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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
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
March 31, 2003 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
Incorporation or Organization) Identification Number)
8800 East 63rd Street, Kansas City, Missouri 64133
- --------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (816) 356-8400
--------------
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 April 14, 2003, the number of shares outstanding of the Registrant's
Common Stock was 6,115,047.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) MARCH 31 SEPTEMBER 30,
ASSETS 2003 2002
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 16,070 $ 13,778
Accounts receivable, less allowance for doubtful receivables
of $1,923 and $1,619, respectively 29,677 28,637
Inventories (note 5) 24,667 24,241
Income taxes receivable -- 287
Prepaid expenses 2,535 1,998
Deferred income taxes 3,179 3,179
-------- --------
Total current assets 76,128 72,120
-------- --------
Property, plant and equipment, at cost 67,367 65,762
Less accumulated depreciation and amortization 40,279 38,013
-------- --------
Net property, plant and equipment 27,088 27,749
-------- --------
Property held under capital leases 5,162 5,358
Other assets 8,196 8,234
-------- --------
$116,574 $113,461
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and lease obligations $ 2,442 $ 2,479
Accounts payable 9,897 9,516
Accrued expenses and other current liabilities 11,122 13,569
Income taxes payable 529 --
-------- --------
Total current liabilities 23,990 25,564
-------- --------
Long-term deferred income taxes 1,940 1,940
Long-term debt, excluding current installments 11,568 11,687
Long-term lease obligations, excluding current installments 5,800 6,088
Other liabilities 757 741
Shareholders' equity:
Common stock $0.01 par value. Authorized 20,000,000 shares:
Issued 8,910,784 and 8,885,550 shares, respectively 89 89
Additional paid-in capital 63,374 63,169
Retained earnings 46,850 41,360
Accumulated - other comprehensive income (549) (625)
Less cost of 2,795,737 and 2,757,743 shares, respectively, of
common stock in treasury (37,245) (36,552)
-------- --------
Total shareholders' equity 72,519 67,441
-------- --------
$116,574 $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 MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
------- -------
Net sales $48,744 $48,560
Cost of sales 32,951 33,643
------- -------
Gross margin 15,793 14,917
------- -------
Operating expenses
Selling and advertising expense 5,383 5,226
General and administrative expense 5,273 5,308
------- -------
Total operating expenses 10,656 10,534
------- -------
Operating income 5,137 4,383
Interest expense, net 138 198
------- -------
Earnings before income taxes 4,999 4,185
------- -------
Income taxes 1,651 1,504
------- -------
Net earnings $ 3,348 $ 2,681
======= =======
Basic earnings per common share $ 0.55 $ 0.44
Diluted earnings per common share $ 0.52 $ 0.42
Basic weighted average number of common shares outstanding 6,111 6,091
Diluted weighted average number of common shares outstanding 6,471 6,413
See accompanying notes to condensed consolidated financial statements.
-3-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
------- -------
Net sales $98,809 $89,473
Cost of sales 67,790 62,150
------- -------
Gross margin 31,019 27,323
------- -------
Operating expenses
Selling and advertising expense 10,785 10,304
General and administrative expense 10,676 9,843
------- -------
Total operating expenses 21,461 20,147
------- -------
Operating income 9,558 7,176
Interest expense, net 267 402
------- -------
Earnings before income taxes and the
cumulative effect of accounting change 9,291 6,774
Income taxes 3,069 2,409
------- -------
Income before cumulative effect of an
accounting change 6,222 4,365
Cumulative effect of an accounting change, net of
income tax benefit of $0 -- (1,215)
------- -------
Net earnings $ 6,222 $ 3,150
======= =======
Earnings per common share
Basic
Income before cumulative effect of
accounting change $ 1.02 $ 0.72
Net income $ 1.02 $ 0.52
Diluted
Income before cumulative effect of
accounting change $ 0.97 $ 0.68
Net income $ 0.97 $ 0.49
Basic weighted average number of common
shares outstanding 6,118 6,094
Diluted weighted average number of common
shares outstanding 6,447 6,380
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 SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended
(IN THOUSANDS) 2003 2002
------ ------
Net earnings $3,348 $2,681
Other comprehensive income:
Foreign currency translation adjustments (152) (167)
Net change in foreign exchange gains deferred in
accordance with SFAS No. 133 27 32
------ ------
Comprehensive income $3,223 $2,546
====== ======
Six Months Ended
2003 2002
------ ------
Net earnings $6,222 $3,150
Other comprehensive income:
Foreign currency translation adjustments 112 (92)
Net change in foreign exchange gains deferred in
accordance with SFAS No. 133 (36) 139
------ ------
Comprehensive income $6,298 $3,197
====== ======
See accompanying notes to condensed consolidated financial statements.
