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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
December 31, 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
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Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes |X| No
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As of January 15, 2003, the number of shares outstanding of the Registrant's
Common Stock was 6,108,504.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, SEPTEMBER 30,
ASSETS 2002 2002
------ --------------- ---------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 12,074 $13,778
Accounts receivable, less allowance for doubtful receivables
of $1,894 and $1,619, respectively 33,361 28,637
Inventories (note 4) 22,401 24,241
Income taxes receivable -- 287
Prepaid expenses 2,724 1,998
Deferred income taxes 3,179 3,179
--------------- ---------------
Total current assets 73,739 72,120
--------------- ---------------
Property, plant and equipment, at cost 66,533 65,762
Less accumulated depreciation and amortization 39,380 38,013
--------------- ---------------
Net property, plant and equipment 27,153 27,749
--------------- ---------------
Property held under capital leases 5,260 5,358
Other assets 8,207 8,234
--------------- ---------------
$114,359 $113,461
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and lease obligations $ 2,371 $ 2,479
Accounts payable 9,688 9,516
Income taxes payable 945 --
Accrued expenses and other current liabilities 10,664 13,569
--------------- ---------------
Total current liabilities 23,668 25,564
--------------- ---------------
Long-term deferred income taxes 1,940 1,940
Long-term debt, excluding current installments 12,193 11,687
Long-term lease obligations, excluding current installments 5,800 6,088
Other liabilities 635 741
Shareholders' equity:
Common stock $0.01 par value, authorized 20,000,000
shares: Issued 8,894,969 and 8,885,550 shares,
respectively 89 89
Additional paid-in capital 63,259 63,169
Retained earnings 44,234 41,360
Accumulated - other comprehensive income (424) (625)
Less cost of 2,786,465 and 2,757,743 shares, respectively, of
common stock in treasury (37,035) (36,552)
--------------- ---------------
Total shareholders' equity 70,123 67,441
--------------- ---------------
$114,359 $113,461
=============== ===============
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 DECEMBER 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
---- ----
Net sales $50,065 $40,913
Cost of sales 34,839 28,507
------------ -------------
Gross margin 15,226 12,406
------------ -------------
Operating expenses
Selling and advertising expense 5,402 5,078
General and administrative expense 5,403 4,535
------------ -------------
Total operating expenses 10,805 9,613
------------ -------------
Operating income 4,421 2,793
Interest expense, net 129 204
------------ -------------
Earnings before income taxes and the
cumulative effect of accounting
change 4,292 2,589
Income taxes 1,418 905
------------ -------------
Income before cumulative effect of an
accounting charge 2,874 1,684
Cumulative effect of an accounting change,
net of income tax benefit of $0 -- (1,215)
------------ -------------
Net earnings $2,874 $ 469
============ =============
Earnings per common share
Basic
Income before cumulative effect of
accounting charge $0.47 $ 0.28
Net income $0.47 $ 0.08
Diluted
Income before cumulative effect of
accounting charge $0.45 $ 0.26
Net income $0.45 $ 0.07
Basic weighted average number of common shares outstanding 6,126 6,097
Diluted weighted average number of common shares outstanding 6,436 6,384
See accompanying notes to condensed consolidated financial statements.
-3-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS) 2002 2001
---- ----
Net earnings $2,874 $469
Other comprehensive income:
Foreign currency translation adjustments 264 75
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (63) 107
----------- -----------
Comprehensive income $3,075 $651
=========== ===========
See accompanying notes to condensed consolidated financial statements.
