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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
June 30, 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 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 No [X]
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As of July 14, 2003, the number of shares outstanding of the Registrant's Common
Stock was 6,086,661.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30,
(IN THOUSANDS EXCEPT SHARE DATA) 2003 SEPTEMBER 30,
ASSETS (UNAUDITED) 2002
---------------- ------------------
Current assets:
Cash and cash equivalents $19,113 $ 13,778
Accounts receivable, less allowance for doubtful receivables
of $1,940 and $1,619, respectively 26,514 28,637
Inventories (note 5) 24,977 24,241
Income taxes receivable -- 287
Prepaid expenses 1,998 1,998
Deferred income taxes 3,179 3,179
---------------- -------------------
Total current assets 75,781 72,120
---------------- -------------------
Property, plant and equipment, at cost 67,612 65,762
Less accumulated depreciation and amortization (41,246) (38,013)
---------------- -------------------
Net property, plant and equipment 26,366 27,749
---------------- -------------------
Property held under capital leases 5,064 5,358
Other assets 8,001 8,234
---------------- -------------------
$115,212 $113,461
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and lease obligations $ 2,542 $ 2,479
Accounts payable 7,745 9,516
Income taxes payable 637 --
Accrued expenses and other current liabilities 11,443 13,569
---------------- -------------------
Total current liabilities 22,367 25,564
---------------- -------------------
Long-term deferred income taxes 1,940 1,940
Long-term debt, excluding current installments 11,426 11,687
Long-term lease obligations, excluding current installments 5,800 6,088
Other liabilities 548 741
Shareholders' equity:
Common stock $0.01 par value. Authorized 20,000,000 shares:
Issued 8,923,594 and 8,885,550 shares, respectively 89 89
Additional paid-in capital 63,259 63,169
Retained earnings 48,610 41,360
Accumulated - other comprehensive income (396) (625)
Less cost of 2,836,933 and 2,757,743 shares, respectively, of
common stock in treasury (38,431) (36,552)
---------------- -------------------
Total shareholders' equity 73,131 67,441
---------------- -------------------
$115,212 $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 JUNE 30, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---- ----
Net sales $38,984 $41,048
Cost of sales 26,186 28,132
------------------- --------------------
Gross margin 12,798 12,916
------------------- --------------------
Operating expenses
Selling and advertising expense 5,144 5,286
General and administrative expense 4,940 4,612
------------------- --------------------
Total operating expenses 10,084 9,898
------------------- --------------------
Operating income 2,714 3,018
------------------- --------------------
Interest expense, net 98 117
------------------- --------------------
Earnings before income taxes 2,616 2,901
------------------- --------------------
Income taxes 856 834
------------------- --------------------
Net earnings 1,760 $2,067
=================== ====================
Basic earnings per common share $ 0.29 $ 0.34
Diluted earnings per common share $ 0.27 $ 0.32
Basic weighted average number of common shares outstanding 6,095 6,117
Diluted weighted average number of common shares outstanding 6,562 6,464
See accompanying notes to condensed consolidated financial statements.
-3-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---- ----
Net sales $ 137,793 $ 130,521
Cost of sales 93,976 90,282
--------- ---------
Gross margin 43,817 40,239
--------- ---------
Operating expenses
Selling and advertising expense 15,929 15,590
General and administrative expense 15,616 14,455
--------- ---------
Total operating expenses 31,545 30,045
--------- ---------
Operating income 12,272 10,194
--------- ---------
Interest expense, net 365 519
--------- ---------
Earnings before income taxes and the
cumulative effect of accounting change 11,907 9,675
Income taxes 3,925 3,243
--------- ---------
Income before cumulative effect of an
accounting change 7,982 6,432
Cumulative effect of an accounting change, net of
income tax benefit of $0 -- (1,215)
--------- ---------
Net earnings $ 7,982 $ 5,217
========= =========
Earnings per common share
Basic
Income before cumulative effect of
accounting change $ 1.31 $ 1.05
Net income $ 1.31 $ 0.85
Diluted
Income before cumulative effect of
accounting change $ 1.23 $ 1.00
Net income $ 1.23 $ 0.82
Basic weighted average number of common
shares outstanding 6,111 6,102
Diluted weighted average number of common
shares outstanding 6,474 6,401
See accompanying notes to condensed consolidated financial statements.
