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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
June 30, 2004 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
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (816) 356-8400
---------------------
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of July 14, 2004, the number of shares outstanding of the Registrant's Common
Stock was 6,284,621.
PART I. FINANCIAL INFORMATION
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA) JUNE 30, SEPTEMBER 30,
ASSETS 2004 2003
------ (UNAUDITED)
---------------- ------------------
Current assets:
Cash and cash equivalents $25,117 $ 18,805
Accounts receivable, less allowance for doubtful receivables
of $2,032 and $2,026, respectively 34,847 28,823
Inventories (note 6) 25,417 23,480
Prepaid expenses 2,353 1,342
Deferred income taxes 3,804 3,804
---------------- -------------------
Total current assets 91,538 76,254
---------------- -------------------
Property, plant and equipment, at cost 70,293 67,802
Less accumulated depreciation and amortization (45,704) (42,037)
---------------- -------------------
Net property, plant and equipment 24,589 25,765
---------------- -------------------
Property held under capital leases 4,671 4,967
Other assets 7,636 9,702
---------------- -------------------
$128,434 $116,688
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt and lease obligations $ 2,489 $ 2,494
Accounts payable 12,986 8,393
Income taxes payable 148 1,345
Accrued expenses and other current liabilities 14,677 13,753
---------------- -------------------
Total current liabilities 30,300 25,985
---------------- -------------------
Long-term deferred income taxes 2,588 2,588
Long-term debt, excluding current installments 4,831 6,508
Long-term lease obligations, excluding current installments 5,400 5,730
Other liabilities 469 441
Shareholders' equity:
Common stock $0.01 par value. Authorized 20,000,000 shares:
Issued 9,074,469 and 8,931,411 shares, respectively 91 89
Additional paid-in capital 65,487 63,627
Retained earnings 58,569 50,578
Accumulated other comprehensive income (loss) (60) (411)
Less cost of 2,789,848 and 2,837,633 shares, respectively, of
common stock in treasury (39,241) (38,447)
---------------- -------------------
Total shareholders' equity 84,846 75,436
---------------- -------------------
$128,434 $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 JUNE 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
---- ----
Net sales $57,173 $38,984
Cost of sales 39,431 26,186
------------------- --------------------
Gross margin 17,742 12,798
------------------- --------------------
Operating expenses
Selling and advertising expense 6,076 5,144
General and administrative expense 6,689 4,940
------------------- --------------------
Total operating expenses 12,765 10,084
------------------- --------------------
Operating income 4,977 2,714
------------------- --------------------
Interest expense, net 32 98
------------------- --------------------
Earnings before income taxes 4,945 2,616
------------------- --------------------
Income taxes 1,650 856
------------------- --------------------
Net earnings $3,295 $1,760
=================== ====================
Basic earnings per common share $ 0.53 $ 0.29
Diluted earnings per common share $ 0.49 $ 0.27
Basic weighted average number of common shares outstanding 6,262 6,095
Diluted weighted average number of common shares outstanding 6,779 6,562
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, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
---- ----
Net sales $156,333 $ 137,793
Cost of sales 103,450 93,976
------------------ --------------------
Gross margin 52,883 43,817
------------------ --------------------
Operating expenses
Selling and advertising expense 17,585 15,929
General and administrative expense 18,468 15,616
------------------ --------------------
Total operating expenses 36,053 31,545
------------------ --------------------
Operating income 16,830 12,272
------------------ --------------------
Interest expense, net 206 365
------------------ --------------------
Earnings before income taxes 16,624 11,907
Income taxes 5,563 3,925
------------------ --------------------
Net earnings $11,061 $ 7,982
================== ====================
Basic earnings per common share $ 1.79 $ 1.31
Diluted earnings per common share $ 1.67 $ 1.23
Basic weighted average number of common shares outstanding 6,185 6,111
Diluted weighted average number of common shares outstanding 6,624 6,474
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, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED
