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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-15885
BRUSH ENGINEERED MATERIALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
OHIO 34-1919973
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
17876 ST. CLAIR AVENUE, CLEVELAND, OHIO 44110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
216-486-4200
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark 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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 29, 2002 there were 16,636,562 shares of Common Stock, no par
value, outstanding.
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PART I FINANCIAL INFORMATION
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Brush Engineered Materials Inc.
and its subsidiaries for the quarter ended June 28, 2002 are as follows:
Consolidated Statements of Income --
Three and six months ended June 28, 2002 and June 29, 2001
Consolidated Balance Sheets --
June 28, 2002 and December 31, 2001
Consolidated Statements of Cash Flows --
Six months ended June 28, 2002 and June 29, 2001
1
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------- -------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Net sales........................................ $ 100,749 $ 128,457 $ 190,331 $ 273,980
Cost of sales.................................. 85,679 104,881 165,007 216,369
----------- ----------- ----------- -----------
Gross Margin..................................... 15,070 23,576 25,324 57,611
Selling, general and administrative expenses... 16,907 18,770 32,147 40,276
Research and development expenses.............. 1,101 1,867 2,175 3,559
Other-net...................................... (373) 226 (932) 1,028
----------- ----------- ----------- -----------
Operating Profit (Loss).......................... (2,565) 2,713 (8,066) 12,748
Interest expense............................... 767 852 1,500 1,827
----------- ----------- ----------- -----------
Income (Loss) before income taxes................ (3,332) 1,861 (9,566) 10,921
Income taxes................................... (1,283) 586 (3,683) 3,440
----------- ----------- ----------- -----------
Net Income (Loss)................................ $ (2,049) $ 1,275 $ (5,883) $ 7,481
=========== =========== =========== ===========
Per Share of Common Stock: Basic................. $ (0.12) $ 0.08 $ (0.36) $ 0.45
Weighted average number of common shares outstanding... 16,558,192 16,508,248 16,556,319 16,487,575
Per Share of Common Stock: Diluted............... $ (0.12) $ 0.08 $ (0.36) $ 0.45
Weighted average number of common shares outstanding... 16,558,192 16,690,938 16,556,319 16,683,572
Cash dividends per common share.................. $ -- $ 0.12 $ -- $ 0.24
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 28, DEC. 31,
(DOLLARS IN THOUSANDS) 2002 2001
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ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,917 $ 7,014
Accounts receivable....................................... 61,682 54,616
Inventories............................................... 102,671 109,110
Prepaid expenses.......................................... 6,428 9,910
Deferred income taxes..................................... 41,722 38,672
-------- --------
Total Current Assets.............................. 216,420 219,322
Other Assets................................................ 30,089 33,224
Property, Plant and Equipment............................... 473,058 469,663
Less allowances for depreciation, depletion and
impairment............................................. 309,270 298,367
-------- --------
163,788 171,296
-------- --------
$410,297 $423,842
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 20,301 $ 27,582
Accounts payable.......................................... 21,110 13,869
Other liabilities and accrued items....................... 32,513 34,211
Dividends payable......................................... 0 0
Income taxes.............................................. 3,930 3,917
-------- --------
Total Current Liabilities......................... 77,854 79,579
Other Long-term Liabilities................................. 18,774 22,921
Retirement and Post-employment Benefits..................... 39,180 39,552
Long-term Debt.............................................. 49,219 47,251
Deferred Income Taxes....................................... 20,555 20,189
Shareholders' Equity........................................ 204,715 214,350
-------- --------
$410,297 $423,842
======== ========
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FIRST HALF ENDED
-------------------
JUNE 28, JUNE 29,
(DOLLARS IN THOUSANDS) 2002 2001
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NET (LOSS) INCOME........................................... $ (5,883) $ 7,481
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 10,415 11,018
Decrease (Increase) in accounts receivable................ (5,946) 1,984
Decrease (Increase) in inventory.......................... 7,897 (14,959)
Decrease (Increase) in prepaid and other current assets... 1,082 (116)
Increase (Decrease) in accounts payable and accrued
expenses............................................... 2,297 (9,987)
Increase (Decrease) in interest and taxes payable......... (826) 3,078
Increase (Decrease) in deferred income taxes.............. (227) (135)
Increase (Decrease) in other long-term liabilities........ (4,660) 2,691
Other -- net.............................................. 1,444 746
-------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES.......... 5,593 1,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment.... (2,299) (15,559)
Payments for mine development............................. -- (281)
Proceeds from sale of property, plant and equipment....... 140 --
-------- --------
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES..... (2,159) (15,840)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance/(repayment of) short-term debt..... (8,307) 8,437
Proceeds from issuance of long-term debt.................. 12,000 15,500
Repayment of long-term debt............................... (10,000) (7,500)
Issuance of Common Stock under stock option plans......... -- 1,753
Payments of dividends..................................... -- (3,974)
-------- --------
NET CASH PROVIDED FROM ( USED IN) FINANCING
ACTIVITIES.......................................... (6,307) 14,216
Effects of Exchange Rate Changes............................ (224) 71
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............. (3,097) 248
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 7,014 4,314
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ 3,917 4,562
======== ========
See notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- ACCOUNTING POLICIES
In management's opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of
June 28, 2002 and December 31, 2001 and the results of operations for the three
and six month periods ended June 28, 2002 and June 29, 2001. All of the
adjustments were of a normal and recurring nature.