-5-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(In thousands, except share and per share data) 2003 2002
-------- --------
Common stock:
Balance at beginning of period $ 89 $ 88
Issuance of 25,234 and 48,677 shares of common
stock in 2003 and 2002, 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 241 541
Stock issued from treasury for stock option exercises (36) (262)
-------- --------
Balance at end of period 63,374 62,815
-------- --------
Retained earnings:
Balance at beginning of period 41,360 34,916
Net earnings for the period 6,222 3,150
Cash dividends of $0.12 and $0.03 per share paid on
common stock during 2003 and 2002, respectively (732) (183)
-------- --------
Balance at end of period 46,850 37,883
-------- --------
Accumulated - other comprehensive income:
Balance at beginning of period (625) (856)
Equity adjustment from foreign currency translation and
derivative instruments 76 47
-------- --------
Balance at end of period (549) (809)
-------- --------
Treasury stock:
Balance at beginning of period (36,552) (35,550)
Acquisition of 40,422 and 53,800 shares of common
stock, at cost, during 2003 and 2002, respectively (691) (788)
Issuance of 2,428 and 14,719 treasury shares pursuant to
stock option exercises, net, during 2003 and 2002,
respectively (2) 38
-------- --------
Balance at end of period (37,245) (36,300)
-------- --------
Total shareholders' equity $ 72,519 $ 63,677
======== ========
See accompanying notes to condensed consolidated financial statements.
-6-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS) 2003 2002
------- -------
Cash flows from operating activities:
Net earnings $ 6,222 $ 3,150
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,021 2,636
Cumulative effect of an accounting change -- 1,215
Changes in assets and liabilities:
Accounts receivable (1,040) (4,246)
Inventories (426) 3,395
Prepaid expenses (537) (603)
Accounts payable 381 1,530
Accrued expenses and other liabilities (2,447) (667)
Income taxes payable or receivable 816 77
------- -------
Net cash provided by operating activities 5,990 6,487
------- -------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,016) (2,741)
Net assets of business acquired -- (622)
Change in other assets and liabilities (94) 869
------- -------
Net cash used in investing activities (2,110) (2,494)
------- -------
Cash flows from financing activities:
Payment of cash dividend on common stock (732) (183)
Purchase of treasury stock (691) (788)
Proceeds from issuance of common stock 241 541
Net stock options exercised (38) (224)
Net proceeds (repayments) of borrowings under
revolving bank lines of credit 1,206 (3,808)
Repayments of long-term debt and lease obligations (1,650) (1,905)
------- -------
Net cash used in financing activities (1,664) (6,367)
------- -------
Equity adjustment from foreign currency translation 76 47
------- -------
Net increase (decrease) in cash and cash equivalents 2,292 (2,327)
Cash and cash equivalents at beginning of period 13,778 9,471
------- -------
Cash and cash equivalents at end of period 16,070 $ 7,144
======= =======
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,
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 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 4%
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
March 31, 2003 March 31, 2002
-------------- --------------
Products $40,127 $37,188
Services 8,617 11,372
------- -------
Total $48,744 $48,560
======= =======
Six Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Products $83,028 $72,266
Services 15,781 17,207
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Total $98,809 $89,473
======= =======
-8-
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.
The Company provides a reserve for estimated warranty and product service claims
based on historical loss experience and consideration of changes in products,
technology and warranty terms. A summary of the activity related to the warranty
reserve is as follows (in thousands):
SIX MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Balance at beginning of period $2,888 $2,867
Provisions for warranty 603 792
Claims paid (710) (524)
Adjustments (149) --
------ ------
Balance at end of period $2,632 $3,135
====== ======
(2) INCENTIVE STOCK PLAN
The Company has an incentive stock plan for key employees, officers, and
directors. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to its stock-based
employee compensation.