(IN THOUSANDS) 2004 2003
---- ----
Net earnings $ 3,295 $ 1,760
Other comprehensive income:
Foreign currency translation adjustments (37) 235
Net change in fair value of foreign exchange
contracts deferred in accordance with SFAS No. 133 95 (82)
---------------- ----------------
Comprehensive income $ 3,353 $ 1,913
================ ================
NINE MONTHS ENDED
2004 2003
---- ----
Net earnings $ 11,061 $ 7,982
Other comprehensive income:
Foreign currency translation adjustments 351 347
Net change in fair value of foreign exchange contracts
deferred in accordance with SFAS No. 133 -- (118)
---------------- ----------------
Comprehensive income $ 11,412 $ 8,211
================ ================
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, 2004 AND 2003
(UNAUDITED)
(In thousands, except share and per share data) 2004 2003
---- ----
Common stock:
Balance at beginning of period $ 89 $ 89
Issuance of 143,058 and 38,044 shares of common
stock in 2004 and 2003, respectively 2 --
---------------------- ---------------------
Balance at end of period 91 89
---------------------- ---------------------
Additional paid-in capital:
Balance at beginning of period 63,627 63,169
Excess over par value of common stock issued 1,684 368
Stock issued from treasury for stock option exercises (936) (278)
Income tax benefit from stock option exercises 1,112 --
---------------------- ---------------------
Balance at end of period 65,487 63,259
---------------------- ---------------------
Retained earnings:
Balance at beginning of period 50,578 41,360
Net earnings for the period 11,061 7,982
Cash dividends of $.50 and $.12 per share paid on
common stock during 2004 and 2003, respectively (3,070) (732)
---------------------- ---------------------
Balance at end of period 58,569 48,610
---------------------- ---------------------
Accumulated - other comprehensive income:
Balance at beginning of period (411) (625)
Equity adjustment from foreign currency translation and
derivative instruments 351 229
---------------------- ---------------------
Balance at end of period (60) (396)
---------------------- ---------------------
Treasury stock:
Balance at beginning of period (38,447) (36,552)
Acquisition of 18,000 and 94,622 shares of common
stock, at cost, during 2004 and 2003, respectively (441) (1,846)
Issuance of 65,785 and 15,432 treasury shares pursuant to
stock option exercises, net, during 2004 and 2003,
respectively (353) (33)
---------------------- ---------------------
Balance at end of period (39,241) (38,431)
---------------------- ---------------------
Total shareholders' equity $ 84,846 $ 73,131
====================== =====================
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, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS) 2004 2003
---- ----
Cash flows from operating activities:
Net earnings $11,061 $7,982
Adjustment to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 4,311 4,423
Changes in assets and liabilities:
Accounts receivable (5,703) 3,260
Inventories (1,655) 21
Prepaid expenses (990) 84
Accounts payable 4,498 (1,978)
Accrued expenses and other liabilities 857 (2,363)
Income taxes payable or receivable (76) 964
------------------ ------------------
Net cash provided by operating activities 12,303 12,393
------------------ ------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,578) (2,339)
Net assets of product lines acquired (Note 3) (662) --
Refunds of cash deposits securing bank guarantees 2,170 --
Change in other assets and liabilities 327 (183)
------------------ ------------------
Net cash used in investing activities (743) (2,522)
------------------ ------------------
Cash flows from financing activities:
Payment of cash dividend on common stock (3,070) (732)
Purchase of treasury stock (441) (1,846)
Proceeds from issuance of common stock 1,686 368
Net stock options exercised (1,289) (311)
Net proceeds from borrowings under revolving bank lines
of credit 195 1,009
Repayments of long-term debt and lease obligations (2,275) (2,275)
------------------ ------------------
Net cash used in financing activities (5,194) (3,787)
------------------ ------------------
Effect of exchange rate changes on cash (54) (749)
------------------ ------------------
Net increase in cash and cash equivalents 6,312 5,335
Cash and cash equivalents at beginning of period 18,805 13,778
------------------ ------------------
Cash and cash equivalents at end of period $25,117 $19,113
================== ==================
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. 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
nine-month period ended June 30, 2003.
