<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
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 September 29, 2000
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 1-7006
BRUSH ENGINEERED MATERIALS INC.
(Exact name of Registrant as specified in charter)
Ohio 34-1919973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17876 ST. CLAIR AVENUE, CLEVELAND, OHIO 44110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 216-486-4200
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 November 3, 2000 there were 16,563,743 shares of Common Stock, no
par value, outstanding.
<PAGE> 2
PART I FINANCIAL INFORMATION
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
------------------------------
The consolidated financial statements of Brush Engineered Materials Inc.
(formerly Brush Wellman Inc.) and its subsidiaries for the quarter ended
September 29, 2000 are as follows:
Consolidated Statements of Income -
Three and nine months ended September 29, 2000 and
October 1, 1999
Consolidated Balance Sheets -
September 29, 2000 and December 31, 1999
Consolidated Statements of Cash Flows -
Nine months ended September 29, 2000 and October 1, 1999
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<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
Sep. 29, Oct. 1, Sep. 29, Oct. 1,
(Dollars in thousands except share and per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 143,926 $ 113,794 $ 416,532 $ 335,628
Cost of sales 115,304 94,981 329,912 267,557
------------ ------------ ------------ ------------
Gross Margin 28,622 18,813 86,620 68,071
Selling, administrative
and general expenses 21,101 17,298 64,065 52,919
Research and development expenses 1,870 2,191 5,571 6,207
Other-net (19) 259 314 287
------------ ------------ ------------ ------------
Operating Profit 5,670 (935) 16,670 8,658
Interest expense 1,227 913 3,407 2,697
------------ ------------ ------------ ------------
Income before income taxes 4,443 (1,848) 13,263 5,961
Income taxes 359 (1,296) 3,032 793
------------ ------------ ------------ ------------
Net Income $ 4,084 $ (552) $ 10,231 $ 5,168
============ ============ ============ ============
Per Share of Common Stock: Basic $ 0.25 $ (0.03) $ 0.63 $ 0.32
Weighted average number
of common shares outstanding 16,315,523 16,200,229 16,248,733 16,197,158
Per Share of Common Stock: Diluted $ 0.25 $ (0.03) $ 0.62 $ 0.32
Weighted average number
of common shares outstanding 16,521,028 16,200,229 16,392,435 16,261,878
Cash dividends per common share $ 0.12 $ 0.12 $ 0.36 $ 0.36
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sep. 29, Dec. 31,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 6,182 $ 99
Accounts receivable 101,534 79,772
Inventories 108,448 110,570
Prepaid expenses 6,923 7,204
Deferred income taxes 27,837 26,610
---------------- --------------
Total Current Assets 250,924 224,255
Other Assets 31,613 33,213
Property, Plant and Equipment 448,690 440,234
Less allowances for depreciation,
depletion and impairment 280,699 269,296
---------------- --------------
167,991 170,938
---------------- --------------
$450,528 $428,406
================ ==============
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt $ 21,814 $ 34,687
Accounts payable 33,315 27,731
Other liabilities and accrued
items 35,052 29,869
Dividends payable 1,985 1,959
Income taxes 5,039 5,178
---------------- --------------
Total Current Liabilities 97,205 99,424
Other Long-Term Liabilities 17,109 14,407
Retirement and Post-employment Benefits 39,603 39,430
Long-term Debt 53,305 42,305
Deferred Income Taxes 15,347 12,202
Shareholders' Equity 227,959 220,638
---------------- --------------
$450,528 $428,406
================ ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
SEP. 29, OCT. 1,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $10,231 $ 5,168
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES:
Depreciation, depletion and amortization 15,929 16,645
Amortization of mine development 1,661 4,408
Decrease (Increase) in accounts receivable (18,713) (17,448)
Decrease (Increase) in inventory 993 (7,454)
Decrease (Increase) in prepaid and other current assets 803 (2,665)
Increase (Decrease) in accounts payable and accrued expenses 6,478 19,459
