Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of May 2, 2003 there were 16,563,098 shares of Common Stock, no par
value, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 March 28, 2003 are as follows:
Consolidated Statements of Income --
Three months ended March 28, 2003 and March 29, 2002
Consolidated Balance Sheets --
March 28, 2003 and December 31, 2002
Consolidated Statements of Cash Flows --
Three months ended March 28, 2003 and March 29, 2002
1
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FIRST QUARTER ENDED
-------------------------
MARCH 28, MARCH 29,
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 2003 2002
- ---------------------------------------------------------------------------------------
Net sales................................................... $ 99,518 $ 89,582
Cost of sales............................................. 82,405 79,328
----------- -----------
Gross Margin................................................ 17,113 10,254
Selling, general and administrative expenses.............. 17,298 15,240
Research and development expenses......................... 1,108 1,074
Other-net................................................. 829 (559)
----------- -----------
Operating Loss.............................................. (2,122) (5,501)
Interest expense.......................................... 689 733
----------- -----------
Loss before income taxes.................................... (2,811) (6,234)
Income taxes.............................................. 205 (2,400)
----------- -----------
Net Loss.................................................... $ (3,016) $ (3,834)
=========== ===========
Per Share of Common Stock: Basic............................ $ (0.18) $ (0.23)
Weighted average number of common shares outstanding........ 16,561,430 16,554,667
Per Share of Common Stock: Diluted.......................... $ (0.18) $ (0.23)
Weighted average number of common shares outstanding........ 16,561,430 16,554,667
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MAR 28, DEC. 31,
(DOLLARS IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents................................. $ 3,387 $ 4,357
Accounts receivable....................................... 58,980 47,543
Inventories............................................... 94,805 94,324
Prepaid expenses.......................................... 8,830 9,766
Deferred income taxes..................................... 301 244
-------- --------
Total Current Assets................................. 166,303 156,234
Other Assets................................................ 25,350 25,629
Long-term deferred income taxes............................. 529 472
Property, Plant and Equipment............................... 477,960 476,283
Less allowances for depreciation, depletion and
impairment............................................. 328,810 323,739
-------- --------
149,150 152,544
-------- --------
$341,332 $334,879
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 23,166 $ 27,235
Accounts payable.......................................... 21,966 15,129
Other liabilities and accrued items....................... 31,183 30,439
Income taxes.............................................. 976 786
-------- --------
Total Current Liabilities............................ 77,291 73,589
Other Long-term Liabilities................................. 16,507 17,459
Retirement and Post-employment Benefits..................... 49,102 48,518
Long-term Debt.............................................. 41,185 36,219
Shareholders' Equity........................................ 157,247 159,094
-------- --------
$341,332 $334,879
======== ========
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
---------------------
MARCH 28, MARCH 29,
(DOLLARS IN THOUSANDS) 2003 2002
- -----------------------------------------------------------------------------------
NET LOSS.................................................... $ (3,016) $ (3,834)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED FROM
(USED IN) OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 5,184 5,119
Decrease (Increase) in accounts receivable................ (11,640) (3,384)
Decrease (Increase) in inventory.......................... (454) 4,074
Decrease (Increase) in prepaid and other current assets... 926 867
Increase (Decrease) in accounts payable and accrued
expenses............................................... 7,476 (1,266)
Increase (Decrease) in interest and taxes payable......... 282 (715)
Increase (Decrease) in deferred income taxes.............. (52) (55)
Increase (Decrease) in other long-term liabilities........ (333) (234)
Other -- net.............................................. 1,445 (139)
-------- --------
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES.......................................... (182) 433
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment.... (1,587) (887)
Payments for mine development............................. (101) --
Payments for other investments............................ (1) --
Proceeds from sale of property, plant and equipment....... 9 --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES................ (1,680) (887)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance/(repayment) of short-term debt..... 842 (2,077)
Proceeds from issuance of long-term debt.................. -- 6,968
Repayment of long-term debt............................... (34) (10,000)
-------- --------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES.......................................... 808 (5,109)
Effects of Exchange Rate Changes............................ 84 2
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............. (970) (5,561)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......... 4,357 7,014
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 3,387 $ 1,453
======== ========
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
March 28, 2003 and December 31, 2002 and the results of operations for the three
month periods ended March 28, 2003 and March 29, 2002. All of the adjustments
were of a normal and recurring nature.
