) by
reportable segment (dollars in thousands). Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Segment profit (loss)Environmental Systems
    
    $
    694
    
    
    $
    603
    
    
    $
    3,923
    
    
    $
    979Separation Filtration Systems
    
    
    1,429
    
    
    
    381
    
    
    
    2,408
    
    
    
    2,011Total
    
    $
    2,123
    
    
    $
    984
    
    
    
    6,331
    
    
    
    2,990Unallocated general and administrative
expenses
    
    
    (1,227
    )
    
    
    (1,135
    )
    
    
    (3,463
    )
    
    
    (4,119
    )Operating income (loss)
    
    $
    896
    
    
    $
    (151
    )
    
    $
    2,868
    
    
    $
    (1,129
    )
 Environmental Systems profits in the third quarter of fiscal 2004
increased by $91,000, or 15.1%, from a profit of $603,000 for the three months
ended March 31, 2003, to a profit of approximately $694,000 for the same
quarter this fiscal year. As a percentage of Environmental Systems revenue,
our operational performance increased from a segment profit of 9.8%, to a
segment profit of 14.1%, for the three months ended March 31, 2003 and 2004,
respectively. Environmental Systems profits for the nine months ended March
31, 2004 increased by approximately $2.9 million, from a profit of
approximately $1.0 million for the nine months ended March 31, 2003, to a
profit of approximately $3.9 million for the same period this fiscal year. As
a percentage of Environmental Systems revenue, our operational performance
increased from a segment profit of 3.8% for the nine months ended March 31,
2003, to a - 20 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 segment profit of 16.4% for the same period in fiscal 2004. The
increase in our Environmental Systems
operational performance during the current fiscal year related primarily
to the decrease in start-up and commissioning costs of SCR projects and a
reduction in this segments operational expenses. Separation Filtration Systems profits increased in the third quarter of
fiscal 2004 by approximately $1.0 million, from a profit of approximately
$400,000 for the third quarter of fiscal 2003, to a profit of $1.4 million for
the same quarter this fiscal year. As a percentage of Separation Filtration
Systems revenue, our operational performance increased from a segment profit of
5.7%, to a segment profit of 16.7%, for the three months ended March 31, 2003
and 2004, respectively. Separation Filtration Systems profits increased in the
nine months ended March 31, 2004 by approximately $400,000, from a profit of
approximately $2.0 million for nine months ended March 31, 2003, to a profit of
$2.4 million for the same period this fiscal year. As a percentage of
Separation Filtration Systems revenue, our operational performance increased
from a segment profit of 9.8%, to a segment profit of 10.6%, for the nine
months ended March 31, 2003 and 2004, respectively. The increase in our
Separation Filtration Systems operational performance relates primarily to the
change in our sales mix during the period. Backlog The Companys backlog of unfilled orders was approximately $34 million at
March 31, 2004, compared to $46 million at March 31, 2003. Our backlog at
March 31, 2004 when compared to our backlog at March 31, 2003 has been impacted
by two main factors: (i) the suspension of our boiler business, which impacted
our backlog by approximately $1.9 million, and (ii) the completion of a
substantial contract, approximately $14 million, during the later part of
fiscal 2003 and the first part of fiscal 2004. Our Environmental Systems
segment continues to feel the effects of the slow down in new power plant
construction. We expect that spending for NOx reduction systems will increase
in 2005  2006 as users prepare their compliance plans and compliance deadlines
approach, and we are beginning to see an increase in proposal activity relating
to such initiatives. In addition, while the construction of new power plants
has seen a significant decline, we see this portion of the Environmental
Systems business improving beginning in 2006  2007. The market for Peerless
nuclear and marine products remains strong as nuclear power plants continue to
invest in life extension projects and increased military spending occurs. The
shortage of natural gas supplies is creating new opportunities for Peerless
separators and filters; for example, the production of Liquified Natural Gas
(LNG) and its associated gas processing facilities. Financial Position Assets.Total assets decreased by approximately $1.9 million, or 4.5%,
from $42.6 million at June 30, 2003 to $40.7 million at March 31, 2004. The
decrease in our assets during this period resulted primarily from the
collection of a significant receivable due from a boiler customer that had
filed a plan of reorganization under Chapter 11 of the United States Bankruptcy
Code (see Note 5  Contingencies to the consolidated financial statements of
this Report). At March 31, 2004, we held cash and short-term investments of
$7.0 million, had working capital of $20.1 million, and had a current ratio of
2.23-to-1.0. This compares with cash and short-term investments of $7.0
million, $17.8 million in working capital, and a current ratio of 1.88-to-1.0
at June 30, 2003. The increase in our current ratio was a result of a 4.0%
decrease in our current assets, compared to an 18.8% decrease in our current
liabilities. Liabilities and Shareholders Equity.Total liabilities decreased by
approximately $3.8 million, or 18.8%, from $20.2 million at June 30, 2003 to
$16.4 million at March 31, 2004. This related primarily to decreases in our
accounts payable of approximately $1.7 million, and accrued liabilities of
approximately $800,000, both which related to the reduction in our operational
expenses, and a decrease in our billings in excess of costs on uncompleted
contracts of approximately $1.4 million (see Liquidity and Capital - 21 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 Resources
following). The increase in our equity of approximately $2.0 million, or 9.0%,
from $22.3
million at June 30, 2003, to $24.3 million at March 31, 2004, resulted
primarily from our earnings for the period. As a result, our debt (total
liabilities)-to-equity ratio decreased from .91-to-1.0 at June 30, 2003, to
..67-to-1.0 at March 31, 2004. Liquidity and Capital Resources Our cash and cash equivalents were $7.0 million as of March 31, 2004,