Increase (Decrease) in interest and taxes payable 1,682 2,251
Increase (Decrease) in deferred income tax (136) 2,738
Increase (Decrease) in other long-term liabilities 1,518 (541)
Other - net 2,253 1,027
------------- -------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 22,699 23,588
Cash Flows from Investing Activities:
Payments for purchase of property, plant and equipment (13,030) (11,556)
Payments for mine development (308) (261)
Proceeds from (Payments for) other investments - 141
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (13,338) (11,676)
Cash Flows from Financing Activities:
Proceeds from issuance (repayment) of short-term debt (11,331) (13,271)
Proceeds from issuance of long-term debt 23,000 17,200
Repayment of long-term debt (12,000) (7,000)
Issuance of Common Stock under stock option plans 3,175 171
Purchase of Common Stock for treasury - -
Payments of dividends (5,882) (5,854)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (3,038) (8,754)
Effects of Exchange Rate Changes (240) (36)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,083 3,122
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 99 1,938
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,182 $ 5,060
============= =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
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
September 29, 2000 and December 31, 1999 and the results of operations for the
nine months ended September 29, 2000 and October 1, 1999. Certain amounts in
prior years have been reclassified to conform with the 2000 consolidated
financial statement presentation.
NOTE B - INVENTORIES
SEP. 29, DEC. 31,
(DOLLARS IN THOUSANDS) 2000 1999
-----------------------------------------------------------------------------
Principally average cost:
Raw materials and supplies $ 15,777 $ 20,520
In process 84,891 73,192
Finished goods 32,729 39,634
------------- -------------
Gross inventories 133,397 133,346
Excess of average cost over LIFO
Inventory value 24,949 22,776
------------- -------------
Net inventories $108,448 $110,570
============= =============
NOTE C - COMPREHENSIVE INCOME
During the third quarter 2000 and 1999, comprehensive income amounted to
$3,748,364 and $438,988 respectively. For September year-to-date 2000 and 1999,
comprehensive income amounted to $10,231,141 and $5,171,335 respectively. The
difference between net income and comprehensive income is the cumulative
translation adjustment for the periods presented.
NOTE D - SEGMENT REPORTING
Selected financial data by business segment as prescribed by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", for the
third quarter 2000 and 1999 and for the first nine months of 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
METAL MICRO- TOTAL ALL
SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
-------------- --------------- ------------- ------------- --------------
(Dollars in thousands)
THIRD QUARTER 2000
---------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 93,917 $ 48,498 $142,415 $ 1,511 $143,926
Intersegment revenues 36 553 589 - 589
Segment profit (loss) before
interest and taxes 9,033 3,613 12,646 (6,976) 5,670
THIRD QUARTER 1999
---------------------------
Revenues from external customers 75,099 36,331 111,430 2,364 113,794
Intersegment revenues 67 287 354 - 354
Segment profit (loss) before
interest and taxes (740) 2,940 2,200 (3,135) (935)
FIRST NINE MONTHS 2000
---------------------------
Revenues from external customers $280,181 $131,923 $412,104 $ 4,428 $416,532
Intersegment revenues 245 1,076 1,324 - 1,324
Segment profit (loss) before
interest and taxes 25,361 10,214 35,575 (18,905) 16,670
FIRST NINE MONTHS 1999
---------------------------
Revenues from external customers 228,537 100,857 329,394 6,234 335,628
Intersegment revenues 211 1,145 1,356 - 1,356
Segment profit (loss) before
interest and taxes 12,740 7,790 20,530 (11,872) 8,658
</TABLE>
5
<PAGE> 7
NOTE E - NEW PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition" (SAB 101), which provides guidance on
the measurement and timing of revenue recognition in financial statements. The
provisions of SAB 101 must be adopted by the fourth quarter 2000. Management has
not determined the effect SAB 101 will have, if any, on the Company's financial
statements.