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net earnings, as reported $3,348 $2,681
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (162) (133)
------ ------
Pro forma net earnings $3,186 $2,548
====== ======
Earnings per share:
Basic - as reported $ 0.55 $ 0.44
Basic - pro forma $ 0.52 $ 0.42
Diluted - as reported $ 0.52 $ 0.42
Diluted - pro forma $ 0.49 $ 0.40
-9-
SIX MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Net earnings, as reported $6,222 $3,150
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (325) (267)
------ ------
Pro forma net earnings $5,897 $2,883
====== ======
Earnings per share:
Basic - as reported $ 1.02 $ 0.52
Basic - pro forma $ 0.96 $ 0.47
Diluted - as reported $ 0.97 $ 0.49
Diluted - pro forma $ 0.91 $ 0.45
During the six months ended March 31, 2003, the Company granted options to
purchase 160,250 shares of its common stock at an average price of $16.82 per
share. The per share weighted average value of stock options granted during this
period was $7.39 on the date of grant using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield of .66%, weighted
average risk-free interest rate of 3.8%, expected volatility factor of 35.6% and
a weighted-average expected life of eight years.
(3) 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 condensed 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 March 31, 2003 was $2,146,000, and the
market value of these contracts was $144,000 lower than face value.
-10-
(4) 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
March 31, 2003 March 31, 2002
------------------------------------------ ------------------------------------------
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 $ 3,348 6,111 $ 0.55 $ 2,681 6,091 $ 0.44
Effect of dilutive
securities--stock options -- 360 -- 322
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 3,348 6,471 $ 0.52 $ 2,681 6,413 $ 0.42
========================================== ==========================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE SIX MONTHS ENDED
March 31, 2003 March 31, 2002
------------------------------------------ ------------------------------------------
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 $ 6,222 6,118 $ 1.02 $ 3,150 6,094 $ 0.52
Effect of dilutive
securities--stock options -- 329 -- 286
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 6,222 6,447 $ 0.97 $ 3,150 6,380 $ 0.49
========================================== ==========================================
(5) 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 March 31, 2003 and September 30, 2002 were as
follows (in thousands):
MARCH 31, SEPTEMBER 30,
2003 2002
--------- -------------
Raw materials $12,919 $13,203
Work-in-process 2,136 1,720
Finished goods 9,612 9,318
------- -------
Total $24,667 $24,241
======= =======
-11-
(6) 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
--------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ----------
Domestic APC $39,717 $39,858
Europe APC 5,868 5,624
BHA Technologies 3,159 3,078
------- -------
Total $48,744 $48,560
======= =======
NET SALES
SIX MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ----------
Domestic APC $80,506 $72,247
Europe APC 11,279 10,889
BHA Technologies 7,024 6,337
------- -------
Total $98,809 $89,473
======= =======
Net sales represent revenues from sales to unaffiliated customers.
-12-
EARNINGS (LOSS) BEFORE INCOME TAXES
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ----------
Domestic APC $4,195 $3,620
Europe APC 32 289
BHA Technologies 772 276
------ ------
Total $4,999 $4,185
====== ======
SIX MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2003 2002
--------- ----------
Domestic APC $8,177 $6,082
Europe APC (191) 236
BHA Technologies 1,305 456
------ ------
Total $9,291 $6,774
====== ======
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For purposes of this "Management's Discussion and Analysis," as well as the
segment reporting information included in Note 6 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 sales 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.
The following table summarizes the Company's revenues by segment and, within the
Domestic APC segment, by sales group. Amounts are in thousands.
THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
Domestic APC Segment:
U.S. Fabric Filter $19,765 $20,329
U.S. Electrostatic Precipitator (ESP) 16,374 14,875
Export Sales 3,578 4,654
------- -------
Total Domestic APC Segment 39,717 39,858
Europe APC Segment 5,868 5,624
BHA Technologies Segment 3,159 3,078
------- -------
Total Revenues $48,744 $48,560
======= =======
SIX MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
Domestic APC Segment:
U.S. Fabric Filter $36,785 $39,260
U.S. Electrostatic Precipitator (ESP) 36,818 23,742
Export Sales 6,903 9,245
------- -------
Total Domestic APC Segment 80,506 72,247
Europe APC Segment 11,279 10,889
BHA Technologies Segment 7,024 6,337
------- -------
Total Revenues $98,809 $89,473
======= =======
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
Consolidated net sales for the six months ended March 31, 2003 ("fiscal 2003")
increased 10% to $98.8 million from $89.5 million for the same period in fiscal
2002. Consolidated sales for the quarter ended March 31, 2003 ("second quarter")
increased slightly to $48.7 million from $48.6 million in fiscal 2002.
