<PAGE> 1
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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 June 30,2000
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 August 4, 2000 there were 16,363,998 shares of Common Stock, no par
value, outstanding.
--------------------------------------------------------------------------------
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<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 June
30, 2000 are as follows:
Consolidated Statements of Income -- Three and six months ended June
30, 2000 and July 2, 1999
Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999
Consolidated Statements of Cash Flows -- Six months ended June 30,
2000 and July 2, 1999
1
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED FIRST HALF ENDED
------------------------- --------------------------
JUNE 30, JULY 2, JUNE 30, JULY 2,
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------
Net sales........................................ $ 137,182 $ 108,666 $ 272,606 $ 221,834
Cost of sales.................................. 107,474 83,508 214,604 172,577
----------- ----------- ----------- -----------
Gross margin..................................... 29,708 25,158 58,002 49,257
Selling, administrative and general expenses... 21,147 18,120 42,964 35,621
Research and development expenses.............. 1,686 2,197 3,700 4,016
Other-net...................................... 110 (420) 338 28
----------- ----------- ----------- -----------
Operating profit................................. 6,765 5,261 11,000 9,592
Interest expense............................... 1,061 847 2,181 1,784
----------- ----------- ----------- -----------
Income before income taxes....................... 5,704 4,414 8,819 7,808
Income taxes................................... 1,806 1,181 2,672 2,089
----------- ----------- ----------- -----------
Net Income....................................... $ 3,898 $ 3,233 $ 6,147 $ 5,719
=========== =========== =========== ===========
Per Share of Common Stock: Basic................. $ 0.24 $ 0.20 $ 0.38 $ 0.35
Weighted average number of common shares outstanding... 16,224,638 16,197,328 16,215,338 16,195,533
Per Share of Common Stock: Diluted............... $ 0.24 $ 0.20 $ 0.38 $ 0.35
Weighted average number of common shares outstanding... 16,358,128 16,269,092 16,336,023 16,252,559
Cash dividends per common share.................. $ 0.12 $ 0.12 $ 0.24 $ 0.24
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 5,458 $ 99
Accounts receivable....................................... 96,511 79,772
Inventories............................................... 106,568 110,570
Prepaid expenses.......................................... 7,421 7,204
Deferred income taxes..................................... 27,624 26,610
-------- --------
Total Current Assets.............................. 243,582 224,255
Other Assets................................................ 32,816 33,213
Property, Plant and Equipment............................... 442,793 440,234
Less allowances for depreciation, depletion and
impairment............................................. 277,485 269,296
-------- --------
165,308 170,938
-------- --------
$441,706 $428,406
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 26,386 $ 34,687
Accounts payable.......................................... 32,281 27,731
Other liabilities and accrued items....................... 33,720 29,869
Dividends payable......................................... 1,963 1,959
Income taxes.............................................. 6,070 5,178
-------- --------
Total Current Liabilities......................... 100,420 99,424
Other Long-Term Liabilities................................. 16,157 14,407
Retirement and Post-Employment Benefits..................... 39,583 39,430
Long-Term Debt.............................................. 48,305 42,305
Deferred Income Taxes....................................... 14,373 12,202
Shareholders' Equity........................................ 222,868 220,638
-------- --------
$441,706 $428,406
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST HALF ENDED
-------------------
JUNE 30, JULY 2,
(DOLLARS IN THOUSANDS) 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME.................................................. $ 6,147 $ 5,719
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 10,806 11,172
Amortization of mine development.......................... 1,442 2,920
Decrease (Increase) in accounts receivable................ (17,708) (11,735)
Decrease (Increase) in inventory.......................... 3,257 (7,377)
Decrease (Increase) in prepaid and other current assets... 412 (844)
Increase (Decrease) in accounts payable and accrued
expenses............................................... 9,012 6,929
Increase (Decrease) in interest and taxes payable......... 1,270 3,034
Increase (Decrease) in deferred income tax................ (119) 2,069
Increase (Decrease) in other long-term liabilities........ 2,006 (239)
Other -- net.............................................. 548 1,738
------- -------
NET CASH PROVIDED FROM OPERATING ACTIVITIES....... 17,073 13,386
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment.... (6,415) (5,843)
Payments for mine development............................. (138) (219)
Proceeds from (Payments for) other investments............ -- 37
------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (6,553) (6,025)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance (repayment) of short-term debt..... (7,460) (8,714)
Proceeds from issuance of long-term debt.................. 18,000 13,000
Repayment of long-term debt............................... (12,000) (7,000)
Issuance of Common Stock under stock option plans......... 384 92
Purchase of Common Stock for treasury..................... -- --
Payments of dividends..................................... (3,919) (3,910)
------- -------
NET CASH USED IN FINANCING ACTIVITIES............. (4,995) (6,532)
Effects of Exchange Rate Changes.......................... (166) (172)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS........... 5,359 657
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................... 99 1,938
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 5,458 $ 2,595
======= =======
</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
June 30, 2000 and December 31, 1999 and the results of operations for the six
months ended June 30, 2000 and July 2, 1999. Certain amounts in prior years have
been reclassified to conform with the 2000 consolidated financial statement
presentation.