In June 1998, Financial Accounting Standards No. 133 ("FAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" was issued. FAS 133, as
amended, is effective for the Company beginning January 1, 2001. The statement
requires the Company to recognize all derivatives as either assets or
liabilities and to measure those instruments at their fair values. FAS 133
provides criteria for designating derivatives as either fair value, cash flow or
foreign currency hedges and establishes accounting standards for reporting the
changes in fair value for each type of hedge. Adjustments to a derivative's fair
value will be recorded on the balance sheet with the offsetting gain or loss
recorded through net income or other comprehensive income as appropriate. The
Company is exposed to foreign currency, interest rate and commodity price risks
and uses derivative instruments to hedge those exposures. The Company is
continuing its review of the provisions of FAS 133 and has not yet completed its
assessment of the statement's impact on its financial statements.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Statements set forth in this document that are not historical in nature,
including statements regarding the Company's or management's intentions, hopes,
beliefs, expectations, projections, plans or predictions of the future, are
forward-looking statements. The Company's actual future performance may differ
materially from that contemplated by the forward-looking statements as a result
of a variety of factors. These factors include demand for the Company's products
in the markets the Company serves (especially as impacted by events in
particular markets, including telecommunications, computer, automotive
electronics, optical media and industrial components, or in particular
geographic regions), the Company's success in implementing its strategic plans,
the timely and successful completion of pending capital and remediation
projects, tax rates, exchange rate fluctuations and the resolution of pending
litigation matters in accordance with the Company's expectation that there will
be no material adverse effects.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------------- --------------------------
(Millions, except per share data) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $143.9 $113.8 $416.5 $335.6
Operating Profit(Loss) 5.7 (0.9) 16.7 8.7
Diluted E.P.S. $ 0.25 $(0.03) $ 0.62 $ 0.32
</TABLE>
Sales in the third quarter of 2000 and for the first nine months of 2000
established new record highs. Sales grew 26.5% in the current quarter and 24.1%
year to date from the 1999 levels. Operating profit and diluted earnings per
share also improved in the third quarter and first nine months of 2000 over last
year. Sales and profits from both business groups - the Metal Systems Group and
the Microelectronics Group - increased in the quarter and the first nine months
of the year.
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<PAGE> 9
<TABLE>
<CAPTION>
Metal Systems Group
-------------------
Third Quarter First Nine Months
---------------------- ---------------------
(Millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $93.9 $75.1 $280.2 $228.5
Operating Profit(Loss) 9.0 (0.7) 25.4 12.7
</TABLE>
The Metal Systems Group consists of Alloy Products, Engineered Materials Systems
and Beryllium Products. Group sales grew $18.8 million in the third quarter 2000
over third quarter 1999, a 25.1% improvement. September 2000 year-to-date sales
have grown $51.7 million, or 22.7%, over the previous year. The following chart
highlights individual business unit sales as a percent of the total Metal
Systems Group sales:
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percent of Segment Sales:
Alloy Products 70% 73% 71% 72%
Engineered Material Systems 23 21 23 20
Beryllium Products 7 6 6 8
</TABLE>
Alloy sales increased 20% in the third quarter of 2000 over the third quarter of
1999 while year-to-date sales have increased 22% in 2000. Sales from both of
Alloy's two major families of products - strip products and bulk products - were
higher in the current quarter and for the year as compared to 1999. Demand for
strip products from the telecommunications, computer and automotive electronic
market has remained strong throughout the current year. Production supply from
the recently expanded strip mill in Elmore, Ohio, while improved over last
year's levels, has not been able to keep pace with the growing demand. Pounds
shipped directly from Elmore to customers or to the Company's service centers
without further finishing at the Reading, Pennsylvania facility continued to
increase during the third quarter of 2000, thereby adding to the overall
capacity of the supply chain. However, equipment reliability issues adversely
affected production output in the latter part of the third quarter of 2000 and
8
<PAGE> 10
these issues continued into the early part of the fourth quarter. Strip pounds
sold increased for the fifth consecutive quarter and the growth rate in pounds
sold is higher than the growth rate in the sales value. Strip finished goods
inventories declined significantly in the first half of 2000 and increased very
modestly in the third quarter of 2000.
