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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
December 31, 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
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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 January 15, 2004, the number of shares outstanding of the Registrant's
Common Stock was 6,145,059.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, SEPTEMBER 30,
ASSETS 2003 2003
------ ------------------ ------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 9,768 $18,805
Accounts receivable, less allowance for doubtful receivables
of $2,109 and $2,026, respectively 30,908 28,823
Inventories (note 6) 27,109 23,480
Prepaid expenses 2,081 1,342
Deferred income taxes 3,804 3,804
------------------ -------------------
Total current assets 73,670 76,254
------------------ -------------------
Property, plant and equipment, at cost 68,632 67,802
Less accumulated depreciation and amortization 43,293 42,037
------------------ -------------------
Net property, plant and equipment 25,339 25,765
------------------ -------------------
Property held under capital leases 4,867 4,967
Other assets 9,674 9,702
------------------ -------------------
$113,550 $116,688
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and lease obligations $ 2,275 $ 2,494
Accounts payable 6,612 8,393
Income taxes payable 26 1,345
Accrued expenses and other current liabilities 12,690 13,753
------------------ -------------------
Total current liabilities 21,603 25,985
------------------ -------------------
Long-term deferred income taxes 2,589 2,588
Long-term debt, excluding current installments 7,926 6,508
Long-term lease obligations, excluding current installments 5,400 5,730
Other liabilities 435 441
Shareholders' equity:
Common stock $0.01 par value, authorized 20,000,000
shares: Issued 8,956,182 and 8,931,411 shares,
respectively 90 89
Additional paid in capital 64,338 63,627
Retained earnings 50,624 50,578
Accumulated - other comprehensive income (422) (411)
Less cost of 2,811,123 and 2,837,633 shares, respectively, of
common stock in treasury (39,033) (38,447)
------------------ -------------------
Total shareholders' equity 75,597 75,436
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$113,550 $116,688
================== ===================
See accompanying notes to condensed consolidated financial statements.
-2-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---- ----
Net sales $42,667 $50,065
Cost of sales 27,183 34,839
---------------- -----------------
Gross margin 15,484 15,226
---------------- -----------------
Operating expenses
Selling and advertising expense 5,380 5,402
General and administrative expense 5,318 5,403
---------------- -----------------
Total operating expenses 10,698 10,805
---------------- -----------------
Operating income 4,786 4,421
Interest expense, net 98 129
---------------- -----------------
Earnings before income taxes 4,688 4,292
Income taxes 1,572 1,418
---------------- -----------------
Net earnings $3,116 $2,874
================ =================
Basic earnings per common share $ 0.51 $ 0.47
Diluted earnings per common share $ 0.47 $ 0.45
Basic weighted average number of common shares outstanding 6,126 6,126
Diluted weighted average number of common shares outstanding 6,579 6,436
See accompanying notes to condensed consolidated financial statements.
-3-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS) 2003 2002
---- ----
Net earnings $3,116 $2,874
Other comprehensive income:
Foreign currency translation adjustments 376 264
Net change in foreign exchange gains (losses)
deferred in accordance with SFAS No. 133 (387) (63)
--------------- ---------------
Comprehensive income $3,105 $3,075
=============== ===============
See accompanying notes to condensed consolidated financial statements.