NOTE B -- INVENTORIES
JUNE 28, DEC. 31,
(DOLLARS IN THOUSANDS) 2002 2001
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Principally average cost:
Raw materials and supplies................................ $ 15,785 $ 17,510
In process................................................ 67,794 75,458
Finished goods............................................ 46,155 41,789
-------- --------
Gross inventories.................................... 129,734 134,757
Excess of average cost over LIFO
Inventory value........................................... 27,063 25,647
-------- --------
Net inventories...................................... $102,671 $109,110
======== ========
NOTE C -- COMPREHENSIVE INCOME
The reconciliation between Net Income and Comprehensive Income for the
three and six month periods ended June 28, 2002 and June 29, 2001 is as follows:
SECOND QUARTER
ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
(DOLLARS IN THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
Net Income (Loss)................................ $(2,049) $1,275 $(5,883) $7,481
Cumulative Translation Adjustment................ 833 (189) 745 (779)
Change in the Fair Value of Derivative Financial
Instruments.................................... (4,559) 435 (3,167) (13)
------- ------ ------- ------
Comprehensive Income (Loss)...................... $(5,775) $1,521 $(8,305) $6,689
======= ====== ======= ======
5
NOTE D -- SEGMENT REPORTING
METAL MICRO- TOTAL ALL
(DOLLARS IN THOUSANDS) SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
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SECOND QUARTER 2002
Revenues from external
customers...................... $ 63,537 $34,481 $ 98,018 $ 2,731 $100,749
Intersegment revenues............ 768 474 1,242 3,743 4,985
Profit (loss) before interest and
taxes.......................... (5,074) 1,467 (3,607) 1,042 (2,565)
SECOND QUARTER 2001
Revenues from external
customers...................... $ 83,401 $42,301 $125,702 $ 2,755 $128,457
Intersegment revenues............ 352 472 824 5,539 6,363
Profit (loss) before interest and
taxes.......................... (1,614) 921 (693) 3,406 2,713
FIRST SIX MONTHS 2002
Revenues from external
customers...................... $119,454 $68,026 $187,480 $ 2,851 $190,331
Intersegment revenues............ 1,367 957 2,324 6,632 8,956
Profit (loss) before interest and
taxes.......................... (13,599) 3,669 (9,930) 1,864 (8,066)
FIRST SIX MONTHS 2001
Revenues from external
customers...................... $182,030 $89,196 $271,226 $ 2,754 $273,980
Intersegment revenues............ 1,938 1,301 3,239 10,386 13,625
Profit (loss) before interest and
taxes.......................... 4,946 3,340 8,286 4,462 12,748
NOTE E -- RELATED PARTY TRANSACTIONS
In 2002, the Company entered into insurance agreements with two executive
officers and five other employees. Pursuant to the agreements, the Company paid
an aggregate of $367,000 in premium on the life insurance contracts owned by the
seven employees. The agreements provide that the portion of the policy premiums
paid by the Company is treated as a loan from the Company to the employee. The
loans are secured by the insurance policies, and the agreements require the
employee to maintain the insurance policy's cash value in an amount at least
equal to the outstanding loan amount. The loan is payable upon the employee's
death or at an earlier date upon the occurrence of specified events. The loans
carry an interest rate equal to the applicable Federal rate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
Portions of the narrative set forth in this document that are not
statements of historical or current facts are forward-looking statements. The
Company's actual future performance may materially differ from that contemplated
by the forward-looking statements as a result of a variety of factors. These
factors include, in addition to those mentioned elsewhere herein:
- The condition of the markets which the Company serves, whether defined
geographically or by segment, with the major market segments being
telecommunications and computer, optical media, automotive electronics,
industrial components, aerospace and defense, and appliance;
- Changes in product mix and the financial condition of particular
customers;
- The Company's success in implementing its strategic plans and the timely
and successful completion of pending capital expansion projects;
- The availability of adequate lines of credit and the associated interest
rates;
- Other financial factors, including tax rates, exchange rates, energy
costs and the cost and availability of insurance;
- Changes in government regulatory requirements and the enactment of new
legislation that impacts the Company's obligations; and,
- The conclusion of pending litigation matters in accordance with the
Company's expectation that there will be no material adverse effects.
6
RESULTS OF OPERATIONS
SECOND QUARTER FIRST SIX MONTHS
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(Millions, except per share data) 2002 2001 2002 2001
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Sales.............................................. $100.7 $128.5 $190.3 $274.0
Operating Profit (Loss)............................ (2.6) 2.7 (8.1) 12.7
Diluted E.P.S...................................... $(0.12) $ 0.08 $(0.36) $ 0.45
Sales of $100.7 million in the second quarter 2002 were 22% lower than
sales in the second quarter 2001, while year-to-date sales of $190.3 million in
2002 were 31% lower than the comparable period in 2001. However, sales in the
second quarter 2002 grew 12% from the first quarter 2002, reversing a
five-quarter trend of declining sales. Sales began to decline slightly in the
first quarter 2001, with a major slow down beginning in the latter part of the
second quarter 2001 and continuing through the first quarter 2002. This slow
down was caused by a significant reduction in demand from the telecommunications
and computer market. This market accounted for 42% of the Company's total sales
in 2001 and 49% of sales in 2000. Sales into this market in the second quarter
2002 were lower than the second quarter 2001 but were slightly improved over the
last several quarters. This recent modest improvement may have resulted from
customer inventory replenishment programs, as the growth was not consistent
across product lines or applications. The incoming order rate and other
marketing information do not indicate that sales into this market will
substantially recover in the second half of the year. Other important markets
that the Company serves, including automotive, defense and plastic tooling,
improved during the current quarter over recent levels.