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 on Form 10-K 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
typically 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 9%. 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, 2004 June 30, 2003
------------- -------------
Products $44,762 $32,279
Services 12,411 6,705
------------------- ---------------------
Total $57,173 $38,984
=================== =====================
Nine Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Products $127,987 $115,207
Services 28,346 22,586
------------------- ---------------------
Total $156,333 $137,793
=================== =====================
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,
-8-
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, 2004 JUNE 30, 2003
------------- -------------
Balance at beginning of period $2,663 $2,888
Provisions for warranty 1,437 1,016
Claims paid (1,084) (1,306)
Adjustments -- (149)
--------------------- --------------------
Balance at end of period $3,016 $2,449
===================== ====================
(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
------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Net earnings, as reported $3,295 $1,760
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (159) (161)
---------------------- ---------------------
Pro forma net earnings $3,136 $1,599
====================== =====================
Earnings per share:
Basic - as reported $0.53 $0.29
Basic - pro forma $0.50 $0.26
Diluted - as reported $0.49 $0.27
Diluted - pro forma $0.46 $0.24
-9-
NINE MONTHS ENDED
-----------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Net earnings, as reported $11,061 $7,982
Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards, net of
related tax effects (407) (482)
---------------------- ---------------------
Pro forma net earnings $10,654 $7,500
====================== =====================
Earnings per share:
Basic - as reported $ 1.79 $1.31
Basic - pro forma $ 1.72 $1.23
Diluted - as reported $ 1.67 $1.23
Diluted - pro forma $ 1.61 $1.16
During the nine months ended June 30, 2004, the Company granted options to
purchase 24,000 shares of its common stock at an average price of $27.06 per
share. The per share weighted average value of stock options granted during this
period was $10.65 on the date of grant using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield of 1.75%, weighted
average risk-free interest rate of 4.6%, expected volatility factor of 35.5% and
a weighted-average expected life of eight years.
(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.
In January 2004, the Company acquired certain assets including inventory,
customer lists, and other intangible assets related to Baltec, a supplier of
electrical controls for air pollution equipment located in Australia.
The aggregate purchase price of these transactions consisted of cash payments
totaling $662,000. The pro forma effect of these transitions 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 June 30, 2004 was $5,495,000, and the Company has incurred an
unrealized loss of $248,000 thereon. Approximately 89% of the deferred losses
under these contracts will be reclassified to earnings within the next twelve
months.
-10-
The Company's U.S. subsidiaries 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 June 30, 2004, there were Euro 5.0 million (USD 6.1 million) of
intercompany loans that were economically hedged using forward exchange
contracts for the same amount. Changes in fair value of these foreign exchange
contracts are recorded in earnings.
(5) EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed based upon the weighted
average number of common shares and dilutive common equivalent shares
outstanding. Stock options, which are common stock equivalents, have a dilutive
effect on earnings per share in all periods presented and are therefore included
in the computation of diluted earnings per share. A reconciliation of the
numerators and the denominators of the basic and diluted per-share computations
are as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
June 30, 2004 June 30, 2003
------------------------------------------ ------------------------------------------
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 $ 3,295 6,262 $ 0.53 $ 1,760 6,095 $ 0.29
Effect of dilutive
securities--stock options -- 517 -- 467
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $ 3,295 6,779 $ 0.49 $ 1,760 6,562 $ 0.27
========================================== ==========================================
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
June 30, 2004 June 30, 2003
------------------------------------------ ------------------------------------------
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 $11,061 6,185 $ 1.79 $7,982 6,111 $1.31
Effect of dilutive
securities--stock options -- 439 -- 363
Diluted earnings per share:
Earnings available to common
shareholders and assumed
conversion $11,061 6,624 $ 1.67 $7,982 6,474 $1.23
========================================== ==========================================
-11-
The following table summarizes repurchases of the Company's common stock during
the nine-month periods ended June 30, 2004 and 2003. In the aggregate, as of
June 30, 2004, the Company has acquired 2,662,000 of the 4,000,000 shares of BHA
common stock authorized by the Board of Directors for repurchase. No shares were
repurchased by the Company during the quarter ended June 30, 2004.
NINE MONTHS ENDED
-----------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Shares Purchased 18,000 94,622
Average Price Per Share $24.49 $19.51
(6) INVENTORIES
BHA values its inventory at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Components of inventories at June 30, 2004 and September 30, 2003 were as
follows (in thousands):
JUNE 30, SEPTEMBER 30,
2004 2003
----------------------- -----------------------
Raw materials $13,598 $13,031
Work-in-process 1,579 1,234
Finished goods 10,240 9,215
----------------------- -----------------------
Total $25,417 $23,480
======================= =======================
(7) PROPOSED MERGER
On June 1, 2004, BHA Group Holdings, Inc. (the "Company") announced that it had
entered into an Agreement and Plan of Merger, dated as of May 31, 2004 (the
"Merger Agreement"), by and among General Electric Company, a New York
corporation, Casey Acquisition Company, a Delaware corporation which is
wholly-owned by General Electric Company, and the Company, under which Casey
Acquisition Company will merge with and into the Company, and the Company will
be wholly-owned by General Electric Company. As consideration, the Company's
stockholders would receive $38.00 per share in cash. The closing of the merger
is subject to the affirmative vote of the Company's stockholders, regulatory
approvals, and other customary closing conditions.
