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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
June 30, 2002 0-15045
BHA Group Holdings, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 43-1416730
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
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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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 twelve 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 [ ]
As of July 12, 2002, the number of shares outstanding of the Registrant's Common
Stock was 6,119,446.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)) JUNE 30 SEPTEMBER 30,
ASSETS 2002 2001
------ ---------------- ------------------
Current assets:
Cash and cash equivalents $12,356 $ 9,471
Accounts receivable, less allowance for doubtful receivables
of $1,574 and $1,385, respectively 30,316 29,803
Inventories (note 6) 20,335 22,845
Income taxes receivable 738 379
Prepaid expenses 2,541 2,187
Deferred income taxes 2,655 2,655
---------------- -------------------
Total current assets 68,941 67,340
---------------- -------------------
Property, plant and equipment, at cost 65,185 64,322
Less accumulated depreciation and amortization 36,638 36,043
---------------- -------------------
Net property, plant and equipment 28,547 28,279
---------------- -------------------
Property held under capital leases 5,582 5,830
Other assets 8,064 9,713
================ ===================
$111,134 $111,162
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and lease obligations $ 3,069 $ 2,499
Accounts payable 8,524 8,946
Accrued expenses and other current liabilities 11,913 10,659
---------------- -------------------
Total current liabilities 23,506 22,104
---------------- -------------------
Long-term deferred income taxes 1,984 1,984
Long-term debt, excluding current installments 13,034 17,769
Long-term lease obligations, excluding current installments 6,200 6,637
Other liabilities 916 1,534
Shareholders' equity:
Common stock $0.01 par value. Authorized 20,000,000 shares:
Issued 8,877,189 and 8,814,492 shares, respectively 89 88
Additional paid-in capital 62,912 62,536
Retained earnings 39,950 34,916
Accumulated - other comprehensive income (905) (856)
Less cost of 2,757,743 and 2,706,417 shares, respectively, of
common stock in treasury (36,552) (35,550)
---------------- -------------------
Total shareholders' equity 65,494 61,134
================ ===================
$111,134 $111,162
================ ===================
See accompanying notes to condensed consolidated financial statements.
-2-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
---- ----
Net sales $41,048 $41,930
Cost of sales 28,132 29,301
------------------- --------------------
Gross margin 12,916 12,629
------------------- --------------------
Operating expenses
Selling and advertising expense 5,286 5,096
General and administrative expense 4,612 4,684
------------------- --------------------
Total operating expenses 9,898 9,780
------------------- --------------------
Operating income 3,018 2,849
------------------- --------------------
Interest expense, net 117 366
------------------- --------------------
Earnings before income taxes 2,901 2,483
------------------- --------------------
Income taxes 834 812
=================== ====================
Net earnings $2,067 $1,671
=================== ====================
Basic earnings per common share $ 0.34 $ 0.27
Diluted earnings per common share $ 0.32 $ 0.26
Basic weighted average number of common
shares outstanding 6,117 6,108
Diluted weighted average number of common
shares outstanding 6,464 6,433
See accompanying notes to condensed consolidated financial statements.
-3-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
---- ----
Net sales $ 130,521 $ 136,149
Cost of sales 90,282 96,114
------------------ --------------------
Gross margin 40,239 40,035
------------------ --------------------
Operating expenses
Selling and advertising expense 15,590 15,630
General and administrative expense 14,455 14,371
------------------ --------------------
Total operating expenses 30,045 30,001
------------------ --------------------
Operating income 10,194 10,034
------------------ --------------------
Interest expense, net 519 1,344
------------------ --------------------
Earnings before income taxes and the
cumulative effect of accounting change 9,675 8,690
Income taxes 3,243 2,917
------------------ --------------------
Income before cumulative effect of an
accounting change 6,432 5,773
Cumulative effect of an accounting change, net of
income tax benefit of $0 (Note 2) (1,215) --
------------------ --------------------
Net earnings $ 5,217 $ 5,773
================== ====================
Earnings per common share
Basic
Income before cumulative effect of
accounting change $ 1.05 $ 0.93
Net income $ 0.85 $ 0.93
Diluted
Income before cumulative effect of
accounting change $ 1.00 $ 0.88
Net income $ 0.82 $ 0.88
Basic weighted average number of common
shares outstanding 6,102 6,230
Diluted weighted average number of common
shares outstanding 6,401 6,533
See accompanying notes to condensed consolidated financial statements.