compared to $6.7 million at June 30, 2003. Cash used in continuing operating
activities for the period ended March 31, 2004 was approximately $1.4 million,
compared to cash provided of approximately $5.4 million for the same period
last year. Because we are engaged in the business of manufacturing custom systems,
our progress billing practices are event-oriented rather than date-oriented,
and vary from contract to contract. Billings to customers affect the balance
of billings in excess of costs and earnings or the balance of cost and earnings
in excess of billings, as well as the balance of accounts receivable.
Consequently, we focus on the net amount of these accounts, along with accounts
payable, to manage our working capital. The balance of these working capital
accounts was approximately $11.5 million at March 31, 2004 and $7.8 million at
June 30, 2003, representing an increase in our investment in these working
capital items of approximately $3.7 million. Generally a contract will either
allow for amounts to be billed upon shipment or on a progress basis based on
the attainment of certain agreed upon milestones. During the current period, a
greater percentage of the Companys contracts in progress called for billings
upon project shipment versus based upon the attainment of certain milestones.
In addition to the foregoing, we used cash for operational purposes, during the
period, to decrease our payables and accrued expenses, which offset cash
provided by our earnings. Cash used in investing activities was approximately $53,000 for the period
ended March 31, 2004, compared to approximately $72,000 for the same period
last year. The decrease in cash used during the current fiscal year related to
an increase in capital expenditures, offset by proceeds from short-term
investments. We had approximately $51,000 of cash provided by financing activities
during the current period, and $57,000 during the same period last year. The
cash provided by financing activities, during both these periods, related to
the cash received from the issuance of common stock pursuant to our employee
stock options. Cash provided from our Discontinued Operations was approximately $1.7
million during the period, compared to a use of cash of approximately $300,000
during the same period last year. The cash provided during the current period
can be attributed primarily to the collection of a significant receivable due
from a customer of our discontinued boiler operation that had filed a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code (see Note
5  Contingencies to the consolidated financial statements of this Report). As a result of the above factors, for the nine months ended March 31,
2004, we increased our cash and cash equivalents by approximately $300,000,
compared to $5 million for the same period last year. On October 31, 2003, we entered into a $12.5 million revolving credit
facility that expires on October 31, 2006. The facility carries a floating
interest rate based on the prime or Euro rate plus or minus an applicable
margin (Euro plus 1.75% at March 31, 2004), and is secured by substantially all
our domestic assets. At March 31, 2004, we had $3.9 million outstanding under
letters of credit and no loans outstanding, leaving us a maximum availability
under our credit facility of $8.6 million. The facility - 22 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 contained financial
covenants, certain restrictions on capital expenditures, acquisitions, asset
dispositions,
dividends and additional debt, as well as other customary covenants. As
of March 31, 2004, the Company was in compliance with all financial and other
covenants under the credit facility. We believe that we maintain adequate liquidity to support our existing
operations and our planned growth, as well as to continue operations during
reasonable periods of adversity. Factors That May Affect Our Operating Results and Other Risk Factors Investing in our common stock involves a high degree of risk. Any of the
following risks could have a material adverse effect on our financial
condition, liquidity and results of operations or prospects, financial or
otherwise. Reference to these factors in the context of a forward-looking
statement or statements shall be deemed to be a statement that any one or more
of the following factors may cause actual results to differ materially from
those in such forward-looking statement or statements. See Item 2 -
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Forward-Looking Statements of this Report. Changes in the power generation industry and/or the economy could have an
adverse impact on our sales of Environmental Systems and our operating results. The demand for our Environmental Systems depends, to an extent, on the
continued construction of power generation plants and the upgrade of existing
power plants. The power generation industry has experienced cyclical periods
of slow growth or decline. Any change in the power plant industry that results
in a decline in the construction of power plants or a decline in the upgrading
of existing power plants could have a materially adverse impact on our
Environmental Systems revenues and our results of operations. See Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations of this Report. Changes in current environmental legislation could have an adverse impact
on the sale of our Environmental Systems and on our operating results. Our Environmental Systems business is primarily regulatory driven. Laws
and regulations governing the discharge of pollutants into the environment or
otherwise relating to the protection of the environment or human health have
played a significant part in the increased use of Environmental Systems in the
United States. These laws include U.S. federal statutes such as the Resource
Conservation and Recovery Act of 1976, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, or CERCLA, the Clean Water
Act and the Clean Air Act, and the regulations implementing them, as well as
similar laws and regulations at state and local levels and in other countries.
These laws and regulations may change or other jurisdictions may not adopt
similar laws and regulations. This business will be adversely impacted to the
extent that current regulations requiring the reduction of NOx and ozone
emissions are repealed, amended or implementation dates delayed or to the