Sales from the Metal Systems Group and the Microelectronics Group (MEG),
the Company's two reportable business segments, were lower in the current
quarter and year compared to the prior year.
International sales accounted for 26.8% of the Company's total sales in the
second quarter 2002 compared to 30.0% in the second quarter 2001. For the first
six months of the year, international sales were $53.0 million, or 27.8% of
total sales, in 2002 and $80.1 million, or 29.3% of total sales in 2001.
International sales include sales from the Company's international operations as
well as direct exports from the U.S. Sales into Western Europe and South Asia,
the Company's two major international sales regions, were lower in the first
half of 2002 compared to the first half of 2001.
The dollar weakened against the yen, euro and sterling during the second
quarter 2002 compared to the exchange rates earlier in the year. Sales from the
Company's international operations are predominately denominated in the local
currency while the majority of the cost of goods sold is incurred in dollars. As
the dollar weakens against these currencies, the translated value of margins on
the Company's foreign currency denominated sales should improve (all else
equal). The currency translation effect on sales was a favorable $0.1 million in
the second quarter 2002 and an unfavorable $0.8 million for the first half of
2002 versus the same periods in 2001. The Company uses foreign currency
derivative contracts to hedge this exposure against the dollar strengthening. A
weaker dollar in future periods may generate smaller exchange gains or
potentially exchange losses that will offset a portion of the benefit from the
higher margins.
Total gross margin was $15.1 million in the second quarter 2002 compared to
$23.6 million in the second quarter 2001 and the margin as a percent of sales
declined from 18.4% to 15.0% during these two periods. The gross margin for the
first six months was $25.3 million (13.3% of sales) in 2002 and $57.6 million
(21.0% of sales) in 2001. Lower sales volumes in 2002 reduced the margin
contribution by $12.9 million in the second quarter and $38.9 million for the
first two quarters. Changes in the product mix resulted in a net unfavorable
$2.8 million and $4.9 million for the second quarter and year-to-date periods,
respectively. Offsetting a portion of the unfavorable volume and mix impacts was
a reduction in manufacturing overhead costs and inventory provisions in 2002
compared to 2001. These costs were $7.1 million lower in the second quarter 2002
and $11.6 million lower in the first six months of 2002 than the comparable
periods in 2001. Expenses, including manpower, services and supplies, were
reduced in the second half of 2001 in response to the declining sales volumes.
The remaining difference in margins between periods was attributable to copper
prices and the foreign currency impact.
7
Total selling, general and administrative expenses (SG&A) were $16.9
million, or 16.8% of sales in the second quarter 2002 and $18.8 million, or
14.6% of sales, in the second quarter 2001. For the first half of the year, SG&A
expenses were $32.1 million, or 16.9% of sales, in 2002, and $40.3 million, or
14.7% of sales, in 2001. Expenses were lower in 2002 than in 2001 due to the
aforementioned manpower reductions and other cost savings initiatives
implemented in the second half of 2001. In addition, corporate costs associated
with chronic beryllium disease, including legal costs, charges to the legal
reserves and medical oversight, were $0.8 million lower in the second quarter
2002 than the second quarter 2001 and $1.6 million lower in the first six months
of 2002 compared to last year. Incentive compensation expenses were $0.2 million
higher in the second quarter 2002 than the second quarter 2001, but were $2.2
million lower than 2001 on a year-to-date basis.
Research and development expenses (R&D) declined to $1.1 million in the
second quarter 2002 from $1.9 million in the second quarter 2001. For the first
six months of the year, R&D expenses were $2.2 million in 2002 and $3.6 million
in 2001. The majority of the change in expense levels in the quarter and year
were in the Metal Systems Group and resulted from the cost reduction initiatives
implemented in the second half of 2001.
Other net income was $0.4 million in the second quarter 2002 compared to an
expense of $0.2 million in the second quarter 2001. The year-to-date other
income was $0.9 million in 2002 while the year-to-date other expense was $1.0
million in 2001. The financing fee on precious metal and certain copper
inventories was $0.2 million lower in the second quarter 2002 and $0.7 million
lower in the first half of the year as compared to the same periods in 2001. The
savings resulted from a reduction in the quantity of metal on hand as well as
lower available financing rates. Foreign currency exchange gains were $1.3
million in the second quarter 2002 and $2.0 million for the first six months of
the year. Exchange gains were $0.6 million and $1.1 million in the comparable
periods last year. The Company recorded an unrealized gain on the valuation of a
non-employee director deferred compensation plan of $0.5 million in the first
quarter 2002. Other-net also includes bad debt expenses, amortization of
intangibles, gain or loss on the sale of capital assets, interest income and
other non-operating items.
The operating loss was $2.6 million in the second quarter 2002 and $8.1
million in the first six months of the year. In 2001, the Company generated an
operating profit of $2.7 million in the second quarter and $12.7 million in the
first half of the year. The lower margins as a result of the reduced sales
volumes coupled with the adverse sales mix effect and offset in part by lower
expenses caused the reduction in operating profit between periods.