-4-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended
(IN THOUSANDS) 2002 2001
---- ----
Net earnings $ 2,067 $ 1,671
Other comprehensive income:
Foreign currency translation adjustments 127 327
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (223) (40)
----------------- -----------------
Comprehensive income $ 1,971 $ 1,958
================= =================
Nine Months Ended
2002 2001
---- ----
Net earnings $ 5,217 $ 5,773
Other comprehensive income:
Foreign currency translation adjustments 35 854
Foreign exchange gains deferred upon
implementation of FAS 133 -- 144
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (84) (54)
----------------- -----------------
----------------- -----------------
Comprehensive income $ 5,168 $ 6,717
================= =================
See accompanying notes to condensed consolidated financial statements.
-5-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(In thousands, except share and per share data) 2002 2001
---- ----
Common stock:
Balance at beginning of period $ 88 $ 87
Issuance of 62,697 and 15,746 shares of common
stock in 2002 and 2001, respectively 1 1
---------------------- ---------------------
Balance at end of period 89 88
---------------------- ---------------------
Additional paid-in capital:
Balance at beginning of period 62,536 61,854
Excess over par value of common stock issued 675 185
Stock issued from treasury for stock option exercises (299) (108)
---------------------- ---------------------
Balance at end of period 62,912 61,931
---------------------- ---------------------
Retained earnings:
Balance at beginning of period 34,916 28,440
Net earnings for the period 5,217 5,773
Cash dividends of $.03 and $.06 per share paid on
common stock during 2002 and 2001, respectively (183) (564)
---------------------- ---------------------
Balance at end of period 39,950 33,649
---------------------- ---------------------
Accumulated - other comprehensive income:
Balance at beginning of period (856) (1,634)
Equity adjustment from foreign currency translation and
derivative instruments (49) 944
---------------------- ---------------------
Balance at end of period (905) (690)
---------------------- ---------------------
Treasury stock:
Balance at beginning of period (35,550) (28,940)
Acquisition of 68,358 and 437,108 shares of common
stock, at cost, during 2002 and 2001, respectively (1,043) (5,909)
Issuance of 17,032 and 10,744 treasury shares pursuant to
stock option exercises, net, during 2002 and 2001,
respectively 41 (49)
---------------------- ---------------------
Balance at end of period (36,552) (34,898)
---------------------- ---------------------
Total shareholders' equity $ 65,494 $ 60,080
====================== =====================
See accompanying notes to condensed consolidated financial statements.
-6-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS) 2002 2001
---- ----
Cash flows from operating activities:
Net earnings $5,217 $5,773
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,930 4,566
Deferred income taxes -- (399)
Cumulative effect of an accounting change 1,215 --
Changes in assets and liabilities:
Accounts receivable (513) 284
Inventories 2,812 4,095
Prepaid expenses (354) (414)
Accounts payable (422) (3,175)
Accrued expenses and other liabilities 1,104 708
Income taxes payable or receivable (359) (830)
------------------ ------------------
Net cash provided by operating activities 12,630 10,608
------------------ ------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,870) (2,990)
Net assets of business acquired (Note 3) (622) --
Change in other assets and liabilities 206 (423)
------------------ ------------------
Net cash used in investing activities (4,286) (3,413)
------------------ ------------------
Cash flows from financing activities:
Payment of cash dividend on common stock (183) (564)
Purchase of treasury stock (1,043) (5,909)
Proceeds from issuance of common stock 676 175
Net stock options exercised (258) (146)
Net proceeds (repayments) from borrowings under
revolving bank lines of credit (2,697) 521
Repayments of long-term debt and other long-term liabilities (1,905) (2,275)
------------------ ------------------
Net cash used in financing activities (5,410) (8,198)
------------------ ------------------
Equity adjustment from foreign currency translation (49) 944
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 2,885 (59)
Cash and cash equivalents at beginning of period 9,471 3,877
------------------ ------------------
Cash and cash equivalents at end of period $12,356 $3,818
================== ==================
See accompanying notes to condensed consolidated financial statements.