-4-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
(In thousands, except share and per share data) 2002 2001
---- ----
Common stock:
Balance at beginning period $ 89 $ 88
Issuance of 9,419 and 27,078 shares of common
stock in 2002 and 2001, respectively -- --
------------------ ----------------
Balance at end of period 89 88
------------------ ----------------
Additional paid-in capital:
Balance at beginning of period 63,169 62,536
Excess over par value of common stock issued 95 299
Stock issued from treasury for stock option exercises (5) --
------------------ ----------------
Balance at end of period 63,259 62,835
------------------ ----------------
Retained earnings:
Balance at beginning of period 41,360 34,916
Net earnings for the period 2,874 469
Cash dividends of $0 and $.03 per share paid on common
stock during 2002 and 2001, respectively -- (182)
------------------ ----------------
Balance at end of period 44,234 35,203
------------------ ----------------
Accumulated - other comprehensive income:
Balance at beginning of period (625) (856)
Equity adjustment from foreign currency translation
and derivative instruments 201 182
------------------ ----------------
Balance at end of period (424) (674)
------------------ ----------------
Treasury stock:
Balance at beginning of period (36,552) (35,550)
Acquisition of 28,722 and 53,800 shares of common
stock, at cost, during 2002 and 2001, respectively (483) (788)
------------------ ----------------
Balance at end of period (37,035) (36,338)
------------------ ----------------
Total shareholders' equity $70,123 $61,114
================== ================
See accompanying notes to condensed consolidated financial statements.
-5-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS) 2002 2001
---- ----
Cash flows from operating activities:
Net earnings $2,874 $ 469
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,540 1,283
Cumulative effect of an accounting change -- 1,215
Changes in assets and liabilities:
Accounts receivable (4,724) 789
Inventories 1,840 1,022
Prepaid expenses (726) (898)
Accounts payable 172 493
Accrued expenses and other liabilities (2,905) (1,985)
Income taxes receivable or payable 1,232 376
--------------- ---------------
Net cash provided by (used in) operating activities (697) 2,764
--------------- ---------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (772) (1,462)
Net assets of business acquired -- (622)
Change in other assets and liabilities (153) 388
--------------- ---------------
Net cash used in investing activities (925) (1,696)
--------------- ---------------
Cash flows from financing activities:
Payment of cash dividends on common stock -- (182)
Purchase of treasury stock (483) (788)
Proceeds from issuance of common stock 95 299
Net stock options exercised (5) --
Net proceeds from borrowings under revolving bank lines
of credit 1,135 --
Repayments of long-term debt and lease obligations (1,025) (1,325)
--------------- ---------------
Net cash used in financing activities (283) (1,996)
--------------- ---------------
Equity adjustment from foreign currency translation 201 182
--------------- ---------------
Net decrease in cash and cash equivalents (1,704) (746)
Cash and cash equivalents at beginning of period 13,778 9,471
--------------- ---------------
Cash and cash equivalents at end of period $12,074 $8,725
=============== ===============
See accompanying notes to condensed consolidated financial statements.
-6-
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,
2002, and with Management's Discussion and Analysis of Results of Operations and
Financial Condition appearing within this quarterly report.
Sales of electrostatic precipitator ("ESP") parts and services tend to be
seasonal, with the majority of the revenues being generated in advance of spring
outages scheduled by operators of coal-fired utilities. The results of
operations for interim periods are not necessarily indicative of results to be
expected for a full year.
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. Revenues generated by products and services were as
follows (in thousands):
Three Months Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Products $42,901 $35,077
Services 7,164 5,836
------------------------- -----------------------
Total $50,065 $40,913
========================= =======================
-7-
In some instances, arrangements with customers involve multiple elements which
are delivered at different points in time. These situations typically arise when
the Company has delivered parts, but is also obligated to perform installation
services or parts are delivered over time, rather than on a single delivery
date. In determining the appropriate amount of revenue to be recognized, the
Company evaluates whether the delivered elements have standalone value to the
customer, whether the fair value of the undelivered elements is reliably
determinable and whether delivery of the remaining elements is probable and
within the Company's control. In instances where all of these conditions are
satisfied, the Company recognizes revenue for the elements that have been
delivered to the customer. In instances where one or more of these conditions
have not been satisfied, the Company defers the recognition of revenue until all
these conditions are satisfied or all elements have been delivered.
(2) 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 December 31, 2002 was $1.4 million, and the market value of
these contracts was $171,000 lower than face value.