extent that regulatory authorities minimize enforcement. See Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations of this Report. Competition could result in lower sales and decreased margins. We operate in highly competitive markets worldwide. Competition could
result in not only a reduction in our sales, but also a reduction in the prices
we charge for our products. To remain competitive we must be able to not only
anticipate or respond quickly to our customers needs and enhance and upgrade
our existing products and services to meet those needs, but also continue to
price our products competitively. Our competitors may develop cheaper, more
efficient products or may be - 23 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 willing to charge lower prices for strategic
marketing or to increase market share. Some of our
competitors have more capital and resources than we do and may be better
able to take advantage of acquisition opportunities or adapt more quickly to
changes in customer requirements. We enter into fixed-priced contracts. If our actual costs exceed our
original estimates, our profits will be reduced. The majority of our contracts are on a fixed-price basis. Although we
benefit from cost savings, we have limited ability to recover cost overruns.
Because of the large scale and long duration of our contracts, unanticipated
cost increases may occur as a result of several factors, including, but not
limited to: (1) increases in the cost, (2) shortages of components, materials
or labor, (3) unanticipated technical problems, (4) required project
modifications not initiated by the customer, (5) and suppliers or
subcontractors failure to perform. These factors could delay delivery of our
products and our contracts often provide for liquidated damages for late
delivery. Unanticipated costs that we cannot pass on to our customers or the
payment of liquidated damages under fixed contracts would negatively impact our
profits. Our backlog may not be indicative of our future revenue. Customers may cancel or delay projects for reasons beyond our control.
Our orders normally contain cancellation provisions, which permit us to recover
only our costs and a portion of our anticipated profit in the event a customer
cancels an order. If a customer elects to cancel, we may not realize the full
amount of revenues included in our backlog. If projects are delayed, the
timing of our revenues could be affected and projects may remain in our backlog
for extended periods of time. Revenue recognition occurs over long periods of
time and is subject to unanticipated delays. If we receive relatively large
orders in any given quarter, fluctuations in the levels of our quarterly
backlog can result because the backlog in that quarter may reach levels that
may not be sustained in subsequent quarters. Our backlog may not be indicative
of our future revenues. See Item 2   Managements Discussion and Analysis of
Financial Condition and Results of Operations of this Report. 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 operations and earnings throughout the world have been, and may in the
future be, affected from time to time in varying degrees by war, political
developments and foreign laws and regulations, such as regional economic
uncertainty, political instability, restrictions, customs and tariffs, changing
regulatory environments, fluctuations in foreign currency exchange rates and
adverse tax consequences. The likelihood of such occurrences and their overall
effect upon us vary greatly from country to country and are not predictable.
These factors may result in a decline in revenues or profitability and could
adversely affect our ability to expand our business outside of the United
States. Our financial performance may vary significantly from quarter to quarter,
making it difficult to estimate future revenue. Our quarterly revenues and earnings have varied in the past and are likely
to vary in the future. Our Environmental Systems contracts generally stipulate
customer specific delivery terms and may have contract cycles of a year or
more, which subjects them to many factors beyond our control. In addition,
these contracts are significantly larger in size than our typical Separation
Filtration Systems contracts, which tends to intensify their impact on our
quarterly operating results. Furthermore, as a significant portion of our
operating costs are fixed, an unanticipated decrease in our Environmental
Systems revenues, a delay or cancellation of orders in backlog, or a decrease
in the demand for our Environmental Systems - 24 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 products, may have a significant impact on our quarterly operating
results. Therefore, our quarterly operating results may be subject to
significant variations and our operating performance in one quarter may not be
indicative of our future performance. Our margins are affected by shifts in our product mix. Certain of our products have higher margins than others. Consequently,
changes in the composition of our sales between products from
quarter-to-quarter or from period-to-period can have a significant impact on
our reported margins. Certain of our products also have a much higher
internally manufactured cost component; and therefore, changes from
quarter-to-quarter or from period-to-period can have a significant impact on
our reported margins through a negative or positive impact on our manufacturing
absorption. See Item 2   Managements Discussion and Analysis of Financial
Condition and Results of Operations of this Report. Our products are covered by warranties. Unanticipated warranty costs for
defective products could adversely affect our financial condition and results
of operations and reputation. We provide warranties on our products generally for a period of 12 months
from installation or 18 months from shipment, whichever occurs first. These
warranties require us to repair or replace faulty products and meet certain
performance standards, among other customary warranty provisions. While we
continually monitor our warranty claims and provide a reserve for estimated
warranty issues on an on-going basis, an unanticipated claim could have a
material adverse impact on our operations. In some cases, we may be able to
subrogate a claim back to a subcontractor, if the subcontractor supplied the
defective product or performed the service, but this may not always be
possible. The need to repair or replace products with design or manufacturing
defects could temporarily delay the sale of new products, reduce our profits