Interest expense, net of amounts capitalized in association with long-term
capital projects, was $0.8 million in the second quarter 2002 and $0.9 million
in the second quarter 2001. For the first two quarters, interest expense was
$1.5 million in 2002 and $1.8 million in 2001. The lower expense in 2002 for the
quarter and the first half resulted from a lower average borrowing rate as well
as reduced levels of outstanding debt.
The loss before income taxes was $3.3 million in the second quarter 2002
and $9.6 million in the first half of the year. In 2001, the Company recorded
income before income taxes of $1.9 million in the second quarter and $10.9
million in the first six months of the year.
A tax benefit rate of 38.5% was applied against the loss before income
taxes in both the second quarter and the first six months of 2002. A tax
provision rate of 31.5% was used in both the second quarter and first half of
2001. The main differences between the effective rates and the statutory rates
in the periods presented were the benefits of percentage depletion and foreign
source income.
The net loss was $2.0 million in the second quarter 2002, or $0.12 per
share diluted, compared to a net income of $1.3 million, or $0.08 per share
diluted in the second quarter 2001. For the first six months, the net loss was
$5.9 million, or $0.36 per share diluted, in 2002 while the net income was $7.5
million, or $0.45 per share diluted, in 2001. The $0.12 loss in the second
quarter represents a 48% improvement over the net loss in the first quarter 2002
and an even stronger improvement over each of the last two quarters of 2001.
SEGMENT DISCLOSURES
The Company aggregates its five business units into the two reportable
segments. The operating results from the Company's beryllium mining and milling
operations, as managed by Brush Resources Inc., a wholly owned subsidiary, and
BEM Services, Inc., a wholly owned subsidiary that provides administrative,
financial and other
8
corporate oversight services to the rest of the corporation, are included in the
All Other column in the segment footnote to the consolidated financial
statements.
METAL SYSTEMS GROUP
SECOND QUARTER FIRST SIX MONTHS
--------------- -----------------
(MILLIONS) 2002 2001 2002 2001
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Sales................................................ $63.5 $83.4 $119.5 $182.0
Operating Profit (Loss).............................. (5.1) (1.6) (13.6) 4.9
The Metal Systems Group consists of Alloy Products, Technical Materials,
Inc. (TMI) and Beryllium Products. The following chart highlights business unit
sales as a percent of the total Metal Systems Group sales:
SECOND FIRST SIX
QUARTER MONTHS
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Percent of Segment Sales
Alloy................................................. 64.6% 75.5% 66.3% 73.7%
TMI................................................... 19.5 15.1 20.1 18.2
Beryllium Products.................................... 15.9 9.4 13.6 8.1
Sales of Alloy Products were 35% lower in the second quarter 2002 than the
second quarter 2001 while 2002 year-to-date sales were 41% lower than the
comparable period in 2001. After achieving record levels in the first quarter
2001, Alloy sales declined in each of the subsequent quarters in 2001. Sales
have grown in each of the first two quarters of 2002. Alloy Products sells and
manufactures two main product lines -- strip products and bulk products.
Strip products consist of precision strip and thin gauge rod and wire
manufactured from copper beryllium and nickel beryllium alloys. Sales of strip
products were 32% lower in the second quarter 2002 than the second quarter 2001
and 42% lower in the first six months of 2002 than the first six months of 2001.
The sales decline from last year resulted primarily from the weak demand from
the telecommunications and computer market. Sales into this market started to
show some improvement in South Asia in the second quarter 2002 over recent
levels. Sales of strip products into the automotive and appliance markets also
improved slightly over recent levels.
Pounds sold of strip products declined by 21% in the quarter and 34%
year-to-date versus the comparable periods in 2001. The majority of the decline
in both the quarter and for the year was in the higher beryllium-containing
strip products as well as rod and wire products. These products typically are
higher priced and generate higher contribution margins. Sales of the lower
beryllium-containing alloys in pounds increased in the second quarter 2002 over
the second quarter 2001 but were still lower than 2001 on a year-to-date basis.
Total strip pounds sold improved by 15% over the first quarter 2002 and were
also higher than the shipments in the last two quarters of 2001.
Bulk products are copper and nickel alloys manufactured in rod, bar, tube,
plate and other forms. Sales of these products were 37% lower in the second
quarter 2002 compared to the second quarter 2001 while year-to-date 2002 sales
were 41% behind the prior year's pace. The main cause for the decline was lower
sales into the undersea telecommunications market. Management believes that
sales into these niche applications will remain behind last year's levels for
the balance of 2002. Demand from the oil and gas sector within the industrial
components market was also weak during the first half of 2002, but is
anticipated to improve in the second half of the year. Sales into the plastic
tooling market were strong throughout the majority of the first half of 2002 but
began to soften late in the second quarter. Bulk products pounds sold were 33%
lower than last year in both the second quarter and first six months of 2002.