NOTE B -- INVENTORIES
MARCH 28, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------------------------------
Principally average cost:
Raw materials and supplies................................ $ 22,810 $ 22,572
In process................................................ 65,899 65,809
Finished goods............................................ 30,796 29,522
-------- --------
Gross inventories.................................... 119,505 117,903
Excess of average cost over LIFO
Inventory value........................................ 24,700 23,579
-------- --------
Net inventories........................................ $ 94,805 $ 94,324
======== ========
NOTE C -- COMPREHENSIVE LOSS
The reconciliation between Net Loss and Comprehensive Loss for the three
month periods ended March 28, 2003 and March 29, 2002 is as follows:
FIRST QUARTER ENDED
------------------------
MARCH 28, MARCH 29,
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------------
Net Loss.................................................... $(3,016) $(3,834)
Cumulative Translation Adjustment........................... (74) (88)
Change in the Fair Value of Derivative Financial
Instruments............................................... 1,164 1,392
------- -------
Comprehensive Loss.......................................... $(1,926) $(2,530)
======= =======
NOTE D -- SEGMENT REPORTING
METAL MICRO- TOTAL ALL
(DOLLARS IN THOUSANDS) SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
- ------------------------------------------------------------------------------------------
FIRST QUARTER 2003
Revenues from external customers.... $61,207 $38,311 $99,518 $ -- $99,518
Intersegment revenues............... 901 272 1,173 3,573 4,746
Profit (loss) before interest and
taxes............................. (3,424) 2,537 (887) (1,235) (2,122)
FIRST QUARTER 2002
Revenues from external customers.... $55,917 $33,545 $89,462 $ 120 $89,582
Intersegment revenues............... 599 483 1,082 2,889 3,971
Profit (loss) before interest and
taxes............................. (8,525) 2,202 (6,323) 822 (5,501)
5
NOTE E -- INCOME TAXES
A tax benefit was not recorded against the loss before income taxes in the
first quarter 2003 for domestic and certain foreign taxes as a result of the
deferred tax valuation allowance recorded in the fourth quarter 2002 in
accordance with SFAS No. 109, "Accounting for Income Taxes", due to the
uncertainty regarding full realization of the Company's deferred tax assets. The
Company intends to maintain a valuation allowance until a realization event
occurs to support reversal of all or a portion of the allowance. Therefore, the
$0.2 million income tax expense recorded in the first quarter 2003 represents
taxes from various state and local jurisdictions and foreign taxes from Japan
and Singapore only. In the first quarter 2002, the Company recorded a tax
benefit of $2.4 million for federal, state, local and foreign taxes. The $2.4
million benefit was calculated at 38.5% of the loss before income taxes.
NOTE F -- NON-CASH TRANSACTION
The Company's revolving credit agreement allows for both short-term and
long-term borrowings. The limitation on outstanding short-term borrowings was
revised as part of renegotiating the agreement in the first quarter 2003. As a
result, the Company transferred $5.0 million of short-term borrowings to
long-term borrowings under the agreement in order to comply with the reduced
limitation. This was a non-cash transfer that did not impact the Consolidated
Statement of Cash Flows for the period ended March 28, 2003.