Lamson Rheinfrank, Jr., James E. Lund, James J. Thome, and James C. Shay and
other related beneficial holders have entered into voting agreements with
General Electric Company, dated as of May 31, 2004 that require them to vote
their shares of Company common stock in favor of the merger, subject to certain
conditions. Voting Agreements have been signed relative to 623,764 outstanding
shares together with an additional 415,632 shares subject to stock options. The
Voting Agreements will terminate in accordance with their terms upon a
termination of the Merger Agreement.
(8) 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
-12-
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 Domestic and Europe 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,
2004 2003
----------------------- -----------------------
Domestic APC $43,024 $28,607
Europe APC 7,930 6,820
BHA Technologies 10,418 7,022
Inter-Segment Eliminations (4,199) (3,465)
----------------------- -----------------------
Total $57,173 $38,984
======================= =======================
NET SALES
NINE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2004 2003
---------------------- -----------------------
Domestic APC $113,106 $109,113
Europe APC 26,615 18,099
BHA Technologies 29,013 20,247
Inter-Segment Eliminations (12,401) (9,666)
----------------------
-----------------------
Total $156,333 $137,793
====================== =======================
-13-
EARNINGS BEFORE INCOME TAXES
THREE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2004 2003
----------------------- -----------------------
Domestic APC $2,884 $1,735
Europe APC 402 242
BHA Technologies 1,659 639
-----------------------
-----------------------
Total $4,945 $2,616
======================= =======================
NINE MONTHS ENDED
---------------------------------------------------
JUNE 30, JUNE 30,
2004 2003
----------------------- -----------------------
Domestic APC $9,501 $9,912
Europe APC 1,616 51
BHA Technologies 5,507 1,944
-----------------------
-----------------------
Total $16,624 $11,907
======================= =======================
-14-
BHA GROUP HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 8 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, Asia
and the Pacific Rim. 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 sales
group is approximately $4,000. 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 of up to $1.0 million. 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 Company considers major projects to be those orders with
sales values ranging from $250,000 up to several million dollars for any single
transaction.
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
-15-
mid-size orders. This business is supplemented by larger transactions such as
ESP and baghouse project work 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 generally 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
------------------------------------------
JUNE 30, JUNE 30,
2004 2003
------------------- -------------------
Domestic APC Segment:
U.S. Fabric Filter $21,810 $17,739
U.S. Electrostatic Precipitator (ESP) 14,796 6,269
Export Sales 6,418 4,599
------------------- -------------------
Total Domestic APC Segment 43,024 28,607
Europe APC Segment 7,930 6,820
BHA Technologies Segment 6,219 3,557
------------------- -------------------
Total Revenues $57,173 $38,984
=================== ===================
-16-
NINE MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30,
2004 2003
------------------- -------------------
Domestic APC Segment:
U.S. Fabric Filter $62,743 $54,524
U.S. Electrostatic Precipitator (ESP) 34,176 43,087
Export Sales 16,187 11,502
------------------- -------------------
Total Domestic APC Segment 113,106 109,113
Europe APC Segment 26,615 18,099
BHA Technologies Segment 16,612 10,581
------------------- -------------------
Total Revenues $156,333 $137,793
=================== ===================
FISCAL 2004 COMPARED TO FISCAL 2003
NET SALES
Consolidated net sales for the nine months ended June 30, 2004 ("fiscal 2004")
increased 13% to $156.3 million from $137.8 million for the same period in
fiscal 2003. Consolidated sales for the quarter ended June 30, 2004 ("third
quarter") increased 47% to $57.2 million from $39.0 million for the same period
in fiscal 2003.