NOTE B -- INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Principally average cost:
Raw materials and supplies............................... $ 15,708 $ 20,520
In process............................................... 84,979 73,192
Finished goods........................................... 30,537 39,634
-------- --------
Gross inventories..................................... 131,224 133,346
Excess of average cost over LIFO
Inventory value.......................................... 24,656 22,776
-------- --------
Net inventories....................................... $106,568 $110,570
======== ========
</TABLE>
NOTE C -- COMPREHENSIVE INCOME
For the second quarter 2000 and 1999, comprehensive income amounted to
$3,760,326 and $2,847,847, respectively. Year-to-date 2000 and 1999
comprehensive income amounted to $5,608,089 and $4,732,347, 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
second quarter 2000 and 1999 and for the first six months of 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
METAL MICRO- TOTAL ALL
SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
(Dollars in thousands) -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SECOND QUARTER 2000
-----------------------
Revenues from external customers........ $ 95,088 $41,818 $136,906 $ 276 $137,182
Intersegment revenues................... 49 240 289 -- 289
Segment profit (loss) before interest
and taxes............................. 9,172 3,397 12,569 (5,804) 6,765
SECOND QUARTER 1999
-----------------------
Revenues from external customers........ 74,815 31,871 106,686 1,980 108,666
Intersegment revenues................... 112 441 553 -- 553
Segment profit (loss) before interest
and taxes............................. 6,410 3,090 9,500 (4,239) 5,261
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
METAL MICRO- TOTAL ALL
SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
(Dollars in thousands) -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FIRST SIX MONTHS 2000
------------------------
Revenues from external customers........ $186,263 $83,425 $269,688 $ 2,918 $272,606
Intersegment revenues................... 209 526 735 -- 735
Segment profit (loss) before interest
and taxes............................. 16,328 6,601 22,929 (11,929) 11,000
FIRST SIX MONTHS 1999
------------------------
Revenues from external customers........ 153,438 64,526 217,964 3,870 221,834
Intersegment revenues................... 251 853 1,104 -- 1,104
Segment profit (loss) before interest
and taxes............................. 13,490 4,850 18,340 (8,748) 9,592
</TABLE>
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.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Portions of the narrative set forth in this document that are not
historical in nature are forward-looking statements. The Company's actual future
performance may differ from that contemplated by the forward-looking statements
as a result of a variety of factors. These factors include, in addition to those
mentioned elsewhere herein, the condition of the markets which the Company
serves (especially as impacted by events in particular markets, including
telecommunications, computer, automotive electronics and industrial components,
or in particular geographic regions), the success of the Company's strategic
plans, the timely and successful completion of pending capital expansions and
remediation projects, tax rates, exchange rates and the conclusion of pending
litigation matters in accordance with the Company's expectation that there will
be no materially adverse effects.
REORGANIZATION
On May 2, 2000, the Company's shareholders approved the reorganization of
the Company's corporate structure. Through a merger, Brush Wellman Inc. became a
wholly owned subsidiary of a holding company, Brush Engineered Materials Inc.
According to the merger agreement, each share of Brush Wellman Inc. common stock
was exchanged for one share of Brush Engineered Materials Inc. common stock. The
merger was effective May 16, 2000.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
---------------- ----------------
(MILLIONS, EXCEPT PER SHARE DATA) 2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales......................................... $137.2 $108.7 $272.6 $221.8
Operating Profit.............................. 6.8 5.3 11.0 9.6
Diluted E.P.S................................. $ 0.24 $ 0.20 $ 0.38 $ 0.35
</TABLE>
Sales in the second quarter 2000 and the first six months of 2000
established new record highs. Sales grew 26.2% in the second quarter 2000 and
22.9% in the first six months of 2000 from 1999 levels. Operating profit and
diluted earnings per share also have improved in 2000, although at slower rates
than sales. The Company's two business groups -- the Metal Systems Group and the
Microelectronics Group -- both increased their sales and profits in the current
period.