NOTE G -- STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and applies the intrinsic value method
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock incentive
plan. In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," the following table presents the effect
on net loss and net loss per share had compensation cost for the Company's stock
plans been determined consistent with SFAS No. 123:
FIRST QUARTER ENDED
---------------------
MARCH 28, MARCH 29,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2003 2002
- -----------------------------------------------------------------------------------
Net loss, as reported....................................... $(3,016) $(3,834)
Less stock-based compensation expense determined under fair
value method for all stock options, net of related income
tax benefit............................................... 174 249
------- -------
Pro forma net loss.......................................... $(3,190) $(4,083)
======= =======
Basic and diluted loss per share, as reported............... $ (0.18) $ (0.23)
Basic and diluted loss per share, pro forma................. $ (0.19) $ (0.25)
The fair value was estimated on the grant date using the Black-Scholes
option pricing model with the following assumptions for options issued for the
three months ending March 2002 and 2003:
MARCH 28, MARCH 29,
2003 2002
- -----------------------------------------------------------------------------------
Risk free interest rates.................................... 3.73% 4.49%
Dividend yield.............................................. 0% 0%
Volatility.................................................. 39.5% 39.6%
Expected lives (in years)................................... 8 8
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 global economy;
- The condition of the markets which the Company serves, whether defined
geographically or by segment, with the major market segments being
telecommunications and computer, automotive electronics, industrial
components, optical media, 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, pension
costs, energy costs and the cost and availability of insurance;
- The uncertainties concerning the impact resulting from war and terrorist
activities;
- 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.
RESULTS OF OPERATIONS
FIRST QUARTER
---------------
(MILLIONS, EXCEPT PER SHARE DATA) 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Sales....................................................... $ 99.5 $ 89.6 $ 9.9
Operating Loss.............................................. (2.1) (5.5) 3.4
Diluted E.P.S. ............................................. $(0.18) $(0.23) $0.05
Total sales were $99.5 million in the first quarter 2003, an 11%
improvement over the first quarter 2002. Domestic sales grew 10% while
international sales grew 14% in the first quarter 2003 over the comparable
period last year. The sales growth came from the automotive, defense,
telecommunications and computer and optical media markets. Sales from both of
the Company's reportable segments - the Metal Systems Group and the
Microelectronic Group (MEG) -- increased in the first quarter 2003 from the
first quarter 2002. Approximately $5.8 million of the $9.9 million increase in
sales was due to the precious metal price and mix effect and the impact of
foreign currency translation rate differences. First quarter 2003 sales were
also higher than the last two quarters of 2002, growing 12% over the fourth
quarter 2002 and 6% over the third quarter 2002.
Gross margin was $17.1 million (or 17% of sales) in the first quarter 2003
compared to $10.3 million (or 11% of sales) in the first quarter 2002. The $6.8
million increase in gross margin resulted from a combination of higher volumes,
product mix and improved manufacturing performance as well as a $1.5 million
reduction in manufacturing overhead expenses. The gross margin dollars and
percent of sales were the highest quarterly results since the second quarter
2001.
Selling, general and administrative expenses (SG&A) were $17.3 million in
the first quarter 2003 compared to $15.2 million in the first quarter 2002. SG&A
expenses were 17% of sales in both the first quarter 2003 and the first quarter
2002. The Company incurred an additional $0.9 million in fees associated with
amending various financing arrangements during the first quarter 2003. The
weaker U.S. dollar (as compared to the euro, yen, sterling and Singapore dollar)
in the first quarter 2003 versus the first quarter 2002 resulted in a $0.4
million
7
increase in the translated value of foreign currency denominated expenses.
Management and employee incentive compensation accruals were also higher in the
current year than last year.
Research and development expenses (R&D) were $1.1 million in the first
quarter 2003 and unchanged from the year-ago period. There were no changes in
the R&D strategic direction or efforts during the quarter.
Net-other expense was $0.8 million in the first quarter 2003 compared to
net-other income of $0.6 million in the first quarter 2002. Foreign currency
exchange gains were $0.6 million lower in 2003 as a result of the weaker U.S.
dollar. The majority of the remaining difference between periods was caused by a
mark-to-market unrealized gain on a deferred compensation plan for non-employee
directors of $0.5 million recorded in the first quarter 2002. Net-other also
includes metal financing fees, bad debt expense, amortization of intangibles,
gain or loss on disposal of assets and other non-operating items.