and adversely affect our reputation. See Note 3  Product Warranties of this
Report for further discussion and analysis of our product warranties. Product liability claims not covered by insurance could adversely affect
our financial condition and results of operations. We may be subject to product liability claims involving claims of personal
injury or property damage. While we maintain product liability insurance
coverage to protect us in the event of such a claim, our coverage may not be
adequate to cover the cost of defense and the potential award in the event of a
claim. Also, a well-publicized actual or perceived problem could adversely
affect our reputation and reduce the demand for our products. Large contracts represent a significant portion of our accounts
receivable, which increases our exposure to credit risk. We continue to closely monitor the credit worthiness of our customers.
Significant portions of our sales are to customers who place large orders for
custom products and whose activities are related to the power industry. As
such, our exposure to credit risk is affected to some degree by conditions
within the power industry and governmental and/or political conditions. We try
to mitigate our exposure to credit risk, to some extent, by requiring progress
payments and letters of credit. However, as some of our exposure is outside of
our control, unanticipated events could have a materially adverse impact on our
operating results. - 25 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 The terms and conditions of our credit facility impose restrictions on our
operations. We may not be able to raise additional capital, if needed. The terms and conditions of our $12.5 million revolving credit facility
impose certain restrictions on our ability to incur debt, make capital
expenditures, merge, sell assets, make distributions, or create or incur liens,
among other things. Availability of our credit facility is also subject to
certain financial covenants, including a minimum level of shareholders equity.
Our ability to comply with the covenants may be affected by events beyond our
control and we cannot assure that we will achieve operating results meeting the
requirements of the credit agreement. A breach of any of these covenants could
result in a default under our credit facility. In the event of a default, the
bank could elect to declare the outstanding principal amount of our credit
facility, all interest thereon, and all other amounts payable under our credit
facility to be immediately due and payable. Our ability to satisfy any debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our
control. We anticipate that borrowings from our existing revolving credit
facility, or the refinancing of our revolving credit facility, and cash
provided by operating activities, should provide sufficient funds to finance
capital expenditures, working capital and otherwise meet our operating expenses
and service our debt requirements as they become due. However, in the event
that we require additional capital, there can be no assurance that we will be
able to raise such capital when needed or on satisfactory terms, if at all. Our business is subject to risks of terrorist acts and acts of war. Terrorist acts and acts of war may disrupt our operations, as well as our
customers operations. Such acts have created, and continue to create, economic
and political uncertainties and have contributed to the global economic
instability that we are currently facing. Any future terrorist activities, or
any continued military or security operations could further weaken the global
economy and create additional uncertainties forcing our customers to further
reduce their capital spending, or cancel or delay already planned construction
projects, which could have a material adverse impact on our business, operating
results and financial condition. Our common stock is thinly traded, which may result in low liquidity. The daily trading volume of our common stock is relatively low and
therefore the liquidity and appreciation in our stock may not meet our
shareholders expectations. The market price of our common stock could be
adversely impacted as a result of sales by our existing shareholders of a large
number of shares of our common stock in the market, or the perception that such
sales could occur. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our primary market risk exposures are in the areas of interest rate risk
and foreign currency exchange rate risk. We feel our risk to interest rate
fluctuations is nominal, as our investments are short-term in nature and we are
currently not in a borrowing position. Our exposure to currency exchange rate
fluctuations has been, and is expected to continue to be, modest as foreign
contracts payable in currencies other than US dollars are performed, for the
most part, in the local currency and therefore provide a natural hedge
against currency fluctuations. We, on occasion, will purchase derivative
transactions with respect to foreign contracts that do not contain a natural
hedge, but the impact of any fluctuation in the exchange rates in these hedged
currencies would be expected to have an immaterial impact on our financial
operations. The impact of currency exchange rate movements on inter-company
transactions has been, and is expected to continue to be, immaterial. We did
not have any material derivative transactions outstanding as of March 31, 2004. - 26 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 
 Item 4. Controls and Procedures The Company, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Companys disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective as of March 31,
2004 to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the 1934 Act) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms. There were no changes in the Companys internal control over financial
reporting during the Companys fiscal quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings From time to time we are involved in various litigation matters arising in
the ordinary course of our business. We do not believe the disposition of any
current matter will have a material adverse effect on our consolidated
financial position or results of operations (see Note 5 to the consolidated
financial statements of this Report). Items 2, 3, 4, and 5 are not applicable and have been omitted 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits The following exhibits are filed as part of this report. ExhibitNumber
    