-4-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
(In thousands, except share and per share data) 2003 2002
---- ----
Common stock:
Balance at beginning period $ 89 $ 89
Issuance of 24,771 and 9,419 shares of common
stock in 2003 and 2002, respectively 1 --
---------------------- ---------------------
Balance at end of period 90 89
---------------------- ---------------------
Additional paid-in capital:
Balance at beginning of period 63,627 63,169
Excess over par value of common stock issued 288 95
Stock issued from treasury for stock option exercises (689) (5)
Income tax benefit from stock option exercises 1,112 --
---------------------- ---------------------
Balance at end of period 64,338 63,259
---------------------- ---------------------
Retained earnings:
Balance at beginning of period 50,578 41,360
Net earnings for the period 3,116 2,874
Cash dividends of $.50 and $0 per share paid on common
stock during 2003 and 2002, respectively (3,070) --
---------------------- ---------------------
Balance at end of period 50,624 44,234
---------------------- ---------------------
Accumulated - other comprehensive income:
Balance at beginning of period (411) (625)
Equity adjustment from foreign currency translation
and derivative instruments (11) 201
---------------------- ---------------------
Balance at end of period (422) (424)
---------------------- ---------------------
Treasury stock:
Balance at beginning of period (38,447) (36,552)
Acquisition of 18,000 and 28,722 shares of common
stock, at cost, during 2003 and 2002, respectively (441) (483)
Issuance of 44,510 shares during 2003 for stock option
exercises, net (145) --
---------------------- ---------------------
Balance at end of period (39,033) (37,035)
---------------------- ---------------------
Total shareholders' equity $75,597 $70,123
====================== =====================
See accompanying notes to condensed consolidated financial statements.
-5-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS) 2003 2002
---- ----
Cash flows from operating activities:
Net earnings $3,116 $2,874
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 1,387 1,540
Changes in assets and liabilities:
Accounts receivable (1,501) (4,238)
Inventories (3,008) 2,126
Prepaid expenses (697) (695)
Accounts payable (1,940) 82
Accrued expenses and other liabilities (1,229) (3,003)
Income taxes receivable or payable (180) 1,251
--------------- ---------------
Net cash used in operating activities (4,052) (63)
--------------- ---------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (765) (767)
Net assets of product line acquired (Note 3) (520) --
Change in other assets and liabilities 439 (98)
--------------- ---------------
Net cash used in investing activities (846) (865)
--------------- ---------------
Cash flows from financing activities:
Payment of cash dividends on common stock (3,070) --
Purchase of treasury stock (441) (483)
Proceeds from issuance of common stock 289 95
Net stock options exercised (834) (5)
Net proceeds from borrowings under revolving bank lines
of credit 1,726 804
Repayments of long-term debt and lease obligations (1,025) (1,025)
--------------- ---------------
Net cash used in financing activities (3,355) (614)
--------------- ---------------
Effect of exchange rate changes on cash (784) (162)
--------------- ---------------
Net decrease in cash and cash equivalents (9,037) (1,704)
Cash and cash equivalents at beginning of period 18,805 13,778
--------------- ---------------
Cash and cash equivalents at end of period $ 9,768 $12,074
=============== ===============
See accompanying notes to condensed consolidated financial statements.
-6-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND REVENUE RECOGNITION
These condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States of America applied
on a consistent basis. In order to present the financial statements on a
consistent basis, certain reclassification entries were made relative to the
previously reported condensed consolidated statement of cash flows for the
period ended December 31, 2002.
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,
2003, 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
December 31, 2003 December 31, 2002
----------------- -----------------
Products $36,943 $42,901
Services 5,724 7,164
------------------------- -------------------------
Total $42,667 $50,065
========================= =========================
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
-7-
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):
THREE MONTHS ENDED
------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Balance at beginning of period $2,663 $2,888
Provisions for warranty 307 229
Claims paid (257) (220)
------------------------- ----------------------------
Balance at end of period $2,713 $2,897
========================= ============================
(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 (in thousands except per share data).
THREE MONTHS ENDED
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DECEMBER 31, 2003 DECEMBER 31, 2002
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Net earnings, as reported $3,116 $2,874
Deduct: Total stock-based compensation expense
determined under the fair value based method
for all awards, net of related tax effects (114) (163)
----------------------- -----------------------
Pro forma net earnings $3,002 $2,711
======================= =======================
Earnings per share:
Basic - as reported $0.51 $0.47
Basic - pro forma $0.49 $0.44
Diluted - as reported $0.47 $0.45
Diluted - pro forma $0.46 $0.42
During the three months ended December 31, 2003, the Company did not grant any
options to purchase shares of its common stock. The pro forma adjustments
reflected in the table above reflect the impact of options that were granted in
prior years which vest over multiple fiscal periods.