Sales in the Domestic APC segment increased 4% for the first nine months of
fiscal 2004 and increased 50% for the third quarter when compared to the same
periods in 2003. Sales of fabric filter replacement parts and services increased
15% to $62.7 million for the nine-month period and 23% to $21.8 million for the
third quarter as spending in the U.S. manufacturing sector has continued to
improve. Sales of ESP parts and services declined by 21% for the nine-month
period as shipments returned to historical levels after an unusually strong
performance in fiscal 2003. Sales of ESP parts and services for the third
quarter were $14.8 million compared to $6.3 million for the same period in 2003
due to timing of major project work. For the first nine months of fiscal 2004,
export sales were $16.2 million, an increase of 41%, as compared to the same
period in fiscal 2003. During the third quarter, export sales increased 40% to
$6.4 million as compared to the third quarter of 2003. The sales increases have
been the result of higher shipments of fine filtration products and improvement
in the market for ESP rebuilds.
Sales in the Company's Europe APC segment, when expressed in U.S. dollars
("USD"), increased by 47% for the first nine months of fiscal 2004 to $26.6
million compared to $18.1 million for the same period in 2003. During the third
quarter, sales were 16% higher than during the third quarter of fiscal 2003,
increasing to $7.9 million from $6.8 million. When expressed in Euros, sales of
this segment increased by 31% during the first nine months of fiscal 2004 and
15% for the third quarter of fiscal 2004 as compared to the same periods in the
prior year. The sales increase reflects execution of several large projects
together with improved "day to day" sales of replacement parts and services. The
weaker dollar relative to the Euro has improved the Company's competitive
position in Europe.
-17-
Shipments of ePTFE membrane from BHA Technologies to third party customers
increased by 57% for the first nine months of fiscal 2004 and 75% in the third
quarter as compared to the prior year periods. BHA Technologies generated
increases from sales of ePTFE membrane for applications in industrial outerwear,
other industrial products and in consumer outerwear products. The majority of
the sales growth continues to be attributable to incremental business in
non-consumer apparel. Inter-segment shipments of BHA Tex (R) products for use in
the Company's Domestic APC and Europe APC segments increased by 28% for the
first nine months of fiscal 2004 to $12.4 million from $9.7 million for the same
period in fiscal 2003.
GROSS MARGIN
Consolidated gross margin was 33.8% of sales for the first nine months of fiscal
2004 compared to 31.8% for the same period in fiscal 2003. In the third quarter,
gross margin was 31.0% of sales compared to 32.8% in the prior year. The
improvements in the year to date margins were attributable to several factors
including: 1) increased ePTFE production resulted in a decrease in per unit cost
and improved margins in the BHA Technologies segment, 2) improved sales mix
within the Domestic APC business segment that included higher shipments of fine
filtration products as compared to lower margin ESP project work during the
prior year, 3) improvements in plant productivity and increased throughput
resulted in lower per unit costs in fabric filter manufacturing and 4) the
strong Euro resulted in a decrease in the relative cost of raw materials and
parts purchased from the U.S. The lower margins recognized in the third quarter
were attributable to: 1) an increase in sales of ESP project work at lower
margins than traditional parts business, 2) losses recognized during the third
quarter of $0.4 million relating to the impact of steel costs on fixed price
contracts that are scheduled to ship during fiscal 2005 and 3) steel cost
increases that had an adverse impact on margins related to shipments of ESP
parts during the quarter.
OPERATING EXPENSES
Operating expenses were $36.1 million (23.1% of sales) for the first nine-months
of fiscal 2004 compared to $31.5 million (22.9% of sales) for the same period in
fiscal 2003. For the third quarter, operating expenses were $12.8 million (22.3%
of sales) compared to $10.1 million (25.9% of sales) for the same period in
fiscal 2003. The $4.5 million (14%) increase in operating expenses for the first
nine months of fiscal 2004 as compared to the same period in fiscal 2003 was the
result of: 1) legal, investment banking and regulatory filing fees totaling $0.7
million related to the pending merger of the Company with and into a subsidiary
of General Electric Company ("GE") which were recognized during the third
quarter, 2) increases in accruals for retirement plan contributions and
management incentive bonus plans, both of which are subject to variable funding
based upon consolidated earnings, 3) the weakening USD as compared to the Euro
resulted in an increase in USD denominated expenses of the Europe APC business
segment, 4) normal wage increases, 5) higher legal and audit expenses, including
costs associated with corporate governance activities and 6) increased sales and
marketing expense related to BHA Technologies' products outside of air pollution
control.