TMI manufactures engineered material systems that are used in
semiconductors, contacts and conductors. Revenues from TMI in the second quarter
2002 were flat with the second quarter 2001 while second quarter 2002
year-to-date revenues were 27% lower than the same period in 2001. After
declining in the second and third quarters of 2001, sales of TMI products
increased in each of the last three quarters. The decline in 2001 sales was
9
caused by the weakness in the telecommunications and computer market. While
activity in this market improved modestly in the second quarter 2002, sales have
not rebounded to the prior levels from 2000 and early 2001 and the outlook for
the balance of the year remains weak. Sales from TMI into the automotive market
continued to be strong in the second quarter 2002. Sales order entry rates have
increased in each of the last four quarters. TMI marketing and research
personnel continue to develop new applications for TMI products in emerging
markets.
Beryllium Products manufactures pure beryllium and beryllium aluminum
alloys that are sold into the defense, electronics, medical and optical scanning
markets. While accounting for less than 9% of the Company's total sales thus far
in 2002, sales from Beryllium Products grew 30% in the second quarter 2002 and
11% in the first six months of 2002 compared to the same periods in 2001. This
growth was mainly due to improved sales for defense applications. Order entry
rates and other marketing data indicate that sales for defense applications
should remain strong for the next several quarters.
The gross margin on Metal Systems Group sales declined by $6.9 million in
the second quarter 2002 from the second quarter 2001 and $27.7 million in the
first six months of 2002 compared to 2001. The lower sales volume reduced the
contribution margin by $9.7 million in the second quarter. The sales mix was an
additional unfavorable $2.3 million in the second quarter. Overhead spending was
reduced, primarily in Alloy Products and TMI, generating $5.0 million of savings
on a quarter-to-quarter basis. The remaining change in margins resulted from a
slightly net favorable impact from copper prices and currency. The lower sales
volumes caused a $29.9 million reduction in the contribution margin on a
year-to-date basis. The sales mix for the first six months was an unfavorable
$6.9 million, occurring primarily in Alloy Products, while the unfavorable
foreign currency impact was essentially offset by lower copper prices in the
first half of 2002. Manufacturing overhead costs within the Metal Systems Group
were $9.4 million lower in the first half of 2002 compared to the first half of
2001. Manpower costs, outside services and maintenance and supply costs were all
lower in the first half of 2002 than the first half of 2001 as total
manufacturing overhead costs were reduced at the three major facilities within
Metal Systems (Elmore, Ohio, Reading, Pennsylvania and Lincoln, Rhode Island).
Offsetting a portion of these benefits was an increase in rent expense in Alloy
Products of $2.5 million in 2002 over 2001 primarily due to the graduated
payment schedule on the leased equipment within the Elmore strip manufacturing
operations. Elmore manufacturing operations made improvements in unscheduled
equipment downtime, yields and other operating efficiencies during 2002. These
improvements contributed to the overhead cost reductions as well as prevented
the unfavorable sales mix from being larger.
SG&A, R&D and other-net expenses improved $3.4 million in the second
quarter 2002 from the second quarter 2001 and $9.2 million in the first six
months of 2002 from the first six months of 2001. The lower expense levels
resulted primarily from the manpower reductions and other cost saving
initiatives implemented in the second half of 2001. Incentive compensation
expense was unchanged in the second quarter but $1.2 million lower for the year
compared to 2001. The second quarter 2002 expenses included one-time severance
costs of $0.4 million.
The operating loss from Metal Systems was $5.1 million in the second
quarter 2002 compared to $1.6 million in the second quarter 2001. For the first
six months of 2002, the operating loss was $13.6 million compared to an
operating profit of $4.9 million in the first half of 2001. The margin impact of
the lower sales volumes offset in part by cost reductions within manufacturing
overhead as well as SG&A and R&D account for the majority of the change in
profits between periods.
MICROELECTRONICS GROUP
SECOND QUARTER FIRST SIX MONTHS
--------------- -----------------
(MILLIONS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
Sales.................................................. $34.5 $42.3 $68.0 $89.2
Operating Profit....................................... 1.5 0.9 3.7 3.3
10
The Microelectronics Group (MEG) consists of Williams Advanced Materials
Inc. (WAM) and Electronic Products. The following chart highlights business unit
sales as a percent of the total Microelectronics Group sales:
SECOND FIRST SIX
QUARTER MONTHS
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Percent of Segment Sales
WAM................................................... 78.7% 77.2% 77.9% 76.3%
Electronic Products................................... 21.3 22.8 22.1 23.7
WAM manufactures precious, non-precious and specialty metal products for
sale into the optical media storage, microelectronic, decorative and performance
film, magnetic head and aerospace markets. Sales from WAM declined 17% in the
second quarter 2002 from the second quarter 2001 while 2002 year-to-date sales
declined 22% from last year. The cost of the metal content of the products sold
by WAM is a straight pass-through to the customer; therefore, WAM's revenues,
but not necessarily margins or profits, are affected by the cost and mix of the
metals sold. This effect can then distort sales comparisons between periods. The
value added, or sales less the cost of the metal sold, removes the impact of
changes in the metal mix and cost. WAM's value added only declined 2% in the
second quarter 2002 from the second quarter 2001 while the value added for the
first six months of 2002 was 6% lower than in 2001. A large portion of this mix
shift was due to the substitution of silicon for gold and silver alloys in
various vapor deposition target applications that began very late in the fourth
quarter 2001. This conversion in the marketplace appeared to stabilize late in
the second quarter 2002. While WAM was able to maintain its market share, the
value added from all target products in total was lower in 2002 as the
underlying demand has softened from last year. Frame lid assembly sales and
value added were higher in the current quarter and year due to the acquisition
of a former competitor's business late in the second quarter 2001.