-4-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three Months Ended
(IN THOUSANDS) 2003 2002
---- ----
Net earnings $ 1,760 $ 2,067
Other comprehensive income:
Foreign currency translation adjustments 235 127
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (82) (223)
------- -------
Comprehensive income $ 1,913 $ 1,971
======= =======
Nine Months Ended
2003 2002
------- -------
Net earnings $ 7,982 $ 5,217
Other comprehensive income:
Foreign currency translation adjustments 347 35
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (118) (84)
------- -------
Comprehensive income $ 8,211 $ 5,168
======= =======
See accompanying notes to condensed consolidated financial statements.
-5-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 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 38,044 and 62,697 shares of common
stock in 2003 and 2002, respectively -- 1
-------- --------
Balance at end of period 89 89
-------- --------
Additional paid-in capital:
Balance at beginning of period 63,169 62,536
Excess over par value of common stock issued 368 675
Stock issued from treasury for stock option exercises (278) (299)
-------- --------
Balance at end of period 63,259 62,912
-------- --------
Retained earnings:
Balance at beginning of period 41,360 34,916
Net earnings for the period 7,982 5,217
Cash dividends of $.12 and $.03 per share paid on
common stock during 2003 and 2002, respectively (732) (183)
-------- --------
Balance at end of period 48,610 39,950
-------- --------
Accumulated - other comprehensive income:
Balance at beginning of period (625) (856)
Equity adjustment from foreign currency translation and
derivative instruments 229 (49)
-------- --------
Balance at end of period (396) (905)
-------- --------
Treasury stock:
Balance at beginning of period (36,552) (35,550)
Acquisition of 94,622 and 68,358 shares of common
stock, at cost, during 2003 and 2002, respectively (1,846) (1,043)
Issuance of 15,432 and 17,032 treasury shares pursuant to
stock option exercises, net, during 2003 and 2002,
respectively (33) 41
-------- --------
Balance at end of period (38,431) (36,552)
-------- --------
Total shareholders' equity $ 73,131 $ 65,494
======== ========
See accompanying notes to condensed consolidated financial statements.
-6-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS) 2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 7,982 $ 5,217
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,423 3,930
Cumulative effect of an accounting change -- 1,215
Changes in assets and liabilities:
Accounts receivable 2,123 (513)
Inventories (736) 2,812
Prepaid expenses -- (354)
Accounts payable (1,771) (422)
Accrued expenses and other liabilities (2,126) 1,104
Income taxes payable or receivable 924 (359)
-------- --------
Net cash provided by operating activities 10,819 12,630
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,536) (3,870)
Net assets of business acquired -- (622)
Change in other assets and liabilities (170) 206
-------- --------
Net cash used in investing activities (2,706) (4,286)
-------- --------
Cash flows from financing activities:
Payment of cash dividends on common stock (732) (183)
Purchase of treasury stock (1,846) (1,043)
Proceeds from issuance of common stock 368 676
Net stock options exercised (311) (258)
Net proceeds (repayments) from borrowings under
revolving bank lines of credit 1,789 (2,697)
Repayments of long-term debt and lease obligations (2,275) (1,905)
-------- --------
Net cash used in financing activities (3,007) (5,410)
-------- --------
Equity adjustment from foreign currency translation 229 (49)
-------- --------
Net increase in cash and cash equivalents 5,335 2,885
Cash and cash equivalents at beginning of period 13,778 9,471
-------- --------
Cash and cash equivalents at end of period $ 19,113 $ 12,356
======== ========
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 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
June 30, 2003 June 30, 2002
------------- -------------
Products $32,279 $33,785
Services 6,705 7,263
------------------- ---------------------
Total $38,984 $41,048
=================== =====================
Nine Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Products $115,207 $106,051
Services 22,586 24,470
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Total $137,793 $130,521
=================== =====================
-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):
NINE MONTHS ENDED
-----------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Balance at beginning of period $2,888 $2,867
Provisions for warranty 1,016 1,176
Claims paid (1,306) (829)
Adjustments (149) --
--------------------- ---------------------
Balance at end of period $2,449 $3,214
===================== =====================
(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.