INTEREST EXPENSE, NET
Net interest expense for the first nine months of fiscal 2004 was $0.2 million
compared to $0.4 million for the same period in the prior year. The decrease is
the result of lower outstanding borrowings and higher cash balances. All of the
Company's borrowings are at variable interest rates.
-18-
EARNINGS BEFORE INCOME TAXES
Pre-tax earnings for the Domestic APC segment were $9.5 million for the first
nine months of fiscal 2004 compared to $9.9 million for the same period in the
prior year. For the third quarter, pre-tax earnings for this segment were $2.9
million compared to $1.7 million in the prior year. The decline in pre-tax
profits for the first nine months is consistent with the higher operating
expenses, which include fees for professional services including those
pertaining to the pending merger agreement with GE, together with management
incentive bonus and retirement contributions which primarily impact this segment
since amounts are allocated to the domestic segments based upon relative sales
volume or payroll dollars. The increase in pre-tax earnings during the most
recent quarter is consistent with the higher sales volume.
The Europe APC segment reported pre-tax earnings of $1.6 million for the first
nine months of fiscal 2004 compared to pre-tax earnings of $0.1 million for the
same period in the prior year. The improved operating results are consistent
with the higher sales volumes as the operating costs of the Europe APC Segment
are largely fixed in nature.
BHA Technologies' pre-tax earnings for the first nine months of fiscal 2004 were
$5.5 million compared to pre-tax earnings of $1.9 million for the same period in
the prior year. The improvement in operating results is consistent with a 57%
increase in shipments to third party customers and a 28% increase in shipments
of BHA Tex products to the Company's APC businesses. Pre-tax earnings as a
percentage of sales (third party and inter-company combined) for this segment
increased from 9.6% for the first nine months of fiscal 2003 to 19.0% in the
most recent nine-month period. The ePTFE manufacturing process includes
significant fixed costs resulting in strong earnings leverage from higher
production volumes.
INCOME TAXES
The effective income tax rate for the first nine months of fiscal 2004 was 33.5%
compared to 33.0% for the same period in the prior year. The rate for the
current year is generally consistent with the actual rate of tax for all of
fiscal 2003.
NET EARNINGS
Net earnings for the first nine months of fiscal 2004 were $11.1 million ($1.67
per diluted share) compared to earnings of $8.0 million ($1.23 per diluted
share) for the same period in fiscal 2003. Net earnings in the third quarter
were $3.3 million ($0.49 per diluted share) compared to earnings of $1.8 million
($0.27 per diluted share) for the same period in the prior year. The average
number of common and common equivalent shares increased by approximately 150,000
to 6.6 million shares for the nine-month period due to issuances of common
shares pursuant to option exercises, net of treasury stock purchases, and the
impact of the Company's higher share price on the number of common equivalent
shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased from $50.3 million at September 30, 2003 to $61.2
million at June 30, 2004. The current ratio at June 30, 2004 and September 30,
2003 was 3.0 and 2.9, respectively. The Company's cash increased from $18.8
million at September 30, 2003 to $25.1 million at June 30, 2004.
During the nine months ended June 30, 2004, the Company generated $12.3 million
in cash from operating activities compared to $12.4 million in the first nine
months of the prior year. Despite an increase in earnings, cash provided by
operating activities decreased slightly due to increased working capital
required to support the higher sales volume.
-19-
Investing activities resulted in the use of $0.7 million of cash during the nine
months ended June 30, 2004, as compared to $2.5 million during the first nine
months of fiscal 2003. In the most recent period, cash in the amount of $2.2
million that was previously deposited to secure bank guarantees was released by
the banks. This source of unrestricted cash largely offset cash used for
investing activities including $2.6 million used to acquire property plant and
equipment and $0.7 million invested in product line acquisitions. During the
first nine months of fiscal 2003, the Company invested $2.3 million in capital
expenditures.
During the first nine months of fiscal 2004, cash used by the Company in
financing activities included dividend payments of $3.1 million, repurchases of
the Company's common stock for $0.4 million and repayment of bank borrowings of
$2.1 million. During the first nine months of fiscal 2003, the Company's
financing activities included $1.3 million in net debt repayments, $0.7 million
in dividend payments, and $1.8 million used to repurchase the Company's common
stock.