-8-
(3) ACQUISITION OF ASSETS
In November 2003, the Company acquired certain assets including inventory,
equipment, customer lists, and other intangible assets related to Analytec
Corporation's acoustic cleaner product line. The purchase price consisted of
cash payments totaling $520,000.
The pro forma effect of this transaction is not material to the Company.
(4) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has entered into forward exchange contracts with commercial banks in
order to fix the currency exchange rate related to intercompany transactions
with its foreign subsidiaries. Changes in the value of these instruments due to
currency movements offset the foreign exchange gains and losses of the
corresponding intercompany transactions, which primarily relate to the purchases
by the Company's European subsidiaries of inventory from their U.S. affiliates.
In accordance with SFAS 133, these transactions have been determined to be
effective hedges. The fair value of these contracts has been recognized in
accrued liabilities in the consolidated balance sheet. The related gains and
losses are deferred in shareholders' equity (as a component of comprehensive
income). These deferred gains and losses are recognized in income in the period
in which the related purchases being hedged are acquired. The notional amount of
such contracts at December 31, 2003 was $5.2 million, and the Company has
incurred an unrealized loss of $635,000 thereon. Approximately 78% of the
deferred losses under these contracts will be reclassified to earnings within
the next twelve months.
(5) EARNINGS PER COMMON SHARE AND TREASURY SHARE PURCHASES
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed based upon the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Stock options, which are common stock equivalents, have a dilutive
effect on earnings per share in all periods presented and are therefore included
in the computation of diluted earnings per share. A reconciliation of the
numerators and the denominators of the basic and diluted per-share computations
is as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
December 31, 2003 December 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 $3,116 6,126 $0.51 $2,874 6,126 $0.47
Effect of dilutive
securities--stock options -- 453 -- 310
Diluted earnings per share:
Earnings available to common
shareholders and assumed
common equivalent holders $3,116 6,579 $0.47 $2,874 6,436 $0.45
========================================== ==========================================
-9-
The following table summarizes repurchases of the Company's common stock during
the quarters ended December 31, 2003 and 2002. In the aggregate, as of December
31, 2003, the Company had acquired 2,662,000 of the 4,000,000 shares of BHA
common stock authorized by the Board of Directors for repurchase.
THREE MONTHS ENDED
------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Shares Purchased 18,000 28,722
Average Price Per Share $24.49 $16.84
(6) INVENTORIES
BHA Group Holdings, Inc. values its inventory at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Components of inventories at December 31, 2003 and September 30, 2003 were as
follows (in thousands):
DECEMBER 31, 2003 SEPTEMBER 30, 2003
---------------------------- ---------------------------
Raw materials $15,868 $13,031
Work-in-process 4,462 1,234
Finished goods 6,779 9,215
---------------------------- ---------------------------
Total $27,109 $23,480
============================ ===========================
(7) BUSINESS SEGMENTS
BHA reports its operations as three business segments, Domestic Air Pollution
Control (Domestic APC), Europe Air Pollution Control (Europe APC), and BHA
Technologies. Domestic APC consists of the air pollution control products and
services sold or managed from the United States. Such sales include shipments
and services throughout North America, Latin America, Asia, and the Pacific Rim,
as such revenues are derived from BHA's U.S. based management group. The Europe
APC segment represents sales of products and services managed from BHA's
European manufacturing, distribution, and sales offices. BHA Europe generally
services customers throughout Europe, as well as in the Middle East and Northern
Africa. BHA Technologies supplies ePTFE membrane products to BHA's APC business,
and is also developing a market for such products outside of air pollution
control.
BHA manages these segments as strategic business units. Europe APC represents a
distinct business unit as it maintains its own manufacturing, sales, marketing,
and project management resources. Sales to other international locations are
included in the Domestic APC business segment, as most or all of the key
manufacturing, engineering, and sales support functions are performed from the
United States. BHA Technologies operates as a distinct entity due to its unique
technologies, as well as the marketing of products unrelated to air pollution
control.
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.