-14-
Sales in the Domestic APC segment increased 11% for the first six months of
fiscal 2003 and decreased by less than 1% for the most recent quarter when
compared to the same periods in the prior year. Within this segment, the sales
of fabric filter replacement parts and services declined 6% for the six-month
period and 3% for the most recent quarter. The sales of electrostatic
precipitator ("ESP") parts and services increased 10% for the most recent
quarter and 55% for the first six-months of fiscal 2003 as compared to the prior
year. The Company's ESP business has continued to benefit from its favorable
competitive position in dealing with the operators of coal-fired boilers within
the U.S. electric utility market. Fifty percent of the Company's APC revenues
generated in the U.S. during the first six months of fiscal 2003 were derived
from the ESP business. This is not in line with the Company's historical trend
or its expectation for full year results. Export sales decreased 25% for the
first six-months of fiscal 2003 and 23% for the second quarter as compared to
the same periods in the prior year. The decline in sales of fabric filter parts
and services, both in the U.S. and for export, reflect the economic contraction
in the industrial and manufacturing sectors in the U.S. and international
economies.
Sales in the Company's Europe APC segment, when expressed in U.S. dollars
("USD"), increased by 4% for both the most recent quarter and for the first
six-months of fiscal 2003 as compared to prior year results. However, sales of
this segment actually declined by 10% for the first six-months of fiscal 2003
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 by 11% for the first six-months of fiscal 2003 and 3% in the second
quarter as compared to the prior year periods. The increase was primarily
attributable to incremental business in non-consumer apparel for military and
firefighting garments. Sales of ePTFE membrane for consumer apparel and HEPA
applications also increased modestly.
GROSS MARGIN
Consolidated gross margin was 31.4% of sales for the first six-months of fiscal
2003 compared to 30.5% for the same period in the prior year. In the second
quarter, gross margin was 32.4% of sales compared to 30.7% in the prior year.
The improvements were attributable to a more favorable mix of business, lower
manufacturing overheads and higher efficiency in plant utilization. In
particular, the significant increase in ESP production was accomplished with
only a modest increase in plant labor costs, contributing to the favorable gross
margin comparisons. BHA Technologies' gross margins benefited from favorable
product mix and increased plant throughput.
OPERATING EXPENSES
Operating expenses were $21.5 million (21.7% of sales) for the first six-months
of fiscal 2003 compared to $20.1 million (22.5% of sales) for the same period in
fiscal 2002. For the second quarter of fiscal 2003, operating expenses were
$10.7 million (21.9% of sales) compared to $10.5 million (21.7% of sales) for
the same period in the prior year. The 6.5% increase in operating expenses for
the first six-months of fiscal 2003 as compared to the same period in the prior
year was the result of normal wage increases together with $0.4 million of
additional depreciation expense related to the Company's ERP software
implementation and an increase in insurance costs. Additionally, the weakening
USD as compared to the Euro resulted in a $0.4 million increase in USD
denominated expenses of the Europe APC business segment. When expressed in local
currencies, operating expenses in Europe were essentially unchanged.
-15-
INTEREST EXPENSE
Interest expense for the first six-months of fiscal 2003 was $0.3 million
compared to $0.4 million for the same period in the prior year. Average
borrowings decreased from $24.9 million in the first half of fiscal 2002 to
$20.5 million during the most recent six-months. Additionally, the average
interest rate on the Company's borrowings decreased from 3.9% in the fiscal 2002
period to 3.3% for the first half of fiscal 2003. All of the Company's
borrowings are at variable interest rates.
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $8.2 million for the first
six-months of fiscal 2003 compared to $6.1 million for the same period in the
prior year. For the second quarter of fiscal 2003, pre-tax earnings for this
segment were $4.2 million compared to $3.6 million in the prior year. The
improvement in the profitability of this business segment reflects the execution
of significantly higher ESP volume with only modest increases in the Company's
cost structure. Sales of 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. As such, the results of operations for the
first half of the fiscal year are not indicative of results to be expected for a
full year.
The Europe APC segment reported a pre-tax loss of $0.2 million for the first
six-months of fiscal 2003 compared to pre-tax earnings of $0.2 million for the
same period in the prior year. In the most recent quarter, this business segment
generated pre-tax earnings of $32,000 compared to pre-tax earnings of $0.3
million in the same quarter during the prior year. The unfavorable results
reflect the 10% decrease in sales volumes (when expressed in local currencies).