At June 30, 2004, BHA had unused lines of credit of $21.0 million. The debt
structure includes: an $18.0 million revolving credit facility maturing on April
30, 2006; $5.0 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
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 believes it has taken reasonable care in
preparing these estimates and making these judgments, actual results could and
probably will differ from the estimates.
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.
-20-
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 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 following is specific guidance being provided for the fourth quarter of
fiscal 2004:
o For the fourth quarter of fiscal 2004, the Company anticipates that
consolidated net sales will increase by as much as 5% over the same
period in the prior year.
o Earnings for the fourth quarter of fiscal 2004 are expected to be in
the range of $0.30 to $0.35 per diluted share as compared to $.30
reported for the same period in the prior year. The earnings per
diluted share figures included within this Outlook section are
exclusive of any estimated expenses associated with the pending merger
with GE.
Due to various factors, visibility with respect to future results beyond 90 days
remains a challenge. For more information, you should refer to the "Outlook"
section and the "Factors Affecting Earnings and Share Price" section and other
information included in the Company's Annual Report on Form 10-K, filed with the
SEC on November 12, 2003. The Company cannot provide assurance that it will
achieve the goals or estimates that have been outlined above.
BACKLOG
The Company's backlog was $57.0 million at June 30, 2004 compared to a backlog
of $59.1 million at June 30, 2003 and $71.9 million at March 31, 2004.
Approximately $5.9 million of the June 30, 2004 backlog is scheduled to ship
after June 30, 2005.
-21-
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, 2003. 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, 2004, a 1%
fluctuation in market rates would impact interest expense by approximately
$130,000 annually.
EXCHANGE RATES AND FORWARD EXCHANGE CONTRACTS
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.
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 June 30, 2004, the amount of
unhedged exposures was less than $0.5 million.
The Company's U.S. subsidiaries 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
June 30, 2004, there were Euro 5.0 million (USD 6.0 million) of intercompany
loans that were economically hedged using forward exchange contracts for the
same amount. Changes in fair value of these foreign exchange contracts are
recorded in earnings.
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, 2004, the notional amount
of these forward exchange contracts was approximately $5.5 million and the
Company has incurred an unrealized loss of $248,000 thereon.
-22-
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 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 effect 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 these customers' financial results fail to
recover in the near term.
ITEM 4. CONTROLS AND PROCEDURES
CEO and CFO Certifications. Attached as Exhibits 31.1 and 31.2 and Exhibits 32.1
and 32.2 to 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 as
amended and 18 U.S.C. 1350 (the "Certifications"). This section of the quarterly
report contains the information concerning the evaluation of Disclosure Controls
& Procedures and changes to Internal Control 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 & Procedures and Internal Control Over Financial Reporting.
Disclosure Controls & Procedures are procedures that are designed for the
purpose of ensuring that information required to be disclosed in the Company's
reports filed under the Exchange Act (such as this quarterly report), is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms. Internal Control Over Financial Reporting 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 and 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 Control 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.
-23-
Conclusions Regarding Disclosure Controls and Procedures. Based upon the
required evaluation of the Company's Disclosure Controls and Procedures, the
Company's CEO and CFO have concluded that as of June 30, 2004, 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.
Changes to Internal Control over Financial Reporting. In accordance with the
SEC's requirements, the Company's CEO and the CFO determined in their evaluation
that during the quarterly period covered by this Report, there were no
significant changes in our Internal Control over Financial Reporting that have
materially affected, or are reasonably likely to materially affect, our Internal
Control over Financial Reporting.
PART II. OTHER INFORMATION
ITEM 2 - CHANGE IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In 1995, the board of directors of the Company adopted a stockholder rights plan
(the "Rights Agreement") under which it declared a distribution of one right for
each outstanding share of Company common stock. Each right entitled the holder
to purchase one-tenth of a share of Company common stock. The rights become
exercisable only if a person or group acquires beneficial ownership of 20% or
more of Company common stock or commences a tender offer or exchange offer upon
completion of which such person or group would beneficially own 20% or more of
Company common stock.