METAL SYSTEMS GROUP
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
-------------- ----------------
(MILLIONS) 2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales........................................... $95.1 $74.8 $186.3 $153.4
Operating Profit................................ 9.2 6.4 16.3 13.5
</TABLE>
The Metal Systems Group consists of Alloy Strip and Bulk Products,
Engineered Material Systems and Beryllium Products. As the above chart
indicates, Metal Systems sales increased 27% in the second quarter 2000 over the
second quarter 1999 while sales for the first half of 2000 have increased 21%
over last year. The following chart highlights business unit sales as a percent
of the total Metal Systems Group sales:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
--------------- ------------
(MILLIONS) 2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percent of Segment Sales:
Alloy Products..................................... 70.5% 70.2% 72.0% 72.0%
Engineered Material Systems........................ 23.9 21.2 22.4 19.7
Beryllium Products................................. 5.6 8.6 5.6 8.3
</TABLE>
7
<PAGE> 9
Sales of Alloy Products improved 28% in the second quarter 2000 and 22% for
the first six months of 2000 compared to the respective periods of 1999. Alloy
manufactures two families of products -- Strip Products and Bulk Products -- and
sales from both families were higher in the current quarter and year as compared
to last year. Strip Products consists primarily of copper-beryllium alloys sold
into the telecommunication, computer and automotive electronic markets. Demand
for these products remained very robust and continued to out pace supply.
Production output from the recently installed strip mill at the Company's
Elmore, Ohio facility was higher in the second quarter 2000 than the first
quarter 2000, but this improvement still lagged the increase in demand. Strip
pounds sold increased for the fourth consecutive quarter, with the majority of
the growth in the lower priced, lower beryllium containing alloys. A portion of
the sales growth in 2000 was achieved by further reducing finished good
inventories in the Company's service centers.
Bulk Products are alloys, primarily copper-beryllium, manufactured in
plate, rod, bar, tube, billet and other forms and sold into a variety of markets
including plastic tooling, undersea communications, oil and gas, aerospace and
welding. Sales of Bulk Products were 38% higher in the second quarter 2000 than
in the second quarter 1999 while year-to-date sales were 33% higher in 2000 than
1999. Demand from the undersea communications market, which has been strong all
year, and the oil and gas markets fueled the increased sales in the current
quarter. Demand from the plastic tooling market showed some improvement in the
second quarter 2000 from recent quarters.
Sales (and profits) from Engineered Material Systems established new
quarterly records once again. Sales of these products grew 43% in the second
quarter and 37% year-to-date from 1999's levels. Engineered Material Systems are
manufactured and marketed by Technical Materials Inc. (TMI), a wholly owned
subsidiary of the Company. Major markets for these products include
telecommunications, automotive and computers. Sales from all of TMI's main
product families, including the products manufactured through the recently
expanded plating operations, have increased in the current year compared to last
year. The incoming order rate remained strong throughout the first half of 2000.
Beryllium Product sales were lower in the second quarter 2000 than the
second quarter 1999, as expected. Year-to-date sales of Beryllium Products are
17% behind last year. Weak demand from the defense market coupled with an
automotive application that reached the end of its product life cycle
contributed to the sales decline in 2000. The recent incoming order rate has
increased, indicating that sales may improve in upcoming quarters.
Gross margin on Metal Systems Group Sales increased $3.4 million in the
second quarter 2000 over the second quarter 1999. Year-to-date gross margin for
Metal Systems improved $4.2 million from last year. The higher sales volumes
generated additional margin in 2000, a large portion of which was offset by
higher manufacturing costs, the translation effect of the weaker deutschmark,
production flow and product mix issues. Total manufacturing overhead costs,
including inventory valuation changes, were $4.2 million higher in the second
quarter and $6.3 million higher in the first six months of 2000 than in the
comparable periods of 1999. Disruptions to the equipment reliability and/or up
time at the Elmore facility have caused product flow and related quality and
cost issues for both Alloy and Beryllium Products in 2000. The dollar continued
to be relatively strong against the deutschmark and the currency translation
effect (net of the benefit from a stronger yen) at the margin line was an
unfavorable $0.5 million for the quarter and an unfavorable $1.3 million for the
year. Product mix shifts were unfavorable within Alloy and Beryllium in the
second quarter 2000.