-7-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND REVENUE RECOGNITION
These condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States of America applied
on a consistent basis.
These statements should be read in conjunction with the Notes to Consolidated
Financial Statements contained in BHA Group Holdings, Inc.'s (the "Company" or
"BHA") Annual Report to Shareholders for the fiscal year ended September 30,
2001, and with Management's Discussion and Analysis of Results of Operations and
Financial Condition appearing within this quarterly report.
Sales of products are recognized when goods are shipped "free on board" (FOB)
from their shipping point and when all obligations of the Company have been met.
The Company recognizes sales and gross profits on its services using the
percentage of completion method based on total costs incurred as compared to the
total estimated cost of the service contract. Substantially, all projects are
completed in less than 60 days from the date of commencement and the Company
does not engage in any long-term contracts.
The Company's service revenues generally result in gross margins as a percentage
of sales that are lower than the consolidated gross margins by approximately 5%
to 7%. Such revenues often represent the installation of the products that are
also sold by the Company. During the quarter and nine months ended June 30,
2002, favorable execution of service contracts resulted in gross margins that
were only slightly lower than those recognized from product sales. Revenues
generated by products and services were as follows (in thousands):
Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Products $33,785 $33,451
Services 7,263 8,479
------------------- ---------------------
Total $41,048 $41,930
=================== =====================
Nine Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Products $106,051 $107,025
Services 24,470 29,124
------------------- ---------------------
Total $130,521 $136,149
=================== =====================
(2) ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standard (SFAS) No. 142. "Accounting for
Goodwill and Other Intangible Assets" was issued in July 2001 and has been
adopted by the Company effective October 1, 2001. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead, such assets must be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. This statement also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
-8-
Prior to the adoption of SFAS 142, the Company evaluated the recoverability of
goodwill based upon undiscounted estimated future cash flows. In connection with
the SFAS 142 transitional goodwill impairment evaluation, the Statement required
that the Company perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption, using a fair value model. To
accomplish this, the Company was required to identify its reporting units and to
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 October 1, 2001. Based upon a discounted cash flow
analysis, the Company concluded that the carrying value of its Europe APC
reporting unit exceeded its fair value and as such the related goodwill was
impaired. As a result, the Company recognized a charge of $1,215,000 during the
quarter ending December 31, 2001, to write-off the goodwill of its Europe
segment in its entirety. This write-off has been recognized as the cumulative
effect of a change in accounting principle.
The goodwill affected by this write-off related to two transactions, both of
which were acquisitions of the common stock of the target companies. As such,
there was no adjustment in the tax basis of the assets of such companies at the
time of the acquisitions. Accordingly, no tax benefit can be recorded as a
result of the write-off of the related goodwill.
The remaining acquired intangible assets and goodwill of the Company as of June
30, 2002 were as follows (in thousands):
GROSS ACCUMULATED
CARRYING AMOUNT AMORTIZATION
--------------- ------------
Amortized Intangible Assets:
Non-compete agreements $ 786 $ 332
Patent rights 2,026 1,486
Customer lists and other 175 20
------------------- ------------------
Total $ 2,987 $ 1,838
=================== ==================
Unamortized Intangible Assets:
Trademark and Product Rights $ 1,282
===================
Goodwill $ 4,004
===================
There were no changes in the carrying value of goodwill during the quarter or
nine month period ended June 30, 2002 other than the impairment loss recognized
upon implementation of SFAS No. 142. All of the goodwill recorded on the balance
sheet of the Company at June 30, 2002 relates to the Domestic APC segment.
Amortization expense relative to acquired intangibles was $61,000 for the
quarter and $176,000 for the nine months ended June 30, 2002. Amortization of
purchased intangibles for each of the next five years is estimated as follows:
2002 - $240,000, 2003 - $229,000, 2004 - $222,000, 2005 - $222,000 and 2006 -
$222,000.
