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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
September 30, 2001 0-15045
BHA Group Holdings, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 43-1416730
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8800 East 63rd Street, Kansas City, Missouri 64133
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 356-8400
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of each class on Which Registered
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None - - - - -
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Indicate by checkmark 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 [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of October 26, 2001, the number of shares outstanding of the Registrant's
Common Stock was 6,106,275 shares.
The aggregate market value of the voting stock held by non-affiliates* of the
Registrant's Common Stock was $42,043,380, computed by reference to the closing
price of $15.00 as reported to Registrant at which such stock was quoted by the
NASDAQ National Market on October 26, 2001.
The Registrant's definitive proxy statement for the annual meeting of
stockholders to be held on February 19, 2002 (which will be filed within 120
days after the end of the fiscal year covered by the Form 10-K) is incorporated
to Part III, items 10, 11, 12 and 13, by reference.
*Excludes value of shares held by present officers, directors and principal
stockholders of the Registrant. The determination of "affiliate" status for
purposes of this Annual Report on Form 10-K shall not be deemed a determination
as to whether a person is an affiliate of the Registrant for any other purpose.
-1-
The statements contained in this Report on Form 10-K that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements are
included in the "Factors Affecting Earnings and Stock Price" section,
"Management's Discussion and Analysis," and may be included in other sections
throughout the report. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or those anticipated. The words "should," "believe,"
"anticipate," "expect," "see," and other expressions that indicate future events
and trends identify forward-looking statements. Actual future results and trends
may differ materially from historical results or those anticipated depending on
a variety of factors, including, but not limited to, the performance of newly
established domestic and international operations, demand and price for the
Company's products and services, and other factors. Certain of these factors are
discussed throughout this report on Form 10-K.
PART I
ITEM 1 - BUSINESS
BHA Group Holdings, Inc. (together with its domestic and international
subsidiaries, the "Company" or "BHA") is a global filtration company. Its
principal business is the design, manufacture and sale of replacement parts and
the performance of rehabilitation conversion services for the types of
industrial air pollution control ("APC") equipment known as "baghouses",
"cartridge collectors" and "electrostatic precipitators" ("ESPs"). This
equipment is used to eliminate particulate from the air by passing particulate
laden gases through fabric filters (filter bags) or pleated media filter
elements, in the case of baghouses, and between electrically charged collector
plates, in the case of electrostatic precipitators. The Company's business also
includes the maintenance, conversion and rebuilding of this equipment through a
network of employees and independent contractors. The Company's products and
services are marketed throughout North America, South America, Europe, the Near
East, the Pacific Rim and China. While definitive industry statistics are not
available, based upon Dun & Bradstreet reports and other financial information
available to it, the Company believes it is a leader in worldwide sales of air
pollution control replacement parts and services.
The Company has also established BHA Technologies, Inc. ("BHA Technologies") as
a wholly-owned subsidiary that supplies expanded polytetrafluoroethylene
("ePTFE") membrane products for use in its APC product lines. Through BHA
Technologies, the Company is also supplying ePTFE membrane products to a new
base of customers for use outside of air pollution control.
DOMESTIC BUSINESS AND CORPORATE STRUCTURE
The following outlines a chronology relating to the establishment of the
Company's various domestic business units. The Company's international business
units are described below in the section entitled "International Business."
The Company was organized as an unincorporated division of Standard Havens, Inc.
("Standard Havens") in 1975 and was incorporated in Delaware as a wholly-owned
subsidiary of Standard Havens in 1986. The Company became publicly-owned when it
completed its initial public offering of common stock in November 1986. Net
proceeds from this public
-2-
offering amounted to approximately $3.6 million, which was applied to
outstanding bank debt. The Company completed a second public offering of common
stock in February 1989. Net proceeds from that public offering (approximately
$8.3 million) were used for working capital purposes and to finance several
acquisitions.
In April 1989, the Company formed PrecipTech, Inc. ("PrecipTech"), a Delaware
corporation, as a wholly-owned subsidiary. PrecipTech, which had previously been
a division of BHA, was formed for the purpose of conducting and expanding the
Company's business as it relates to replacement parts, accessories and services
for electrostatic precipitators.
During 1989, BHA and PrecipTech completed several acquisitions in efforts to
expand their product lines and services. In June 1989, BHA acquired the business
of developing and manufacturing acoustic horns for use in both baghouses and
electrostatic precipitators from Saracco Acoustic Sciences Corporation. Also in
1989, PrecipTech completed three acquisitions of privately held companies or
their operating assets. Such acquisitions included ESP Specialties, Inc., a
company that manufactured and sold replacement parts for electrostatic
precipitators; Kinetic Controls, Inc., a company that manufactured and sold
automatic voltage controllers for electrostatic precipitators; and Midwest Power
Corporation, a company that manufactured and sold replacement parts and
accessories and provided services for electrostatic precipitators.
During 1994, the Company established BHA Technologies as a Delaware Corporation.
This wholly-owned subsidiary was formed for the purpose of developing ePTFE
membranes. BHA Technologies successfully developed its own ePTFE membrane, which
it manufactures and markets for various applications both within and outside the
Company's traditional air pollution control equipment markets. In the air
pollution control market, ePTFE membrane is laminated using a thermal process to
a fabric substrate, which is then converted into a replacement filter and
marketed under the trade name BHA-TEX(R). The benefits of this product line to
the customer include improved collection efficiency, increased throughput and
lower operating costs. The ePTFE membranes are widely used outside of air
pollution control applications. These applications include, but are not limited
to, wet filtration, industrial, electrical insulation, medical and apparel. Some
of the products and processes in these applications are currently under patent
protection. In addition to supplying the Company's air pollution control
business with ePTFE membranes for use on filter elements, BHA Technologies has
also identified other market niches and product opportunities. Products
currently being sold include membrane fabrics for use in high performance
outerwear marketed under the eVENT (TM) trade name, high efficiency (HEPA)
filter media used in household appliances and industrial applications, cleanroom
garments, military outerwear, and allergy relief products.
In November 1996, the Board of Directors approved certain changes to the
Company's corporate structure. The Board determined that servicing the domestic
APC customers of its corporate business through one company, instead of through
various subsidiaries, would yield the greatest sales, marketing and operational
efficiencies. To achieve this objective, three wholly-owned subsidiaries of the
Company that were involved in various air pollution control businesses were
merged into PrecipTech to form one company. On February 18, 1997, the
shareholders of the Company approved an amendment to the Certificate of
Incorporation of the Company to change PrecipTech's name to BHA Group, Inc. and
the Company's name to BHA Group Holdings, Inc.
-3-
The Company has been doing business internationally since 1982 and has expanded
its presence throughout the world as seen in the chart below:
Date Company Name (1) Location
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September 1982 BHA Group GmbH Ahlen, Germany
August 1994 BHA Group AG Klus/Balsthal, Switzerland
March 1997 BHA Environmental Technology Co. Ltd. Shanghai, China
April 1997 BHA Group International Pvt. Ltd. (2) Pune, India
August 1997 BHA U.K. Limited Birmingham, United Kingdom
November 1997 BHA Purfilter S.L. Barcelona, Spain
March 1998 BHA Technologies AG Klus/Balsthal, Switzerland
August 1998 BHA Group International Holdings B.V. Amsterdam, Netherlands
November 1998 BHA do Brazil Ltda. Sao Paulo, Brazil
December 1998 BHA Group Philippines, Inc. (2) Manila, Philippines
June 1999 BHA Technologies K.K. Tokyo, Japan
1) Each company is a wholly-owned subsidiary of BHA Group Holdings, Inc. or
one of its subsidiaries.
2) The Company's presence in the Philippines originated in 1997 and in
India in 1994 as Representative and Liaison offices, respectively.
INTERNATIONAL BUSINESSES
The Company sells products and services in several geographical areas.
Operations of the domestic business are based in the United States (U.S.). The
domestic business provides products and services to the U.S. markets and exports
to Canada, Latin America, the Near East, the Pacific Rim and People's Republic
of China ("China"). The European business operations manufacture and sell
products and services in Europe, the Middle East, and North Africa. The
financial data for the Company's domestic and foreign businesses is disclosed in
note 9 to the consolidated financial statements. Each of the entities identified
below is 100% owned, either directly or indirectly, by the Company.
EUROPE
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BHA GROUP GMBH
BHA Group GmbH ("GmbH"), formerly Filtra GmbH, is a German corporation that
operates from Ahlen, Germany as an air pollution control replacement parts
marketer, selling products throughout Europe, the Middle East, and Northern
Africa. Until September 1999, GmbH manufactured APC parts, however, such
operations are now consolidated into the BHA Purfilter S.L. facility in
Barcelona, Spain.
BHA GROUP AG
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BHA Group AG, formerly SF Air Filtration AG, is a Swiss corporation that designs
and produces high efficiency replacement cartridge filter elements. This
wholly-owned subsidiary manufactures the pleated media filter elements in
Klus/Balsthal, Switzerland and sells these products throughout Europe.
BHA UK LIMITED
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BHA UK Limited sells industrial air pollution control parts and services to
customers throughout the United Kingdom and supports product sales from the
manufacturers in Spain and Switzerland helping the Company to expand its
presence in Europe.
-4-
BHA PURFILTER S.L.
BHA Purfilter S.L. ("Purfilter") is a Spanish corporation that manufactures and
sells replacement filters for industrial air pollution equipment. Purfilter
manufactures air pollution control replacement parts in Barcelona, Spain for the
European market and provides a sales presence in Southern Europe.
BHA TECHNOLOGIES AG
BHA Technologies AG, a Swiss corporation, is a wholly-owned subsidiary of BHA
Technologies that markets ePTFE membrane products for a wide variety of
applications both within and outside of the air pollution control industry. BHA
Technologies AG sells ePTFE membrane products throughout Europe and Asia.
BHA GROUP INTERNATIONAL HOLDINGS B.V.
BHA Group International Holdings B.V. is a holding corporation for the
Company's international businesses. It is based in the Netherlands, which
maintains an extensive tax treaty network throughout the world.
LATIN AMERICA
BHA DO BRAZIL LTDA.
BHA do Brazil Ltda. ("BHA Brazil") is a Brazilian corporation that warehouses
and markets industrial air pollution control parts and services. BHA Brazil
stores the air pollution control parts in Sao Paulo, Brazil and sells them to
customers in Brazil and surrounding countries.
In addition to the office in Brazil, the Company supports the Latin American
operations through telemarketing and support services managed from its Kansas
City, Missouri headquarters.
ASIA
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BHA GROUP PHILIPPINES, INC.
BHA Group Philippines, Inc. ("BHA Philippines") is located in Manila,
Philippines and operates as BHA's Asia-Pacific regional sales office to support
the export sales from the United States to customers in the Pacific Rim and
Australia.
BHA ENVIRONMENTAL TECHNOLOGY COMPANY, LTD.
BHA Environmental Technology Company, Ltd. ("BHA China") is a corporation
established in China. BHA China assembles and sells APC products and provides
after-sale services and relevant technical support to customers throughout China
and surrounding regions.
BHA GROUP INTERNATIONAL PRIVATE LIMITED
BHA Group International Private Limited ("BHA India") is an Indian corporation
that provides sales and service assistance to customers in India including
support for exported product sales from the Company's manufacturing units in the
United States.
BHA TECHNOLOGIES K.K.
BHA Technologies K.K. ("BHA Technologies Japan"), a Japanese corporation, is a
wholly-owned subsidiary of BHA Technologies, Inc. that markets ePTFE membrane
products for a wide variety of applications both within and outside the air
pollution control industry. BHA Technologies Japan also provides support for
BHA's non-ePTFE APC business in Japan.
-5-
COMPETITION
Based upon Dun & Bradstreet reports and other publicly available financial
information, the Company believes that it is a global leader in the APC
equipment aftermarket. A number of regional offices have been established in
Asia and Latin America. As a result of this movement into the international
market, the Company is facing increased competition from competitors in those
specific markets, as well as existing competitors from the U.S. and Europe.
Several of the Company's competitors are, or are part of, large integrated
companies, which have greater resources than the Company. The competition also
includes several dozen small to mid-size filter bag manufacturers that compete
in local and regional geographic markets. Generally, original equipment
manufacturers in the U.S. have not effectively competed in the aftermarket for
baghouses, but have been a significant factor in the aftermarket for
electrostatic precipitators.
The domestic market for electrostatic precipitators has been competitive in
recent years due largely to the utility industry, which has been restructuring
in response to deregulation. During the past year, tight energy supplies have
led to a surge in replacement parts and service business for ESPs. An ESP is the
prevalent piece of air pollution control equipment on coal-fired boilers for the
U. S. electrical utility industry. Due to tight supplies of electricity, many
customers in the industry have been focusing on increasing the capacity or
utilization of their coal-fired boilers while maintaining compliance with
environmental regulations. The electric utilities are looking to reduce downtime
and improve efficiency of their coal-fired generating capacity. The company
believes that it is well positioned in this market and is benefiting from
opportunities to work with these electric utility customers. Outside of the
U.S., it is important to note that electrostatic precipitators are currently
more prevalent than baghouses for use in air pollution control systems. The
Company continues to position itself for additional growth in the international
marketplace.