Total selling, administrative and general expenses and other-net expenses
for the Metal Systems Group increased by $0.6 million in the second quarter 2000
and $1.3 million for the first half of 2000 over last year. As a result,
operating profit for Metal Systems was $9.2 million in the second quarter 2000,
an improvement of $2.8 million over the second quarter 1999. For the first half
of 2000, operating profit for Metal Systems was $16.3 million compared to $13.5
million in the first half of 1999.
8
<PAGE> 10
MICROELECTRONICS GROUP
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
(Millions) -------------- --------------
---------- 2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales............................................. $41.8 $31.8 $83.3 $64.5
Operating Profit.................................. 3.4 3.1 6.6 4.9
</TABLE>
The Microelectronics Group (MEG) consists of Williams Advanced Materials,
Inc. and Electronic Products. MEG sales increased 31% in the second quarter 2000
and 29% for the first two quarters of 2000 over the comparable periods in 1999.
The following chart highlights business unit sales as a percent of the total MEG
sales:
<TABLE>
<CAPTION>
SECOND QUARTER FIRST HALF
(Millions) -------------- --------------
---------- 2000 1999 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percent of Segment Sales:
WAM............................................. 74.6% 74.4% 75.6% 76.0%
Electronic Products............................. 25.4 25.6 24.4 24.0
</TABLE>
Williams Advanced Materials, Inc. (WAM), a wholly owned subsidiary of the
Company, produces and markets precious and non-precious metal physical vapor
deposition targets, specialty alloys and other precious metal products. WAM's
sales improved 31% in the second quarter and 28% for the first half of 2000
compared to 1999 as a result of strong demand from the optical media market
(DVD, CD-R, CD-RW applications) and for wireless applications within the
microelectronics market. Precious metal prices typically are passed through to
customers and as a result, approximately $3.6 million of WAM's increased sales
in the first half of 2000 is due to higher metal prices. The higher metal prices
have unfavorably impacted further growth of performance film applications in the
current year. Sales from Pure Tech, a wholly owned subsidiary of WAM, continued
to grow through development of new applications, including applications for the
fiber optics market. At the end of the second quarter 2000, Pure Tech was in the
process of expanding its operations and market presence by opening a new bonding
center in California.
Revenues from Electronic Products continued to grow in the second quarter
2000 and in the first half of 2000 from the levels generated in 1999. Core
beryllia ceramic products, manufactured at the Company's Tucson, Arizona
facility, were responsible for a large portion of the current year's growth in
Electronic Products sales as demand from the telecommunications markets
continued to be very strong. Several manufacturing lines at the Tucson facility
have been operating at full capacity over the last six to nine months. Sales of
direct bond copper, powder metal products and circuits also increased in 2000,
as did the incoming order rates.
Gross margin on MEG sales increased $1.2 million in the second quarter 2000
over the second quarter 1999. For the year, margins have improved $3.8 million,
although as a percent of sales, the year-to-date gross margin remains unchanged.
Sales volumes increased $18.7 million in the first half of the year, but $3.6
million of that total is due to the higher precious metal prices which did not
generate any additional margin. Manufacturing overhead expenses increased $1.0
million in the second quarter 2000 over the second quarter 1999 and $1.6 million
for the first half of the year as a result of the higher level of activity and
inventory valuation adjustments. The product mix within Electronic Products was
favorable in 2000.
Operating profit was $3.4 million in the second quarter 2000 compared to
$3.1 million in the second quarter of 1999. The $1.2 million improvement in
gross margin was partially offset by a $0.9 million increase in selling,
administrative and general and other-net expenses. For the first half 2000, MEG
operating profit was $6.6 million, a 36% improvement over 1999.
CONSOLIDATED
Total sales, including operations not part of Metal Systems or MEG, were
$137.2 million in the second quarter 2000 compared to $108.7 million in the
second quarter 1999. For the first half of the year, total sales were $272.6
million in 2000 and $221.8 million in 1999. Total international sales, which
include sales by the Company's international subsidiaries and direct exports,
were $37.6 million in the second quarter 2000 and
9
<PAGE> 11
$32.4 million in the second quarter 1999. International sales totaled $76.1
million, or 27.9% of sales in the first half of 2000 and $68.0 million, or 30.7%
of sales, in the first half of 1999. The majority of this $8.1 million
improvement was in Metal System sales in Asia.