-10-
Reportable segment data was as follows (in thousands):
NET SALES
THREE MONTHS ENDED
------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- --------------------------
Domestic APC $30,446 $40,789
Europe APC 6,957 5,411
BHA Technologies 8,447 6,645
Inter-Segment Eliminations (3,183) (2,780)
------------------------- --------------------------
Total $42,667 $50,065
========================= ==========================
EARNINGS (LOSS) BEFORE INCOME TAXES
THREE MONTHS ENDED
------------------
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- --------------------------
Domestic APC $2,854 $3,982
Europe APC 309 (223)
BHA Technologies 1,525 533
------------------------- --------------------------
Total $4,688 $4,292
========================= ==========================
-11-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is a world leader in innovative filtration technology. Its two
principal operating subsidiaries are BHA Group, Inc., the world's largest
supplier of replacement parts and services for industrial air pollution controls
systems, and BHA Technologies, Inc., which manufactures and markets expanded
polytetrafluoroethylene (ePTFE) membrane products for use in a variety of
industrial and consumer products.
For purposes of this "Management's Discussion and Analysis," as well as the
segment reporting information included in Note 7 to the Condensed Consolidated
Financial Statements, the Domestic Air Pollution Control ("Domestic APC")
segment represents all air pollution control business for which the products or
services are sold or managed from the U.S. Generally, this includes sales to
customers in the U.S. and exports to customers in Canada, Latin America, and
Asia. The Europe APC segment 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, sold worldwide, represents BHA's
third business segment.
Within the Domestic APC segment, there are three distinct sales groups which
include domestic fabric filter, domestic electrostatic precipitator ("ESP") and
export sales. The domestic fabric filter group sells parts and services for
baghouse equipment throughout the U.S. and Canada. In this market, BHA
distinguishes itself from the competition by using a combination of innovative
products together with problem solving advice provided by its sales people,
product managers and technical advisors. Through the use of its proprietary
telesales system, the Company can cost-effectively service a diverse customer
base. The vast majority of the Company's baghouse sales represent small
transactions with numerous customers. The average order size for this business
is approximately $3,500. This sales approach generally results in BHA avoiding
competing on the basis of "commodity products". As a result, the Company
generates higher gross margins than its direct competitors in this market. This
core business is, however, supplemented with certain targeted large transactions
in a very competitive environment. Depending upon the mix of business, the gross
margins within this sales group can vary significantly between fiscal periods.
The domestic ESP sales group uses a sales strategy similar to that of the
domestic fabric filter group, however, this business is much more dependent on
major projects. The majority of the Company's ESP sales are to the utility
industry and the sales staff works closely with customers to plan major project
work to coincide with scheduled plant outages, generally during the spring and
fall months. The average order size for this sales group is approximately
$50,000 and quarterly shipments fluctuate significantly based upon the timing of
major project work.
The export sales group sells both fabric filter and ESP parts and services to
customers throughout Latin America, the Pacific Rim and Asia. Historically,
approximately 60% of the sales volume generated by this sales group can be
categorized as "day-to-day" small to mid-size orders. This business is
supplemented by larger transactions such as ESP project work
-12-
or orders to supply large quantities of filter bags to support major equipment
change-outs. The results of this sales group are significantly impacted by the
economic and political situations in its key markets as well as the timing of
large shipments.
The Europe APC segment also uses the Company's proprietary telesales system and
the problem solving approach to distinguish itself from the competition. This
segment sells the full line of the Company's products for fabric filter and ESP
equipment. In recent years, approximately 80% of the sales within this segment
can be characterized as "day-to-day" transactions and approximately 20% have
been the result of major projects. Based upon the cost structure and sales
volumes, this segment requires a combination of steady daily orders combined
with some project work in order to generate profitable operations for a given
quarterly period. On average, nearly 30% of the product costs for this segment
are raw materials or products imported from the U.S. As a result, the relative
value of the Euro and the USD has a significant impact on the Europe APC
segment's results of operations.
