<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Ex-
change Act of 1934. For the quarterly period ended June 30, 1998,
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securi-
ties Exchange Act of 1934. For the transition period from _______
to _______.
Commission File Number: 0-4791
PAUL MUELLER COMPANY
- ----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri
- ----------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
44-0520907
- ----------------------------------------------------------------------
(I.R.S. Employer Identification No.)
1600 W. Phelps Street, P.O. Box 828, Springfield, Missouri 65801-0828
- ----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 831-3000
- ----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all re-
ports 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 [ ]
Indicate the number of shares outstanding of the issuer's Common Stock
as of August 7, 1998: 1,168,021
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements,
prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that
these condensed financial statements be read in connection with the
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K. This report reflects all adjust-
ments of a normal recurring nature which are, in the opinion of
management, necessary for a fair statement of the results for the
interim period.
2
<PAGE> 3
PAUL MUELLER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30 Dec. 31
1998 1997
------- -------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash............................................ $ 3,951 $ 3,402
Available-for-sale investments, at market....... 2,951 8,347
Accounts and notes receivable, less reserve of
$632 at June 30,1998, and $559 at December 31,
1997, for doubtful accounts................... 15,142 16,113
Inventories (Note 2) -
Raw materials and components.................. $ 6,045 $ 5,101
Work-in-process............................... 3,804 1,728
Finished goods................................ 3,748 1,203
-------- --------
$ 13,597 $ 8,032
Prepayments..................................... 805 475
-------- --------
Total Current Assets........................ $ 36,446 $ 36,369
Other Assets...................................... 3,407 3,523
Property, Plant & Equipment, at cost.............. $ 57,389 $ 54,313
Less - Accumulated depreciation................. 38,773 37,658
-------- --------
$ 18,616 $ 16,655
-------- --------
$ 58,469 $ 56,547
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------
Current Liabilities:
Accounts payable................................ $ 3,931 $ 4,296
Accrued expenses................................ 7,698 6,249
Advance billings................................ 4,742 5,225
-------- --------
Total Current Liabilities................... $ 16,371 $ 15,770
Other Long-Term Liabilities....................... 1,438 1,100
Contingencies (Note 4)............................
Shareholders' Investment:
Common Stock, par value $1 per share -
Authorized 20,000,000 shares - Issued
1,342,325 shares.............................. $ 1,342 $ 1,342
Preferred Stock, par value $1 per share -
Authorized 1,000,000 shares - No shares issued - -
Paid-in surplus................................. 4,307 4,307
Retained earnings............................... 37,565 36,582
-------- --------
$ 43,214 $ 42,231
Less - Treasury stock, 174,304 shares at
June 30, 1998, and December 31, 1997,
at cost.................................. 2,554 2,554
-------- --------
$ 40,660 $ 39,677
-------- --------
$ 58,469 $ 56,547
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
<PAGE> 4
PAUL MUELLER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales..................... $ 24,810 $ 21,868 $ 42,234 $ 39,076
Cost of Sales................. 17,936 16,467 30,566 29,446
-------- -------- -------- --------
Gross Profit.............. $ 6,874 $ 5,401 $ 11,668 $ 9,630
Selling, General &
Administrative Expenses..... 4,503 4,231 8,519 8,134
-------- -------- -------- --------
Operating Income.......... $ 2,371 $ 1,170 $ 3,149 $ 1,496
Other Income (Expense):
Interest income............. $ 87 $ 183 $ 194 $ 376
Interest expense............ (8) (3) (10) (5)
Other, net.................. 37 212 161 324
-------- -------- -------- --------
$ 116 $ 392 $ 345 $ 695
-------- -------- -------- --------
Income from Operations before
Provision for Income Taxes.. $ 2,487 $ 1,562 $ 3,494 $ 2,191
Provision for Income Taxes.... 803 515 1,109 708
-------- -------- -------- --------
Net Income................ $ 1,684 $ 1,047 $ 2,385 $ 1,483
======== ======== ======== ========
Earnings per Common