The sales improvement in Alloy bulk products in 2000 resulted from increased
demand from the oil and gas and the undersea communication markets. Bulk
products are a family of alloys, primarily copper-beryllium, manufactured in
rod, bar, tube, billet and other forms. Additional markets served by bulk
products include plastic tooling, aerospace and welding. Sales of non-beryllium
containing alloys from the Company's Lorain, Ohio facility have not grown
appreciably.
Sales from Engineered Materials Systems improved 34% in the third quarter of
2000 and 36% in the first nine months of 2000 over the respective periods in
1999. These products are manufactured and sold by Technical Materials Inc.
(TMI), a wholly owned subsidiary of the Company. TMI's sales and profits are on
pace to establish annual record highs in 2000. Major markets served by TMI
include telecommunications, automotive electronics and computer. A portion of
TMI's sales growth has resulted from the on-going expansion of its plating
operations. The over-all incoming order rate for Engineered Material System
products remains strong.
Sales of Beryllium Products were 42% higher in the third quarter 2000 than in
the third quarter 1999. Year-to-date sales of these products were unchanged from
1999. Sales in the first half of 2000 had been depressed by slow-downs in
government defense spending and an automotive application that had reached the
end of its product life cycle. The order entry trend was positive in the third
quarter of 2000, particularly for long leadtime defense-related beryllium metal
products. Although sales grew in the third quarter compared to the first two
9
<PAGE> 11
quarters of 2000, constraints within manufacturing operations may impact the
Company's ability to quickly respond to the increased order level.
Gross margin on Metal Systems sales increased by $9.8 million in the third
quarter 2000 over the third quarter 1999. For the year, the gross margin
increased $14.1 million on the strength of the higher sales. As a percent of
sales, the margin was higher in the third quarter of 2000 than in the third
quarter of 1999 and down slightly on a year-to-date basis. The recently
implemented price increase on selective Alloy products had a minor favorable
impact on margins in the third quarter. Disruptions due to equipment reliability
issues and/or manufacturing up time at the Elmore facility have caused product
flow and related quality issues for Alloy Products and, to a lesser extent,
Beryllium Products, in 2000. Total manufacturing fixed overhead costs were
unchanged in the third quarter 2000 compared to the third quarter 1999 as
current quarter higher cost increases were offset by the cost of the expanded
focused start-up effort for the Elmore strip mill incurred in the third quarter
of 1999. For the year, fixed overhead costs have increased $6.4 million over
1999. The European currencies were weaker relative to the U.S. dollar in 2000 as
compared to 1999, while the yen was slightly stronger. The resulting translation
effect on Metal System's sales and margins was an unfavorable $1.2 million in
the third quarter 2000 and $2.5 million for the first nine months of 2000 as
compared to the respective periods in 1999. The weakness in the European
currencies continued into the early part of the fourth quarter of 2000.
The total selling, administrative and general expenses and other-net expenses
for Metal Systems only increased $0.1 million in the third quarter 2000 compared
to the prior year while the year-to-date expenses increased $1.4 million. As a
result, the group's operating profit of $9.0 million in the third quarter of
2000 represents a $9.7 million improvement over the operating loss generated in
the third quarter of 1999. For the first nine months of 2000,
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<PAGE> 12
operating profit of $25.5 million was approximately double the profit earned in
the comparable period in 1999.