The BHA Technologies segment typically sells its products through strategic
alliances with major companies in several markets as opposed to direct sales to
end users. Under these relationships, BHA Technologies is the exclusive supplier
of ePTFE membrane goods to its partners. These partners incorporate the membrane
into their products which are then sold to a third party. Because of this sales
structure, approximately two-thirds of the sales by BHA Technologies to third
party customers have been to its three largest customers and the operating
results of this segment are highly dependent upon these relationships. The
production costs of ePTFE membrane products include substantial fixed overhead
and BHA Technologies has significant available capacity for future growth. As a
result, increases in plant throughput can have a significant favorable impact on
gross margins.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Domestic APC Segment:
U.S. Fabric Filter $17,643 $17,020
U.S. Electrostatic Precipitator (ESP) 9,252 20,444
Export Sales 3,551 3,325
-------- --------
Total Domestic APC Segment 30,446 40,789
Europe APC Segment 6,957 5,411
BHA Technologies Segment 5,264 3,865
-------- --------
Total Revenues $42,667 $50,065
======= =======
FISCAL 2004 FIRST QUARTER COMPARED TO FISCAL 2003 FIRST QUARTER
The Company's net earnings for the three months ended December 31, 2003 ("fiscal
2004 first quarter") were $3.1 million ($0.47 per diluted share) compared to
$2.9 million ($0.45 per diluted share) for the first quarter of fiscal 2003. The
increase in earnings was achieved despite a 15% decrease in consolidated sales.
The sales decline was attributable to significant ESP project work completed in
the first quarter of the prior year and was anticipated by management as
discussed under "Outlook" in the Company's Form 10-K for the year ended
September 30, 2003. The improved profitability resulted from higher gross
margins as a percentage of sales which were 36.3% in the first quarter of fiscal
2004 compared to 30.4% for the same period in
-13-
the prior year and 32.0% for all of fiscal 2003. As discussed above, gross
margin as a percentage of sales in each of its business segments can be
significantly impacted by the mix of business as well as by the volume of ePTFE
membrane produced. During the first quarter of fiscal 2004, the Company
experienced a favorable product mix and the weak USD relative to the Euro
reduced product costs for the Europe APC segment. Favorable warranty results and
vendor rebates earned on calendar year purchases also had positive impacts on
gross margins. The Company does not believe that the gross margins achieved
during the most recent quarter are indicative of the margins anticipated for the
balance of the fiscal year.
NET SALES
Consolidated net sales for the fiscal 2004 first quarter decreased 15% to $42.7
million from $50.1 million for the same period in fiscal 2003.
Sales in the Domestic APC segment decreased by 25%. The decline was anticipated,
as sales of ESP parts and services returned to historical levels during the
fiscal 2004 first quarter after an unusually strong first quarter in fiscal
2003. Sales of ESP parts and services were $9.3 million in the most recent
quarter compared to $20.4 million in the first quarter of the prior year. Sales
of ESP parts and services during the first quarter of fiscal 2002 were $8.9
million. The lower sales in the ESP product line were partially offset by
improvements in this segment's other sales groups. The Company's domestic sales
of fabric filter parts and services increased 4% to $17.6 million in the most
recent quarter compared to $17.0 million in first quarter of the prior year.
Export sales increased 7% over the same period, due to improving business
conditions in Latin America.
Sales in the Europe APC segment, when expressed in U.S. dollars ("USD"),
increased by 29% during the first quarter of fiscal 2004 compared to the same
period in the prior year. The sales increase was 9% when reported in Euros. The
increase in shipments reflects slightly higher project work together with an
overall improvement in the Company's competitive position due to the impact of
the strong Euro on the cost of raw materials and parts imported from the U.S.
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased $1.4 million or 36% during the fiscal 2004 first quarter compared to
the same period in the prior year. The increase was attributable to incremental
business in non-consumer apparel in North America and Europe.
GROSS MARGIN
Consolidated gross margin was 36.3% of sales in the first quarter of fiscal 2004
compared to 30.4% for the same period in the prior year. The higher gross margin
was the result of several factors including: 1) increased ePTFE membrane
production resulted in a decrease in per unit cost and improved margins in the
BHA Technologies segment, 2) an improved sales mix within the Domestic APC
business segment that included higher shipments of fine filtration products in
the most recent quarter as compared to lower margin ESP project work in the
first quarter of the prior year, 3) the strong Euro resulted in a decrease in
the relative cost of raw materials and parts purchased from the U.S., 4) vendor
rebates earned on calendar year purchases (to the extent such inventory had been
sold by the Company prior to December 31, 2003) and 5) favorable adjustments to
warranty reserves resulting from resolution of previously identified claims.