The market in which BHA Technologies competes is much less fragmented than the
APC business. The primary competitors include the industry leader, W. L. Gore,
which developed the process for expanded PTFE in 1958. Other competitors include
Tetratec and Nitto Denko. Competition is based upon brand name, quality,
innovation and pricing.
FACTORS AFFECTING EARNINGS AND STOCK PRICE
General Business Conditions
---------------------------
The current business environment around the world is challenging. Planning has
become more complex as the uncertainties and threats associated with war,
terrorist activities and a global recession must be considered. The Company is
not immune from these significant external factors and a serious business
downturn resulting from any of those factors would have a material adverse
impact on its operating results.
The Company continues to monitor the global business environment very closely
and its potential impact on BHA's business. While the current environment poses
a serious threat to near term operating results, the Company believes it is well
positioned in its markets to generate positive earnings and consistent cash
flows during a period of slower business. The Company will use its free cash
flows to invest in its business to strengthen its competitive position. The
following briefly summarizes a few of the Company's key strategies and
competitive advantages:
-6-
o The Company is a global leader in the APC replacement parts and service
market and is looking to expand market share through its ability to deliver
value to its customers.
o The Company has a stronger financial position than many of its competitors
and will use its free cash flow to invest in its people, new products,
technology and its common stock repurchase program.
o The Company is a world leader in the supply of innovative filtration
products. Its business includes a diverse product line across numerous
filtration applications. The business is also diverse from a geographic and
industry perspective.
o The Company is working to expand these and other competitive advantages
during this period of economic uncertainty.
Although the Company has confidence in its strategies and business plans, it is
important to note that there are a number of risk factors that could have a
material adverse impact on future results. These factors are discussed in more
detail below.
Domestic Air Pollution Control (APC) Segment
--------------------------------------------
U.S. Fabric Filter
The Company is the leader in the supply of replacement parts and service to U.S.
operators of fabric filter dust collectors. During the Company's fiscal year
ended September 30, 2001 ("fiscal 2001"), its sales were $86 million in this
market, representing a 5% decrease from the prior year. Industry data indicates
that the U.S. market for these products contracted as much as 20% during that
period. Factors contributing to the market decline include customer efforts to
reduce on-hand inventories, delays in spending for major equipment upgrades and
reduced plant utilization. For its fiscal year ending September 30, 2002
("fiscal 2002"), the Company will be focused on further expanding its share in
this market. Although the Company believes it will be successful in expanding
its market presence, a severe and protracted downturn in the U.S. economy would
have a material adverse impact on the Company's near-term operating results due
to the cyclical nature of many of the industries its customers operate in. Such
weakness in the U.S. market could result in a further decline in sales and
possibly gross margin compression due to competitive pressures in the
marketplace.
U.S. Electrostatic Precipitator (ESP)
The fiscal 2001 results in this area were very strong as sales of $36 million
represented a 29% increase over the prior year. The electric utility industry
represents the primary industry group serviced by this portion of the Company's
business. The Company believes it is a leader in this market. ESP's are the
primary air pollution control technology utilized on coal-fired boilers at
electric utilities. The Company's internal project tracking system indicates
that in the near-term there appear to be good opportunities for large project
work. Demand for the Company's products and services are influenced in part by
the price of coal relative to natural gas and other alternatives. Demand is also
influenced by regulatory pressure. The longer-term dynamics for both of these
factors appear to be favorable for the Company. Any shorter-term volatility
would impact near-term results. A substantial portion of the sales derived in
this area is fixed price work on major field installations that carry their own
sets of risks. Any decline in fiscal 2002 sales in this area relative to fiscal
2001 results or substantial project cost overruns on fixed-price work would have
a material adverse impact on the Company's short-term operating results.
-7-
U.S. Exports to Latin America and Asia
The Company exports fabric filter and ESP replacement parts and service to
customers in Latin America and Asia. During fiscal 2001, sales were $21 million,
up 5% from the prior year. Although the Company does not have a substantial
investment in property, plant and equipment in either of these regions, the
uncertainty associated with world events holds additional risks for this portion
of the business. Specifically, the economies of many of the countries BHA sells
to in Latin America follow closely the U.S. economy. A severe and protracted
downturn in the U.S. economy would negatively impact many of the countries the
Company serves throughout Latin America. With respect to Asia, the primary
concerns relate to a decline in business that could occur if tensions and
conflict in the region continue to escalate. In the event that business
conditions remain uncertain in Latin America or Asia for an extended period of
time, the large project portion of exports to these markets could decline. Such
a decline, would have a material adverse impact on the Company's operating
results.
Europe APC Segment
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The Company's Europe APC Segment posted a substantial turnaround in operating
results from fiscal 2000 to 2001. Sales for this segment were $22 million in
fiscal 2001. Moving into fiscal 2002, a significant risk factor relates to the
potential softening of the market in Europe as part of an overall deterioration
of the global economy. Approximately 15% of Europe's fiscal 2001 sales relate to
ESP project work. A substantial portion of this work is for customers in North
Africa and the Middle East and could be negatively impacted by world events.
Another risk to the Europe APC segment would be any substantial or prolonged
strengthening of the U.S. dollar as many of the products and raw materials sold
to customers in this market are sourced from the U.S. Any one or combination of
the above noted factors could have a material adverse impact on the Company's
operating results.
BHA Technologies Segment
------------------------
Through BHA Technologies, the Company has established a business to supply ePTFE
membrane products for use in applications outside of air pollution control. BHA
Technologies reduced its pre-tax losses from $0.6 million in fiscal 2000 to $0.2
million in fiscal 2001. In fiscal 2001, sales by BHA Technologies to
non-affiliates were $10.8 million, up from $6.6 million in fiscal 2000. The
Company is focused on establishing through BHA Technologies a business segment
that provides it with an additional vehicle for higher technology products and
for long-term growth. In the near-term, eliminating losses and improving cash
flows within this business segment is a priority. Moving into fiscal 2002, BHA
Technologies' supply contract for the supply of HEPA rated vacuum filters has
been restructured, which will result in a reduction in gross margin dollars. The
Company also expects that competitive factors will put some pressure on gross
margins related to the sale of inter-company and third party APC roll goods.
Success in fiscal 2002 requires the establishment of several new sales channels
and the expansion of sales through relationships that were established in fiscal
2001. The Company expects to achieve this goal and generate modest positive
earnings for this segment in fiscal 2002.
The Company believes that its core competency with respect to third party sales
for ePTFE membrane products outside of air pollution control will be in the
areas of new product development and manufacturing. The Company believes that a
substantial portion of its future business will be transacted through supply
agreements with third parties. The Company will be responsible for the product
and manufacturing issues. Its customers will incorporate the
-8-
Company's products into other product offerings that will then be sold to third
parties. BHA Technologies' success in this regard is also tied in part to its
customers' success in delivering product through their supply chains. The nature
of this business will be to work with fewer customers on larger supply
agreements. The Company's future success is dependent upon its ability to
continue to develop, establish and maintain its existing and targeted new supply
arrangements. Failure to execute this strategy or the termination of a major
supply contract could have a material adverse impact on the Company's operating
results. Failure to execute its strategy could also impact the carrying value of
the Company's investment in BHA Technologies' property, plant and equipment.
Corporate
---------
The Company is in the process of implementing enterprise resource planning
("ERP") software for its primary air pollution control business. The planned
"Go-Live" for this project is the summer of fiscal 2002. During fiscal 2001, the
Company expended $2.2 million on this project of which $0.5 million was expensed
and $1.7 million has been capitalized. During fiscal 2002, the Company
anticipates spending an additional $3.3 million to $3.8 million. The objective
of the new information technology system is to improve BHA's profitability by
achieving a number of specific financial and operational measures. The goal of
the system is to improve working capital management and lower operating costs.
The new information technology system will also provide the Company with a
stable, long-term platform enabling the business to deliver value to its
customers through information sharing and electronic commerce as these issues
become more important in future periods.
ERP implementations are challenging initiatives that carry substantial project
risk in the areas of cost overruns, project delays and business interruption.
The Company has a number of risk management programs in place designed to
mitigate these risks. Notwithstanding these efforts, failure to properly
implement the new information technology systems could have a material adverse
impact on the Company's operating results.
Impact of Risk Factors on the Company's Outlook
-----------------------------------------------
The Company believes that its expectations for the first quarter of fiscal 2002
included in the "Outlook" section of "Management's Discussion and Analysis" of
this Annual Report on Form 10-K are reasonable. Achievement of those targets is
subject to certain risks and uncertainties including the above noted risk
factors and other risks described elsewhere in this report. Any of such risks
could cause the Company to fall short of its financial targets.
Such conditions may cause the Company to re-evaluate its longer-term strategies
with respect to certain product and market opportunities. In these instances, it
may be necessary to reduce expenses and take other steps to rationalize the
costs of these areas to make them profitable. These actions could result in
restructuring expenses that would impact future results.
PRODUCTS AND SERVICES
The Company believes it has the broadest product line in the air pollution
control equipment aftermarket. This, combined with its proprietary telemarketing
system, and database of customer equipment specifications enables it to respond
promptly to customer requests, thus providing it with a competitive advantage.
-9-
The Company manufactures and sells a wide variety of filter bags, replacement
parts and accessories for the industrial air pollution control equipment
aftermarket. Filter bags are manufactured by the Company from fabric purchased
in bulk from fabric manufacturers. The Company manufactures industry standard
bags, as well as bags for customer specific applications. Most filter bags are
produced from fiberglass, polyester, aramid, acrylic, and polypropylene fabrics.
A market shift towards higher efficiency filtration has led to increased usage
of filters that have ePTFE membrane applied to the fabric and other more
specialized materials. The Company's wholly-owned subsidiary, BHA Technologies,
manufactures the expanded PTFE membrane (BHA-TEX(R)) used on its filter bags and
elements. The Company is one of the few filter bag suppliers that manufactures
its own expanded PTFE membrane (see "Business"), which the Company believes
provides it a competitive advantage as it is able to control availability, raw
material costs, quality and product development. Baghouse replacement parts
include support cages for the filter bags, clamps, spring tensioning systems,
continuous particulate monitoring systems and gaskets. Electrostatic
precipitator replacement parts include collecting plates, wires, discharge
electrodes, transformer/rectifiers, rappers and electronic controls.
In addition to standard replacement parts, the Company continues to aggressively
introduce new products and accessories that enhance the performance of a dust
collection system. These new products include continued enhancements to the
Company's electrical products for both baghouses and precipitators and the
introduction of pleated media filter elements and evaporative gas cooling
product lines. The Company is also uniquely positioned for potentially
significant revenues from conversions of precipitators to baghouses or cartridge
collectors. With expertise in each type of air pollution control equipment, BHA
can work with its customers to maximize the efficiency of their air pollution
control to meet regulatory standards or to increase plant operating
efficiencies. Internal product development continues to be supplemented with
strategic acquisitions such as the Drayton Corporation's sound-off acoustic
cleaner product line acquired in January 1999. By combining the Drayton horn
line with the Company's other acoustic products, BHA now has the most
comprehensive line of acoustic horns in the industry.
Product profitability varies considerably over different product groups, with
standard products typically providing a lower profit margin than replacement
parts and accessories.
The Company's business also includes the maintenance, conversion and rebuilding
of industrial air pollution control equipment through a network of independent
contractors and its own service crews. A comprehensive safety program enables
both the Company and customer to control costs from a risk management
perspective. Conversion and rebuilding services involve retrofitting a partial
or entire baghouse or electrostatic precipitator to restore it to original
operating parameters or improve overall performance. BHA is capable of supplying
a variety of other services specifically fitted to its customers' requirements,
including preventive maintenance, system/equipment analysis, inspections,
supervision of customer personnel and training. Information gathered during
preventive maintenance, analysis and inspections is stored in the Company's
database for future reference, and thus is a valuable source of important
customer information. In addition, knowledge gained in solving one customer's
problems is stored in the Company's database and made available on-line to the
Company's salespeople to enable them to respond promptly to similar problems
encountered by other customers. BHA believes it is one of the world leaders in
providing these services.
-10-
BHA Technologies provides BHA-TEX fabrics to BHA Group and to other air
pollution control companies for use in fabric filter bags and pleated media
filter elements. Additionally, BHA Technologies has developed numerous other
applications for its ePTFE membrane. These include outerwear and footwear for
consumers, as well as for military and industrial users. Other product
applications include High Efficiency Particulate Air filtration (HEPA) rated
vacuum cleaner filters, clean room apparel, allergen barriers such as mattress
encasings and other industrial applications.
CUSTOMER BASE
The Company's APC customer base is diverse both industrially and geographically,
and includes customers in virtually all sectors of the industrial economy.