-9-
THREE MONTHS ENDED
------------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Net earnings, as reported $1,760 $2,067
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (161) (133)
---------------------- ---------------------
Pro forma net earnings $1,599 $1,934
====================== =====================
Earnings per share:
Basic - as reported $0.29 $0.34
Basic - pro forma $0.26 $0.32
Diluted - as reported $0.27 $0.32
Diluted - pro forma $0.24 $0.30
NINE MONTHS ENDED
-----------------
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Net earnings, as reported $7,982 $5,217
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (482) (400)
---------------------- ---------------------
Pro forma net earnings $7,500 $4,817
====================== =====================
Earnings per share:
Basic - as reported $1.31 $0.85
Basic - pro forma $1.23 $0.79
Diluted - as reported $1.23 $0.82
Diluted - pro forma $1.16 $0.75
During the nine months ended June 30, 2003, the Company granted options to
purchase 162,250 shares of its common stock at an average price of $16.88 per
share. The per share weighted average value of stock options granted during this
period was $7.18 on the date of grant using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield of .63%, weighted
average risk-free interest rate of 3.4%, expected volatility factor of 34.9% 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 consolidated balance sheet. The related gains and
losses are deferred in shareholders' equity (as a component of comprehensive
income). These deferred gains and losses are recognized in income in the period
in which the related purchases being hedged are acquired. The notional amount of
such contracts at June 30, 2003 was $2,696,000, and the market value of these
contracts was $226,000 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
June 30, 2003 June 30, 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 $ 1,760 6,095 $0.29 $ 2,067 6,117 $ 0.34
Effect of dilutive securities--
stock options -- 467 -- 347
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 1,760 6,562 $ 0.27 $ 2,067 6,464 $ 0.32
========================================== ==========================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
June 30, 2003 June 30, 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 $ 7,982 6,111 $ 1.31 $ 5,217 6,102 $ 0.85
Effect of dilutive securities--
stock options -- 363 -- 299
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 7,982 6,474 $ 1.23 $ 5,217 6,401 $ 0.82
========================================== ==========================================
(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 June 30, 2003 and September 30, 2002 were as
follows (in thousands):
JUNE 30, SEPTEMBER 30,
2003 2002
----------------------- -----------------------
Raw materials $13,257 $13,203
Work-in-process 2,971 1,720
Finished goods 8,749 9,318
----------------------- -----------------------
Total $24,977 $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 has also developed markets 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.
The supply by BHA Technologies of BHA-TEX(R) fabrics to the Company's APC
business segments represents a significant portion of its overall revenues.
These inter-segment sales are at gross margins which are generally consistent
with BHA Technologies' average margins on sales to its third party customers.
The sales dollars for the BHA Technologies' segment as reflected in the table
below include such inter-segment transfers of BHA-TEX fabrics. Other sales of
products and services between the Company's business segments are not material
and as such, are excluded from the net sales amounts.
Reportable segment data was as follows (in thousands):
NET SALES
THREE MONTHS ENDED
----------------------------------------------------
JUNE 30, JUNE 30,
2003 2002
----------------------- -----------------------
Domestic APC $28,607 $32,056
Europe APC 6,820 5,421
BHA Technologies 7,022 6,118
Inter-Segment Eliminations (3,465) (2,547)
----------------------- -----------------------
Total $38,984 $41,048
======================= =======================
-12-
NET SALES
NINE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2003 2002
---------------------- -----------------------
Domestic APC $109,113 $104,303
Europe APC 18,099 16,310
BHA Technologies 20,247 17,112
Inter-Segment Eliminations (9,666) (7,204)
---------------------- -----------------------
Total $137,793 $130,521
====================== =======================
EARNINGS BEFORE INCOME TAXES
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2003 2002
----------------------- -----------------------
Domestic APC $1,735 $2,426
Europe APC 242 190
BHA Technologies 639 285
----------------------- -----------------------
Total $2,616 $2,901
======================= =======================
NINE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2003 2002
----------------------- -----------------------
Domestic APC $9,912 $8,508
Europe APC 51 426
BHA Technologies 1,944 741
----------------------- -----------------------
Total $11,907 $9,675
======================= =======================
-13-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 revenues to
customers in the U.S. and exports to customers in Canada, Latin America, and
Asia. Europe APC represents all air pollution control business for which the
products or services are sold or managed primarily from Europe. Such revenues
are typically generated in Europe, Northern Africa and the Middle East. BHA
Technologies, a subsidiary engaged in the production and sale of ePTFE membrane
for both APC and non-APC applications, represents BHA's third business segment.