-9-
The following table presents net income for each period exclusive of
amortization expense recognized in such periods related to goodwill and other
intangible assets which will no longer be amortized. Also excluded is the loss
reported as a cumulative effect of an accounting change resulting from the
implementation of SFAS No. 142. Amounts are in thousands except per share
information:
THREE MONTHS ENDED
------------------
PRO FORMA INFORMATION JUNE 30, 2002 JUNE 30, 2001
------------- -------------
Net income as reported $2,067 $1,671
Add back:
Amortization of goodwill -- 55
Amortization of trademark and product rights -- 92
Less tax effect of proforma adjustments -- (36)
---------------------- ---------------------
Adjusted net income $2,067 $1,782
====================== =====================
Diluted earnings per share:
Net income as reported $0.32 $0.26
Amortization of goodwill, trademark and product rights,
net of tax -- .02
---------------------- ---------------------
Adjusted net income $0.32 $0.28
====================== =====================
NINE MONTHS ENDED
-----------------
PRO FORMA INFORMATION JUNE 30, 2002 JUNE 30, 2001
------------- -------------
Net income as reported $5,217 $5,773
Add back:
Cumulative effect of accounting change 1,215 --
Amortization of goodwill -- 165
Amortization of trademark and product rights -- 276
Less tax effect of proforma adjustments -- (108)
---------------------- ---------------------
Adjusted net income $6,432 $6,106
====================== =====================
Diluted earnings per share:
Net income as reported $0.82 $0.88
Cumulative effect of accounting change .18 --
Amortization of goodwill, trademark and product rights,
net of tax -- 0.05
---------------------- ---------------------
Adjusted net income $1.00 $0.93
====================== =====================
(3) ACQUISITION OF ASSETS
In November 2001, the Company acquired certain assets including inventory,
equipment, customer lists, and other intangible assets of a fabric filter
manufacturer in Mexico. The purchase price consisted of a cash payment in the
amount of $622,000 together with the assumption of liabilities of approximately
$150,000.
The proforma effect of this transaction is not material to the Company.
-10-
(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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. The fair value of these contracts has been recognized in
accrued liabilities in the consolidated balance sheet. The related gains and
losses are deferred in shareholders' 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 June 30, 2002 was $2,350,000, and the market value of these
contracts was $220,000 lower than face value.
(5) 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 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. A reconciliation of the
numerators and the denominators of the basic and diluted per-share computations
are as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
June 30, 2002 June 30, 2001
------------------------------------------ ------------------------------------------
Net Earnings Shares Per-Share Net Earnings Shares Per-Share
(Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt.
----------- -------- ---- ----------- -------- ----
Basic earnings per share:
Earnings available to common
shareholders $ 2,067 6,117 $ 0.34 $ 1,671 6,108 $ 0.27
Effect of dilutive
securities--stock options -- 347 -- 325
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 2,067 6,464 $ 0.32 $ 1,671 6,433 $ 0.26
========================================== ==========================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
June 30, 2002 June 30, 2001
------------------------------------------ ------------------------------------------
Net Earnings Shares Per-Share Net Earnings Shares Per-Share
(Numerator) (Denom.) Amt. (Numerator) (Denom.) Amt.
Basic earnings per share:
Earnings available to common
shareholders $ 5,217 6,102 $ 0.85 $ 5,773 6,230 $ 0.93
Effect of dilutive
securities--stock options -- 299 -- 303
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 5,217 6,401 $ 0.82 $ 5,773 6,533 $ 0.88
========================================== ==========================================
-11-
(6) 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 June 30, 2002 and September 30, 2001 were as
follows (in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
----------------------- -----------------------
Raw materials $14,088 $15,593
Work-in-process 558 946
Finished goods 5,689 6,306
----------------------- -----------------------
Total $20,335 $22,845
======================= =======================
(7) BUSINESS SEGMENTS
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 the Middle East and Northern
Africa. BHA Technologies supplies ePTFE membrane products to BHA's APC business,
and is also developing a market for such products outside of air pollution
control.
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 was as follows (in thousands):
NET SALES
THREE MONTHS ENDED
--------------------------------------------------
JUNE 30, JUNE 30,
2002 2001
----------------------- ----------------------
Domestic APC $32,056 $34,801
Europe APC 5,421 5,187
BHA Technologies 3,571 1,942
----------------------- ----------------------
Total $41,048 $41,930
======================= ======================
-12-
NET SALES
NINE MONTHS ENDED
--------------------------------------------------
JUNE 30, JUNE 30,
2002 2001
----------------------- ----------------------
Domestic APC $104,303 $112,010
Europe APC 16,310 16,700
BHA Technologies 9,908 7,439
----------------------- ----------------------
Total $130,521 $136,149
======================= ======================
Net sales represent revenues from sales to unaffiliated customers.