International markets include Canada, Europe, Latin America, the Near East, the
Pacific Rim and China. The Company's products and services are used in major
industrial environments such as cement kilns, asphalt plants, steel and iron
foundries, aluminum and copper smelters, rock and gypsum dryers, chemical
plants, grain and food processing plants, refuse to energy plants, waste and
hazardous waste incinerators and electric utilities, as well as many other
areas. In recent years, there has been an emergence of multinational companies
expanding their worldwide presence in BHA's traditional target industries.
Management believes that over the longer term, this trend could have a positive
impact on its international business.
The vast majority of the Company's baghouse sales represent small transactions
with numerous customers. Precipitator replacement parts sales frequently
accompany conversion or rebuild services. No customer accounted for more than
10% of the Company's annual sales during any of its last three fiscal years. The
Company does not believe that it is dependent upon any single customer or group
of customers and has no unusual geographical or industry concentrations of
business or credit risk.
The Company established its APC business with a strategy of marketing and
selling directly to the end user of the product. By contrast, BHA Technologies
does not sell to the end user of the product. Strategic alliances have been
formed with major companies in several markets. Under these relationships, BHA
Technologies is the exclusive supplier of ePTFE membrane goods to its partners.
These partners incorporate the membrane into their products which are then sold
to a third party. The Company's strategic alliance partners include Mitsui & Co.
Ltd. and Radici Tessuti SPA for consumer apparel, Tiong Liong Industrial Co.,
Ltd. for footwear, Fibrotek Industries, Inc. for industrial apparel and Salu,
Inc. for allergen barrier products.
-11-
SALES AND MARKETING
One of the Company's principal competitive APC advantages is its proprietary
telesales system, the core of which is a computer database containing detailed
information on over 135,000 pieces of pollution control equipment (baghouses and
electrostatic precipitators) at over 65,000 accounts. Because of the large
number of different original equipment manufacturers and varying maintenance
procedures, many pieces of customer equipment have unique features. Included in
the Company's database is information on the location of the equipment; a phone
contact for the individuals responsible for maintaining the equipment; the type
of equipment (by manufacturer, design and unique attributes); date of
installation; fabric type, size and design of filter bags used; when the bags
were last serviced; additional accessories that were installed; application and
temperature requirements; as well as other detailed pieces of useful information
about the equipment and the customer. This information has been gathered since
the Company was established in 1975, and is continually updated following
customer calls, site inspections and maintenance jobs.
The ongoing population of the customer database is an important part of the
Company's sales strategy. In recent years, a substantial portion of the growth
in the customer database relates to the international marketplace and segments
of the U.S. market where the Company's newer fine filtration products have
application.
The Company keeps information in a central computer database that is accessed
on-line by its telesales representatives. The computer tracks customer calls and
pending orders, which helps make efficient use of the representative's time.
Each day, a list of the most important customer calls is provided to the
representative. This list includes contracts and orders in negotiation, as well
as reminders for calls to customers that have not been serviced for some time.
Once an order is taken, the information is routed electronically to the
operations department where invoices and contracts are generated. Invoice and
technical data about the filter bags, cages, precipitator replacement parts and
accessories is sent via computer connection to the Company's manufacturing
facilities. There the bags are sewn, the support cages and precipitator
replacement parts are manufactured, and the accessories are consolidated for
shipment. The order is packaged and sent to the customer according to a priority
schedule.
Each telesales representative is furnished with data to evaluate their
performance and enable them to focus on high opportunity sales calls. Historical
sales data is made available to each telesales representative showing (i)
performance by the month and year toward targeted goals (broken down by product
category) for sales volume and profit margin, (ii) the sales history for each
customer, as well as the sales potential for such customer, and (iii) a summary
of each contact with each customer and its results, including notes of any
useful information for further follow-up opportunities. The Company believes
that the system provides effective feedback to telesales personnel to meet their
sales goals.
In addition to its use on a customer-by-customer basis, the Company's telesales
system and database is used to develop industry statistics and analyze market
trends. Information is also extracted for marketing and advertising campaigns
and new product evaluations.
GOVERNMENT REGULATION AND INITIATIVES
The Company is not subject to direct environmental protection regulation with
respect to the manufacture or sale of its products other than regulations
applicable to manufacturers
-12-
generally. The Company's customers are required to meet national primary and
secondary ambient air quality standards for specific pollutants, including
particulate matter, which have been promulgated under the Clean Air Act, as
amended (the "Act"). Title V, the cornerstone of the Act, establishes a national
operating permit program. Title V requires appropriate and sufficient record
keeping, monitoring and reporting requirements to assure compliance with the
standards established by the permitting authorities. Also included in the Act is
the Maximum Achievable Control Technology ("MACT") program. Under MACT, the EPA
develops hazardous air pollutant emissions limitations for various categories of
pollutants that sharply reduce allowable emissions. The states have primary
responsibility for implementing these standards, and in some cases, have adopted
standards which are more stringent than those adopted by the Environmental
Protection Agency ("EPA") under the Act. Revisions to the Act have expanded the
type of emissions monitored and provided the regulatory agencies more authority
to enforce permits and issue fines. These regulations will impact producers of
cement, aluminum, chemicals, steel and other industries. It is anticipated that
efforts by industry to comply with MACT standards may increase demand for the
Company's fine filtration and emissions monitoring products.
In November 1996, the EPA announced its intentions to promulgate new National
Ambient Air Quality Standards (NAAQS) for the control of particulate matter
("PM"), which includes lead, ground-level ozone, sulfur dioxide, nitrogen
dioxide, carbon monoxide and other fine particulate matter. Currently, the
states do not monitor for small particulate (less than 2.5 microns), therefore
very little data has been collected to determine which areas meet or do not meet
the revised PM-fine standards. On December 1, 1996, the EPA proposed new and
more stringent monitoring requirements for PM-2.5 in conjunction with the
proposed NAAQS for fine particles. On July 18, 1997, the EPA further revised
these standards and since that time, PM-2.5 monitoring networks are being
installed and each state will have to prepare a State Implementation Plan that
documents its approach to meeting the new NAAQS. The network of required
monitors will be phased in over a three to four year period. When considering
the proposed regulations, the industries most likely to be impacted by the
changing air quality standards are the utility, automotive, chemical, petroleum
and manufacturing industries. The Company believes that the growing awareness of
the importance for better air quality and the adoption of the proposed
regulations are positive long-term indicators of the Company's growth potential.
Further, the Company is not aware of any likely statutory changes that may have
a negative impact on its business.
Additionally, the Company manufactures and sells its products in Europe, Latin
America, Canada, the Near East, the Pacific Rim and China. The Company's
domestic and international customers are required to operate in compliance with
certain standards established and promulgated by their respective permitting
authorities.
BACKLOG
On September 30, 2001, the Company's backlog of orders was $46.4 million
compared to $52.7 million at September 30, 2000 and $47.2 million at September
30, 1999. The lower backlog primarily relates to a decline in orders for fabric
filter parts and services in the U.S. which results from the economic
environment as well as an increased tendency of the Company's customers to
provide shorter lead times with their orders. This decline was partly offset by
a strong backlog for the domestic ESP group. The backlog in Europe declined
slightly as the prior year numbers included an order for a significant ESP
rebuild project. BHA Technologies experienced a decline in its backlog related
to a restructuring of its supply agreement with a vacuum cleaner manufacturer.
-13-
EMPLOYEES
As of September 30, 2001, the Company employed approximately 1,050 persons, none
of whom are represented by labor unions. The Company restricts access to its
database and customarily requires its employees having access to proprietary
systems and information to execute confidentiality agreements and covenants not
to compete. The Company believes that its relations with its employees are good.
PATENTS, TRADEMARKS, COPYRIGHTS, AND PROPRIETARY INFORMATION
The Company owns patents, trademarks, copyrights, and proprietary information
and has pending applications for patents and trademarks for parts, accessories,
and electrical controls for industrial air pollution control equipment and
non-air pollution control markets. The Company considers such patents,
trademarks, copyrights, and proprietary information and applications for patents
and trademarks to be important. The business of the Company, however, is not
dependent on such patents, trademarks, copyrights, and proprietary information.
Patents owned by the Company expire at various dates from 2002 through 2016.
-14-
ITEM 2 - PROPERTIES
CORPORATE HEADQUARTERS
The Company owns the facility in Kansas City, Missouri, which serves as its
Corporate Headquarters (approximately 66,000 square feet).
The table below provides certain information with respect to the domestic and
foreign properties owned and leased by the company.
Location Use Owned/Leased Square Feet
-------- --- ------------ -----------
Kansas City, Missouri Corporate Headquarters Owned 66,000
Lee's Summit, Missouri (7) Production/Warehouse Leased 37,500
Slater, Missouri (1) Production Owned 170,000
Slater, Missouri (7) Production Owned 28,000
Slater, Missouri (1) Warehouse Owned 10,000
Slater, Missouri (2) Leased to Supplier Owned 54,000
Salisbury, Missouri (1) Production Owned 20,000
Salisbury, Missouri (1) Production Owned 65,000
Folkston, Georgia (3) Production Owned 105,000
Newport News, Virginia (4) Production Leased 21,000
Fredericksburg, Virginia (5) Warehouse Leased 3,200
Covington, Kentucky (5) Warehouse Leased 5,000
Germany (6) Office/Warehouse Owned 30,000
Switzerland (1) Office/Production Leased 20,000
Philippines (6) Office Space Leased 1,000
China (6) Office/Product Assembly Leased 17,000
India (6) Office Space Leased 3,000
Brazil (6) Office/Warehouse Leased 5,100
Spain (1) Office/Production Leased 26,300
Japan (6) Office Space Leased 1,000
1) Operations include the manufacture of traditional and pleated filter
elements, spot welding of metal cages, and warehouse and assembly
operations.
2) Leased to a raw material supplier of the Company.
3) Operations include the manufacture of parts and accessories for
electrostatic precipitators.
4) Operations include the manufacture and assembly of computer based
voltage control systems for electrostatic precipitators.
5) Warehouse and office space for the Company's field service crews.
6) Warehouse and office space for sales and service support in certain
international markets.
7) Operations include the manufacture of ePTFE membranes. The Lee's Summit
facility is subject to a capital lease related to an industrial revenue
bond obligation. The Slater facility is owned by the Company.
The facilities and office space owned and leased by the Company are considered
adequate for its present needs and, with modest ongoing capital expenditures,
are suitable for any foreseeable expansion.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in no legal proceedings other than ordinary litigation
incidental to the Company's business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year ended
September 30, 2001 to a vote of security holders through the solicitation of
proxies or otherwise.
-15-
PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market and quoted
under the symbol "BHAG" on the NASDAQ National Market ("NASDAQ").
The information set forth in response to Item 201 of Regulation S-K is included
in this Form 10-K in Part II Item 8, Financial Statement, and Supplementary Data
as Note 10, Quarterly Financial Data (Unaudited) ("Note 10"), and is
incorporated by reference in partial response to this Item 5. The prices set
forth in Note 10 do not include commissions and do not necessarily represent
actual transactions. The closing price of the Company's common stock on the
NASDAQ on October 26, 2001 was $15.00.
HOLDERS
As of October 26, 2001, there were 8,816,292 shares issued and 2,710,017 shares
in treasury. At October 26, 2001, the Company had 6,106,275 shares outstanding
that were owned by approximately 2,500 beneficial owners.
DIVIDENDS
During the years ended September 30, 1999, 2000 and 2001, the Company declared
and paid quarterly dividends each year aggregating $.12 per share to
shareholders. The Company's Board of Directors ("Board of Directors") has since
declared a dividend of $.03 per share, payable on November 26, 2001 to
shareholders of record on November 16, 2001.
The Company does not have a formal policy for paying cash dividends on its
stock. Future determinations concerning dividends will be made, at the
discretion of the Board of Directors, based upon the Company's earnings, its
capital requirements, its financial condition, restrictions placed against
payment of dividends under any financing agreements and such other factors as
the Board of Directors, at its discretion, may from time to time deem relevant.
RECENT SALES OF UNREGISTERED SECURITIES
The company has not sold any equity securities during the reporting period that
were not registered under the Securities Exchange Act of 1933, as amended.
TREASURY STOCK
The Company has periodically repurchased shares of BHA Common Stock since an
initial stock repurchase plan was authorized by the Board of Directors in 1994.
In the aggregate, the Company has repurchased 2,480,331 shares out of a total of
3,500,000 shares authorized by the Board of Directors. During fiscal 2001,
485,287 shares were repurchased at an average price of $13.58.
-16-
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth in the table below have been
derived from the consolidated financial statements of the Company and related
notes thereto. The selected income statement data for the years ended September
30, 1999, 2000 and 2001, and the selected balance sheet data as of September 30,
2000 and 2001, are derived from the consolidated financial statements of the
Company and the related notes thereto, which have been audited by KPMG LLP,
independent auditors and which are included in Item 8 in this Form 10-K. This
data should be read in conjunction with and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 in this Form 10-K and the Company's audited
consolidated financial statements, including the related notes and the
independent auditors' report thereon and the other financial information
included in Item 8 in this Form 10-K.