The following table summarizes the Company's revenues from third party sales by
segment and, within the Domestic APC segment, by sales group. Amounts are in
thousands.
THREE MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30,
2003 2002
------------------- -------------------
Domestic APC Segment:
U.S. Fabric Filter $17,739 $18,229
U.S. Electrostatic Precipitator (ESP) 6,269 9,797
Export Sales 4,599 4,030
------------------- -------------------
Total Domestic APC Segment 28,607 32,056
Europe APC Segment 6,820 5,421
BHA Technologies Segment 3,557 3,571
------------------- -------------------
Total Revenues $38,984 $41,048
=================== ===================
NINE MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30,
2003 2002
------------------- -------------------
Domestic APC Segment:
U.S. Fabric Filter $54,524 $57,489
U.S. Electrostatic Precipitator (ESP) 43,087 33,539
Export Sales 11,502 13,275
------------------- -------------------
Total Domestic APC Segment 109,113 104,303
Europe APC Segment 18,099 16,310
BHA Technologies Segment 10,581 9,908
------------------- -------------------
Total Revenues $137,793 $130,521
=================== ===================
-14-
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
Consolidated net sales for the nine months ended June 30, 2003 ("fiscal 2003")
increased 6% to $137.8 million from $130.5 million for the same period in fiscal
2002. Consolidated net sales for the quarter ended June 30, 2003 ("third
quarter") decreased 5% to $39.0 million from $41.0 million for the third quarter
in fiscal 2002. For the first nine months of fiscal 2003, sales increased in
each of the Company's business segments as compared to the same period in the
prior year. The decline in sales for the most recent quarter as compared to the
same period in the prior year was primarily attributable to the timing of sales
of ESP products and services as the Company executed record ESP volume during
the second quarter of the current year.
Sales in the Domestic APC segment increased 5% for the first nine months of
fiscal 2003 but declined 11% for the third quarter compared to the same periods
in fiscal 2002. Within this segment, the sales of fabric filter replacement
parts and services declined 5% for the nine-month period and 3% for the most
recent quarter as compared to the same periods in the prior year. The sales of
electrostatic precipitator ("ESP") parts and services increased 28% for the
first nine months of fiscal 2003 but decreased 36% for the most recent quarter
as compared to the prior year. The Company's ESP business has continued to
benefit from its favorable competitive position in dealing with operators of
coal-fired boilers within the U.S. electric utility market. The sales decline
for the third quarter is attributable to timing with respect to major project
work. Export sales decreased 13% for the first nine-months of fiscal 2003 but
increased 14% for the most recent quarter as compared to the same periods in the
prior year. The year-to-date results were adversely impacted by decreased sales
in Latin America. For the most recent quarter, higher sales in the Pacific Rim
and Asia more than offset the decline in sales into Latin America.
Sales in the Company's Europe APC segment, when expressed in U.S. dollars
("USD"), increased by 11% for the first nine months of fiscal 2003 and 26% for
the most recent quarter as compared to prior year results. However, sales of
this segment actually declined by 8% for the first nine months of fiscal 2003
when reported in Euros. This decline reflects the slow-down in manufacturing
activity in Europe as well as timing of major projects.
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by 7% for the first nine months of fiscal 2003 and were essentially
unchanged for the most recent quarter when compared to the same periods in
fiscal 2002. The increase in year to date sales was primarily attributable to
incremental business in industrial products and non-consumer apparel for
military garments.
GROSS MARGIN
Consolidated gross margin was 31.8% of sales for the first nine months of fiscal
2003 compared to 30.8% for the same period in the prior year. For the third
quarter, consolidated gross margin was 32.8% of sales compared to 31.5% in the
third quarter of the prior year. For the nine-month period, gross margins as a
percentage of sales have improved in each of the Company's business segments.