The operating loss was $2.1 million in the first quarter 2003, a $3.4
million improvement over the $5.5 million loss generated in the first quarter
2002. The improvement resulted from the higher margins offset in part by an
increase in expenses.
Interest expense was $0.7 million in the first quarter 2003, down 6% from
the year ago period. Average balance sheet debt levels were lower in the first
quarter 2003 than the prior year. Interest capitalized in association with
long-term capital projects was minor in both periods.
The loss before income taxes was $2.8 million in the first quarter 2003 and
$6.2 million in the first quarter 2002. This was the smallest loss before income
taxes since the second quarter 2001.
Income tax expense of $0.2 million was recorded in the first quarter 2003
for foreign, state and local taxes in those jurisdictions where the Company did
not record a valuation allowance. A tax benefit was not recorded against the
loss before income taxes in the first quarter 2003 for domestic and certain
foreign taxes as a result of the deferred tax valuation allowance recorded in
the fourth quarter 2002 in accordance with SFAS No. 109, "Accounting for Income
Taxes", due to the uncertainty regarding full realization of the deferred tax
assets. The Company intends to maintain a valuation allowance until a
realization event occurs to support reversal of all or a portion of the
allowance. In the first quarter 2002, a rate of 38.5% was applied against the
loss before income taxes to calculate a tax benefit of $2.4 million. The
benefits from foreign source income and percentage depletion were the main
differences between the effective and statutory rates in the first quarter 2002.
The net loss of $3.0 million in the first quarter 2003 was only $0.8
million better than the net loss in the first quarter 2002 despite a $3.4
million improvement in income before income taxes as a result of the $2.6
million difference in the tax provisions between years. The net loss per share
was $0.18 in the first quarter 2003 and $0.23 in the first quarter 2002.
SEGMENT DISCLOSURES
The Company aggregates its five business units into two reportable segments
- -the Metal Systems Group and the MEG. The results from Brush Resources Inc., a
wholly owned subsidiary that manages the Company's mining and milling
operations, and BEM Services, Inc., a wholly owned subsidiary that provides
administrative, financial and other corporate oversight services to the balance
of the corporation, are included in the All Other column in the segment footnote
to the Consolidated Financial Statements.
METAL SYSTEMS GROUP
FIRST QUARTER
-------------
(MILLIONS) 2003 2002 CHANGE
- ------------------------------------------------------------------------------------
Sales....................................................... $61.2 $55.9 $5.3
Operating Loss.............................................. $(3.4) $(8.5) $5.1
8
The Metal Systems Group is the larger of the Company's two reportable
segments and consists of Alloy Products, Technical Materials, Inc. (TMI) and
Beryllium Products. The following chart summarizes sales by business unit within
the Metal System Group:
FIRST QUARTER
---------------
(MILLIONS) 2003 2002 CHANGE
- --------------------------------------------------------------------------------------
Alloy Products.............................................. $ 40.5 $ 38.3 $2.2
TMI......................................................... 11.9 11.5 0.4
Beryllium Products.......................................... 8.8 6.1 2.7
Sales from Alloy Products, the Company's largest business unit, increased
$2.2 million, or 6% in the first quarter 2003 over the first quarter 2002. Alloy
Products manufactures and sells two main product families. Strip products
consist of precision strip and thin diameter rod and wire sold into the
telecommunications and computer, automotive and appliance markets. Bulk products
include rod, bar, tube, plate and other forms that are sold into the industrial
component, plastic tooling and undersea telecommunications markets.
Alloy strip sales grew 15% in the first quarter 2003 over the first quarter
2002. Pounds sold only grew 7% between the two periods as volumes of the
higher-priced, traditional strip and rod and wire products increased while
volumes of the lower-priced, lower beryllium-containing alloy strip products
decreased. Strip product sales into the automotive and appliance markets were
strong in the first quarter 2003. The Company improved its market share of the
strip market during the quarter while a portion of the increase in strip sales
in the first quarter 2003 was due to higher sales to the telecommunications and
computer market. Management believes that this increase was not caused by an
improvement in end-use consumer demand, but rather the extremely low order entry
rate over the last six quarters has now resulted in the elimination of the
excess inventory throughout the supply chain. With lower inventory positions,
the Company's customers increased their purchases in order to satisfy their
demand. International sales of strip products increased as well, in large part
because of the translation effect of the weaker U.S. dollar.