Years Ended September 30,
2001 2000 1999* 1998 1997
---- ---- ----- ---- ----
(In Thousands, Except per Share Data)
Selected Income Statement Data
Net Sales $ 174,923 $164,550 $159,047 $ 145,494 $133,407
Gross Margin 52,688 49,351 41,940 44,033 40,786
Operating Expense 40,173 37,894 38,297 31,853 28,196
Interest Expense, Net 1,614 1,951 1,984 1,423 1,009
Earnings Before Income Taxes 10,901 9,506 1,659 10,757 11,581
Net Earnings $ 7,223 $ 6,016 $ 1,084 $ 7,332 $ 8,101
Basic Earnings per Share $ 1.17 $ .91 $ .15 $ 1.02 $ 1.12
Weighted Average Shares Outstanding--Basic 6,199 6,601 7,028 7,171 7,226
Diluted Earnings per Share $ 1.11 $ .90 $ .15 $ .97 $ 1.06
Weighted Average Shares Outstanding--Diluted 6,482 6,672 7,134 7,552 7,676
Selected Balance Sheet Data
Working Capital $ 45,236 $ 42,275 $ 43,285 $ 42,223 $32,132
Total Assets 111,162 112,232 108,148 107,574 87,605
Current Portion of Long-Term Debt and Capital Lease
Obligations 2,499 2,669 2,922 3,988 62
Long-Term Debt (Less Current Portion) 17,769 17,638 20,345 23,029 12,415
Capital Lease Obligations (Less Current Portion) 6,637 7,200 7,600 -- --
Shareholders' Equity 61,134 59,807 58,892 61,953 56,918
Cash Dividends Declared per Common Share $ .12 $ .12 $ .12 $ .12 $ .11
*Operating expenses for the year ended September 30, 1999 include $2,167,000 of
restructuring charges ($1,408,000 after taxes or $0.20 per share). Additionally,
cost of goods sold for the year ended September 30, 1999 includes unusual
charges of $4,200,000 ($2,730,000 after taxes or $0.38 per share).
-17-
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
For purposes of this "Management's Discussion and Analysis" as well as the
segment reporting information included in Note 9 to the Audited Financial
Statements, the Domestic Air Pollution Control ("Domestic APC") segment
represents all APC business for which the products or services are sold or
managed from the United States. Generally, this includes revenues to customers
in the U.S. and exports to customers in Canada, Latin America, and Asia. The
Europe APC segment represents all business for which the products or services
are sold or managed primarily from Europe. Such revenues are typically generated
in Europe and Northern Africa. BHA Technologies, a subsidiary engaged in the
production and sale of ePTFE membrane for both APC and non-APC applications,
represents BHA's third business segment.
FISCAL 2001 COMPARED TO FISCAL 2000
-----------------------------------
NET SALES
Consolidated net sales during the year ended September 30, 2001 ("fiscal 2001")
were $174.9 million compared to $164.6 million during the year ended September
30, 2000 ("fiscal 2000"), an increase of 6%. Sales in the Domestic APC segment
increased 3% from $137.9 million to $142.4 million. Sales in the Europe APC
segment increased 8% from $20.1 million to $21.7 million. The BHA Technologies
business segment generated fiscal 2001 third party sales of $10.8 million
compared to prior year sales of $6.6 million.
Within the Domestic APC segment, fabric filter replacement parts and service
sales to customers in the U.S. declined 5% to $85.6 million. The decline in
these product lines was the result of the economic contraction in the industrial
and manufacturing sectors of the U.S. economy and the decision by many customers
to defer expenditures for capital improvements and increases in production
capacity. The Company's domestic ESP sales increased 29% from $28.0 million to
$36.1 million as this portion of the business benefited from favorable business
conditions within the U.S. electric utility market for operators of coal-fired
boilers. Export sales increased 5% to $21.7 million as shipments into Asia and
the Pacific Rim more than offset a modest decline in shipments to Latin America
which resulted from lack of major project work in that region.
The Europe APC segment's sales increased 8% when expressed in U.S. dollars.
Sales for the year rose 20% on a local currency basis. The sales growth
primarily reflects work completed on two large ESP projects during the current
fiscal year together with modestly higher shipments of the Company's fabric
filter products.
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by 65% to $10.8 million. The increase reflects higher shipments of
HEPA rated filters to a major consumer products manufacturer under a contract
which commenced in the third quarter of fiscal 2000. Additional increases relate
to sales of membrane for apparel to be sold under the eVENT(R) brand name as
well as membrane sold for use in non-consumer apparel applications and clean
room products.
-18-
GROSS MARGIN
Consolidated gross margin was 30.1% in fiscal 2001 compared to 30.0% in fiscal
2000. In the Domestic APC segment, margins declined slightly. Despite the
adjustments made by the Company to its cost structure in the fabric filter
production facilities, the lower production volumes resulted in higher per unit
costs for these products. Gross margins improved in the Europe APC segment due
to the improved plant utilization. In the BHA Technologies segment, gross
margins declined slightly as a result of higher costs related to a second
manufacturing facility that was brought on line during the year and which was
not fully utilized.
OPERATING EXPENSES
Selling and advertising expenses were $20.8 million (11.9% of sales) in fiscal
2001 compared to $19.7 million (12.0% of sales) in fiscal 2000. General and
administrative expenses were $19.4 million (11.1% of sales) in fiscal 2001
compared to $18.2 million (11.0% of sales) in fiscal 2000. In total, operating
expenses increased 6.0% from $37.9 million to $40.2 million. Although the
personnel levels in fiscal 2001 were slightly lower than the prior year, there
were increases in operating expenses relative to per person salaries and health
care costs. Additionally, the Company incurred higher costs in its information
technology department including approximately $0.5 million related to training
and consulting for the enterprise resource planning software which will be
installed in fiscal 2002. The provision for bad debt expense was increased by
$0.3 million in fiscal 2001 as compared to the prior year as a result of the
higher sales together with the potential impact of the weakening U.S. economy on
the Company's industrial customers' ability to pay.
INTEREST EXPENSE
Interest expense for fiscal 2001 was $1.8 million compared to $2.0 million in
fiscal 2000. The decline was the result of a decrease in average borrowings from
$32.7 million to $30.0 million together with lower average interest rates which
were approximately 6.2% annually in fiscal 2000 compared to 5.8% in fiscal 2001.
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $10.4 million (7.3% of sales)
in fiscal 2001 compared to $10.9 million (7.9% of sales) in fiscal 2000. The
decline in profitability for this segment is the result of lower profits in the
domestic fabric filter business resulting from the 5% decline in sales. This was
partially offset by improved profits from ESP and export sales.
The Europe APC segment generated pre-tax earnings in fiscal 2001 of $0.7 million
compared to a pre-tax loss of $0.8 million in fiscal 2000. Of the improvement,
approximately $0.6 million was the result of foreign exchange as the Company
incurred exchange rate gains in fiscal 2001 of approximately $0.2 million and
exchange rate losses of approximately $0.4 million in fiscal 2000. The balance
of the improvement was the result of the 20% increase in sales, expressed in
local currencies, which were generated with substantially the same overhead
structure.
BHA Technologies' pre-tax loss was $0.2 million in fiscal 2001 compared to a
pre-tax loss of $0.6 million in fiscal 2000. During fiscal 2001, sales increased
to $10.8 million from $6.6 million in the prior year. The cost structure also
increased as a second manufacturing facility was brought on line during the
year.
-19-
INCOME TAXES
The effective income tax rate was 33.7% in fiscal 2001 compared to 36.7% in
fiscal 2000. The effective tax rate in 2001 was lower than the statutory rate
due to credits for research and development, tax benefits on export sales and
net operating loss carry-forwards utilized by certain foreign subsidiaries. The
fiscal 2000 rate was higher than the Company's historical rate due to losses on
certain foreign subsidiaries for which the Company did not recognize any tax
benefits.
NET EARNINGS
Net earnings were $7.2 million ($1.11 per diluted share) in fiscal 2001 compared
to $6.0 million ($0.90 per diluted share) in fiscal 2000. The improved earnings
were the result of the turn-around in Europe and lower losses in BHA
Technologies combined with reduced interest expense. Improved earnings per share
were also partially the result of fewer average shares outstanding. Weighted
average common and common equivalent shares outstanding decreased from 6.7
million shares to 6.5 million shares due common stock repurchases.
FISCAL 2000 COMPARED TO FISCAL 1999
-----------------------------------
Consolidated net sales during fiscal 2000 were $164.6 million compared to $159.0
million during the year ended September 30, 1999 ("fiscal 1999"), an increase of
3%. Sales in the Domestic APC segment increased 0.6% from $137.2 million to
$137.9 million. Sales in the Europe APC segment were essentially unchanged at
$20.1 million for each fiscal year. The BHA Technologies business segment
generated fiscal 2000 third party sales of $6.6 million compared to prior year
sales of $1.8 million
Within the Domestic APC segment, fabric filter replacement parts and service
sales to customers in the U.S. grew 12% to $90.3 million, and export sales
increased 11% to $19.7 million. Export sales into Latin America increased 8% led
by higher sales of fabric filter replacement parts. Shipments to the Pacific Rim
and Asia also increased as the economies in those markets showed some signs of
improvement. Sales of fine filtration products were especially strong across
both the Company's domestic and international markets. The strong growth in
these portions of the business was largely offset by a $10.6 million sales
decline in domestic ESP parts and services. The decline in ESP sales was
anticipated as fiscal 1999 included a number of larger rebuild projects.
Sales for the Europe APC segment on a U.S. dollar basis were essentially
unchanged. Expressed in local currencies, sales of the Europe APC segment
increased 14%. Within the BHA Technologies segment, the noted increase in sales
was largely driven by a multi-year contract to supply high efficiency (HEPA)
filters to a major household vacuum cleaner manufacturer.
GROSS MARGIN
Consolidated gross margin was 30.0% of sales in fiscal 2000 compared to 26.4% in
fiscal 1999. Excluding unusual charges of $4.2 million, the fiscal 1999 gross
margin was 29.0%. The higher gross margin percentage in fiscal 2000 reflects an
improved mix of business emphasizing the Company's fine filtration products.
Increased sales volume also resulted in improved utilization of the Company's
fabric filter and ePTFE membrane production facilities. The noted gross margin
percentage improvement was offset in part by a decrease in the utilization of
ESP production facilities relating to the decline in sales volume of large
rebuild projects.
-20-
OPERATING EXPENSES
Selling and advertising expenses were $19.7 million (12.0% of sales) in fiscal
2000 compared to $20.2 million (12.7% of sales) in fiscal 1999. General and
administrative expenses were $18.2 million (11.0% of sales) in fiscal 2000
compared to $15.9 million (10.0% of sales) in fiscal 1999. Fiscal 1999 operating
expenses also included $2.2 million in restructuring charges. In total,
operating expenses exclusive of restructuring items increased 4.9% from $36.1
million to $37.9 million. The increase in operating expenses in part relates to
higher compensation and retirement plan funding costs that are tied to the
overall improvement in the results of the business. During fiscal 2000, the
Company also incurred incremental consulting expenses relating to an information
technology initiative and costs associated with foreign exchange losses
resulting from the weakening Euro.
INTEREST EXPENSE
Interest expense for fiscal 2000 was $2.0 million compared to $2.1 million in
fiscal 1999. The decline was the result of lower borrowings which more than
offset increasing interest rates. Strong cash flows during the year enabled the
Company to reduce the amounts outstanding under its bank lines. The majority of
the Company's borrowings are from banks at variable interest rates. The
Company's weighted average cost of borrowing during the year increased as U.S.
interest rates rose.
INCOME TAXES
The effective income tax rate was 36.7% in fiscal 2000 compared to 34.7% in
fiscal 1999. The higher income tax rate was the result of losses by certain
foreign subsidiaries for which the Company did not recognize income tax benefits
during the year.
NET EARNINGS
Net earnings were $6.0 million ($0.90 per diluted share) in fiscal 2000 and $1.1
million ($0.15 per diluted share) in fiscal 1999. The improved earnings was the
result of the higher sales and improved gross margins addressed above together
with the elimination of the adverse impact that restructuring and unusual
charges had on fiscal 1999 results. Weighted average common and common
equivalent shares outstanding decreased from 7.1 million shares to 6.7 million
shares primarily due to treasury stock repurchases.
OTHER
-----
The U.S. inflation rate grew at a moderate pace during fiscal 2001. BHA believes
that its business is not affected by inflation except to the extent the economy
in general is affected.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net working capital was $45.2 million at September 30, 2001 compared to $43.3
million at September 30, 2000. The current ratio was 3.0 in fiscal 2001 compared
to a current ratio of 2.8 in fiscal 2000. Cash provided by operating activities
was $16.5 million in fiscal 2001 compared to $15.3 million in fiscal 2000. The
cash flow provided by operating activities in fiscal 2001 reflects net earnings
of $7.2 million combined with depreciation and amortization of $5.8 million.