On each of May 13, 2004 and May 31, 2004, UMB Bank, N.A., the rights agent under
the Rights Agreement, and the Company amended the Rights Agreement to exclude
tender offers or acquisitions by a third party that are agreed to or approved by
the Company's board of directors from triggering he exercisability of the
rights. In connection with the potential merger of Casey Acquisition Company, a
wholly-owned subsidiary of General Electric Company, with and into the Company,
pursuant to which the Company would become a wholly-owned subsidiary of General
Electric Company (see "Item 5 - Other Events" below), the amendments
specifically provide that neither General Electric Company nor Casey Acquisition
Company would be deemed an "acquiring person" for purposes of the Rights
Agreement and excluded the execution of the merger agreement entered into
between the parties, the voting agreement entered into in connection with the
merger agreement and the consummation of the merger from triggering the
exercisability of rights under the Rights Agreement.
ITEM 5 - OTHER EVENTS:
On June 1, 2004, the Company announced that it had entered into an Agreement and
Plan of Merger, dated as of May 31, 2004, by and among General Electric Company,
a New York corporation, Casey Acquisition Company, a Delaware corporation which
is wholly-owned by General Electric Company, and the Company, under which Casey
Acquisition Company will merge with and into the Company, and the Company will
be wholly-owned by General Electric Company (the "Merger"). As consideration,
the Company's stockholders would receive $38.00 per share in cash. The closing
of the merger is subject to the affirmative vote of the Company's stockholders,
regulatory approvals, and other customary closing conditions.
-24-
Lamson Rheinfrank, Jr., James E. Lund, James J. Thome, and James C. Shay and
other related beneficial holders have entered into voting agreements with
General Electric Company, dated as of May 31, 2004 that require them to vote
their shares of Company common stock in favor of the merger, subject to certain
conditions. The Voting Agreement has been signed relative to 623,764 outstanding
shares together with an additional 415,632 shares subject to stock options. The
Voting Agreements will terminate in accordance with their terms upon a
termination of the Merger Agreement.
In connection with the proposed merger, a preliminary proxy statement has been
filed with the SEC by the Company. The Company's stockholders are urged to read
the proxy statement and any other relevant documents filed with the SEC
regarding the proposed merger because they contain important information. A
definitive proxy statement will be sent to the Company's stockholders seeking
their approval of the merger. Stockholders may obtain a free copy of the
definitive proxy statement when it becomes available, and other documents filed
or furnished by the Company with the SEC, at the SEC's web site at www.sec.gov.
The definitive proxy statement and other documents filed or furnished by the
Company may also be obtained for free by directing a request to the Company's
Corporate Secretary at 1-800-821-2222.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
(31.1) Certification of Chief Executive Officer pursuant to Rules 13(a)
- 14(a) and 15(d) - 14(a) of the Securities Exchange Act, as
amended.
(31.2) Certification of Chief Financial Officer pursuant to Rules 13(a)
- 14(a) and 15(d) - 14(a) of the Securities Exchange Act, as
amended.
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350.
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350.
(99.1) Agreement and Plan of Merger, dated as of May 31, 2004, by and
among General Electric Company, Casey Acquisition Company, and
BHA Group Holdings, Inc., incorporated by reference to Exhibit
99.1 to Form 8-K dated and filed with the SEC on June 1, 2004.
(99.2) Form of Voting Agreement, incorporated by reference to Exhibit
99.2 to Form 8-K dated and filed with the SEC on June 1, 2004.
(99.3) Amendment No. 1 to the Rights Agreement, dated as of May 13,
2004, between the Company and UMB Bank, N.A., incorporated by
reference to Amendment No. 1 to Form 8-A filed with the SEC on
June 1, 2004.
(99.4) Amendment No. 2 to Rights Agreement, dated as of May 31, 2004,
between the Company and UMB Bank, N.A., incorporated by
reference to Amendment No. 1 to Form 8-A filed with the SEC on
June 1, 2004.
-25-
(b) Reports on Form 8-K:
On April 21, 2004, 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
quarter ended March 31, 2004.
On June 1, 2004, the Company filed a Form 8-K under Item 5 and Item 7 in
which the Company announced that it had entered into an agreement whereby
a wholly-owned subsidiary of General Electric Company would be merged
with and into the Company in exchange for consideration of $38.00 per
share in cash.
No other reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2004.
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 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
-26-
BHA GROUP HOLDINGS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
(31.1) Certification of Chief Executive Officer pursuant to Rules
13(a) - 14(a) and 15(d) - 14(a) of the Securities Act, as
amended.
(31.2) Certification of Chief Financial Officer pursuant to Rules
13(a) - 14(a) and 15(d) - 14(a) of the Securities Act, as
amended.
(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350.
(32.2) Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350.
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