-14-
OPERATING EXPENSES
Operating expenses were $10.7 million (25.0% of sales) for the first quarter of
fiscal 2004 compared to $10.8 million (21.5% of sales) for the same period in
the prior year. Operating expenses remained relatively constant as the Company
operated with fewer salaried and clerical personnel in the fiscal 2004 first
quarter than during the same period in the prior year. This savings was
sufficient to offset the general inflation in wage costs as well as higher
corporate insurance and employee health costs.
INTEREST EXPENSE, NET
Net interest expense was $0.1 million in the fiscal 2004 first quarter and was
comparable to the net interest expense in the prior year. All of the Company's
borrowings are at variable interest rates.
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment in the first quarter of fiscal
2004 were $2.9 million compared to $4.0 million for the first quarter of fiscal
2003. Pre-tax earnings as a percentage of sales for this segment were 9.3% for
the fiscal 2004 first quarter compared to 9.7% for the same period in the prior
year. The decline in pre-tax profits is consistent with the lower sales volume
offset, in part, by the higher gross margins.
The Europe APC segment generated pre-tax earnings of $0.3 million in the most
recent quarter compared to a pre-tax loss of $0.2 million for the same period in
the prior year. Gains on foreign exchange contributed approximately $150,000 of
the improvement. The results were also favorably impacted by increases in sales
volume and in gross margins as a percentage of sales.
BHA Technologies generated pre-tax earnings of $1.5 million in the first quarter
of fiscal 2004 compared to $0.5 million for the same period in the prior year.
Pre-tax earnings as a percentage of sales (third party and inter-company
combined) for this segment increased from 8.0% for the first quarter of fiscal
2003 to 18.0% in the most recent quarter. The improvement in operating results
is consistent with a 36% increase in shipments to third party customers and a
14% increase in shipments of BHA Tex products to the Company's APC businesses.
INCOME TAXES
The effective income tax rate was 33.5% for the first quarter of fiscal 2004
compared to 33.0% for the first quarter of the prior year. The rate for the most
recent quarter is generally consistent with the actual rate of tax for all of
fiscal 2003.
NET EARNINGS
Net earnings for the most recent quarter were $3.1 million ($0.47 per diluted
share) compared to $2.9 million ($0.45 per diluted share) for the first quarter
of fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $52.1 million at December 31, 2003 compared to $50.3
million at September 30, 2003. The current ratio at December 31, 2003 and
September 30, 2003 was 3.4 and 2.9, respectively. The Company's cash decreased
from $18.8 million at September 30, 2003 to $9.8 million at December 31, 2003.
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During the quarter ended December 31, 2003, the Company used $4.1 million in
cash for operating activities compared to $0.1 million in cash used for
operating activities during the same period in the prior year. Traditionally,
the first fiscal quarter generates little, if any, cash from operations as the
Company funds incentive bonus plans and employee benefit contributions during
the quarter which are accrued during the prior fiscal year. Operating cash flow
for the most recent quarter also reflected a significant increase in accounts
receivable and inventories due to the timing of shipments and collections
related to project work.
Investing activities resulted in a net use of cash of $0.8 million and $0.9
million for the three months ended December 31, 2003 and 2002, respectively. The
investment in property, plant and equipment used $0.8 million in cash in each
period. Investing activities during the December 2003 quarter also included $0.5
million related to the acquisition of certain assets of a U.S. company that
markets acoustic cleaning equipment.
During the December 2003 quarter, the Company's financing activities included
$3.1 million used for dividend payments on its common stock and $0.4 million
used to repurchase shares of the Company's common stock. During the December
2002 quarter, BHA repurchased $0.5 million of the Company's common stock and did
not pay dividends on its common stock. During the first quarter of fiscal 2004,
the Company changed the timing of its annual dividend payment to December from
January in the previous year.