EARNINGS (LOSS) BEFORE INCOME TAXES
THREE MONTHS ENDED
--------------------------------------------------
JUNE 30, JUNE 30,
2002 2001
----------------------- ----------------------
Domestic APC $2,426 $2,363
Europe APC 190 272
BHA Technologies 285 (152)
----------------------- ----------------------
Total $2,901 $2,483
======================= ======================
NINE MONTHS ENDED
--------------------------------------------------
JUNE 30, JUNE 30,
2002 2001
----------------------- ----------------------
Domestic APC $8,508 $8,355
Europe APC 426 873
BHA Technologies 741 (538)
----------------------- ----------------------
Total $9,675 $8,690
======================= ======================
-13-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
For purposes of this "Management's Discussion and Analysis," as well as the
segment reporting information included in Note 7 to the Condensed Consolidated
Financial Statements, Domestic Air Pollution Control ("Domestic APC") represents
all air pollution control 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. Europe APC represents all air pollution control business for which the
products or services are sold or managed primarily from Europe. Such revenues
are typically generated in Europe, Northern Africa and the Middle East. 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 2002 COMPARED TO FISCAL 2001
NET SALES
Consolidated net sales for the nine months ended June 30, 2002 ("fiscal 2002")
decreased 4% to $130.5 million from $136.1 million for the same period in fiscal
2001. Consolidated net sales for the quarter ended June 30, 2002 ("third
quarter") decreased 2% to $41.0 million from $41.9 million in fiscal 2001. The
overall decline in sales was attributable to the weakness in the worldwide
manufacturing and industrial production and the impact of this weak demand on
the Company's APC business.
Sales in the Domestic APC segment declined 8% for the most recent quarter and 7%
for the first nine months of fiscal 2002 as compared to the prior year. Within
this segment, the sales of fabric filter replacement parts and services declined
15% for the most recent quarter and 11% for the nine month period. The sales of
electrostatic precipitator ("ESP") parts and services increased 23% for the most
recent quarter and 5% for the first nine months of fiscal 2002 as compared to
the prior year. The ESP business has continued to benefit from favorable
business conditions within the U.S. electric utility market for operators of
coal-fired boilers. Export sales decreased 25% for the most recent quarter and
13% for the first nine months of fiscal 2002 as compared to the same periods in
the prior year due to decreased sales in Latin America and in the Pacific Rim.
Sales in the Company's Europe APC segment increased by 5% for the quarter and
declined 2% for the nine-month period as compared to prior year results due to
the timing of large projects executed.
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by $1.6 million in the third quarter and $2.5 million for the first
nine months of fiscal 2002 as compared to the prior year periods. The increase
was attributable to incremental business in non-consumer apparel resulting from
a customer which supplies ePTFE membrane laminated to base fabric as part of the
supply chain in a government contract together with improved sales of HEPA
filtration products.
-14-
GROSS MARGIN
Consolidated gross margin was 31.5% of sales in the third quarter compared to
30.1% in the prior year. For the first nine months of fiscal 2002, the
consolidated gross margin was 30.8% of sales compared to 29.4% in the prior
year. The majority of the improvement in gross margins as a percentage of sales
was in the Domestic APC segment. The improvements were attributable, in part, to
a more favorable mix of business, lower manufacturing overheads and higher
efficiency in plant utilization. The improved margins were also due to several
significant service contracts that were completed with favorable cost variances
which are not expected to be recurring.
OPERATING EXPENSES
Operating expenses were $9.9 million (24.1% of sales) for the third quarter of
fiscal 2002 compared to $9.8 million (23.3% of sales) for the same quarter in
fiscal 2001. For the first nine months of fiscal 2002, operating expenses were
$30.0 million (23.0% of sales) compared to $30.0 million (22.0% of sales) for
the same period in the prior year. During the first nine months of fiscal 2002,
the Company recognized net foreign exchange losses of $0.1 million compared to
net foreign exchange gains of $0.2 million for the same period in the prior
year. Additionally, bad debt expense was $0.6 million for the first nine months
of fiscal 2002 compared to $0.4 million for the prior year period. These
increases in operating expenses aggregating $0.5 million, together with
incremental spending on the Company's enterprise resource planning system
implementation, were offset by a $0.5 million decrease in amortization resulting
from the implementation of SFAS 142.