Sales of Alloy bulk products declined 8% in the first quarter 2003 from the
first quarter 2002. Pounds sold of bulk products declined 22% between these same
two periods. The percentage decrease in the quantity sold exceeds the change in
the sales value as the first quarter 2002 included the one-time shipment of
lower-priced ingots. Sales into the plastic tooling market improved in the first
quarter 2003 over the first quarter 2002. However, sales into the industrial
components market declined. New product market development efforts continued
during the quarter and sales of new products were a minor contributor to total
sales.
TMI produces materials that are used for semiconductors, contacts and
connectors in the telecommunications and computer and automotive markets. Sales
from TMI grew 3% in the first quarter 2003 over the first quarter 2002. TMI
sales in the first quarter 2003 were higher than either of the last two quarters
of 2002 as well. The increase in sales was due to the automotive market and the
computer sector of the telecommunications and computer market. A significant
portion of the increase in demand came from South Asia.
Beryllium Products manufactures pure beryllium and beryllium aluminum
alloys that are sold into the defense, electronic, automotive, medical and
optical scanning markets. Revenues from Beryllium Products were $8.8 million in
the first quarter 2003 and 44% higher than the year ago period. Defense remains
the largest market for Beryllium Products and sales and orders from this market
continued to be strong. Automotive sales were also higher in the first quarter
2003 than the first quarter 2002.
The Metal Systems Group gross margin of $9.8 million was 16% of sales in
the first quarter 2003 and a $6.3 million improvement over the first quarter
2002. The additional margin contribution on the increase in sales volume was
$2.2 million while product mix, operating performance and currency issues
combined to increase margins by $2.8 million. Manufacturing overhead costs were
$1.3 million lower in the first quarter 2003 than in the first quarter 2002 as
manpower and other costs were reduced.
SG&A and Other-net expenses were $1.2 million higher in the first quarter
2003 than in the first quarter 2002. The impact of foreign currency movements on
the translated value of expenses and exchange gains and higher incentive
compensation accruals were the main causes for the increase in expenses.
9
The Metal Systems Group operating loss was $3.4 million in the first
quarter 2003, a $5.1 million improvement over the first quarter 2002.
MICROELECTRONICS GROUP
FIRST QUARTER
-------------
(MILLIONS) 2003 2002 CHANGE
- ------------------------------------------------------------------------------------
Sales....................................................... $38.3 $33.5 $4.8
Operating Profit............................................ $ 2.5 $ 2.2 $0.3
The MEG consists of Williams Advanced Materials Inc. (WAM) and Electronic
Products. The following chart summarizes business unit sales within the MEG:
FIRST QUARTER
-------------
(MILLIONS) 2003 2002 CHANGE
- ------------------------------------------------------------------------------------
WAM......................................................... $30.5 $25.8 $4.7
Electronic Products......................................... 7.8 7.7 0.1
WAM manufactures precious, non-precious and specialty metal products,
including vapor deposition targets, frame lid assemblies, clad and precious
metal pre-forms, high temperature braze materials and ultra fine wire. Major
markets for WAM products include optical media, magnetic head, electron tube,
performance film and the wireless, semiconductor, photonic and hybrid segments
of the microelectronics market. The cost of the precious metal content of the
goods sold by WAM is passed through to the customer. Therefore, WAM's sales are
affected by the cost and the mix of the metals sold. While WAM's sales grew $4.7
million, or 18%, in the first quarter 2003 from the first quarter 2002,
underlying volumes, after adjusting for the metal price and mix differences,
grew 3%, with the majority of the increase in vapor deposition targets. Efforts
to develop thin film materials to expand WAM's semiconductor market penetration
continued during the quarter.