Share (Note 3).............. $ 1.44 $ 0.90 $ 2.04 $ 1.27
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
PAUL MUELLER COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income...................................... $ 2,385 $ 1,483
Adjustments to reconcile net income to net
cash provided by operating activities:
Bad debt (recovery)........................... (4) 17
Depreciation and amortization................. 1,236 1,108
(Gain) on sales of fixed assets............... (7) (2)
Changes in assets and liabilities -
Decrease in interest receivable............. 76 55
Decrease in accounts and notes receivable... 974 1,153
(Increase) in inventory..................... (5,565) (4,829)
(Increase) in prepayments................... (330) (177)
Decrease (increase) in other assets......... 89 (99)
(Decrease) increase in accounts payable..... (2,304) 1,705
Increase in accrued expenses................ 3,388 1,008
(Decrease) increase in advance billings..... (483) 832
Increase (decrease) in long-term liabilities 338 (389)
-------- --------
Net Cash (Required) Provided by Operations $ (207) $ 1,865
Cash Flows Provided (Requirements) from
Investing Activities:
Proceeds from maturities of investments......... $ 7,550 $ 10,440
Purchases of investments........................ (2,230) (6,130)
Proceeds from sale of equipment................. 9 2
Additions to property, plant and equipment...... (3,171) (1,642)
-------- --------
Net Cash Provided from
Investing Activities.................. $ 2,158 $ 2,670
Cash Flows (Requirements) from
Financing Activities:
Dividends paid.................................. $ (1,402) $ (1,402)
-------- --------
Net Cash (Required) by
Financing Activities.................. $ (1,402) $ (1,402)
-------- --------
Net Increase in Cash.............................. $ 549 $ 3,133
Cash at Beginning of Period....................... 3,402 2,221
-------- --------
Cash at End of Period............................. $ 3,951 $ 5,354
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest...................................... $ 14 $ 9
Income taxes.................................. 560 895
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
PAUL MUELLER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
1. The condensed financial statements include the accounts of Paul
Mueller Company (Company) and its wholly owned subsidiaries,
Mueller International Sales Corporation, Mueller Transportation,
Inc., and Mueller Field Operations, Inc. A summary of the signi-
ficant accounting policies is included in Note 1 to the consoli-
dated financial statements included in the Company's annual report
on Form 10-K for the year ended December 31, 1997.
2. Inventory is recorded at the lower of cost, last-in, first-out
(LIFO), or market.
Because the inventory determination under the LIFO method can only
be made at the end of each fiscal year based on the inventory
levels and costs at that time, interim LIFO determinations, in-
cluding those at June 30, 1998, must necessarily be based on
management's estimate of expected year-end inventory levels and
costs. Since estimates of future inventory levels and prices are
subject to many factors beyond the control of management, interim
financial results are subject to final year-end LIFO inventory
amounts. Accordingly, inventory components reported for the period
ending June 30, 1998, are estimates based on management's knowledge
of the Company's production cycle, the costs associated with this
cycle, and the sales and purchasing volume of the Company.
3. The net income per share of common stock has been computed on
the basis of weighted average shares outstanding: 1,168,021 for
periods ended June 30, 1998, and June 30, 1997. There are no
dilutive securities.
4. The Company was the defendant in a breach-of-contract / breach-of-
warranty lawsuit concerning reactor vessels sold in 1992 in Tarrant
County, Texas (Alcon Laboratories, Inc. versus Paul Mueller Com-
pany). As a result of a trial that ended September 19, 1997, the
Company received an adverse decision, and the final judgment
awarded damages, interest, and attorney's fees totaling $1,700,000
to the plaintiff. Management believes the decision was incorrect
and, based on the advice of legal counsel, has appealed the deci-
sion. As a result of the decision, a provision of $775,000 was
made during the third quarter of 1997 for the ultimate resolution
of the matter; the related reserve is included as accrued expenses
on the Consolidated Condensed Balance Sheets. If the decision is
upheld on appeal, the Company's liability will exceed the reserve.