Additionally, reductions in accounts receivable and inventories generated
additional cash from operations which was partially offset by lower accounts
payable and income tax accruals.
-21-
Investing activities have resulted in a net use of cash during each of the past
three years. Capital expenditures were $4.4 million, $4.5 million, and $5.8
million, in fiscal 2001, 2000, and 1999, respectively. Capital expenditures over
the past three years have been used to expand capacity for ePTFE membrane,
invest in improved information systems, and develop new products and increased
manufacturing capacity for BHA's APC products. In fiscal 2000, the Company
received $1.1 million from the sale of assets relative to the Allergydirect.com
division of BHA Technologies. Additional investments made in recent years
include the acquisition of product rights relative to Drayton's sound-off
acoustic cleaner product line in 1999.
During fiscal 2001, the Company used $7.4 million for financing activities
including $6.6 million to repurchase BHA common stock and $0.7 million for the
payment of cash dividends. The Company also repaid $0.6 million in borrowings,
net. During fiscal 2000, the company used $7.8 million for financing activities
including $3.6 million to repurchase BHA common stock and $0.8 million for the
payment of cash dividends. The Company also repaid $3.4 million in borrowings,
net. During fiscal 1999, the Company used a nominal amount of cash for financing
activities as cash generated from operations was generally sufficient to support
the Company's investing activities. The incremental borrowings of $3.9 million
during fiscal 1999 were largely used to repurchase BHA common stock.
Cash balances, including short-term investments increased from $3.9 million at
September 30, 2000 to $9.5 million at September 30, 2001.
At September 30, 2001, BHA had unused lines of credit of $15.2 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2004; $11.9 million under an amortizing term loan with a
final maturity in 2006; a European revolving credit facility of $5.0 million
with a maturity on April 30, 2004; and a capital lease related to an industrial
revenue bond transaction for $7.2 million with annual sinking fund payments and
a final maturity in 2018.
The domestic term loans and revolving credit facility include financial
covenants regarding minimum net worth, minimum fixed charge coverage ratios, and
maximum borrowing to EBITDA ratios. The Company was in compliance with all such
covenants at September 30, 2001. With the exception of the capital lease
transaction, no assets of the Company are pledged to secure any indebtedness.
BHA Group Holdings, Inc. and its primary U. S. affiliates have guaranteed the
European revolving credit facility. The company believes that cash flows from
operations and available credit lines will be sufficient to meet its capital
needs for the foreseeable future.
OUTLOOK
-------
The Company is focused on achieving consistent earnings growth and increasing
returns to its shareholders. Its specific longer-term financial goals are as
follows:
o Increase compounded earnings per diluted share at a 12% to 15% annual
rate over time.
o Increase return on average equity to 15% by fiscal 2004. Moving beyond
fiscal 2004, the longer-term goal is a 20% return on average equity.
Economic conditions around the world are challenging as businesses are faced
with the uncertainties and threats associated with war, terrorist activities and
the current recession. The Company is not immune from these significant external
factors and a substantial downturn in
-22-
business resulting from any of the above noted factors would negatively impact
financial results. The Company's record fiscal 2001 earnings per diluted share
represented a 23% increase over the previous year. Although the Company has
confidence in its business strategies and believes that its longer-term earnings
growth rate targets are achievable, it remains cautious about near-term
operating results.
The company does not believe it is appropriate to provide specific guidance with
respect to a range of sales or profits for fiscal 2002. Management anticipates
that sales and meaningful profit growth during the upcoming fiscal year will be
difficult and plans to continue to proactively manage the cost side of its
business. Although visibility with respect to future results is a challenge, the
Company expects to operate profitably, maximize cash flows and execute
strategies to strengthen its competitive position across key business lines.
Management believes that BHA is well positioned to weather a global recession
and emerge from it stronger than its competitors due to its diverse product
offerings, global presence and strong financial position.
FIRST QUARTER OF FISCAL 2002
o Consolidated net sales will likely be lower than the first quarter of
fiscal 2001 by as much as 5%
o Earnings per diluted share are expected to be in the range of $0.24 to
$0.29 before the impact of the $1.2 million pre-tax charge related to
adoption of SFAS No. 142
IMPACT OF SFAS NO. 142
o As discussed in more detail below, the Company will adopt Statement of
Financial Accounting Standard (SFAS) 142 "Accounting for Goodwill and Other
Intangible Assets" during the first quarter of fiscal 2002.
o In the first quarter, the Company will recognize a pre-tax charge of $1.2
million related to impairment of goodwill in its Europe APC segment. This
charge will be presented as the cumulative effect of a change in accounting
principle.
o Amortization expense related to goodwill and other intangibles is expected
to decrease by approximately $0.6 million in fiscal 2002 as compared to
fiscal 2001 as a result of implementing SFAS 142.
Readers should refer to "Factors Affecting Earnings and Share Price" and other
information included in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 142. "Accounting for
Goodwill and Other Intangible Assets" was issued in July 2001 and must be
adopted by the Company in either the year beginning October 1, 2001 or 2002.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. This statement will
also require that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
to be Disposed of.
The Company has determined that it will adopt SFAS No. 142 effective October 1,
2001. As such, it will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments by the end of its first fiscal
-23-
quarter at December 31, 2001. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 prior to December 31, 2001. Any impairment loss will be measured as
of the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the SFAS 142 transitional goodwill impairment evaluation, the
Statement requires that the Company perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets to those reporting units as of the
date of adoption. The Company has performed this evaluation and has determined
that the carrying value of its Europe APC reporting unit exceeds it fair value
and as such the related goodwill is impaired. As a result, the Company
anticipates recognizing a pre-tax charge of approximately $1.2 million during
the quarter ending December 31, 2001 as the cumulative effect of the change in
accounting principle.
As of the date of adoption, the Company has unamortized and unimpaired goodwill
of $4.0 million, all of which relates to its Domestic APC reporting unit.
Additionally, it has other unamortized intangible assets with indeterminative
lives totaling $1.3 million and other intangibles with estimable lives of $1.0
million. As a result of the adoption of SFAS No. 142, it is anticipated that
amortization expense related to goodwill and other intangible assets will be
approximately $0.6 million lower for fiscal 2002 than that which would have been
recognized under the prior accounting rules. The lower amortization expense will
be more than offset by the aforementioned pre-tax charge of $1.2 million that
will be recognized as a result of the impairment of goodwill in the Europe APC
reporting unit.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements that reflect BHA's current views
with respect to future events and financial performance. The statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or those anticipated. The words
"should," "believe," "anticipate," "expect," and other expressions that indicate
future events and trends identify forward-looking statements. Actual future
results and trends may differ materially from historical results or those
anticipated depending on a variety of factors, including, but not limited to,
competition, the performance of newly established domestic and international
operations, demand and price for BHA's products and services, general U.S. and
international business conditions and other factors. You should consult the
section entitled "Factors Affecting Earnings and Stock Price." The Company
cautions that the foregoing lists of important factors is not exclusive.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
All of the Company's indebtedness is at variable rates of interest. The Company
has not used derivative financial instruments to hedge its exposure to interest
rate changes. Based upon borrowings outstanding at September 30, 2001, a 1%
fluctuation in market rates would impact interest expense by approximately
$250,000 annually.
-24-
EXCHANGE RATES
The Company views its equity investment in a foreign subsidiary as a long-term
commitment and does not hedge the translation exposures relative to such equity
investments.
In addition to its equity investment, the Company from time-to-time has U. S.
dollar denominated trade payables and advances due from its European affiliates.
Such amounts are subject to translation exposure. At September 30, 2001, the
amount of such unhedged exposures was approximately $1.0 million, substantially
all of which is related to its affiliates in the European Common Market.
FORWARD EXCHANGE CONTRACTS
BHA periodically enters into forward exchange contracts with commercial banks in
order to fix the currency exchange rate related to intercompany transactions
with its foreign subsidiaries. Changes in the value of these instruments due to
currency movements offset the foreign exchange gains and losses of the
corresponding intercompany transactions. At September 30, 2001, the aggregate
amount of such forward exchange contracts was approximately $2.6 million, and
the market value of these contracts was $136,000 lower than their face value.
-25-
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors of BHA Group Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of BHA Group
Holdings, Inc. and subsidiaries as of September 30, 2001 and 2000, and the
related consolidated statements of earnings, shareholders' equity, comprehensive
income and cash flows for each of the years in the three-year period ended
September 30, 2001. These consolidated financial statements are the
responsibility of BHA's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BHA Group Holdings,
Inc. and subsidiaries at September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2001 in conformity with accounting principles generally
accepted in the United States of America.
[GRAPHIC OMITTED]
KPMG LLP
November 2, 2001
Kansas City, Missouri
-26-
BHA GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 9,471 $ 3,877
Accounts receivable, less allowance for doubtful
receivables of $1,385 in 2001 and $1,039 in 2000 29,803 31,569
Inventories (note 1) 22,845 26,357
Income taxes receivable 379 --
Prepaid expenses 2,187 2,495
Deferred income taxes (note 5) 2,655 2,510
--------------- ---------------
TOTAL CURRENT ASSETS 67,340 66,808
--------------- ---------------
Property, plant and equipment, at cost:
Land and improvements 1,044 1,044
Buildings and improvements 18,416 18,221
Machinery and equipment 40,976 41,103
Office furniture, fixtures and equipment 3,886 4,923
--------------- ---------------
64,322 65,291
Less accumulated depreciation and amortization 36,043 36,411
--------------- ---------------
NET PROPERTY, PLANT AND EQUIPMENT 28,279 28,880
--------------- ---------------
Property held under capital leases, net (note 1) 5,830 5,809
Intangible and other assets, less accumulated amortization (note 1) 4,551 5,378
Excess of cost over net assets of businesses acquired,
less accumulated amortization 5,162 5,357
--------------- ---------------
$111,162 $112,232
=============== ===============
See accompanying notes to consolidated financial statements.
-27-
BHA GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2001 2000
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3) $ 1,936 $ 2,269
Current lease obligations (note 4) 563 400
Accounts payable 8,946 10,357
Accrued compensation and employee benefit costs 4,436 4,342
Accrued expenses and other current liabilities 3,356 3,372
Reserve for warranty and product service 2,867 2,553
Income taxes payable -- 240
--------------- ----------------
TOTAL CURRENT LIABILITIES 22,104 23,533
--------------- ----------------
Deferred income taxes (note 5) 1,984 2,096
Long-term debt, excluding current installments (note 3) 17,769 17,638
Long-term lease obligations, excluding current installments (note 4) 6,637 7,200
Other long-term liabilities 1,534 1,958
Shareholders' equity:
Common stock $.01 par value, authorized 20,000,000 shares:
Issued 8,814,492 and 8,752,895 shares, respectively 88 87
Additional paid-in capital 62,536 61,854
Retained earnings 34,916 28,440
Accumulated other comprehensive income (856) (1,634)
Less cost of 2,706,417 and 2,236,552 shares, respectively,
of common stock in treasury (35,550) (28,940)
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 61,134 59,807
--------------- ----------------
Commitments and contingent liabilities (notes 4 and 7)
$ 111,162 $ 112,232
=============== ================
See accompanying notes to consolidated financial statements.
-28-
BHA GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30,
2001 2000 1999
---- ---- ----
Net sales $ 174,923 $ 164,550 $ 159,047
Cost of sales (note 8) 122,235 115,199 117,107
----------------- ----------------- -----------------
GROSS MARGIN 52,688 49,351 41,940
----------------- ----------------- -----------------
Operating expenses:
Selling and advertising expense 20,807 19,721 20,212
General and administrative expense 19,366 18,173 15,918
Restructuring expense (note 8) -- -- 2,167
----------------- ----------------- -----------------
TOTAL OPERATING EXPENSES 40,173 37,894 38,297
----------------- ----------------- -----------------
OPERATING INCOME 12,515 11,457 3,643
Interest expense (1,753) (2,022) (2,069)
Other income, net 139 71 85
----------------- ----------------- -----------------
EARNINGS BEFORE INCOME TAXES 10,901 9,506 1,659
----------------- ----------------- -----------------
Income taxes (note 5):
Current 4,001 3,977 1,321
Deferred (323) (487) (746)
----------------- ----------------- -----------------
TOTAL INCOME TAXES 3,678 3,490 575
----------------- ----------------- -----------------
NET EARNINGS $ 7,223 $ 6,016 $ 1,084
================= ================= =================
Basic earnings per common share $ 1.17 $ 0.91 $ 0.15
Diluted earnings per common share $ 1.11 $ 0.90 $ 0.15
See accompanying notes to consolidated financial statements.