Microelectronics Group
----------------------
<TABLE>
<CAPTION>
Third Quarter First Nine Months
---------------------- ---------------------
(Millions) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> >C> <C>
Sales $48.5 $36.3 $131.9 $100.9
Operating Profit 3.6 2.9 10.2 7.8
</TABLE>
The Microelectronics Group (MEG) consists of Williams Advance Materials, Inc.
and Electronic Products. As the above chart indicates, MEG sales increased 34%
in the third quarter 2000 and 31% in the first nine months of 2000 over the
respective periods in the prior year. The following chart highlights business
unit sales as a percent of the total MEG sales:
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percent of Segment Sales:
WAM 78% 78% 76% 77%
Electronic Products 22 22 24 23
</TABLE>
Sales from Williams Advanced Materials, Inc. (WAM), a wholly owned subsidiary of
the Company, continued to grow, improving 33% for the quarter and 30% for the
year. WAM produces a wide variety of precious and non-precious metal products
used in the optical media and the wireless, photonic and other sectors of the
microelectronics markets. Major applications for WAM's products include the
reflective coating on DVD, CD-R, and CD-RW discs. In addition, WAM provides
precious metal refining services to its customers, while also using the refinery
as a cost-effective means of recycling internally generated scrap. Precious
metal prices typically are passed through to the customer and, as a result,
approximately $6.7 million of WAM's year-to-date sales increase is due to higher
metal prices. Revenues from Pure Tech, a wholly owned subsidiary of WAM,
improved once again as a result of new application development, including fiber
optic applications. Pure Tech's order entry trend remains robust.
11
<PAGE> 13
Electronic Products sales increased 37% in the third quarter of 2000 and 33% in
the first nine months of 2000 compared to the same periods a year ago. This unit
manufactures beryllia ceramic products, direct bond copper products, powder
metal products and thick film circuits used in the telecommunications, defense
and automotive markets. Sales of all four product families were higher in the
first nine months of the current year than last year. Demand for beryllia
ceramic products may slow down in the upcoming quarters due to an application
that has been discontinued.
The MEG gross margin improved by $1.5 million in the third quarter of 2000 from
the third quarter of 1999, while the year-to-date margin increased $6.4 million.
The gross margin as a percent of sales was lower in 2000 than 1999 due in part
to the higher metal price pass through effect. Fixed manufacturing overhead
expenses were $0.6 million higher in the third quarter of 2000 and $2.2 million
higher in the first nine months of 2000 as a result of an increased level of
activity and unfavorable inventory valuation adjustments. Product mix was
unfavorable in the third quarter of 2000 compared to the third quarter of last
year.
The total selling, administrative and general expenses and other-net expense for
the MEG were $0.8 million higher in the third quarter of 2000 than the third
quarter of 1999 while the year-to-date expenses were $2.9 million higher in the
current year. Operating profit in the third quarter of 2000 was $3.6 million
compared to $2.9 million in the third quarter of 1999. Year-to-date operating
profit of $10.2 million represents a 31.0% improvement over profits in 1999.
CONSOLIDATED
Total sales, including sales from operations not part of Metal Systems or MEG,
were $143.9 million in the third quarter of 2000 compared to $113.8 million in
the third quarter of 1999. September year-to-date sales were $416.5 million in
2000 and $335.6 million in 1999. International sales were $35.5 million in the
third quarter of 2000, up $1.2 million from the third
12
<PAGE> 14
quarter last year. International sales totaled $111.9 million, or 27% of sales,
in the first three quarters of 2000 and $102.3 million, or 31% of sales, in the
same time period last year. International sales include sales from the Company's
subsidiaries in Europe and Asia as well as direct exports from the Company's
U.S. operations.
Total gross margin improved to $28.6 million in the third quarter of 2000 from
$18.8 million in the comparable period last year. The gross margin also improved
as a percent of sales to 19.9% in the third quarter of 2000 from 16.5% in the
third quarter of 1999. The year-to-date gross margin was $86.6 million, or 20.8%
of sales, in 2000, versus $68.1 million, or 20.3% of sales, in 1999.