Electronic Products' sales decreased 24% in the second quarter 2002 from
the second quarter 2001, while year-to-date sales were 22% less than last year.
The decline was caused by the softness in demand from the telecommunications and
computer market. Sales of beryllia ceramic products accounted for over half of
the sales decline in both the current quarter and first half of 2002. Management
does not anticipate revenues from these products to improve in the second half
of 2002. Sales of electronic packages, while relatively minor, improved in the
second quarter 2002 and in the first six months over the comparable periods in
2001. Sales of thick film circuits, which are used in commercial and defense
applications, declined in 2002 from the prior year.
The gross margin on MEG sales was unchanged in the second quarter 2002
compared to the second quarter 2001 despite the 18% reduction in sales. The
difference in sales volumes reduced the margin contribution by $2.8 million.
However, the sales mix effect from WAM was a favorable $1.6 million. In
addition, manufacturing overhead costs were reduced by $1.2 million in the
second quarter 2002 as compared to the second quarter 2001. The MEG gross margin
was $1.2 million lower in the first six months of 2002 than in the comparable
period last year. The volume impact on margins from the sales decline was $6.8
million while the mix effect was a favorable $3.3 million. Manufacturing
overhead costs and inventory provisions were $2.3 million lower in the first six
months of 2002 than in the first six months of 2001. The majority of the cost
reductions were in manpower and supplies within Electronic Products.
SG&A, R&D and Net-other expenses were $0.6 million lower in the second
quarter 2002 from the second quarter 2001. These expenses within the MEG were
$1.6 million lower in the first six months of 2002 compared to the first six
months of 2001. The reduced precious metal financing fee was a major cause for
the difference in expenses for the quarter and the first half of the year.
Incentive compensation expense was $0.4 million lower in 2002 on a year-to-date
basis.
The MEG generated an operating profit of $1.5 million in the second quarter
2002, an improvement over the $0.9 million profit earned in the second quarter
2001. For the first six months of the year, operating profit improved from $3.3
million in 2001 to $3.7 million in 2002. Operating profit was 5.3% of sales in
the first half of 2002 and 3.7% in the first half of 2001.
11
LEGAL PROCEEDINGS
One of the Company's subsidiaries, Brush Wellman Inc., is a defendant in
proceedings in various state and federal courts brought by plaintiffs alleging
that they have contracted chronic beryllium disease (CBD) or related conditions
as a result of exposure to beryllium. Plaintiffs in CBD cases seek recovery
under theories of intentional tort and various other legal theories and seek
compensatory and punitive damages, in many cases of an unspecified sum. Spouses,
if any, claim loss of consortium.
The following table summarizes the associated activity with CBD cases:
QUARTER ENDED
-----------------------------
JUNE 28, 2002 MAR. 29, 2002
------------- -------------
Total cases pending........................................ 52 65
Total plaintiffs........................................... 102 170
Number of claims (plaintiffs) filed during period ended.... 1(2) 0(0)
Number of claims (plaintiffs) dismissed in prior period,
but not previously reported.............................. 0(0) 1(3)
Number of claims (plaintiffs) settled during period
ended.................................................... 12(68) 7(15)
Aggregate cost of settlements during period ended (dollars
in thousands)............................................ $4,420 $ 25
Number of claims (plaintiffs) otherwise dismissed.......... 2(2) 3(5)
Number of claims (plaintiffs) voluntarily withdrawn........ 0(0) 0(0)
Additional CBD claims may arise. Management believes that the Company has
substantial defenses in these cases and intends to contest the suits vigorously.
Employee cases, in which plaintiffs have a high burden of proof, have
historically involved relatively small losses to the Company. Third party
plaintiffs (typically employees of customers or of contractors) face a lower
burden of proof than do employees or former employees, but these cases are
generally covered by varying levels of insurance. In class actions, plaintiffs
have historically encountered difficulty in obtaining class certification. A
reserve was recorded for CBD litigation of $8.2 million at June 28, 2002 and
$13.0 million at December 31, 2001. A receivable was recorded of $4.3 million at
June 28, 2002 and $6.6 million at December 31, 2001 from the Company's insurance
carriers as recoveries for insured claims.
Although it is not possible to predict the outcome of the litigation
pending against the Company and its subsidiaries, the Company provides for costs
related to these matters when a loss is probable and the amount is reasonably
estimable. Litigation is subject to many uncertainties, and it is possible that
some of these actions could be decided unfavorably in amounts exceeding the
Company's reserves. An unfavorable outcome or settlement of a pending CBD case
or additional adverse media coverage could encourage the commencement of
additional similar litigation. The Company is unable to estimate its potential
exposure to unasserted claims.
While the Company is unable to predict the outcome of the current or future
CBD proceedings, based upon currently known facts and assuming collectibility of
insurance, the Company does not believe that resolution of these proceedings
will have a material adverse effect on the financial condition or the cash flow
of the Company. However, the Company's results of operations could be materially
affected by unfavorable results in one or more of these cases. In the fourth
quarter of 2001, the Company began settlement negotiations involving 21 cases
and 88 plaintiffs. During the second quarter of 2002, the Company settled 12 of
these cases and 68 plaintiffs were dismissed. Currently, all purported class
actions against the Company have been dismissed; however, one of them is pending
appeal in the 8th District Court of Appeals (Ohio).