-29-
BHA GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30,
2001 2000 1999
---- ---- ----
COMMON STOCK:
Balance at beginning of year $ 87 $ 87 $ 87
Issuance of 61,597 shares of common stock in 2001,
6,915 shares of common stock in 2000,
and 79,627 shares in 1999 1 -- --
--------------- ---------------- -----------------
BALANCE AT END OF YEAR 88 87 87
--------------- ---------------- -----------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 61,854 61,792 61,310
Excess over par value of common stock issued 618 62 653
Stock issued from treasury for stock option exercises (194) -- (303)
Income tax benefit from stock option exercises 258 -- 132
--------------- ---------------- -----------------
BALANCE AT END OF YEAR 62,536 61,854 61,792
--------------- ---------------- -----------------
RETAINED EARNINGS:
Balance at beginning of year 28,440 23,219 22,983
Net earnings 7,223 6,016 1,084
Payment of cash dividends on common stock (747) (795) (848)
--------------- ---------------- -----------------
BALANCE AT END OF YEAR 34,916 28,440 23,219
--------------- ---------------- -----------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (1,634) (899) (293)
Equity adjustment from foreign currency translation and
derivative instruments 778 (735) (606)
--------------- ---------------- -----------------
BALANCE AT END OF YEAR (856) (1,634) (899)
--------------- ---------------- -----------------
UNEARNED COMPENSATION:
Balance at beginning of year -- (4) (108)
Recognition of compensation expense -- 4 104
--------------- ---------------- -----------------
BALANCE AT END OF YEAR -- -- (4)
--------------- ---------------- -----------------
TREASURY STOCK:
Balance at beginning of year (28,940) (25,303) (22,026)
Acquisition of 485,287, 398,084, and 319,500 shares in 2001,
2000 and 1999, respectively (6,590) (3,637) (3,476)
Issuance of 15,422 shares in 2001 and 8,888 shares in 1999
for stock option exercises, net (20) -- 199
--------------- ---------------- -----------------
BALANCE AT END OF YEAR (35,550) (28,940) (25,303)
--------------- ---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY $ 61,134 $ 59,807 $ 58,892
=============== ================ =================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30,
2001 2000 1999
---- ---- ----
Net earnings $ 7,223 $ 6,016 $ 1,084
Other comprehensive income:
Foreign currency translation adjustments 914 (735) (606)
Foreign exchange gains deferred on
implementation of FAS 133 144 -- --
Net change in foreign exchange gains
deferred in accordance with FAS 133 (280) -- --
--------------- ---------------- -----------------
Comprehensive income $ 8,001 $ 5,281 $ 478
=============== ================ =================
See accompanying notes to consolidated financial statements.
-30-
BHA GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,223 $ 6,016 $ 1,084
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,846 5,576 6,052
Non-cash restructuring charges -- -- 1,713
Provision for deferred income taxes (257) 231 (911)
Issuance of common stock to directors, officers
and employees 88 62 105
Changes in assets and liabilities:
Accounts receivable 1,766 (3,213) 2,982
Inventories 3,512 1,686 (680)
Prepaid expenses 64 (506) (161)
Income taxes (619) 559 (546)
Accounts payable (1,411) 1,476 (14)
Accrued expenses and other current liabilities 256 3,412 (351)
---------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,468 15,299 9,273
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,439) (4,531) (5,836)
Net assets of businesses or product rights acquired -- -- (718)
Assets sold -- 1,100 --
Change in other assets 15 (341) (1,399)
---------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,424) (3,772) (7,953)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 531 -- 548
Payment of cash dividends on common stock (747) (795) (848)
Purchase of treasury stock (6,590) (3,637) (3,476)
Stock option exercise - net payments 44 -- (104)
Proceeds from long-term obligations -- -- 25,997
Repayments of long-term obligations (2,900) (3,525) (5,064)
Borrowings (repayments) on lines of credit, net 2,298 165 (17,083)
---------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (7,364) (7,792) (30)
Equity adjustment from foreign currency translation 914 (735) (606)
---------- ----------- -----------
Net increase in cash and cash equivalents 5,594 3,000 684
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,877 877 193
---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,471 $ 3,877 $ 877
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,764 $ 2,105 $ 2,058
Income taxes $ 4,554 $ 2,699 $ 2,032
Supplemental disclosure of non-cash investing and financing activities:
Accrual of additional purchase price -- -- $ 800
See accompanying notes to consolidated financial statements.
-31-
BHA Group Holdings, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The consolidated financial statements include the accounts of BHA Group
Holdings, Inc. (BHA) and its wholly-owned foreign and domestic
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
REVENUE RECOGNITION
BHA recognizes revenue at the time products are shipped or services are
performed. In the case of contracts for certain ESP and baghouse
rebuilds, the Company recognizes revenues using the percentage of
completion method based upon its estimate of the completion of each
project.
SHIPPING AND HANDLING
Several accounting and financial pronouncements were recently adopted by
the Financial Accounting Standards Board and by the Securities and
Exchange Commission relating to the recognition and measurement of
revenues and the classifications of shipping and handling costs.
In order to comply with these standards, the Company has, in the
accompanying financial statements, recognized freight which has been paid
by the Company and invoiced to the customer ("prepay and add freight") as
revenue and cost of sales. Previously, prepay and add freight billed to
customers was netted with cost of sales. During the year ended September
30, 2001, prepay and add freight billed by the Company was $3.7 million.
In order to present the financial statements on a consistent basis,
revenues and cost of sales were each increased for fiscal 2000 and fiscal
1999 in the amount of $3.5 million and $3.3 million, respectively.
USES OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INVENTORIES
BHA values its inventory at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Components of
inventories at September 30, 2001 and 2000 were as follows:
($ IN THOUSANDS) 2001 2000
----------------- ----------------
Raw materials $ 15,593 $ 16,760
Work-in-process 946 1,168
Finished goods 6,306 8,429
----------------- ----------------
TOTAL $ 22,845 $ 26,357
================= ================
-32-
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Major renewals and
betterments are charged to the property accounts; replacements,
maintenance and repairs that do not improve or extend the life of the
respective assets are charged to expense as incurred.
PROPERTY HELD UNDER CAPITAL LEASES
The Company's BHA Technologies' facility in Lee's Summit, Missouri is
subject to a capital lease related to an industrial revenue bond
obligation. The assets held under this lease at September 30, 2001 and
2000 were as follows:
2001 2000
----------------- -----------------
Land $ 300 $ 300
Building 4,712 4,712
Equipment 1,883 1,461
Less accumulated amortization (1,065) (664)
----------------- -----------------
PROPERTY HELD UNDER CAPITAL LEASES, NET $ 5,830 $ 5,809
================= =================
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, plant and equipment are
computed using the straight-line method with estimated useful lives by
major asset class as follows:
Buildings and improvements 30 years
Machinery and equipment 4-8 years
Office furniture, fixtures and equipment 3-10 years
During fiscal 2001, the Company recognized the retirement of $5.1 million
in fully depreciated assets.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.
No provision is made for income taxes on undistributed earnings of the
foreign subsidiaries because such earnings are considered permanently
invested in the foreign subsidiaries.
WARRANTY AND PRODUCT SERVICE
BHA provides a reserve for estimated warranty and product service claims
based on historical experience and consideration of changes in products,
technology and warranty terms.
-33-
FOREIGN CURRENCY TRANSLATION
Financial statements of BHA's foreign subsidiaries are translated into
U.S. dollars at current and average exchange rates. Translation gains and
losses are included in other comprehensive income. Transaction gains and
losses resulting from fluctuations in exchange rates between the
functional currency (U.S. dollars) and the currency in which a foreign
currency transaction is denominated are included in net earnings.
Transaction gains (losses) included in the consolidated statements of
earnings for 2001, 2000, and 1999 amounted to $124,000, ($354,000), and
$71,000, respectively.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. SFAS 133 establishes accounting and
reporting standards for derivative instruments and requires that all
derivative instruments be recognized on the balance sheet at their fair
value. The adoption of SFAS 133 impacts the Company's accounting for
foreign currency forward exchange contracts.
The company has entered into forward exchange contracts with commercial
banks in order to fix the currency exchange rate related to intercompany
transactions with its foreign subsidiaries. Changes in the value of these
instruments due to currency movements offset the foreign exchange gains
and losses of the corresponding intercompany transactions which primarily
relate to the purchases by the Company's European subsidiaries of
inventory from their U. S. affiliates. In accordance with SFAS 133, these
transactions have been determined to be effective hedges. Subsequent to
adoption of SFAS 133, the fair value of these contracts have been
recognized in prepaid expenses or accrued liabilities in the consolidated
balance sheet. The related gains and losses are deferred in shareowners'
equity (as a component of comprehensive income). These deferred gains and
losses are recognized in income in the period in which the related
purchases being hedged are acquired. The notional amount of such
contracts at September 30, 2001 was $2.6 million and the market value of
these contracts was $136,000 lower than the face value. All of the
deferred gains or losses under these contracts will be reclassified into
net earnings within the next twelve months.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Statement of
Comprehensive Income. Comprehensive income has no impact on net earnings
of the Company.
TREASURY STOCK
The Board of Directors of BHA have periodically approved the purchase of
shares of the Company's common stock. The total shares authorized is
3,500,000 of which approximately 2,480,000 have been purchased. The
purchases of common stock are recorded at cost on the date of purchase.
Issuance of common stock from the treasury is recorded at the average
cost of common stock held in the treasury.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed based
upon the weighted average number of common shares and dilutive common
equivalent shares outstanding. Stock
-34-
options, which are common stock equivalents, have a dilutive effect on
earnings per share in all periods presented and are therefore included in
the computation of diluted earnings per share. Stock options are
described in Note 6. A reconciliation of the numerators and the
denominators of the basic and diluted earnings per-share computations is
as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA.)
2001 2000 1999
------------------------------- --------------------------------- --------------------------------
Net Shares Per-Share Net Shares Per-Share Net Shares Per-Share
Earnings (Denom.) Amt. Earnings (Denom.) Amt. Earnings (Denom.) Amt.
(Numerator) ------- --- (Numerator) ------- ----- (Numerator) -------- ---
----------- ----------- -----------
Basic earnings per share:
Earnings available to
common shareholders $7,223 6,199 $1.17 $6,016 6,601 $0.91 $1,084 7,028 $0.15
Effect of dilutive
securities--stock options -- 283 -- 71 -- 106
Diluted earnings per
share: Earnings
available to common
shareholders and assumed
conversion $ 7,223 6,482 $1.11 $6,016 6,672 $0.90 $1,084 7,134 $0.15
======== ===== ===== ====== ===== ===== ====== ===== =====
Options to purchase 211,590 shares of common stock at prices ranging from
$15.23 to $16.82 per share were outstanding at the end of 2001 but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares. In 2000 and 1999, options to purchase 849,252 shares and
571,688 shares, respectively, were similarly excluded from the
calculation.
COST IN EXCESS OF NET ASSETS ACQUIRED AND INTANGIBLE ASSETS
Cost in excess of net assets acquired is being amortized over periods
ranging from thirty to forty years, and is presented in the accompanying
consolidated balance sheets net of accumulated amortization of $1,750,000
and $1,555,000 at September 30, 2001 and 2000, respectively.
Other intangible assets are being amortized over periods ranging from
five to seventeen years and are presented in the accompanying
consolidated balance sheets net of accumulated amortization of $7,097,000
and $6,464,000 at September 30, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets to be
held and used is measured by comparison of the carrying amount of the
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, BHA considers
overnight invested cash and investments in marketable securities, with
maturities of three months or less to be cash equivalents.
-35-
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value because of the short maturities of these
instruments. The fair value of long-term obligations are estimated by
discounting future cash flows using current market rates. The carrying
amounts of long-term debt and lease obligations approximate fair value at
September 30, 2001.
2. ACQUISITIONS AND DISPOSITIONS OF ASSETS
In September 2000, BHA Technologies sold certain assets of its
Allergydirect.com division to Salu, Inc. and simultaneously entered into
a supply agreement through which BHA Technologies will supply bedding
encasements with ePTFE membrane to Salu. Under the terms of the
agreement, the Company received cash of $1.1 million together with
warrants to purchase Salu stock and additional future consideration of up
to $300,000 contingent upon meeting volume targets. The value of the
total consideration received in excess of net assets transferred is being
recognized over the three-year term of the exclusive supply agreement.
In January 1999, the Company acquired certain assets, including patents,
trademarks, and other intangibles related to Drayton Corporation's
Sound-Off Acoustic Cleaner product line. The purchase price consisted of
a cash payment of $700,000 plus additional contingent payments to be made
over the next five years based upon revenues of the product line. During
fiscal 1999, the Company recorded additional purchase price of $800,000
at the date of acquisition based on their assessment of the likelihood of
attaining such additional revenues. During fiscal 2000, the Company
negotiated an amendment to this purchase agreement under which the
parties agreed to total additional payments of $950,000 (including the
$800,000 recorded at the date of acquisition) to be made through 2004 in
lieu of the contingent payment schedule in the original contract. The
total purchase price of $1,650,000 is being amortized on a straight-line
basis over ten years.