The Company is a defendant in another lawsuit pending at June 30,
1998. In the opinion of management, after consultation with legal
counsel, the outcome of this lawsuit will not have a material ad-
verse effect on the Company's consolidated financial statements.
The Company currently employs over 900 people, of which approxi-
mately 400 are represented by the Sheet Metal Workers Union. The
International Union called a strike beginning July 25, 1995, and
currently 20 employees are participating.
6
<PAGE> 7
PAUL MUELLER COMPANY AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
The following is Management's Discussion and Analysis of the signifi-
cant factors which have affected the Companies' earnings during the
periods included in the accompanying Consolidated Condensed Statements
of Income.
The information discussed below in Management's Discussion and Analy-
sis of Operating Results and Financial Condition contains statements
regarding matters that are not historical facts, but rather are
forward-looking statements. These statements are based on current
financial and economic conditions and current expectations, and
involve risk and uncertainties. Actual future results may differ
materially depending on a variety of factors. These factors, some
of which are identified in the discussion accompanying such forward-
looking statements, include, but are not limited to, milk prices
paid to dairy farmers, feed prices, weather conditions, dairy farm
consolidation, and other factors affecting the profitability of dairy
farmers; the price of stainless steel; actions of competitors; labor
strife; the Company's execution of internal performance plans and
plans to become Year 2000 compliant; economic conditions in key export
markets; the level of capital expenditures in the U.S. economy; and
other changes to business conditions.
OPERATING RESULTS
Net sales for the second quarter ended June 30, 1998, were $24,810,000
compared to $21,868,000 for the second quarter of 1997. The increase
was solely related to sales of Processing Equipment, as they were
$3,257,000 higher. Dairy Farm Equipment sales were about 6% lower
than the same period of a year ago. The improvement in Processing
Equipment sales related primarily to custom-fabricated Processing
Equipment, and the significant factor was a backlog that was 40%
higher as of March 31, 1998, compared to March 31, 1997. The lower
level of Dairy Farm Equipment sales was related to the domestic mar-
ket, as export sales were flat for the second quarter of 1998 compared
to the corresponding quarter of a year ago. A lower backlog of Dairy
Farm Equipment going into the second quarter of 1998 compared to a
year ago and soft domestic market conditions during the second quarter
as a result of unfavorable weather conditions and relatively low milk
prices contributed to lower sales.
The gross profit rate for the quarter ended June 30, 1998, was 27.7%
versus 24.7% for the second quarter of 1997. The improved gross pro-
fit rate was solely due to higher gross margins. The improvement
in gross margins occurred primarily in custom-fabricated Processing
Equipment as a result of improved labor efficiency in the factory and
a higher quality backlog as of March 31, 1998, compared to March 31,
1997.
Selling, general, and administrative expenses for the quarter ended
June 30, 1998, increased by $272,000 over the quarter ended June 30,
1997. The increase was due to higher expenditures for personnel,
sales meetings, warranty and service, and product development activi-
ties.
Other income (expense) was lower for the second quarter of 1998 com-
pared to the second quarter of 1997. Interest income decreased due
to a lower level of investable funds available during the second
quarter of 1998 compared to the second quarter of 1997, and Other,
net declined as a result of an operating loss for the brewpub/brewery
operation and lower duty drawback, trucking income, and royalty in-
come.
The effective tax rate for the second quarter of 1998 and 1997 varied
from the statutory tax rate (34%) primarily as a result of tax-exempt
interest, the lower effective rate for the Foreign Sales Corporation,
and tax credits.
7
<PAGE> 8
Net sales for the six months ended June 30, 1998, were $42,234,000
versus $39,076,000 for the six months June 30, 1997. The increase
was attributable to Processing Equipment sales which improved by
$4,909,000, while Dairy Farm Equipment sales declined by $1,751,000.