    Exhibit3(a)
    
    Articles of Incorporation, as amended to date (filed as
Exhibit 3(a) to our report on Form 10-Q 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
report on Form 10-Q for the fiscal quarter ended December 31, 2003,
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, LLC), as Rights Agent (filed as Exhibit 1 to
our Registration Statement on Form 8-A dated May 22, 1997, and
incorporated herein by reference).
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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 ExhibitNumber
    
    Exhibit4(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/A dated August 30, 2001, and incorporated herein by
reference).31(a)
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended
(adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002). *31(b)
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended
(adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002). *32(a)
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002). **32(b)
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002). **
   *
    
    Filed herewith**
    
    Furnished herewith  (b)
    
    Reports on Form 8-K. On February 11, 2004, the Registrant filed a Report on Form
8-K to file a press release announcing its financial results for
the second quarter of the fiscal year ending June 30, 2004, which
information was furnished and not filed with the Commission. On May 13, 2004, the Registrant filed a Report on Form 8-K to
file a press release announcing its financial results for the third
quarter of the fiscal year ending June 30, 2004, which information
was furnished and not filed with the Commission. - 28 -




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PEERLESS MFG. CO. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2004 
 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PEERLESS MFG. CO.
 Date: May 14, 2004
    
    /s/ Sherrill StoneSherrill StoneChairman and Chief Executive OfficerDate: May 14, 2004
    
    /s/ Richard L. TravisRichard L. Travis, Chief Financial Officer(Principal Financial and Accounting Officer)
 - 29 -