Selling, administrative and general (SA&G) expenses were $21.1 million in the
third quarter of 2000 compared to $17.3 million in the third quarter of 1999. As
a percent of sales, SA&G declined to 14.7% in the third quarter of 2000 from
15.2% in the third quarter of 1999. For the first nine months of 2000, SA&G
expenses were $64.1 million, or 15.4% of sales, compared to $52.9 million, or
15.8% of sales, in the first nine months of 1999. Selling and marketing expenses
from both the Metal Systems Group and the MEG continue to be higher in 2000 than
1999 in order to support the increased sales volumes and as a result of expanded
market development activities. Legal and administrative costs associated with
pending litigation matters and for research and other costs related to chronic
beryllium disease were also higher in both the third quarter and first nine
months of 2000 than they were in the comparable periods of 1999. However, these
costs were lower in the third quarter 2000 than they were in either of the first
two quarters of 2000. SA&G expenses were also higher in the third quarter and
first nine months of 2000 than in 1999 as a result of the legal and
administrative costs incurred to implement the previously announced corporate
reorganization. Incentive compensation expense was higher in 2000 than 1999 due
to the increased level of profitability.
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<PAGE> 15
Research and development (R&D) expenses were $1.9 million in the third quarter
of 2000, a slight decline from the $2.2 million incurred in the third quarter of
1999. For the first nine months, R&D expenses were $5.6 million (1.3% of sales)
in 2000 and $6.2 million (1.8% of sales) in 1999. The lower expense in the
current year was a result of a planned reduction in efforts supporting Beryllium
Products and Alloy Products. It is also reflective of a minor re-direction of
R&D resources to support Alloy strip manufacturing efforts in Elmore during
2000.
Other-net income was less than $0.1 million in the third quarter of 2000
compared to an expense of $0.3 million in the third quarter of 1999. Other-net
expense was $0.3 million for the first nine months of both 2000 and 1999.
Other-net includes precious and non-precious metal consignment fees, foreign
currency exchange gains and losses, bad debt expenses, cash discounts,
amortization of intangible assets and other miscellaneous non-operating items.
The consignment fee was unchanged in the third quarter 2000 from the third
quarter 1999 but was higher on a year-to-date basis in 2000 as a result of
increased prices and rates. Exchange gains are higher in 2000 than in 1999
offsetting a portion of the unfavorable translation effect at the margin line.
Operating profit was $5.7 million in the third quarter of 2000 compared to an
operating loss of $0.9 million in the third quarter of 1999. For the first nine
months, operating profit was $16.7 million in 2000 and $8.7 million in 1999. The
higher profits in 2000 resulted from the margin earned on the increased sales
less the additional SA&G expenses.
Interest expense was $1.2 million in the third quarter of 2000 versus $0.9
million in the third quarter of 1999. For the first three quarters of 2000,
interest expense was $3.4 million compared to $2.7 million in the first three
quarters of 1999. The average outstanding debt was higher in 2000 than the
previous year as was the average borrowing rate. Interest capitalized
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<PAGE> 16
associated with long-term capital projects increased $0.1 million in 2000 over
1999, but remained at a fairly minor level.
Income before income taxes was $4.4 million in the third quarter of 2000, an
improvement of $6.3 million over the loss before income taxes generated in the
third quarter of 1999. Income before income taxes was $13.3 million for the
first three quarters of 2000 and $6.0 million for the first three quarters of
1999.
Income taxes were applied at a rate of 8.1% of the income before income taxes in
the third quarter of 2000 and 22.9% of income before income taxes for the first
three quarters of 2000. An effective tax rate of 13.3% was used for the first
three quarters of 1999. The lower tax rate used in the third quarter 2000
resulted from the reversal of a valuation allowance on a foreign net operating
loss and recognition of tax benefits associated with higher actual and projected
profits from certain foreign operations. The effective tax rate was reduced in
the third quarter 1999 from the rate used earlier in that year due to lower
anticipated pre-tax earnings for the year and the identification and realization
of certain credits not previously contemplated in the effective rate.