Electronic Products manufactures electronic packages, beryllia ceramics and
thick film circuits for sale into the telecommunications and computer,
automotive and defense markets. Sales from Electronic Products of $7.8 million
were 1% higher in the first quarter 2003 than the first quarter 2002. Sales of
electronic packages declined while beryllia ceramics and circuitry sales
increased. Sales into the automotive and defense markets were slightly higher in
the first quarter 2003 than the first quarter 2002. The management and operating
restructuring efforts within Electronic Products that started in the fourth
quarter 2002 continued into the first quarter 2003.
The gross margin on MEG sales improved $0.3 million in the first quarter
2003 over the first quarter 2002. As a percent of sales, the margin declined to
19% due to the impact of the higher metal content in the sales value. Changes in
product mix increased margins by $0.6 million while the higher volumes added
$0.2 million in margin contribution. Offsetting a portion of these benefits was
a $0.5 million increase in manufacturing overhead expenses, as expenses from
both WAM and Electronic Products were higher in the first quarter 2003 than the
first quarter 2002.
SG&A and Other-net expenses were unchanged in the first quarter 2003 from
the first quarter 2002. MEG operating profit of $2.5 million in the first
quarter 2003 was 7% of sales and a $0.3 million improvement over the first
quarter 2002.
LEGAL
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 or other lung conditions as
a result of exposure to beryllium. Plaintiffs in beryllium 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.
10
The following table summarizes the activity associated with beryllium
cases. Settlement payment and dismissal for a single case may not occur in the
same period.
QUARTER ENDED YEAR ENDED
MAR 28, 2003 DEC 31, 2002
- --------------------------------------------------------------------------------------
Total cases pending..................................... 22 33
Total plaintiffs........................................ 54 70
Number of claims (plaintiffs) filed during period
ended................................................. 1(6) 2(4)
Number of claims (plaintiffs) settled during period
ended................................................. 12(21) 34(107)
Aggregate cost of settlements during period ended
(dollars in thousands)................................ $ 660 $ 4,945
Number of claims (plaintiffs) otherwise dismissed....... 0(1) 11(20)
Number of claims (plaintiffs) voluntarily withdrawn..... 0(0) 0(0)
Additional beryllium 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 contractors) face a lower burden
of proof than do employees or former employees, but these cases are generally
covered by varying levels of insurance. A reserve was recorded for beryllium
litigation of $3.5 million at March 28, 2003 and $4.2 million at December 31,
2002. A receivable was recorded of $4.3 million at March 28, 2003 and $4.9
million at December 31, 2002 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 beryllium
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
beryllium 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. Currently, one purported class action is pending.
Standards for exposure to beryllium are under review by 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 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
The net cash flow used in operations was $0.2 million in the first quarter
2003 as the net loss and the increase in accounts receivable more than offset
the favorable impact of other working capital items. The net cash balance was
$3.4 million at the end of the first quarter 2003, a decline of $1.0 million
from December 31, 2002.
Accounts receivable increased from $47.5 million at December 31, 2002 to
$59.0 million at the end of the first quarter 2003. This change is due to a
$10.5 million improvement in sales in the first quarter 2003 compared to the
fourth quarter 2002. The quarter-end receivable balance is also more directly
affected by sales in the last
11
month of the quarter and sales in March 2003 were higher than in December 2002.
The days sales outstanding (DSO), a measurement of the average collection
period, increased by five days during the first quarter 2003. The increase in
international receivables, which typically have a longer DSO, was
proportionately higher than the increase in domestic receivables in the first
quarter 2003. The DSO was also unusually low at year-end 2002 and the DSO for
the first quarter 2003 is still slightly better than the average for all of
2002.
Inventories grew $0.5 million during the first quarter 2003. The Metal
System Group's inventory declined, mainly due to the continuing efforts by Alloy
Products. The first-in, first-out (FIFO) value of Alloy's inventory declined 5%
since year-end 2002 and 25% since the end of the first quarter 2002. The MEG
inventory increased in the first quarter 2003 while inventory at Brush Resources
Inc. increased as a result of timing differences between mining the bertrandite
ore and shipments of beryllium hydroxide. Inventory at Brush Resources may
increase during the year as a result of extracting ore in excess of current
production needs from the existing pits in order to remove the ore from these
pits within the allowable safety time frame.