INTEREST EXPENSE
Interest expense is presented net of interest earned on short-term investments.
Interest expense was $0.1 million in the third quarter of fiscal 2002 compared
to $0.4 million for the same quarter in fiscal 2001. Interest expense for the
first nine months of fiscal 2002 was $0.5 million compared to $1.3 million for
the first nine months of the prior year. Average borrowings decreased from $31.0
million in the first nine months of fiscal 2001 to $24.0 million during the most
recent nine months. Additionally, the average interest rate on the Company's
borrowings decreased from 6.1% in the fiscal 2001 period to 3.5% for the first
nine months of 2002. Net interest expense has also been favorably impacted by
interest earned on short-term investments. All of the Company's borrowings are
at variable interest rates.
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $2.4 million for both the
third quarter of fiscal 2002 and 2001 due to improved gross margins as a
percentage of sales and lower interest costs, which offset the decline in
revenues. For the nine months ended in June 2002, Domestic APC pre-tax earnings
improved from $8.4 million to $8.5 million despite a 7% decrease in sales. The
impact of the lower sales volume was offset by an improved gross margin
percentage together with a $0.7 million decrease in net interest costs
attributable to this segment.
The Europe APC segment reported pre-tax earnings of $0.2 million in the fiscal
2002 third quarter compared to $0.3 million for the same quarter in fiscal 2001.
For the nine- month periods, pre-tax earnings were $0.4 million in fiscal 2002
compared to $0.9 million in fiscal 2001. The majority of the earnings decline is
the result of foreign exchange. During the first nine months of fiscal 2001,
this segment reported foreign exchange gains of $0.3 million compared to a small
foreign exchange loss in the fiscal 2002 period.
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BHA Technologies' pre-tax earnings for the most recent quarter were $0.3 million
compared to a pre-tax loss of $0.2 million in the prior year. For the first nine
months of fiscal 2002, BHA Technologies reported pre-tax earnings of $0.7
million compared to a pre-tax loss of $0.5 million for the same period in the
prior year. The turnaround resulted from higher sales volumes and an improved
sales mix. Additionally, in the prior year, BHA Technologies incurred costs
related to the start-up of their Lee's Summit, Missouri production facility.
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
During the first quarter of fiscal 2002, the Company adopted SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets." In accordance with SFAS
No. 142, a loss was recognized relative to the impairment of goodwill of the
Company's Europe APC segment. This loss, in the amount of $1.2 million, was
accounted for as the cumulative effect of a change in accounting policy.
INCOME TAXES
The consolidated effective income tax rate for the first nine months of fiscal
2002 was 33.5% compared to 33.6% for the same period in the prior year. The
consolidated effective income tax rates for the three months ended June 30, 2002
and 2001 were 28.7% and 32.7%, respectively. The lower income tax rate in the
third quarter of the current year is attributable to the utilization of
available net operating losses for tax purposes by several of BHA's subsidiaries
in Europe.
NET EARNINGS
Net earnings for the third quarter of fiscal 2002 were $2.1 million ($0.32 per
diluted share) compared to net earnings of $1.7 million ($0.26 per diluted
share) in the third quarter of fiscal 2001. For the first nine months of fiscal
2002, the Company had net earnings of $5.2 million ($0.82 per diluted share)
compared to earnings of $5.8 million ($0.88 per diluted share) for the same
period in the prior year. Exclusive of the cumulative effect of the accounting
change, net earnings for the first nine months of fiscal 2002 were $6.4 million
($1.00 per diluted share). The average number of common and common equivalent
shares declined from 6.5 million shares to 6.4 million shares due to stock
repurchased by the Company in the open market in each year.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased from $45.2 million at September 30, 2001 to $45.4
million at June 30, 2002. The current ratio at June 30, 2002 and September 30,
2001 was 2.9 and 3.0, respectively. The Company's cash increased from $9.5
million at September 30, 2001 to $12.4 million at June 30 2002.