BHA Technologies' pre-tax earnings for the first six-months of fiscal 2003 were
$1.3 million compared to pre-tax earnings of $0.5 million for the same period in
the prior year. For the second quarter of fiscal 2003, this business segment
generated pre-tax earnings of $0.8 million compared to pre-tax earnings of $0.3
million for the same quarter in the prior year. The improvement is consistent
with the 11% increase in shipments to third party customers together with
improved product mix. Second quarter earnings were also favorably impacted by
reduced operating costs including lower bad debt, product development and
selling expenses.
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 effective income tax rate for the first six-months of fiscal 2003 was 33.0%
compared to 35.6% for the same period in the prior year. The rate for the
current year is generally consistent with the actual rate of tax for all of
fiscal 2002.
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NET EARNINGS
Net earnings for the first six-months of fiscal 2003 were $6.2 million ($0.97
per diluted share) compared to earnings (exclusive of the cumulative effect of
the accounting change) of $4.4 million ($0.68 per diluted share) for the same
period in fiscal 2002. Net earnings in the second quarter of fiscal 2003 were
$3.3 million ($0.52 per diluted share) compared to earnings of $2.7 million
($0.42 per diluted share) for the same period in the prior year. The average
number of common and common equivalent shares increased by approximately 0.1
million to 6.5 million shares due to the impact of the Company's higher share
prices on the number of common equivalent shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased from $46.6 million at September 30, 2002 to $52.1
million at March 31, 2003. The current ratio at March 31, 2003 and September 30,
2002 was 3.2 and 2.8, respectively. The Company's cash increased from $13.8
million at September 30, 2002 to $16.1 million at March 31, 2003.
During the six months ended March 31, 2003, the Company generated $6.0 million
in cash from operating activities compared to $6.5 million in the first six
months of the prior year.
Investing activities resulted in a net use of cash of $2.1 million and $2.5
million for the six months ended March 31, 2003 and 2002, respectively. The
investment in capital expenditures was $2.0 million for the first six months of
fiscal 2003 and $2.7 million for the first six months of fiscal 2002. Fiscal
2002 investing activities also included $0.6 million related to the acquisition
of certain assets of a fabric filter manufacturing company in Mexico.
During the first six months of fiscal 2003, the Company used cash generated from
operations to pay dividends of $0.7 million, repurchase $0.7 million of the
Company's common stock, and reduce bank borrowings by $0.4 million. During the
first six months of fiscal 2002, the Company's financing activities included
$5.7 million in net debt repayments and $0.8 million used to repurchase the
Company's common stock.
At March 31, 2003, BHA had unused lines of credit of $18.5 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2004; $8.1 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 is in discussions with its bankers
regarding obtaining an extension of its revolving credit facility and
anticipates that such agreement will be completed prior to June 30, 2003. The
Company believes that cash flows from operations and the extensions of the
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.
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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 financial condition of BHA has been further strengthened over the last 24
months providing the Company with substantial capital to invest in growth areas
and improve its overall position in the key markets it serves. During this
period, the Company has invested in those areas that it believes will provide
the greatest advantage in the long term. The Company believes that its
businesses are diversified and that it is positioned well to achieve its
long-term financial goals.
The record earnings for the first six-months of the current fiscal year have
been driven by sales increases of both ESP replacement parts and service work
for electric utility customers and ePTFE membranes to customers outside of air
pollution control. The strength in these areas has been partially offset by the
decline in the Company's worldwide fabric filter business. The weakness in
fabric filter aftermarket sales is expected to continue and, based on historical
trending, a profit recovery in this area will likely trail an overall
improvement in manufacturing conditions by as much as six months.
For the first six-months of the current fiscal year, fifty percent of the
Company's APC revenues in the U.S. were derived from the ESP business. This is
not in line with the Company's historical trend or its expectation for full year
results. Consistent with previous years, the Company expects that ESP
replacement parts and service sales for the last six months of the fiscal year
will be lower than the first six months. Due to the timing of order execution,
the Company expects that ESP replacement parts and service sales for the last
six months of the current year will be less than the prior year.