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 cost, contributing to the favorable gross
margin comparisons. BHA Technologies' gross margins benefited from favorable
product mix and increased plant throughput. The increased throughput resulted
from higher shipments to third parties as well as increased shipments of ePTFE
membrane to the Company's APC business segments.
-15-
OPERATING EXPENSES
Operating expenses were $31.5 million (22.9% of sales) for the first nine months
of fiscal 2003 compared to $30.0 million (23.0% of sales) for the same period in
fiscal 2002. For the third quarter of fiscal 2003, operating expenses were $10.1
million (25.9% of sales) compared to $9.9 million (24.1% of sales) for the same
period in the prior year. The 5% increase in operating expenses for the first
nine months of fiscal 2003 as compared to the same period in the prior year was
the result of normal wage increases together with $0.6 million of additional
depreciation expense related to the Company's ERP software implementation and a
$0.2 million increase in insurance costs. Additionally, the weakening USD
resulted in a $0.9 million increase in USD denominated expenses of the Europe
APC business segment as compared to a $0.3 million increase when expressed in
local currencies.
INTEREST EXPENSE
Interest expense is presented net of interest earned on short-term investments.
Net interest expense was $0.4 million for the first nine months of fiscal 2003
compared to $0.5 million for the same period in the prior year. Average
borrowings decreased from $24.0 million in the first nine months of fiscal 2002
to $20.2 million for the most recent nine-month period. Additionally, the
average rate on the Company's borrowings decreased from 3.5% in fiscal 2002 to
3.2% in 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 $9.9 million for the first
nine months of fiscal 2003 compared to $8.5 million for the same period in the
prior year. For the third quarter of fiscal 2003, pre-tax earnings for this
segment were $1.7 million compared to $2.4 million for the third quarter of
fiscal 2002. For the first nine months, the improvement in pre-tax profitability
reflects the higher sales volume and improved product mix. The decline in
earnings for the most recent quarter is the result of the 11% decrease in sales.
The Europe APC segment reported pre-tax earnings of $0.1 million for the first
nine months of fiscal 2003 compared to pre-tax earnings of $0.4 million for the
same period in the prior year. In the most recent quarter, this business segment
generated pre-tax earnings of $0.2 million which was consistent with earnings
during the fiscal 2002 third quarter. The lower earnings for the first nine
months of the current year is consistent with the 8% decline in sales volumes
(when expressed in local currencies).
BHA Technologies' pre-tax earnings for the first nine months of fiscal 2003 were
$1.9 million compared to $0.7 million for the same period in the prior year. For
the third quarter of fiscal 2003, this business segment generated pre-tax
earnings of $0.6 million compared to pre-tax earnings of $0.3 million for the
same quarter in the prior year. The improvement in profitability reflects
slightly higher sales to third party customers together with improved product
mix. Additionally, BHA Technologies has benefited from increased shipments of
ePTFE membrane to the Company's APC business segments.
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.
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INCOME TAXES
The consolidated effective income tax rate for the first nine months of fiscal
2003 was 33.0% compared to 33.5% for the same period in the prior year. The
consolidated effective income tax rates for the three months ended June 30, 2003
and 2002 were 32.7% and 28.7%, respectively. The effective income tax rate
recognized during the first nine months of fiscal 2003 is generally consistent
with the 33.4% rate incurred for all of fiscal 2002.
NET EARNINGS
Net earnings for the first nine months of fiscal 2003 were $8.0 million ($1.23
per diluted share) compared to earnings (exclusive of the cumulative effect of
the accounting change) of $6.4 million ($1.00 per diluted share) for the same
period in fiscal 2002. Net earnings in the third quarter of fiscal 2003 were
$1.8 million ($0.27 per diluted share) compared to earnings of $2.1 million
($0.32 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 shares to 6.6 million shares for the most recent quarter due to the
impact of the Company's higher share prices on the number of common equivalent
shares.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased from $46.6 million at September 30, 2002 to $53.4
million at June 30, 2003. The current ratio at June 30, 2003 and September 30,
2002 was 3.4 and 2.8, respectively. The Company's cash increased from $13.8
million at September 30, 2002 to $19.1 million at June 30, 2003.