The proforma effect of these transactions are not material to the
Company.
3. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT
A summary of notes payable to banks and long-term debt at September 30,
2001 and 2000 are as follows:
($ IN THOUSANDS) 2001 2000
----------- ------------
Unsecured domestic line of credit with variable interest rate $ 3,028 $ --
Foreign line of credit with variable interest rate, secured by
guarantees of U. S. affiliates 4,741 --
Foreign line of credit with variable interest rate, secured by a
standby letter of credit -- 2,877
Term loan payable to a domestic bank with variable interest rate 11,875 14,375
Notes payable to a foreign bank with a fixed interest rate of 4.75%
secured by a standby letter of credit -- 2,260
Other notes payable 61 395
Less current installments (1,936) (2,269)
----------- ------------
LONG-TERM DEBT, EXCLUDING CURRENT INSTALLMENTS $17,769 $17,638
=========== ============
-36-
BHA has a domestic unsecured bank line of credit of $18,000,000,
including approximately $3,000,000 which can be borrowed in foreign
currencies, for working capital purposes, letters of credit and other
corporate matters. This line of credit bears interest at variable rates
based on either the prime rate, LIBOR or Euribor and expires in April
2004. This facility is a revolving credit agreement on which BHA pays a
0.25% commitment fee on the unused portion. At September 30, 2001,
borrowings under this revolving credit facility where Euro 3,300,000 (USD
3,028,000) at an average interest rate of approximately 5.3%. At
September 30, 2000, there were no outstanding borrowings under this
revolving credit facility, however, a standby Letter of Credit had been
issued in the amount of $5,500,000 to secure the Company's foreign bank
lines of credit.
BHA's German subsidiary maintains a foreign bank line of credit for
borrowings in local currencies up to the U. S. equivalent of $5,000,000.
This credit facility is secured by the guarantees of BHA Group Holdings,
Inc. This facility is a revolving credit agreement on which the Company
pays a 0.25% commitment fee on the unused portion. At September 30, 2001,
borrowings under this revolving credit facility were Euro 5,168,000 (USD
4,741,000) at an average interest rate of 6.25%.
At September 30, 2000, BHA's German subsidiary maintained a revolving
credit facility and a term loan, each of which were secured by a standby
Letter of Credit. Borrowings under the revolver at September 30, 2000
were DM 6,364,000 (USD 2,877,000) at an average interest rate of 5.79%.
Borrowings under the term loan at September 30, 2000 were DM 5,000,000
(USD 2,260,000) at a fixed interest rate of 4.75%. These borrowings were
repaid with the proceeds from a replacement credit facility negotiated
during fiscal 2001.
BHA's foreign subsidiary located in Switzerland maintains a line of
credit with a foreign bank in the amount of CHF 600,000 (approximately
USD 372,000 at September 30, 2001). As of September 30, 2001 and 2000,
there were no borrowings outstanding under this line of credit.
In September 1999, BHA entered into a $15 million unsecured term loan,
the proceeds of which were used to repay existing long-term debt and
provide for general corporate matters. This term loan has a variable
interest rate based on LIBOR (3.49% at September 30, 2001) and matures in
October 2006. Quarterly principal payments are required in the amount of
$625,000.
At September 30, 2001, the Company had unused commitments under its bank
facilities totaling $15.2 million. The term loans and domestic bank line
of credit require BHA, among other things, to maintain minimum levels of
net worth, minimum fixed charge coverage, minimum current ratio, and
maximum debt to cash flow ratio. BHA was in compliance with all covenants
at September 30, 2001. Under the most restrictive of these covenants, at
September 30, 2001, $13.3 million of retained earnings were available for
cash dividends.
-37-
Scheduled payments on long-term debt for the next five fiscal years are
as follows:
YEAR $ IN THOUSANDS
--------------------- --------------------
2002 $ 1,936
2003 2,500
2004 10,269
2005 2,500
2006 2,500
Thereafter --
--------------------
$ 19,705
====================
4. LEASES
In December 1998, BHA Technologies, Inc., a wholly-owned subsidiary,
entered into a capital lease in the form of a sale-leaseback transaction
with the City of Lee's Summit, Missouri. In connection with this lease,
the city issued tax-exempt Industrial Development Revenue Bonds ("Bonds")
totaling $8,000,000 and placed the proceeds in a trust to fund future
capital expenditures at the Lee's Summit manufacturing facility. BHA
Technologies is obligated, through its lease, for the repayment of these
bonds over the next 20 years. Annual lease payments of $400,000 commenced
in December 1999. The interest rate on the tax-exempt Bonds is variable
based on a weekly published index that is approximately 67% of LIBOR
(2.4% as of September 30, 2001). As of September 30, 2001 and 2000, BHA
Technologies had $0.7 million and $1.1 million, respectively in
restricted cash held in trust for the exclusive use for qualified capital
expenditures in Lee's Summit. The restricted cash is included in
Intangible and Other Assets in the accompanying Consolidated Balance
Sheets.
The Company also enters into operating leases from time-to-time relative
to its facilities, office equipment and manufacturing equipment.
At September 30, 2001, future minimum lease payments for capital leases
and for noncancelable, long-term operating leases for the next five
fiscal years were as follows (amounts in thousands):
MINIMUM LEASE PAYMENTS
YEAR CAPITAL LEASES OPERATING LEASES
---- -------------- ----------------
2002 $ 563 $ 1,224
2003 554 783
2004 544 521
2005 534 440
2006 525 440
Thereafter 5,949 403
---------- ----------
Total 8,669 $ 3,811
==========
Less imputed interest 1,469
----------
Present value of capital leases 7,200
Less current portion 563
----------
Obligations under capital leases,
less current portion $ 6,637
==========
Total rental expense on noncancelable, long-term operating leases
amounted to approximately $1,776,000, $1,855,000, and $2,780,000 for the
years ended September 30, 2001, 2000, and 1999, respectively.
-38-
5. INCOME TAXES
The components of total income tax expense for the years ended September
30, 2001, 2000, and 1999 are as follows:
($ IN THOUSANDS) 2001 2000 1999
------------- ------------ --------------
Current income tax expense (benefit):
Federal $ 3,175 $ 3,230 $ 1,621
Foreign 352 269 (552)
State and local 474 478 252
Deferred income tax expense (benefit):
Federal (272) (428) (683)
State (51) (59) (63)
------------- ------------ --------------
$ 3,678 $ 3,490 $ 575
============= ============ ==============
The effective tax rate differs from the expected tax rate for the
respective years as follows:
2001 2000 1999
------------- ------------- -------------
Expected income tax expense 34.0% 34.0% 34.0%
State income taxes, net 2.6 2.9 7.5
Foreign subsidiaries (2.0) 1.9 14.1
Research and experimentation credits (2.3) (2.6) (12.1)
Other, net 1.4 .5 (8.8)
------------- ------------- -------------
EFFECTIVE INCOME TAX RATE 33.7% 36.7% 34.7%
============= ============= =============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 2001 and 2000 are presented as follows:
($ IN THOUSANDS) 2001 2000
---------------- ----------------
Deferred tax assets:
Reserves and accruals not
currently deductible $ 2,242 $ 1,946
Inventories 336 353
Other, net 552 613
---------------- ----------------
Total gross deferred tax assets 3,130 2,912
---------------- ----------------
Deferred tax liabilities:
Intangible and other assets 468 519
Property, plant and equipment 1,304 1,186
Prepaid expenses 63 141
Other, net 624 652
---------------- ----------------
Total gross deferred tax liabilities 2,459 2,498
---------------- ----------------
NET DEFERRED TAX ASSET $ 671 $ 414
================ ================
-39-
At September 30, 2001 and 2000, deferred tax assets and liabilities are
classified in the accompanying consolidated balance sheets as follows:
($ IN THOUSANDS) 2001 2000
----------------- ----------------
Current deferred income tax asset $ 2,655 $ 2,510
Non-current deferred income tax liability 1,984 2,096
----------------- ----------------
NET DEFERRED TAX ASSET $ 671 $ 414
================= ================
BHA has not recorded a valuation allowance relating to deferred tax
assets, as taxable temporary differences are expected to be offset by
deductible temporary differences and future taxable income.
BHA has not provided deferred taxes on the cumulative undistributed
earnings of its foreign subsidiaries, which approximated $106,000 at
September 30, 2001 as management considers these earnings to be
permanently invested. At September 30, 2000, the Company had a cumulative
deficit for its foreign subsidiaries. Net earnings (losses) of these
foreign subsidiaries were approximately $942,000, $(167,000), and
$(3,449,000) for the years ended September 30, 2001, 2000, and 1999,
respectively. During fiscal 2001, the Company utilized net operating loss
carry-forwards ("NOLs") which had the effect of reducing income tax
expense by approximately $53,000 as compared to the expense that would
have been incurred without the benefit of such NOLs.
6. INCENTIVE STOCK PLAN
BHA has an incentive stock plan for key employees, officers and
directors. The plan provides for 2,221,084 shares of common stock (as
adjusted for the dilutive effect of stock dividends) available for
issuance of stock options, restricted stock and payment to outside
directors in lieu of cash. Stock options are granted at a price equal to
the fair market value of BHA Common Stock at the date of grant for terms
of up to ten years.
BHA accounts for its stock-based employee compensation plans pursuant to
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair
value-based method of accounting. BHA has chosen to adopt the pro-forma
disclosure requirements of SFAS 123, and continue to record stock
compensation in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), as amended,
which is permitted under SFAS 123. Under APB 25 compensation expense is
recorded on the date of grant for stock options granted only if the
current market price of the underlying stock exceeds the exercise price.
-40-
A summary of transactions in the incentive stock plan is as follows:
2001 2000 1999
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
---------------------------- ------------------------------ ------------------------------
Outstanding at beginning
of year 1,273,569 $11.06 1,077,150 $11.35 1,087,057 $10.63
Granted 31,500 13.12 197,750 9.48 312,800 13.37
Expired -- -- -- -- (3,492) 9.86
Canceled (41,000) 12.25 (1,331) 12.77 (200,312) 12.67
Exercised (152,056) 10.52 -- -- (118,903) 7.90
--------------------------------------------------------------------------------------------
Outstanding at end of
year 1,112,013 $11.19 1,273,569 $11.06 1,077,150 $11.35
---------------------------- ------------------------------ ------------------------------
Exercisable at end of yr. 456,673 $ 8.59 396,317 $ 7.82 505,462 $ 8.27
============================ ============================== ==============================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- --------------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
RANGE OF EXERCISE OUTSTANDING AVG. CONTRACTED AVG. EXERCISE EXERCISABLE AVERAGE
PRICES AT 9/30/01 LIFE IN YRS. PRICE AT 9/30/01 EXERCISE PRICE
------------------------------------------------------------------------- --------------------------------------
$6.20 - 10.47 604,839 4.57 8.63 409,589 8.12
$12.02 - 16.82 507,174 6.45 14.25 47,084 12.67
-----------------
1,112,013
=================
The per share weighted-average fair value of stock options granted during
2001, 2000, and 1999 was $5.80, $4.03, and $5.36, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following assumptions: expected dividend yield of 0.80% for 2001, 1.24%
for 2000, and 1.15% for 1999; weighted average risk-free interest rate of
4.60% for 2001, 5.80% for 2000, and 5.90% for 1999; expected volatility
factor of 34.74%, 32.36%, and 29.38% for 2001, 2000, and 1999,
respectively; and a weighted-average expected life of eight years.
Since BHA applies APB 25 in accounting for its incentive stock plan, no
compensation expense has been recognized for stock options in net
earnings. Stock-based compensation expense, if recorded under SFAS 123
would have reduced net earnings by $373,000 or $0.05 per diluted share in
2001, $613,000 or $.09 per diluted share in 2000, and $738,000 or $.10
per diluted share in 1999.
7. COMMITMENTS AND CONTINGENT LIABILITIES
EMPLOYEE BENEFIT PLANS
BHA has a noncontributory Employee Stock Ownership Plan (ESOP) and a
non-contributory Profit Sharing Plan. These plans include substantially
all domestic employees. BHA, with approval of its Board of Directors,
makes discretionary contributions to the ESOP and Profit Sharing Plans.
Benefits become vested according to years of service. Contributions
charged to operating expense were $1,166,000, $1,330,000, and $435,000
for the years ended September 30, 2001, 2000, and 1999, respectively.
BHA's eligible domestic employees participate in a voluntary 401(k)
employee benefit plan (401(k) Plan). For 2001, the Company matched 150%
of a participant's contribution subject to a maximum contribution of $900
per employee. BHA matching contributions become vested based on years of
service. BHA made matching contributions of $ 557,000, $462,000, and
$330,000 for the years ended September 30, 2001, 2000, and 1999,
respectively.