At December 31, 2003, BHA had unused lines of credit of $21.5 million. The debt
structure includes commitments for: an $18.0 million revolving credit facility
maturing on April 30, 2006; $6.3 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 $5.8 million with annual sinking fund payments and
a final maturity in 2018. The Company believes that cash flows from operations
and available credit lines will be sufficient to meet its capital needs for the
foreseeable future.
MANAGEMENT JUDGMENTS AND ESTIMATES
In preparing the financial statements, a number of assumptions and estimates are
determined, that in the judgment of management, are proper in light of existing
general economic and Company-specific circumstances. Examples of areas in which
judgments and estimates are required include the collectibility of receivables,
the value of certain inventories and the evaluation of certain contingent
liabilities, including product warranties and claims arising in the ordinary
course of business. While the Company has taken reasonable care in preparing
these estimates and making these judgments, actual results could and probably
will differ from the estimates. Management believes that any difference in the
actual results from the estimates will not have a material effect upon the
Company's financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies include the timing of revenue
recognition on certain projects, inventory valuation, estimates related to
collectibility of receivables and estimation of potential warranty claims.
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
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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 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
One of the Company's primary business goals is to increase compounded earnings
per share at a 12% to 15% rate over time. Between fiscal 2000 and 2003, the
Company's consolidated earnings per diluted share have increased at a 19%
compounded rate. The overall financial condition of the Company has improved as
the Company's bank borrowings, net of cash, were been reduced by $30.0 million
during that same period. The Company's earnings growth during that period was
the result of an increase in ESP parts and service work for electric utility
customers in the U.S. and the success of BHA Technologies. These areas of the
Company's business provided strength to offset the overall weakness the Company
experienced in its worldwide fabric filter replacement parts and service
business. Although its financial results have varied by segment, the Company
believes it has improved its market position and competitive advantage in each
of its major business areas.
The following are various factors for consideration as the Company moves into
its second quarter:
o Publicly available information provides an indication that the U.S.
economy is improving. Based on historical trending, the Company
continues to believe that improvement in its market for the sale of
fabric filter replacement parts and services will likely trail an
improvement in overall manufacturing conditions by as much as six
months. Although the Company saw some improvement in new orders during
the first quarter, it expects that competition will remain intense for
at least the next several quarters. The Company believes that it is
well positioned with its products, people and approach to servicing
this market. These factors, combined with a lower cost structure, are
expected to benefit the Company as business conditions improve.
o The Company believes that over the past three years it has established
itself as the premier supplier for ESP replacement parts, services and
rebuilds in the U.S. The Company has also been successful in expanding
this business in certain international
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markets. The Company's overall ESP replacement parts and service
results achieved record levels during fiscal 2003. The Company's system
for tracking project work to be executed over the next few years
provides an indication that this market will continue to provide good
opportunity for BHA. This same tracking information led the Company to
predict the decline in ESP rebuild work executed by customers during
the fall 2003 outage season. The Company believes that work to be
executed in the spring 2004 outage season will also be lower than the
same period in the prior year. Preliminary information available to the
Company provides an indication that business should again start to
increase during the fall 2004 and spring 2005 outage seasons. This
factor, combined with the Company's existing backlog of business
scheduled for the next fiscal year, are early positive indicators of
potential results for fiscal 2005.
o The Company is pleased with its sales and earnings growth in the BHA
Technologies segment. The Company believes this segment is well
positioned for additional growth during fiscal 2004. Incremental third
party revenues within this segment are likely to be structured under
multi-year supply arrangements with new customers. The extent to which
this segment will increase its sales and earnings beyond fiscal 2004
will be dependent upon the timing of final product commercialization
and order execution in its target markets.