The increase in sales for Processing Equipment was due primarily to
custom-fabricated Processing Equipment, as the backlog was 30% higher
at the beginning of 1998 than at the beginning of 1997. Lower sales
were recorded for Dairy Farm Equipment for both domestic and inter-
national markets, with the major portion attributable to decreased
domestic sales. Domestic sales of Dairy Farm Equipment for the first
six months of 1998 were adversely affected by a lower backlog at
December 31, 1997, compared to December 31, 1996, coupled with soft
market conditions during the first half of 1998 as a result of rela-
tively low milk prices, unfavorable weather conditions, and concerns
about feed costs and the government's involvement in domestic milk
markets. Export sales of Dairy Farm Equipment were down during the
first quarter of 1998 compared to the first quarter of the prior year
in several key markets. The strong U.S. dollar, a lower backlog going
into 1998, and higher inventory levels at certain customers all con-
tributed to decreased order entry and sales during the first quarter.
The gross profit rate for the six months ended June 30, 1998, was
27.6% compared to 24.6% for the same period of a year ago. The higher
gross profit rate, as indicated above, was due primarily to improved
gross margins principally for custom-fabricated Processing Equipment.
Margins improved, as the quality of the backlog was higher, and fac-
tory labor efficiency has improved compared to the prior year.
Selling, general, and administrative expenses increased for the six
months ended June 30, 1998, over the comparable period of a year ago
by $385,000. The increase was due to higher expenditures for person-
nel, sales meetings, travel, and product-development activities.
Other income (expense) was lower for the six months ended June 30,
1998, compared to the comparable period of a year ago. Interest
income was lower, as the level of investable funds during the first
six months of 1998 was lower than the first six months of 1997.
Other, net was lower as a result of an operating loss for the
brewpub/brewery operation, a reduced level of duty drawback and
royalty income, and miscellaneous expense.
The effective tax rate for the six months ended June 30, 1998 and
1997, varied from the statutory rate (34%) primarily as a result of
tax-exempt interest, the lower effective tax rate for the Foreign
Sales Corporation, and tax credits.
As previously reported, the labor contract with the Sheet Metal
Workers Union (which covers a portion of the employees at the Spring-
field, Missouri, plant) expired on June 11, 1994. Negotiations with
union representatives continued until an impasse was reached, and the
Company implemented specific provisions of its final offer effective
September 19, 1994. In November 1994, the Regional Director of the
National Labor Relations Board (NLRB) also concluded that a lawful
impasse had been reached in negotiations prior to the Company's
implementation of its offer.
However, on December 22, 1994, the Regional Director of the NLRB
issued an unfair labor practice complaint against the Company for
refusing to supply information to union representatives about the
personal health insurance claims of individual employees and their
dependents and reversed his previous decision regarding the implemen-
tation of changes in wages and benefits. A hearing on these and other
unfair labor practice issues was held during August 1996 by an admin-
istrative law judge of the NLRB, who ruled against the Company on some
unfair labor practice issues, and the Company and the union have both
appealed the decision to the NLRB. A decision by the NLRB is not
expected for several months, and there can be an appeal from any
NLRB decision, either by the Company or by the union. An additional
hearing was held before an administrative law judge of the NLRB in
November 1997, and the judge ruled against the Company on the unfair
labor practice issues involved. The Company has appealed the decision
8
<PAGE> 9
to the NLRB. A final determination of all charges pending may take up
to two years; however, management believes, based on an evaluation by
counsel, that there is no material financial exposure to the Company.
The Company currently employs about 900 people, of which approximately
400 at the Springfield, Missouri, facility are represented by the
Sheet Metal Workers Union. The International Union called a strike
which began on July 25, 1995, and the largest number of employees
participating was approximately 185 during the fourth quarter of 1995.
A substantial number of employees returned to work during 1996, and
currently there are only 20 employees participating. No action has
been taken by the union to prevent nonstriking employees from working.
The Company has implemented the provisions of its revised and final
offer effective April 1, 1996, which remains open for the union's
acceptance, and no further negotiations are scheduled.
The Company has facilities located in Springfield, Missouri, and
Osceola, Iowa. There are approximately 800 employees assigned to
the Springfield facility, and there are an additional 100 employees
at the Osceola facility, none of which are represented by a labor
union.