Standards for exposure to beryllium are under review by governmental
agencies, including the United States Occupational Safety and Health
Administration, and by private standard setting organizations. One result of
these reviews might be more stringent worker safety standards. More stringent
standards, as well as other factors such as the adoption of beryllium disease
compensation programs and publicity related to these reviews may also affect
buying decisions by the users of beryllium-containing products. If the standards
are made more stringent or the Company's customers decide to reduce their use of
beryllium-containing products, the Company's operating results, liquidity and
capital resources could be materially adversely affected. The extent of the
adverse effect
12
would depend on the nature and extent of the changes to the standards, the cost
and ability to meet the new standards, the extent of any reduction in customer
use and other factors that cannot be estimated.
FINANCIAL POSITION
Cash flow from operations was $5.6 million in the first half of 2002 as the
positive effect of working capital changes and depreciation more than offset the
net loss of $5.9 million. Cash balances were $3.9 million at the end of the
second quarter 2002 compared to $7.0 million at December 31, 2001. The cash flow
from operations and the reduction in the cash balances were used to pay down
debt and fund capital expenditures.
Accounts receivable increased $7.1 million during the first six months of
2002 partially as a result of the higher sales in the second quarter 2002. The
days sales outstanding (DSO), a measure of the customer collection period,
increased by two days during this same time period as well. The DSO did improve
in the second quarter 2002 over the first quarter 2002. Accounts written off to
bad debts and changes in the allowance for doubtful accounts were $0.5 million
higher in the first two quarters of 2002 than in the first two quarters of 2001.
Inventories declined by $6.4 million in the first half of 2002. The
majority of the decline was in the Metal Systems Group's inventories during the
first quarter 2002. Improvements in operating efficiencies and equipment
utilization rates have allowed Alloy Products to reduce its work-in-process and
raw material inventories. Inventory turns at the end of the second quarter 2002
remained unchanged from the year-end 2001 level.
Accounts payable increased by $7.2 million during the first six months of
2002 due to higher levels of business activity in the current quarter compared
to year-end 2001 as well as the timing of payments.
Capital expenditures totaled $2.3 million in the first two quarters of
2002. The Company reduced its capital spending rate beginning in the second half
of 2001 in order to conserve cash in light of the operating losses. Spending by
the MEG was $1.3 million while spending by the Metal Systems Group totaled $0.9
million. Within the MEG, WAM spent approximately $1.0 million in the first half
of 2002 on a series of small manufacturing and information technology projects.
Management expects that the expenditure rate may increase slightly in the second
half of 2002 but will remain well below historical levels.
Total debt on the balance sheet totaled $69.5 million at the end of the
second quarter 2002, a decline of $5.3 million from December 31, 2001.
Short-term debt declined by $7.3 million while long-term debt increased by $2.0
million. The Company was in compliance with its debt covenants as of the end of
the second quarter 2002. The Company had available and unused debt capacity of
$18.5 million under its revolving credit agreement and $13.7 million under
various short-term foreign currency lines of credit as of the end of the second
quarter 2002.
The Company paid $4.4 million to settle numerous CBD litigation cases in
the first half of 2002 (see Legal Proceedings). The Company received $2.2
million from its insurance carriers in the first half of 2002 as a partial
recovery of the insured portion of these claims. The Company had previously
reserved the settlement amounts and recorded the amounts to be recovered from
insurance. Therefore, these payments and receipts did not impact net income in
2002.
The Company reviewed the carrying values of its deferred tax assets in
accordance with SFAS No. 109, "Accounting for Income Taxes", and determined that
a valuation allowance was not required as of the end of the second quarter 2002.
Cash flow from operations was $1.8 million in the first half of 2001.
Accounts receivable were $3.4 million lower at the end of the second quarter
2001 than the previous year end as a result of lower sales. Inventories
increased $14.0 million in the first two quarters of 2001 due to a planned
replenishment of finished goods inventories, the need to cover for planned plant
shutdowns in the second half of the year and the $3.1 million purchase of
beryllium under a long-term supply arrangement. Capital spending was $15.8
million in the first half of 2001, with approximately 60% of the spending in
support of Metal Systems. Included in the total spending was the purchase of
land and mineral rights for $1.3 million by the Company's Utah mining
operations. Total balance sheet debt increased by $15.1 in the first half of
2001. The Company paid dividends totaling $4.0 million in the first two quarters
of 2001. In the third quarter 2001, the Company suspended its regular quarterly
dividend
13
program in order to improve the Company's future cash and debt positions. Cash
balances increased $0.2 million during the first half of 2001.
Funds from operations and the available borrowing capacity are believed to
be adequate to support operating requirements, capital expenditures and
environmental remediation projects. The Company's ability to raise additional
debt financing above the existing lines may currently be limited due to the
current operating losses and leverage ratios.
OUTLOOK
Improvement in the telecommunications and computer market remains key to
the Company's sales growth. While portions of this vast market have shown mild
growth, the over all growth rate for 2002 appears sluggish at best. The general
economic recovery appears to be slower than anticipated, which may also slow
down the growth in the Company's revenues. In addition, the Company's third
quarter sales are typically adversely affected by customer plant shutdowns.