(3) 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
is as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
December 31, 2002 December 31, 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 $2,874 6,126 $0.47 $ 469 6,097 $ 0.08
Effect of dilutive
securities--stock options -- 310 -- 287
Diluted earnings per share:
Earnings available to common
shareholders and assumed
common equivalent holders $2,874 6,436 $0.45 $ 469 6,384 $ 0.07
========================================== ==========================================
-8-
(4) INVENTORIES
BHA Group Holdings, Inc. 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 December 31, 2002 and September 30, 2002 were as
follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
2002 2002
----------------------- -----------------------
Raw materials $14,202 $13,203
Work-in-process 1,581 1,720
Finished goods 6,618 9,318
----------------------- -----------------------
Total $22,401 $24,241
======================= =======================
(5) 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
DECEMBER 31, DECEMBER 31,
2002 2001
----------------------- -----------------------
Domestic APC $40,789 $32,389
Europe APC 5,411 5,265
BHA Technologies 3,865 3,259
----------------------- -----------------------
Total 50,065 40,913
======================= =======================
Net sales represent revenues from sales to unaffiliated customers.
-9-
EARNINGS (LOSS) BEFORE INCOME TAXES
DECEMBER 31, DECEMBER 31,
2002 2001
----------------------- -----------------------
Domestic APC $3,982 $2,462
Europe APC (223) (53)
BHA Technologies 533 180
-----------------------
-----------------------
Total $4,292 $2,589
======================= =======================
-10-
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 5 to the Condensed Consolidated
Financial Statements, Domestic Air Pollution Control ("Domestic APC") represents
all business for which the products or services are sold or managed from the
United States. Generally, this includes sales to customers in the U.S. and
exports to customers in Canada, Latin America, and Asia. Europe APC represents
all business for which the products or services are sold or managed primarily
from Europe. Such revenues are typically generated in Europe, the Middle East,
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.
The following table summarizes the Company's revenues by segment and, within the
Domestic APC segment, by sales group. Amounts are in thousands.
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Domestic APC Segment:
U.S. Fabric Filter $17,020 $18,931
U.S. Electrostatic Precipitator (ESP) 20,444 8,867
Export Sales 3,325 4,591
-------- --------
Total Domestic APC Segment 40,789 32,389
Europe APC Segment 5,411 5,265
BHA Technologies Segment 3,865 3,259
-------- --------
Total Revenues $50,065 $40,913
======= =======
FISCAL 2003 FIRST QUARTER COMPARED TO FISCAL 2002 FIRST QUARTER
NET SALES
Consolidated net sales for the three months ended December 31, 2002 ("Fiscal
2003 first quarter") increased 22% to $50.1 million from $40.9 million for the
same period in fiscal 2002.
The Domestic APC segment realized a 26% increase in sales. These results were
due to an increase in sales of ESP parts and services from $8.9 million for the
first quarter of fiscal 2002 to $20.4 million in the most recent quarter. This
portion of the business benefited from favorable business conditions within the
U.S. electric utility market for operators of coal-fired boilers. Additionally,
certain customers required earlier delivery dates than in the prior year which
benefited the first quarter of fiscal 2003 and will likely result in modest
declines in sales for the Company's second fiscal quarter. The ESP business
generally peaks in the January through April period as electric utilities
historically perform a majority of their maintenance during spring plant
outages. The 231% increase in ESP shipments more than offset a 10% decline in
domestic shipments of fabric filter parts and services and a 28% decline in
export sales. The decline in U.S. fabric filter and export sales reflects the
economic contraction in the industrial and manufacturing sectors in the U.S. and
international economies.
-11-
Sales in the Europe APC segment when expressed in U.S. dollars ("USD") increased
by 3%, however, sales of this segment actually declined by 8% when reported in
Euros. This decline reflects the slow-down in manufacturing activity in Europe.
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased $0.6 million or 19%. The increase was attributable to incremental
business in non-consumer apparel for military and firefighting garments,
together with improved sales of HEPA and APC filtration products.
GROSS MARGIN
Consolidated gross margin was 30.4% of sales in the first quarter of fiscal 2003
compared to 30.3% for the same period in the prior year. During the most recent
quarter, the Company's sales included parts for large ESP rebuild projects at
lower margins than the Company's historical average. Despite these shipments,
margins remained generally consistent with the prior year's first quarter as a
result of cost reductions implemented during fiscal 2002 in fabric filter
manufacturing, strong utilization of the Company's ESP production facilities and
favorable product mix.