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The Company believes it is well positioned to have long-term success in all of
its businesses. Near-term quarterly results are expected to be heavily
influenced by the timing of the receipt and execution of ESP rebuild orders and
ePTFE membrane sales to customers in applications outside of air pollution
control. One of the Company's goals is to deliver consistent annual earnings
growth over time. The Company expects, however, that near-term quarterly
earnings will continue to vary based on the timing of larger orders.
The results for the first six-months of the current year have positioned the
Company to achieve its internal financial goals for the year. For the remainder
of the current fiscal year, the focus will be on expanding growth areas while
managing the cost side of its business to position the Company for incremental
profit growth during fiscal 2004 and beyond. With respect to the upcoming
quarter, the following is specific guidance being provided:
o For the third 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 5%.
o Earnings for the third quarter of fiscal 2003 are expected to be in the
range of $.23 to $.28 per diluted share as compared to $.32 reported
for the same period in the prior year.
o If the Company achieves the earnings targets included in the stated
range, its nine-month earnings per diluted share will be in the range
of $1.20 to $1.25. This compares favorably to $1.00 per diluted share
earned for the first nine months of last year.
BACKLOG
On March 31, 2003, the Company's backlog of orders was $51.3 million compared to
$43.5 million at March 31, 2002. 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 March 31, 2003 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 March 31, 2002 backlog. The total order backlog is
higher at March 31, 2003 than in 2002 when measured in a comparable manner due
to the timing of receipts of orders for ESP parts and services to be shipped for
fall 2003 and spring 2004 project work. Approximately $19.8 million of the March
31, 2003 backlog is scheduled to ship after September 30, 2003.
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, general U.S. and international business conditions 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 for the
fiscal year ended September 30, 2002. The Company cautions that the foregoing
list of important factors is not exclusive.
-19-
ITEM 3. 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 March 31, 2003, 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 European affiliates.
Such amounts are subject to translation exposure. At March 31, 2003, 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 March 31, 2003, the notional amount
of such forward exchange contracts was approximately $2.1 million and the market
value of these contracts was $144,000 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 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 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 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.
ITEM 4. CONTROLS AND PROCEDURES
CEO and CFO Certifications. Immediately following the "Signatures" section of
this quarterly report are the certifications of the CEO and the CFO required by
Rules 13a-14 and 15d-14 the Securities Exchange Act of 1934 (the
"Certifications"). This section of the quarterly report contains the information
concerning the evaluation of Disclosure Controls and changes to Internal
Controls referred to in the Certifications and this information should be read
in conjunction with the Certifications for a more complete understanding of the
topics presented.
Disclosure Controls and Internal Controls. Disclosure Controls are procedures
that are designed for the purpose of ensuring that information required to be
disclosed in the Company's reports filed under the Securities Exchange Act of
1934 (such as this quarterly report), is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Internal Controls are designed for the purpose of providing reasonable assurance
that
-20-
the Company's transactions are properly authorized, recorded and reported
and that the Company's assets are safeguarded from improper use to permit the
preparation of the Company's financial statements in conformity with generally
accepted accounting principles.
Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that the Company's Disclosure
Controls or Internal Controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. Further, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Because of these
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Changes to Internal Controls. In accordance with the SEC's requirements, the CEO
and the CFO note that, since the date of their last evaluation, there have been
no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions regarding Disclosure Controls. Based upon the required evaluation of
Disclosure Controls, the CEO and CFO have concluded that, subject to the
limitations noted above, the Company's Disclosure Controls are effective to
ensure that material information relating to the Company and its consolidated
subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when the Company's periodic reports are being
prepared.
-21-
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On February 18, 2003, at the Annual Meeting of Shareholders of BHA Group
Holdings, Inc.
(a) The following persons were elected as Directors by the following vote:
FOR AUTHORITY WITHHELD
Don H. Alexander 5,132,047 43,580
Robert D. Freeland 5,132,047 43,580
James E. Lund 4,125,229 1,050,398
Thomas A. McDonnell 5,131,888 43,739
Lamson Rheinfrank, Jr. 4,125,229 1,050,398
James J. Thome 4,125,069 1,050,558
(b) Voting for the ratification of KPMG LLP as the independent auditors of the
Company for the fiscal year ending September 30, 2003 was as follows:
FOR AGAINST WITHHELD
5,128,612 41,988 5,027
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:
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2003.
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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)
April 23, 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
-23-
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: April 23, 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: April 23, 2003 /s/ James C. Shay
-----------------
James C. Shay,
Senior Vice President, Finance
and Administration
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