-41-
LETTERS OF CREDIT
The terms of certain contracts require that BHA issue standby letters of
credit to assure performance. Open standby letters of credit (excluding
those issued to secure indebtedness as disclosed in Note 3) amounted to
$55,000 and $798,000 at September 30, 2001 and 2000, respectively.
LITIGATION
In the normal course of business, BHA is party to certain actions arising
out of various allegations of product or professional liability. BHA has
insurance coverage for substantially all such actions, subject to
coverage limitations and deductibles for each claim. In the opinion of
management, the amount of loss, if any, from the final outcome of these
actions will not have a material adverse impact on the consolidated
financial statements.
8. RESTRUCTURING AND UNUSUAL CHARGES
The Company recognized restructuring expenses in the amount of $2,167,000
on a pretax basis during fiscal 1999. A charge of $1,713,000 was taken as
a result of the decision by BHA Technologies to discontinue its in-house
adhesive lamination efforts. Future efforts to sell PTFE membrane for
apparel and other uses involving adhesive lamination will either be
outsourced or will be in the form of unlaminated film. Additionally,
severance cost of $454,000 was expensed and paid during fiscal 1999
relative to the consolidation of manufacturing operations in Europe.
In addition, fiscal 1999 cost of sales includes unusual charges of
$4,200,000 consisting of (1) a cost overrun on a large fixed-price ESP
rebuild project on which a loss of $2,400,000 was recognized, (2)
substantial experimentation and testing performed by BHA Technologies
totaling $1,400,000 related to adhesive lamination to develop products
for non-APC markets and (3) inventory write-downs of $400,000
attributable to the Company's consolidation of manufacturing operations
in Europe.
9. BUSINESS SEGMENTS
SEGMENT REPORTING
Effective September 30, 1999, BHA adopted Statement of Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise
and Related Information," (SFAS No. 131). SFAS No. 131 requires reporting
of segment information that is consistent with the way in which
management operates the Company.
-42-
BHA reports its operations as three business segments, Domestic Air
Pollution Control (Domestic APC), Europe Air Pollution Control (Europe
APC), and BHA Technologies. Domestic APC consists of the air pollution
control products and services sold or managed from the United States.
Such sales include shipments and services throughout North America, Latin
America, Asia, and the Pacific Rim as such revenues are derived from
BHA's U.S. based management group. The Europe APC segment represents
sales of products and services managed from BHA's European manufacturing,
distribution, and sales offices. BHA Europe generally services customers
throughout Europe, as well as in Northern Africa. BHA Technologies
supplies ePTFE membrane products for APC applications, primarily to BHA,
and is also selling such products outside of the air pollution control
market.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies. BHA manages these
segments as strategic business units. Europe APC represents a distinct
business unit as it maintains its own manufacturing, sales, marketing,
and project management resources. Sales to other international locations
are included in the Domestic APC business segment, as most or all of the
key manufacturing, engineering, and sales support functions are performed
from the United States. BHA Technologies operates as a distinct entity
due to its unique technologies, as well as the marketing of products
unrelated to air pollution control.
Reportable segment data for the years ended September 30, 2001, 2000, and
1999 were as follows:
NET SALES
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $142,421 $137,940 $137,168
Europe APC 21,693 20,056 20,076
BHA Technologies 10,809 6,554 1,803
------------------ ---------------------------------------
TOTAL $174,923 $164,550 $159,047
================== ================= =================
Net sales represent revenues from sales to unaffiliated customers.
INTEREST EXPENSE
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $1,196 $1,328 $1,014
Europe APC 292 222 369
BHA Technologies 265 472 686
------------------ ---------------------------------------
TOTAL $1,753 $2,022 $2,069
================== ================= =================
EARNINGS (LOSS) BEFORE INCOME TAXES
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $10,363 $10,893 $10,925
Europe APC 737 (761) (2,744)
BHA Technologies (199) (626) (6,522)
------------------ ---------------------------------------
TOTAL $10,901 $ 9,506 $ 1,659
================== ================= =================
-43-
The aggregate amount of all corporate expenses is allocated to the three
business segments based upon the judgement of management. The fiscal 1999
pretax loss for Europe APC includes restructuring charges of $0.5 million
related to the closure of German manufacturing operations. The fiscal
1999 pretax loss for BHA Technologies includes a restructuring charge in
the amount of $1.7 million related to the discontinuation of its adhesive
lamination efforts.
Additionally, the unusual charges recognized in fiscal 1999 as discussed
in Note 8 are included in the preceding summary and reduced fiscal 1999
pretax earnings of the segments by: Domestic APC, $2,400,000; Europe APC,
$400,000; and BHA Technologies, $1,400,000.
ASSETS
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $ 55,560 $ 63,502 $ 66,829
Europe APC 16,759 16,673 16,234
BHA Technologies 17,581 18,932 14,153
Corporate 21,262 13,125 10,932
------------------ ---------------------------------------
TOTAL $111,162 $112,232 $108,148
================== ================= =================
DEPRECIATION AND AMORTIZATION
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $2,765 $2,886 $3,100
Europe APC 473 597 690
BHA Technologies 1,166 783 843
Corporate 1,442 1,310 1,419
------------------ ---------------------------------------
TOTAL $5,846 $5,576 $6,052
================== ================= =================
CAPITAL EXPENDITURES
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
Domestic APC $ 421 $ 208 $1,493
Europe APC 182 424 665
BHA Technologies 992 2,711 2,600
Corporate 2,844 1,188 1,078
------------------ ---------------------------------------
TOTAL $4,439 $4,531 $5,836
================== ================= =================
Certain corporate assets including intangibles and computer equipment are
not allocated to specific business segments and are thus included in the
above tables of assets, depreciation and amortization, and capital
expenditures as "Corporate."
-44-
GEOGRAPHIC INFORMATION BY COUNTRY
NET SALES
The following table presents revenues by country based on the location of
the use of the product or service. No single country, other than the
United States, comprised more than 10% of BHA's net sales.
($ IN THOUSANDS) 2001 2000 1999
------------------ ----------------- -----------------
United States $127,948 $120,551 $116,797
All Other Countries 46,975 43,999 42,250
------------------ ----------------- -----------------
TOTAL $174,923 $164,550 $159,047
================== ================= =================
LONG-LIVED ASSETS
The following table presents all non-current tangible assets by country
based on the location of the asset. No single country, other than the
United States, comprised more than 10% of the Company's long-lived
assets.
($ IN THOUSANDS) 2001 2000
------------------ -----------------
United States $32,055 $32,445
All Other Countries 4,066 4,461
------------------ -----------------
TOTAL $36,121 $36,906
================== =================
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data are as follows:
DEC. 31 MARCH 31 JUNE 30 SEPT. 30
THREE MONTHS ENDED --------------- ------------------ --------------- ----------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Net sales $ 44,351 $ 49,868 $ 41,930 $ 38,774
Gross margin 13,272 14,134 12,629 12,653
Net earnings 1,933 2,169 1,671 1,450
Diluted earnings per share $ 0.29 $ 0.34 $ 0.26 $ 0.23
Common Stock Price Range, High Low $ 17.19 $ 18.75 $ 17.75 $ 16.49
$ 12.25 $ 11.38 $ 13.05 $ 12.95
2000
Net sales $39,733 $45,144 $40,716 $38,957
Gross margin 11,622 13,514 11,732 12,483
Net earnings 1,255 1,983 1,324 1,454
Diluted earnings per share $ 0.18 $ 0.30 $ 0.20 $ 0.22
Common Stock Price Range, High Low $10.00 $ 9.75 $10.50 $14.25
$ 7.38 $ 6.53 $ 7.63 $ 9.25
-45-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
Charged to
Beginning Costs and Ending
Balance Expenses Deductions Balance
ALLOWANCE FOR DOUBTFUL RECEIVABLES:
Year ended September 30, 2001 $ 1,039 896 550 $ 1,385
============== =============== ============== ==============
Year ended September 30, 2000 $ 1,238 341 540 $ 1,039
============== =============== ============== ==============
Year ended September 30, 1999 $ 1,139 837 738 $ 1,238
============== =============== ============== ==============
RESERVE FOR WARRANTY AND PRODUCT SERVICE:
Year ended September 30, 2001 $ 2,553 2,020 1,706 $ 2,867
============== =============== ============== ==============
Year ended September 30, 2000 $ 1,414 2,724 1,585 $ 2,553
============== =============== ============== ==============
Year ended September 30, 1999 $ 1,140 1,533 1,259 $ 1,414
============== =============== ============== ==============
-46-
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with the Company's principal accountants, which
require disclosure pursuant to this item.
PART III
Part III (Items 10, 11, 12 and 13) is omitted by the Company in accordance with
General Instruction G to Form 10-K. The Company intends to file with the
Commission a definitive proxy statement pursuant to Regulation 14A not later
than 120 days following the close of its fiscal year ending September 30, 2001,
which is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See accompanying Index to Consolidated Financial
Statements and Schedules.
(a) (2) Financial Statement Schedules: See accompanying Index to Consolidated
Financial Statements and Schedules. All schedules not listed have been
omitted because they are not applicable or the information has been
otherwise supplied in the Registrant's Financial Statements and
Schedules.
(a) (3) Exhibits:
(3a) Certificate of Incorporation, as amended (7).
(3b) By-Laws, as amended (6).
(10a) BHA Group, Inc. 1986 Stock Option Plan as amended, including form
of Option Agreement (2).
(10b) Second Amendment to the BHA Group, Inc. 1986 Stock Option Plan
(3).
(10c) Employee Stock Ownership Plan of BHA as amended on May 1, 2000
(9).
(10d) 401(K) Plan of BHA (1).
(10e) Employment Agreement dated February 1, 2000 between BHA Group,
Inc. and Lamson Rheinfrank, Jr. (4).
(10f) Employment Agreement dated February 1, 2000 between BHA Group,
Inc. and James E. Lund (4).
(10g) Employment Agreement dated February 1, 2000 between BHA Group,
Inc. and James J. Thome (4).
(10h) Employment Agreement dated February 1, 2000 between BHA Group,
Inc. and James C. Shay (4).
(10i) Rights Agreement dated as of December 13, 1995, between BHA
Group, Inc., and Boatmen's Trust Company, including Form of
Rights Certificate (Exhibit A) and Summary of Rights to
Purchase Common Stock (Exhibit B) (5).
-47-
(10j) $15,000,000 Term Loan Agreement between BHA Group Holdings, Inc.
and Commerce Bank N.A. dated as of September 20, 1999 (8).
(10k) $18,000,000 Amended and Restated Credit Agreement between BHA
Group Holdings, Inc. and Bank of America, N.A. dated as
of May 7, 2001 (10).
(21) Subsidiaries of the Registrant (10).
(23) Independent Auditors' Consent (10).
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 2001.
(c) Exhibits: See (a) (3) above.
(d) Financial Statement Schedules: See (a) (2) above.
NOTES TO INDEX
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-1, as amended (Registration No. 33-8644) which exhibit is
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1990, which exhibit is incorporated
herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992, which exhibit is incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
March 31, 2000, which exhibit is incorporated herein by reference.
(5) Filed as an exhibit to the Company Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 15, 1995, which
exhibit is incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995, which exhibit is incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996, which exhibit is incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999, which exhibit is incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000, which exhibit is incorporated
herein by reference.
(10) Filed as an exhibit hereto.
-48-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BHA GROUP HOLDINGS, INC.
Dated: November 6, 2001 By: /s/ James E. Lund
------------------------------------------------------------
James E. Lund, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the Registrant and in
the capacities and on the dates indicated.
Dated: November 6, 2001 By: /s/ James E. Lund
------------------------------------------------------------
James E. Lund, President
Principal Executive Officer and Director
Dated: November 6, 2001 By: /s/ Lamson Rheinfrank, Jr.
------------------------------------------------------------
Lamson Rheinfrank, Jr.
Chairman of the Board
Dated: November 6, 2001 By: /s/ Don H. Alexander
------------------------------------------------------------
Don H. Alexander
Director
Dated: November 6, 2001 By: /s/ Robert Freeland
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Robert Freeland
Director
Dated: November 6, 2001 By: /s/ Thomas A. McDonnell
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Thomas A. McDonnell
Director
Dated: November 6, 2001 By: /s/ James J. Thome
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James J. Thome
Executive Vice President,
Principal Operating Officer and Director
Dated: November 6, 2001 By: /s/ Richard C. Green, Jr.
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Richard C. Green, Jr.
Director
Dated: November 6, 2001 By: /s/ James C. Shay
------------------------------------------------------------
James C. Shay
Senior Vice President, Finance and Administration,
Principal Financial & Accounting Officer
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BHA Group Holdings, Inc.
Exhibit Index
EXHIBIT NO. DESCRIPTION
10k Amended and Restated Credit Agreement between BHA Group Holdings, Inc.,
and Bank of America N.A. dated as of May 7, 2001.
21 Subsidiaries of BHA Group Holdings, Inc.
23 Independent Auditors' Report
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