Capital expenditures for property, plant and equipment and mine development
were $1.7 million in the first quarter 2003. Expenditures for the Metal Systems
Group were $0.3 million while expenditures for the MEG were $1.1 million.
Spending by Brush Resources, which is not part of either reportable segment,
accounted for the remaining $0.3 million. The majority of the MEG expenditures
was by WAM and included the acquisition of assets used for the production of
pre-form lids from a former competitor at the end of the quarter. While capital
spending was higher in the first quarter 2003 than the year ago period, spending
levels remain below the long-term historical levels. The Company anticipates
that capital spending will be approximately equal to or slightly higher than the
first quarter 2003 in subsequent quarters this year.
Accounts payable and other liabilities and accrued items increased $7.6
million during the first quarter 2003 as a result of increased business activity
and the timing of disbursements relative to the end of the quarter.
Total balance sheet debt stood at $64.4 million at the end of the first
quarter 2003, an increase of $0.9 million from December 31, 2002 as short-term
debt declined $4.1 million while long-term debt increased $5.0 million. The
Company's revolving credit agreement was amended during the first quarter 2003
to revise various covenants and extend the maturity of the agreement to April
2004. Subsequent to the amendment, the Company transferred $5.0 million of
short-term borrowings to long-term borrowings under the revolving credit
agreement. The Company was in compliance with its debt covenants as of the end
of the first quarter 2003.
There were no significant changes to the amounts outstanding under the
Company's off-balance sheet lease obligations during the first quarter 2003.
Lease payments were made as scheduled. The balance outstanding under the
off-balance sheet precious metal consigned inventory arrangements declined
slightly due to lower metal prices and a reduction in the quantities of metal on
hand during the first quarter 2003.
Cash flow from operations was $0.4 million in the first quarter 2002.
Accounts receivable grew $3.1 million during the quarter as a result of an
increase in the average collection period. Inventories declined $4.2 million in
the first quarter 2002 as the Company adjusted inventories down in light of the
lower sales volumes. The majority of the decline in inventory was within the
Metal Systems Group. Capital expenditures were $0.9 million in the first quarter
2002. Balance sheet debt totaled $70.2 million at the end of the first quarter
2002, a decline of $4.6 million since the previous year-end. Cash on hand
totaled $1.4 million at the end of the first quarter 2002, a decline of $5.6
million for the quarter. The reduction in cash resulted from funding the capital
expenditures and reducing the level of outstanding debt.
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
Management was encouraged by the results from the first quarter 2003. While
modest improvements in the economic conditions in various markets contributed to
the sales growth, market share gains as well as new product development
activities generated positive results as well. The Company believes that these
trends should
12
continue into the second quarter 2003. The automotive market may soften in
subsequent quarters and while the long-term trend for the defense market remains
strong, defense sales may soften temporarily as a result of the government
re-directing funds to finance the war and related activities in Iraq. The
foreign currency translation effect on sales compared to the year ago period
will be positive in the next two or three periods if the dollar remains at the
first quarter 2003 levels versus the yen and euro. Management is estimating that
sales in the second quarter 2003 could improve up to 5% over the first quarter
2003 after adjusting for the metal price and mix differences.
Management was also encouraged by the earnings leverage on the increase in
sales. This leverage resulted from margin contribution improvements and overhead
cost control. While the Company absorbed various one-time costs in the first
quarter 2003, including the bank fees and re-financing charges, the total
overhead expense (manufacturing overhead, SG&A, R&D and Other-net) was slightly
below the average quarterly overhead expense in 2002. Management remains focused
on controlling costs and continuing to improve manufacturing performance.
The Company also continues to focus on its working capital investment and
debt position. Despite the significant increase in accounts receivable, balance
sheet debt only increased $0.9 million during the first quarter 2003.