OPERATING EXPENSES
Operating expenses were $10.8 million (21.6% of sales) for the first quarter of
fiscal 2003 compared to $9.6 million (23.5% of sales) for the same period in the
prior year. The increased expenses include $0.2 million in incremental
depreciation, primarily related to the Company's enterprise resource planning
("ERP") system that went "live" in July 2002. Other increases in the Domestic
APC segment included higher self-insured group health costs resulting from the
timing of certain large claims, higher legal and professional fees and an
increase in bad debt expense due to business failures and cash flow problems in
certain industries serviced by the Company. The weakening USD as compared to the
Euro resulted in a $0.2 million increase in the USD denominated expenses of the
Europe APC business segment. The BHA Technologies segment incurred higher
operating expenses due, in part, to an increase in product development spending.
Additionally, all of the Company's business segments were impacted by higher
costs related to a tightening of the world wide insurance market.
INTEREST EXPENSE, NET
Interest expense was $0.1 million in the fiscal 2003 quarter compared to $0.2
million for the same period in the prior year. Average borrowings declined from
$26.5 million to $20.7 million, and the average interest rate on borrowings
dropped from 3.7% to 3.1%. All of the Company's borrowings are at variable
interest rates.
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $4.0 million compared to $2.5
million for the first quarter of fiscal 2002. The improvement was the result of
a 26% increase in sales.
The Europe APC segment reported a pre-tax loss of $0.2 million in the most
recent quarter compared to a pre-tax loss of $0.1 million for the same period in
the prior year. The unfavorable results reflect the decline in sales volume.
BHA Technologies generated pre-tax earnings of $0.5 million in the current
quarter compared to $0.2 million for the same period in the prior year. The
improvement is consistent with a 19% increase in shipments to third party
customers and improved product mix.
-12-
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE
During the fiscal 2002 first quarter, 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 effective income tax rate was 33.0% for the first quarter of fiscal 2003
compared to 35.0% for the first quarter of the prior year. The rate for the most
recent quarter is generally consistent with the actual rate of tax for all of
fiscal 2002.
NET EARNINGS
Net earnings for the most recent quarter were $2.9 million ($0.45 per diluted
share) compared to $1.7 million ($0.26 per diluted share), exclusive of the
cumulative effect of the accounting change, for the first quarter of fiscal
2002.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $50.1 million at December 31, 2002 compared to $46.6
million at September 30, 2002. The current ratio at December 31, 2002 and
September 30, 2002 was 3.1 and 2.8, respectively. The Company's cash decreased
from $13.8 million at September 30, 2002 to $12.1 million at December 31, 2002.
During the quarter ended December 31, 2002, the Company used $0.7 million in
cash for operating activities compared to $2.8 million of net cash generated
from operating activities during the same period in the prior year.
Traditionally, the first fiscal quarter generates little, if any, cash from
operations as the Company funds incentive bonus plans and employee benefit
contributions during the quarter which are accrued during the prior fiscal year.
Operating cash flow for the most recent quarter also reflected a significant
increase in accounts receivable due to the higher sales volume.
Investing activities resulted in a net use of cash of $0.9 million and $1.7
million for the three months ended December 31, 2002 and 2001, respectively. The
investment in capital expenditures used $0.8 million in cash in the most recent
quarter compared to $1.5 million for the same quarter in the prior year.
Investing activities during the December 2001 quarter included significant
non-recurring expenditures related to the Company's enterprise resource planning
software project and $0.6 million related to the acquisition of certain assets
of a fabric filter manufacturing company in Mexico.
During the December 2002 quarter, the Company's financing activities consisted
primarily of $0.5 million used to repurchase shares of the Company's common
stock. During the December 2001 quarter, the Company repurchased $0.8 million of
the Company's common stock and repaid $1.3 million in debt.
-13-
At December 31, 2002, BHA had unused lines of credit of $18.7 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2004; $8.8 million under an amortizing term loan with a
final maturity in 2006; a European revolving credit facility of $6.0 million
with a maturity on April 30, 2004; and a capital lease related to an industrial
revenue bond transaction for $6.2 million with annual sinking fund payments and
a final maturity in 2018. 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.