Due to the factors discussed above, visibility with respect to future results
beyond 90 days remains a challenge. For more information, you should refer to
the sections entitled, "Outlook" and "Factors Affecting Earnings and Share
Price" included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on November 11, 2003. The following is
specific guidance being provided for the second quarter of fiscal 2004:
o For the second quarter of fiscal 2004, the Company anticipates that
consolidated net sales will be higher than the same period in the prior
year by as much as 10%.
o Gross margins and operating margins as a percentage of sales are
expected to be lower in the second quarter than in the just completed
period. The backlog includes a mix of larger orders of lower margin
products and services.
o Earnings for the second quarter of fiscal 2004 are expected to be in
the range of $.48 to $.58 per diluted share as compared to $.52
reported for the same period in the prior year.
BACKLOG
On December 31, 2003, the Company's backlog of orders was $68.0 million compared
to a backlog of $47.5 million at December 31, 2002 and $60.4 million at
September 30, 2003. Approximately $10.1 million of the December 31, 2003 backlog
is scheduled to ship after December 31, 2004, whereas substantially all of the
December 31, 2002 backlog was scheduled for shipment during calendar 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
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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, 2003. The Company cautions
that the foregoing lists 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 December 31, 2003, a 1%
fluctuation in market rates would impact interest expense by approximately
$150,000 annually.
EXCHANGE RATES AND FORWARD EXCHANGE CONTRACTS
The Company views its equity investment in a foreign subsidiary as long-term
commitments and does not hedge the translation exposures relative to such equity
investments.
Certain of the Company's operations, primarily its international subsidiaries,
make some of their purchases and sales in currencies other than their functional
currencies. This subjects the Company to the risks associated with fluctuations
of currency exchange rates. The Company reduces this risk by utilizing natural
hedging (offsetting receivables and payables). At December 31, 2003, the amount
of unhedged exposures was less than $0.5 million.
The Company's U.S. affiliates have outstanding loans to its European
subsidiaries which are denominated in Euros. In order to substantially eliminate
the foreign exchange risk of these advances, the Company uses forward exchange
contracts with maturities comparable to the underlying intercompany loans. As of
December 31, 2003, there were Euro 5.4 million (USD 6.8 million) of intercompany
loans that were hedged using forward exchange contracts for the same amount.
BHA periodically enters into forward exchange contracts with commercial banks in
order to fix the currency exchange rate related to intercompany transactions
with its foreign subsidiaries. Changes in the value of these instruments due to
currency movements offset the foreign exchange gains and losses of the
corresponding intercompany transactions. At December 31, 2003, the notional
amount of these forward exchange contracts was approximately $5.2 million and
the market value of these contracts was $635,000 lower than their face value.
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ACCOUNTS RECEIVABLE
The Company's customer base operates in numerous industries in the U.S. and
internationally. With the weakness in the global manufacturing economy, the
Company is seeing an increasing level of customer bankruptcies and slow payment
problems that management believes has been appropriately reserved for. Although
there is not a significant concentration of sales in any one industry or with
any individual customer, certain of the Company's customers operate in
industries such as electric utility, steel, textile and foundry, which were
severely impacted by the recent economic uncertainties. Additionally, the
Company executes significant projects and fulfills membrane supply contracts
that can result in open receivables from individual customers that at times
exceed $1 million. It is considered unlikely that the failure of one or more
customers would have a material adverse affect on the Company's financial
condition. However, near term operating results could be adversely impacted by
an increase in bad debt expense in the event that such customers' financial
results fail to recover in the near term.
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 Over Financial Reporting 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 Over Financial Reporting. 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 Over Financial Reporting are designed
and maintained by management 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 Over Financial Reporting 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, during the Company's last fiscal quarter, 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.
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Conclusions Regarding Disclosure Controls. Based upon the required evaluation of
Disclosure Controls, the CEO and CFO have concluded that as of December 31,
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:
(a) Exhibits:
(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.
(b) Reports on Form 8-K:
On October 28, 2003, the Company filed a Form 8-K under Item 7 and
Item 11.
On November 11, 2003, the Company filed a Form 8-K under Item 7 and 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 year ended September 30, 2003.
No other reports on Form 8-K were filed by the Company during the quarter
ended December 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)
January 21, 2004 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.
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