Net income was $4.1 million in the third quarter 2000 compared to a net loss of
$0.6 million in the third quarter 1999. For the first nine months, net income
was $10.2 million in 2000 and $5.2 million in 1999. Diluted earnings per share
of $0.25 for the quarter and $0.62 year-to-date were a marked improvement over
the loss of $0.03 in the third quarter of 1999 and the $0.32 earned in the first
nine months of last year.
LEGAL PROCEEDINGS
The Company is a defendant in proceedings in various state and federal courts by
plaintiffs alleging that they have contracted chronic beryllium disease ("CBD")
or related ailments as a result of exposure to beryllium. Plaintiffs in CBD
cases seek recovery under theories of
15
<PAGE> 17
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 activity associated with CBD cases. The table
includes one purported class action lawsuit which was filed during the first
quarter of 2000 and involves seven named plaintiffs.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
Sep. 29, 2000 Jun. 30, 2000
------------- -------------
<S> <C> <C>
Total cases pending......................................... 60 48
Total plaintiffs............................................ 168 151
Number of claims (plaintiffs) filed during period........... 13(21) 4(8)
Number of claims (plaintiffs) settled during period......... 0(0) 1(2)
Aggregate settlements paid during period (dollars in
thousands).............................................. $0 $180
Number of claims (plaintiffs) dismissed..................... 1(4) 1(2)
</TABLE>
Additional CBD claims may arise. Management believes 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 the Company's customers) face a lower burden of proof
than do the Company's employees, but these cases are generally covered by
insurance. The Company recorded a reserve for CBD litigation of $8.7 million at
September 29, 2000 and $6.0 million at December 31, 1999. The Company also
recorded a receivable of $5.4 million at September 29, 2000 and $3.9 million at
December 31, 1999 from its insurance carriers as recoveries for insured claims.
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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.
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 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.
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FINANCIAL POSITION
Cash flow from operations was $22.7 million in the first nine months of 2000.
Cash balances increased to $6.2 million at the end of the third quarter 2000
from $0.1 million at the end of 1999.
Accounts receivable grew $21.8 million during the first nine months of 2000. The
growth is a function of the record sales volumes as well as an increase in the
days sales outstanding. Accounts written off as bad debts remained minor.
Inventories declined by $2.1 million in the first three quarters of 2000. During
the first quarter of 2000, the Company entered into an off-balance sheet
agreement with a bank to finance a portion of its copper-based inventories. As
of the end of the third quarter, the Company had utilized $8.3 million of this
facility. Absent this agreement, total inventories on the balance sheet would
have increased by $6.1 million. Approximately 60% of the FIFO inventory value
supports Alloy products. During 2000, Alloy work-in-process inventories have
climbed while finished goods have declined. Accounts payable and other accruals
increased in 2000 due to the higher level of activity and to finance a portion
of the receivable growth.
Capital expenditures for property, plant and equipment and mine development were
$13.3 million in the first nine months of 2000. Approximately 60% of the
expenditures in 2000 have been for the Metal Systems Group and 34% for the MEG.
Major projects currently underway include additional plating and welding
equipment at TMI, a new bonding center for Pure Tech and a new furnace for strip
manufacturing in Reading, Pennsylvania.
Total balance sheet debt at the end of the third quarter 2000 stood at $75.1
million, a $1.9 million decrease from December 31, 1999. Short-term debt
declined $12.9 million and long-term debt increased $11.0 million during the
first nine months of 2000. Effective the end of the second quarter of 2000, the
Company amended its revolving credit agreement (the "revolver")
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and various other lines of credit with its bank group. Maximum borrowings under
the revolver were increased to $65.0 million from $55.0 million as a result of
merging a $10.0 million multi-currency line into the facility. Certain
restrictive covenants that apply to the revolver, as well as to the operating
lease that financed a portion of the alloy expansion project, were revised and
new restrictive covenants were added. The revolver matures in July 2003.