During the nine months ended June 30, 2002, the Company generated $12.6 million
in cash from operating activities compared to $10.6 million in the first nine
months of the prior year. The difference is the result of improved working
capital management.
Investing activities resulted in a net use of cash of $4.3 million and $3.4
million for the nine months ended June 30, 2002 and 2001, respectively. The
investment in capital expenditures was $3.9 million for the first nine months of
fiscal 2002 and $3.0 million for the first nine months of fiscal 2001. The
capital expenditures in fiscal 2002 primarily relate to the Company's enterprise
resource planning software project. Current year investing activities also
included $0.6 million related to the acquisition of certain assets of a fabric
filter manufacturing company in Mexico.
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During the first nine months of fiscal 2002, the Company used cash generated
from operations to repay $4.6 million in bank debt. The Company also used $1.0
million to repurchase common stock. During the first nine months of fiscal 2001,
the Company's financing activities consisted primarily of $1.8 million in debt
repayments and the repurchase of $5.9 million of the Company's common stock.
The Company has financing commitments that include $10.6 million outstanding
under a U.S. term note with a final maturity in 2005 that requires quarterly
payments of $0.6 million; an $18.0 million U.S. revolving credit facility
maturing in 2004; and credit lines in Germany for the U.S. equivalent of $6.0
million maturing in 2004. The Company's unused commitments as of June 30, 2002
were approximately $18.6 million. The Company believes that cash flows from
operations and available credit lines will be sufficient to meet its capital
needs for the foreseeable future.
MANAGEMENT JUDGMENTS AND ESTIMATES
In preparing the financial statements, a number of assumptions and estimates are
determined, that in the judgment of management, are proper in light of existing
general economic and Company-specific circumstances. Examples of areas in which
judgments and estimates are required include the collectibility of receivables,
the value of certain inventories and the evaluation of certain contingent
liabilities, including product warranties and claims arising in the ordinary
course of business. While the Company has taken reasonable care in preparing
these estimates and making these judgments, actual results could and probably
will differ from the estimates. Management believes that any difference in the
actual results from the estimates will not have a material effect upon the
Company's financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies include inventory valuation,
estimates related to collectibility of receivables and estimation of potential
warranty claims.
The Company values its inventories on the first-in, first-out (FIFO) accounting
method using standard costs and provides reserves for estimated losses for slow
moving or obsolete items. The reserve requirement is estimated based upon a
review of specific inventory items that are identified as slow moving and
consideration of potential salvage value and carrying costs.
Accounts receivables are reported net of reserves for uncollectible accounts.
The Company estimates the amount of the reserve requirement based upon a review
of delinquent accounts, the Company's historical loss experience and the current
economic factors impacting its customers.
The Company provides warranties on the products and services it sells which vary
in length and terms based upon the nature of such products and services, as well
as the customer's industry. A reserve has been established for potential
warranty claims. The Company estimates its reserve requirement based upon
specific product failures identified, as well as historical loss experiences.
DIVIDEND POLICY
On January 22, 2002, the Company announced a change in its approach to the
payment of cash dividends. In the future, dividends will be paid annually rather
than quarterly. Although no dividend has been declared, the Company anticipates
paying an annual dividend for calendar 2002 of approximately $0.12 per share in
January 2003. This change is intended to streamline the dividend payment process
and lower administrative expenses.
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OUTLOOK
The Company continues to see success in the implementation of its business plan.
The financial condition of BHA has been further strengthened during the current
fiscal year providing the Company with substantial capital to invest in growth
areas and improve its overall position in the key markets it serves. The Company
will continue to focus on managing costs while investing in those areas that
will provide the greatest advantage in the long term. The Company will maximize
opportunities to service the ESP side of the APC business and pursue
opportunities to expand its business in the sale of ePTFE membranes to customers
for use in applications outside of air pollution control.
Although pleased with year-to-date reported earnings and cash flows, the Company
continues to remain cautious about near-term results. Of specific concern is
continued weakness in the worldwide manufacturing and industrial sector. Based
on historical trending, the Company believes that improvement in its market for
the sale of fabric filter replacement parts and services could trail an
improvement in overall manufacturing conditions by as much as six months. The
Company has not seen any improvement in this market and over the last 90 days
has seen further deterioration in certain areas. It is the expectation that, in
the interim, competition will be intense and pricing will continue to come under
pressure. The Company is committed to maintaining and expanding its position as
the premier supplier of APC replacement parts and service during this
challenging economic period.