The Company was the defendant in a breach-of-contract / breach-of-
warranty lawsuit concerning reactor vessels sold in 1992 in Tarrant
County, Texas (Alcon Laboratories, Inc. versus Paul Mueller Company).
As a result of a trial that ended September 19, 1997, the Company
received an adverse decision, and the final judgment awarded damages,
interest, and attorney's fees totaling $1,700,000 to the plaintiff.
Management believes the decision was incorrect and, based on the ad-
vice of legal counsel, has appealed the decision. As a result of the
decision, a provision of $775,000 was made during the third quarter of
1997 for the ultimate resolution of the matter; the related reserve is
included as accrued expenses on the Consolidated Condensed Balance
Sheets. If the decision is upheld on appeal, the Company's liability
will exceed the reserve that has been established.
Management has determined that its manufacturing software and certain
internally developed software must be modified to make them Year 2000
compliant. The computer operating system, the financial software sys-
tem, and the design engineering system are all Year 2000 compatible.
The manufacturing software and certain internally developed software
systems have been examined, and approximately 350 files have been
identified that will require conversion. Approximately one-third
of the files identified have been converted, and testing has been
performed to verify that the files are Year 2000 compliant. The
conversion and testing of all files should be completed by approxi-
mately June 30, 1999. Management does not believe the cost associated
with conversion and testing of the files will be material to the Com-
pany's financial position or results of operations.
The Company is in the process of surveying its major vendors to ensure
that their systems are Year 2000 compliant and that there will be no
disruption in the supply of goods or services. Also, the Company is
currently assessing its noninformation technology systems within its
facilities (plant equipment, telephone system, security system, etc.)
to determine the systems that are noncompliant, if any, and the cost
necessary to bring them into compliance. The Company's products are
Year 2000 compliant or Year 2000 compliance is not an issue.
Looking to the balance of 1998, there are factors that could affect
the results of operations. If there is expanded employee partici-
pation for an extended period of time in the strike mentioned above,
this could have an adverse effect on the level of production and the
ability to secure orders. If the Asian financial crisis continues and
conditions do not improve, this could have an adverse effect on order
entry and sales of Dairy Farm Equipment and certain products included
in the Processing Equipment segment that are sold into the Asian mar-
ket. The price of stainless steel is projected to remain relatively
stable for the balance of the year.
9
<PAGE> 10
The backlog of sales at June 30, 1998, was $28,300,000 compared to
$31,000,000 at June 30, 1997. The June 30, 1998, backlog represents
orders that will be completed and shipped over the next twelve months.
FINANCIAL CONDITION
The consolidated financial condition and the liquidity of the Company
at June 30, 1998, have not changed significantly since December 31,
1997. During the second quarter of 1998, the Company renewed its bank
borrowing facility of $2,000,000 which will expire May 31, 1999, and
none of it is currently utilized. There were no material commitments
for capital expenditures at June 30, 1998.
10
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------ ------------------------------------- --------
<S> <C> <C>
(27) Financial Data Schedule.............. 12
</TABLE>
b. Reports on Form 8-K -- There were no reports on Form 8-K
filed for the three months ended June 30, 1998.
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.
PAUL MUELLER COMPANY
DATE: August 7, 1998 /S/ DONALD E. GOLIK
-------------- --------------------------------------
Donald E. Golik, Senior Vice President
and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,951
<SECURITIES> 2,951
<RECEIVABLES> 15,774
<ALLOWANCES> 632
<INVENTORY> 13,597
<CURRENT-ASSETS> 36,446
<PP&E> 57,389
<DEPRECIATION> 38,773
<TOTAL-ASSETS> 58,469
<CURRENT-LIABILITIES> 16,371
<BONDS> 161
0
0
<COMMON> 1,342
<OTHER-SE> 39,318
<TOTAL-LIABILITY-AND-EQUITY> 58,469
<SALES> 42,234
<TOTAL-REVENUES> 42,234
<CGS> 30,566
<TOTAL-COSTS> 30,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (4)
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 3,494
<INCOME-TAX> 1,109
<INCOME-CONTINUING> 2,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,385
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.04
</TABLE>