Inventories have grown slightly over the last two quarters, but Alloy Products
has made significant progress in reducing its inventory and increasing its
efficiency. Management anticipates that total inventories will decline by
year-end 2003. Capital expenditures remain well below historical levels and are
being closely managed.
CRITICAL ACCOUNTING POLICIES
DEFERRED TAXES: As previously noted, the Company did not record a domestic
federal tax benefit in the first quarter 2003 as a result of the deferred tax
asset valuation allowance recorded in the fourth quarter 2002. Despite the
valuation allowance, the Company retains the ability to utilize the benefits of
its domestic loss carry forwards and other deferred tax assets on future tax
returns. A domestic federal tax benefit will not be recorded in subsequent
periods should the Company continue to generate pre-tax losses. Should the
Company generate a pre-tax profit in subsequent periods, a federal tax expense
will not be recorded either to the extent that the remaining valuation allowance
can be used to offset that expense.
For additional information regarding the Company's critical accounting
policies, please refer to pages 21 and 22 of the Company's annual report to
shareholders for the period ended December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For information regarding the Company's market risks, please refer to pages
23 and 24 of the Company's annual report to shareholders for the period ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President, Chairman and Chief Executive
Officer, and Vice President Finance and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's management has concluded that the Company's disclosure controls
and procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
13
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.
BERYLLIUM CLAIMS
There are claims pending in various state and federal courts against Brush
Wellman Inc., 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 or other lung conditions as a result of exposure to beryllium.
Plaintiffs in beryllium 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 first quarter of 2003, the number of beryllium cases decreased
from 33 cases (involving 70 plaintiffs) as of December 31, 2002, to 22 cases
(involving 54 plaintiffs) as of March 28, 2003. During the first quarter, two
third-party cases (involving eight plaintiffs) were settled and dismissed. In
ten employee cases (involving thirteen plaintiffs), settlement agreements were
signed, and the plaintiffs dismissed their claims. In one third-party case, one
plaintiff was dismissed, although the case remains pending. One third-party case
(involving six plaintiffs) was filed. The settlements in five employee cases
(involving eight plaintiffs) that were dismissed in 2002 and reflected in the
2002 Legal Proceedings table within the MD&A were finalized.
The 22 pending beryllium cases fall into three categories: six "employee
cases" involving an aggregate of six Brush Wellman employees, former employees
or surviving spouses (in three of these cases, a spouse has also filed claims as
part of his or her spouse's case); 15 cases involving third-party individual
plaintiffs, with 16 individuals (and 14 spouses who have filed claims as part of
their spouse's case, and nine children who have filed claims as part of their
parent's case); and one purported class action involving six 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 in which Brush Wellman is seeking review
of the appellate court's reversal of the trial court's denial of class
certification, the named plaintiffs allege that past exposure to beryllium has
increased their risk of contracting chronic beryllium disease and possibly
cancer, although they do not claim to have actually contracted any disease. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement re computation of per share earnings (filed as Exhibit 11
to Part I of this report).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
14
(b) Reports on Form 8-K
In a report on Form 8-K filed April 24, 2003, Brush Engineered Materials
Inc. incorporated in Item 7 its April 24, 2003 press release, reporting
on its earnings for the first quarter of 2003. The press release, with
summary financial information, was furnished pursuant to Items 9 and 12.
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: May 8, 2003
/s/ John D. Grampa
-----------------------------------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
15
CERTIFICATIONS
I, Gordon D. Harnett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brush Engineered
Materials Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the Audit
Committee of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: May 8, 2003 /s/ Gordon D. Harnett
-----------------------------------------------------
Gordon D. Harnett
Chairman, President and
Chief Executive Officer
16
CERTIFICATIONS
I, John D. Grampa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brush Engineered
Materials Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarter
reportly is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the Audit
Committee of the Company's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for
the Company's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal
controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Dated: May 8, 2003 /s/ John D. Grampa
-----------------------------------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
17