In some instances, the Company enters into arrangements with customers that
involve execution of projects over a period of several months or that involve
multiple elements which are delivered at different points in time. In such
cases, management reviews the specific transactions and considers the relevant
accounting pronouncements in determining the appropriate timing for recognition
of revenues.
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.
OUTLOOK
The Company continues to see success in the implementation of its business plan.
The solid financial condition of BHA has been further strengthened over the past
24 months, 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 it
believes will provide the greatest advantage in the long term.
-14-
The Company intends to 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 its first quarter results, the Company continues to remain
cautious about the near-term results of its U.S. and export fabric filter
businesses. Of specific concern is continued weakness in the worldwide
manufacturing and industrial sector. Based on historical trending, the Company
continues to believe that improvement in its market for the sale of fabric
filter replacement parts and services will likely trail an improvement in
overall manufacturing conditions by as much as six months. The Company has not
seen any improvement in business conditions and expects that competition will
remain 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.
During the current period of economic weakness, the Company's results have
largely been driven by success in the area of ESP rebuild project work for
electric utility customers and the sale of ePTFE membranes to customers outside
of air pollution control. This will continue to be the case while the fabric
filter replacement parts and service business remains weak due to current
economic conditions. Although the Company believes it is well positioned to have
success in the electric utility markets for ESP project work and the ePTFE
membrane business, consolidated quarterly results moving forward are likely to
vary depending on the timing of order receipt and execution in these areas.
Visibility with respect to future results beyond 90 days remains a challenge.
For more information you should refer to the sections entitled "Outlook" and
"Factors Affecting Earnings and Stock Price" included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2002. With respect
to the upcoming quarter, the following is specific guidance being provided:
o For the second quarter of fiscal 2003, the Company anticipates that
consolidated net sales will be lower than the same period in the prior
year by as much as 10%.
o Earnings for the second quarter of fiscal 2003 are expected to be in
the range of $.35 to $.40 per diluted share as compared to $.42
reported for the same period in the prior year.
BACKLOG
On December 31, 2002, the Company's backlog of orders was $47.5 million compared
to $50.9 million at December 31, 2001. Over 90% of the December 31, 2002 backlog
is expected to ship within the next 12 months. In connection with the
implementation of its ERP system on June 30, 2002, the Company 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 are not included in the December 31, 2002 backlog and
will not be included in future backlog reports, as they do not drive production
requirements within the ERP system.
Excluding the impact of the change in reporting, the Company believes that the
backlog for fabric filter parts and services in the U.S. and for export is
approximately the same as the December 31, 2001 backlog. The total order backlog
is higher at December 31, 2002 than in 2001 when measured in a comparable manner
due to a 20% increase in the backlog for domestic ESP parts and services.
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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" in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2002. The
Company cautions that the foregoing lists of important factors is not exclusive.
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 December 31, 2002, a 1%
fluctuation in market rates would impact interest expense by approximately
$200,000 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 international
affiliates. Such amounts are subject to translation exposure. At December 31,
2002, the amount of such unhedged exposures was less than $0.5 million.
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 December 31, 2002, the notional
amount of these forward exchange contracts was approximately $1.4 million and
the market value of these contracts was $171,000 lower than face value.
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 has been appropriately reserved for. Although
there is not a significant concentration of sales in any one industry or with
any individual customer, certain of the Company's customers operate in
industries such as electric utility, 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 affect on the Company's financial condition.
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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.
CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that the Company's
disclosure controls and procedures are effective in ensuring that material
information required to be disclosed by the Company is included in the reports
that the Company files with the Securities and Exchange Commission. There were
no significant changes to the Company's internal controls or to other factors
that could significantly affect these internal controls after the Evaluation
Date.
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PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(99.1) Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(99.2) Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On January 10, 2003, the Company filed a Form 8-K with the Securities
and Exchange Commission to report the resignation of Richard C. Green,
Jr., from the Company's Board of Directors.
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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)
January 21, 2003 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
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CERTIFICATIONS
I, James E. Lund, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BHA Group Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ James E. Lund
------------------------
DATED: January 21, 2003 James E. Lund,
President
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I, James C. Shay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BHA Group Holdings,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATED: January 21, 2003 /s/ James C. Shay
-----------------
James C. Shay,
Senior Vice President, Finance and Administration
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