The Company will continue its emphasis on controlling costs and improving
manufacturing performance, including yields, on-time delivery and machine
up-time. Further cost reduction initiatives may be considered in the second half
of 2002 to mitigate the impact of slower revenue growth. Manpower levels at the
end of the second quarter 2002 remain essentially unchanged since the end of
2001. Cost comparisons between the third and fourth quarter 2002 to the
respective quarters in 2001 may not be as favorable as the first two quarters of
2002 compared to the first two quarters of 2001 as a portion of the cost savings
initiatives were implemented during the second half of 2001.
CRITICAL ACCOUNTING POLICIES
Please refer to pages 19 and 20 of the Company's annual report to
shareholders for the period ended December 31, 2001 for information regarding
the Company's critical accounting policies. There were no significant changes to
these policies during the first six months of 2002.
MARKET RISK DISCLOSURES
For information regarding the Company's market risks, please refer to pages
20 and 21 of the Company's annual report to shareholders for the period ended
December 31, 2001.
14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject, from time to time, to a
variety of civil and administrative proceedings arising out of their normal
operations, including, without limitation, product liability claims, health,
safety and environmental claims and employment-related actions. Among such
proceedings are the cases described below.
CBD CLAIMS
There are claims pending in various state and federal courts against Brush
Wellman, one of the Company's subsidiaries, by some of its employees, former
employees or their surviving spouses and by third-party individuals (typically
employees of customers or of independent contractors) alleging that they
contracted, or have been placed at risk of contracting, chronic beryllium
disease ("CBD") or related conditions as a result of exposure to beryllium.
Plaintiffs in CBD cases seek recovery under theories of intentional tort and
various other legal theories and seek compensatory and punitive damages, in many
cases of an unspecified sum. Spouses, if any, claim loss of consortium.
During the second quarter of 2002, the number of CBD cases decreased from
65 cases (involving 170 plaintiffs), as of March 29, 2002 to 52 cases (involving
102 plaintiffs), as of June 28, 2002. During the second quarter, one third-party
case (involving two plaintiffs) was filed; and two employee cases (each
involving one plaintiff) were voluntarily dismissed by the plaintiffs. As part
of the settlement negotiations previously reported in the Company's Form 10-K
for 2001, three third-party cases (involving five plaintiffs), and nine employee
cases (involving 17 plaintiffs) were dismissed during the second quarter of
2002. In one third-party case (involving two plaintiffs) that was part of those
settlement negotiations, a settlement agreement has been finalized but the
Company is awaiting final court dismissal. In one third-party case that was also
part of those settlement negotiations, 46 plaintiffs have settled and dismissed
their claims, but the case remains pending with one plaintiff. Certification has
been denied in the Company's only remaining purported class action.
The 52 pending CBD cases fall into three categories: 29 "employee cases"
involving an aggregate of 29 Brush Wellman employees, former employees or
surviving spouses (in 15 of these cases, a spouse has also filed consortium
claims as part of his or her spouse's case); 22 cases involving third-party
individual plaintiffs, with 23 individuals (and 18 spouses who have filed claims
as part of their spouse's case and ten children who have filed claims as part of
their parent's case); and one purported class action involving seven
individuals, as discussed more fully below. Employee cases, in which plaintiffs
have a high burden of proof, have historically involved relatively small losses
to the Company. Third-party plaintiffs (typically employees of our customers or
contractors) face a lower burden of proof than do employees or former employees,
but these cases are generally covered by varying levels of insurance.
In the one purported class action that is pending on appeal after the
denial of class certification, the named plaintiffs allege that past exposure to
beryllium has increased their risk of contracting CBD, though they do not claim
to have actually contracted it. They seek medical monitoring funds to be used to
detect medical problems that they believe may develop as a result of their
exposure, and seek punitive damages. This purported class action was brought by
named plaintiffs on behalf of tradesmen who worked in one of Brush Wellman's
facilities as employees of independent contractors.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders for 2002 was held on May
7, 2002.
(b) At the Annual Meeting, three directors were elected to serve for a term
of three years by the following vote:
SHARES VOTED SHARES VOTED SHARES VOTED SHARES
"FOR" "AGAINST" "ABSTAINING" "NON-VOTED"
------------ ------------ -------------- -------------
Albert C. Bersticker.... 14,331,996 -0- 229,397 -0-
Charles F. Brush III.... 14,336,643 -0- 224,749 -0-
N. Mohan Reddy PhD...... 14,325,919 -0- 235,474 -0-
The following directors continued their term of office after the
meeting: Gordon D. Harnett, Joseph P. Keithley, David H. Hoag, William
P. Madar, William R. Robertson and John Sherwin Jr.
(c) The selection of Ernst & Young LLP as independent auditors for 2002 was
ratified and approved by the following vote:
SHARES VOTED SHARES VOTED SHARES VOTED SHARES
"FOR" "AGAINST" "ABSTAINING" "NON-VOTED"
------------ ------------ -------------- -------------
14,310,498 167,033 83,858 2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Statement re computation of per share earnings (filed as Exhibit
11 to Part I of this report).
(b) Reports on Form 8-K
Brush Engineered Materials Inc. filed a report on Form 8-K on June 25,
2002 that included a copy of a press release which related to the
settlement of a number of litigation claims.
16
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.
BRUSH ENGINEERED MATERIALS INC.
Dated: August 12, 2002
/s/ John D. Grampa
-----------------------------------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
17