During the nine months ended June 30, 2003, the Company generated $10.8 million
in cash from operating activities compared to $12.6 million in the first nine
months of the prior year. Deposits received from customers in the fourth quarter
of fiscal 2002 on projects executed during fiscal 2003 resulted in the decrease
in operating cash flow reported for the nine-month periods.
Investing activities resulted in a net use of cash of $2.7 million and $4.3
million for the nine months ended June 30, 2003 and 2002, respectively. The
investment in capital expenditures was $2.5 million for the first nine months of
fiscal 2003 and $3.9 million for the first nine 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 nine months of fiscal 2003, the Company used cash generated
from operations to repurchase $1.8 million of the Company's common stock, pay
dividends to shareholders of $0.7 million, reduce bank debt by $0.5 million, and
to increase its cash balances by $5.3 million. During the first nine months of
fiscal 2002, the Company's financing activities included the repayment of $4.6
million of bank debt and repurchases of the Company's common stock in the amount
of $1.0 million.
At June 30, 2003, BHA had unused lines of credit of $19.3 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2006; $7.5 million under an amortizing term loan with a
final maturity in 2006; a European revolving credit facility of $7.0 million
with a maturity on April 30, 2006, 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 the credit lines will be sufficient to meet its capital needs for the
foreseeable future.
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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 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 earnings performance for the first nine 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
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trending, a profit recovery in this area will likely trail an overall
improvement in manufacturing conditions by several months.
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 quarterly earnings will
continue to vary based on the timing of larger orders.
The results for the first nine months of the current year have positioned the
Company to achieve its financial goals for the year. With respect to the
upcoming quarter, the following is specific guidance being provided:
o For the fourth quarter of fiscal 2003, the Company anticipates that
consolidated net sales will be higher than the same period in the
prior year by as much as 5%.
o Earnings for the fourth quarter of fiscal 2003 are expected to be in
the range of $.23 to $.28 per diluted share as compared to $.22
reported for the same period in the prior year.
o If the Company meets the earnings targets included in the stated
range, its full year fiscal 2003 earnings per diluted share will be a
record in the range of $1.46 to $1.51.
BACKLOG
BHA's backlog was $59.1 million at June 30, 2003 compared to a backlog of $39.9
million at June 30, 2002 and $51.3 million at March 31, 2003. Approximately
$14.0 million of the June 30, 2003 backlog is scheduled to ship after
September 30, 2004.
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 on Form 10-K for the
fiscal year ended September 30, 2002. The Company cautions that the foregoing
list of important factors is not exclusive.
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 June 30, 2003, a 1%
fluctuation in market rates would impact interest expense by approximately
$190,000 annually.
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EXCHANGE RATES
The Company views its equity investment in a foreign subsidiary as a long-term
investment and does not hedge the translation exposures relative to such equity
investments.
In addition to its equity investment, the Company from time-to-time has U.S.
dollar denominated trade payables and advances due from its European affiliates.
Such amounts are subject to translation exposure. At June 30, 2003, the amount
of such unhedged exposures was approximately $1.0 million primarily related to
its affiliates in the European Common Market.
FORWARD EXCHANGE CONTRACTS
BHA periodically enters into forward exchange contracts with commercial banks in
order to fix the currency exchange rate related to intercompany transactions
with its foreign subsidiaries. Changes in the value of these instruments due to
currency movements offset the foreign exchange gains and losses of the
corresponding intercompany transactions. At June 30, 2003, the notional amount
of such forward exchange contracts was approximately $2.7 million and the market
value of these contracts was $226,000 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 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
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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 as of June 30, 2003,
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.
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(99.1) Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(99.2) Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(99.3) Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.4) Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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REPORTS ON FORM 8-K:
On April 23, 2003, the Company filed a Form 8-K under Item 9 furnished pursuant
to Item 12 which included a copy of its press release dated that same day in
which the Company announced its earnings for the quarter and six-month period
ended March 31, 2003. No other reports on Form 8-K were filed by the Company
during the quarter ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BHA GROUP HOLDINGS, INC.
(Registrant)
July 22, 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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BHA GROUP HOLDINGS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(31.1) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.