The Company's results for the past two quarters have surpassed expectation from
both an earnings and cash flow standpoint. The Company expects that earnings for
the upcoming quarter will not be as strong due to continued weakness in the
fabric filter business and the timing of contractual shipment of major ESP
mechanical parts orders. The Company also reports that it has gone live with its
new Enterprise Resource Planning (ERP) system in July. Although pleased with the
early adoption and performance of its new system, the Company is factoring into
its estimates some initial inefficiencies expected to occur in the execution of
its business during the fourth quarter. The following is specific guidance being
provided:
o For the fourth quarter of fiscal 2002, the Company anticipates that
consolidated net sales will decline less than 5% from the same quarter
in the prior year.
o Earnings for the fourth quarter of the current fiscal year are expected
to be in the range of $0.19 to $0.24 per diluted share as compared to
$0.23 per diluted share reported for the same period in the prior year.
Although visibility with respect to future results beyond 90 days remains a
challenge, the Company expects that results for the first quarter of next fiscal
year will be stronger than the upcoming quarter due to the known timing of
contractual ship dates of large ESP project orders currently in the backlog.
BACKLOG
BHA's backlog was $39.9 million at June 30, 2002. This compares with order
backlogs of $43.5 million at March 31, 2002 and $45.2 million at June 30, 2001.
In conjunction with the implementation of its new ERP system, the Company has
made the decision to report its backlog to include only scheduled orders as
opposed to the previous practice of reporting all customer commitments in its
backlog. Historically, 20% to 25% of the reported consolidated backlog included
customer commitments under "blanket agreements" that did not include firm
quantities and ship dates. These orders will no longer be reported as backlog as
they do not
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drive production requirements within ERP. The June 30, 2002 backlog reported
herein excludes such amounts.
OTHER ACTIONS
The Company reports that it has accumulated 2.5 million shares of the 3.5
million shares of BHA common stock authorized by its Board of Directors for
repurchase.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements that reflect the Company'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 the Company's
products and services, and other factors. Readers should consult the section
entitled "Factors Affecting Earnings and Stock Price" in the Company's annual
report of Form 10-K.
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 June 30, 2002, a 1%
fluctuation in market rates would impact interest expense by approximately
$220,000 annually.
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 June 30, 2002, the amount
of such unhedged exposures was less than $100,000, primarily 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 June 30, 2002, the notional amount
of such forward exchange contracts was approximately $2.4 million and the market
value of these contracts was $220,000 lower than face value.
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ACCOUNTS RECEIVABLE
The Company's customer base operates in numerous industries in the U.S. and
internationally. With the weakness in the global manufacturing economy, the
Company is seeing an increasing level of customer bankruptcies and slow payment
problems that management believes have been appropriately reserved for. Although
there is not significant concentration of sales in any one industry or with any
individual customer, certain of the Company's customers operate in industries
such as steel, textile, and foundry, which have been severely impacted by the
current economic environment. Additionally, the Company executes significant
projects and fulfills membrane supply contracts that can result in open
receivables from individual customers that at times exceed $1 million. It is
considered unlikely that the failure of one or more customers would have a
material adverse effect on the Company's financial condition. However, if the
current economic environment persists or deteriorates further, near term
operating results could be adversely impacted by a further increase in bad debt
expense.
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PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibit (11), Computation of earnings per common share. See Note 5 to
Unaudited financial statements for the required disclosure.
(b) During the quarter ended June 30, 2002, there were no reports on Form 8-K
filed by the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BHA GROUP HOLDINGS, INC.
(Registrant)
July 23, 2002 By: /s/ James C. Shay
- ----------------------- ----------------------------------------------
Date (Signature)
James C. Shay
Senior Vice President, Finance and
Administration, Principal Financial and
Accounting Officer
By: /s/ James E. Lund
----------------------------------------------
(Signature)
James E. Lund
President and
Chief Executive Officer
M350-BHAR
07/17/2002
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