Proceeds from issuance of Common Stock under stock option plans totaled $3.2
million in the first nine months of 2000. Three quarterly dividends totaling
$5.9 million have been paid thus far in 2000. The quarterly dividend per share
of $0.12 remained unchanged from 1999.
Cash flow from operations was $23.6 million during the first nine months of
1999. Accounts receivable increased $17.8 million while inventories increased
$7.3 million. These increases were generally offset by changes in other elements
of working capital. Capital expenditures, including the implementation of new
information technology systems which were installed in part to avert Year 2000
compatibility issues, totaled $11.8 million in the first three quarters of 1999.
Total debt decreased by $2.2 million during this time period. There were no
purchases of Company Stock and proceeds from issuance of stock under option
plans totaled $0.2 million.
Funds being generated by operations, plus the available borrowing capacity, are
believed to be adequate to support operating requirements, capital expenditures,
remediation projects and dividends. Excess cash, if any, is invested in money
market or other high-quality investments.
MARKET RISK DISCLOSURES
For information on the Company's market risks, refer to page 34 of the annual
report to shareholders for the year ended December 31, 1999.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject, from time to time, to a variety of civil and
administrative proceedings arising out of its 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
the Company by employees, former employees or surviving spouses and third party
individuals alleging that they contracted chronic beryllium disease ("CBD") or
related ailments 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 third quarter of 2000, the number of CBD cases grew from 48
cases (involving 151 plaintiffs), as of June 30, 2000 to 60 cases (involving 168
plaintiffs) as of September 30, 2000. During the third quarter, one purported
class action involving four named plaintiffs was dismissed.
As of September 30, 2000, the Company had an aggregate of 34 CBD
"employee cases" involving an aggregate of 34 employees, former employees or
surviving spouses (in 21 of these cases, a spouse has also filed claims as part
of their spouse's case). 25 of the other CBD cases involve third party
individual plaintiffs, with 60 individuals or surviving spouses (and 40 spouses
who have filed claims as part of their spouse's case and six children who have
filed claims as part of their parent's case). In addition, there is one
purported class action involving seven named plaintiffs. 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) face a lower burden of proof than do our employees,
but these cases are generally covered by insurance.
OTHER CLAIMS
The Company's Egbert subsidiary has been named as a defendant in a
number of lawsuits alleging asbestos-induced illness, arising out of the conduct
of a friction materials business whose operating assets Egbert sold in 1986. In
each of the pending cases, Egbert is one of a large number of defendants named
in the respective complaints. Egbert is a party to an agreement with the
predecessor owner of its operating assets, Pneumo Abex Corporation (formerly
Abex Corporation), and five insurers, regarding the handling of these cases.
Under the Agreement, the insurers share some expenses of defense, and Egbert,
Pneumo Abex Corporation and the insurers share payment of settlements and/or
judgments. In each of the pending cases, both expenses of defense and payment of
settlements and/or judgments are subject to a limited, separate
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reimbursement agreement under which a successor owner of the business is
obligated. A number of cases of this type have been disposed of to date, some by
voluntary dismissal, others by summary judgment, one by jury verdict of no
liability, and still others upon payment of nominal amounts in settlement. There
are at present 23 asbestos cases pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(10) Form of Agreement Relating to Restricted Shares entered into by the
Company and Mr. Gordon D. Harnett dated September 1, 2000.
(11) Statement re computation of per share earnings (filed as Exhibit 11
to Part I of this report).
(27) Financial Data Schedule.
(b) Reports on Form 8-K
There have been no reports on Form 8-K during the quarter ended September
29, 2000.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BRUSH ENGINEERED MATERIALS INC.
Dated: November 13, 2000
/s/ John D. Grampa
---------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
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