Total gross margin as a percent of sales was 21.7% in the second quarter
2000 compared to 23.2% in the second quarter 1999. While still lower than the
margin percent from the comparable period a year ago, the margin percent has now
improved in three straight quarters. The year-to-date margin percent was 21.3%
in 2000 and 22.2% in 1999.
Selling, administrative and general (SA&G) expenses were $21.1 million, or
15.4% of sales, in the second quarter 2000 and $18.1 million, or 16.7% of sales,
in the second quarter 1999. For the first six months of 2000, SA&G expenses were
$43.0 million compared to $35.6 million in the first six months of 1999. As a
percent of sales, the year-to-date expenses were 16.1% last year and 15.8% this
year. The main causes for the increased spending in the current year are higher
legal and administrative costs associated with pending litigation matters and
additional research efforts into the causes, prevention and diagnosis of chronic
beryllium disease. Additional one-time legal and administrative costs were
incurred in 2000 to implement the corporate reorganization described elsewhere
herein. Selling and marketing expenses are higher in 2000 than 1999 in order to
support both the current increased sales volumes and expanded market development
activities.
Research and development (R&D) expenses were $1.7 million in the second
quarter 2000 and $3.7 million in the first half 2000. R&D expenses were $2.2
million and $4.0 million in the respective periods in 1999. The decline in the
second quarter 2000 expenses was due to a planned reduction in the R&D efforts
supporting Beryllium Products and Alloy Products.
Other-net expense was $0.1 million in the second quarter 2000 compared to
other-net income of $0.4 million in the second quarter 1999. For the first half
of the year, other-net expense was $0.3 million in 2000 and less than $0.1
million in 1999. Other-net includes metal consignment fees, foreign currency
exchange gains and losses, bad debt expense, amortization of intangible assets,
cash discounts and other miscellaneous non-operating items. The metal
consignment fee is higher in the current period as a result of increased prices
and rates.
Operating profit was $6.8 million in the second quarter 2000, an
improvement of $1.5 million from the second quarter of 1999. For the first six
months of 2000, operating profit was $11.0 million versus an operating profit of
$9.6 million earned in the first six months of 1999. In both the quarter and
first half of the year in 2000, sales were higher, generating additional margin
dollars, but at a lower rate than last year. The higher margin dollars were then
partially offset by a significant increase in SA&G expenses.
Interest expense was $1.1 million in the second quarter 2000 versus $0.8
million in the second quarter 1999. For the first six months of the year,
interest expense was $2.2 million in 2000 and $1.8 million in 1999. The average
borrowing rates were slightly higher in 2000 than 1999 as was the average
outstanding level of debt. The level of interest capitalized in association with
spending on capital projects was minor in both years.
Income before income taxes was $5.7 million in the second quarter 2000 and
$8.8 million for the first two quarters of 2000 compared to $4.4 million and
$7.8 million in the respective periods in 1999.
Income taxes were provided for at 30.3% of the income before income taxes
in the first half of 2000 compared to a rate of 26.8% used in the first half of
1999. The rate increase in the current year resulted from anticipated higher
taxable income for the full year of 2000 compared to 1999 and lower available
tax credits.
Net income was $3.9 million in the second quarter 2000 and $3.2 million in
the second quarter 1999. For the first half of the year, net income was $6.1
million in 2000 and $5.7 million in 1999.
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 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
<PAGE> 12
The following table summarizes the activity associated with CBD cases. The
table includes two purported class action lawsuits which were filed during the
first quarter of 2000 and involve eleven named plaintiffs.
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, MARCH 31,
2000 2000
------------- --------------
<S> <C> <C>
Total cases pending.................................... 48 46
Total plaintiffs....................................... 151 147
Number of claims (plaintiffs) filed during period...... 4(8) 9(31)
Number of claims (plaintiffs) settled during period.... 1(2) 0(0)
Aggregate settlements paid during period (dollars in
thousands)........................................... $180 $ 0
Number of claims (plaintiffs) dismissed................ 1(2) 0(3)
</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 $7.3 million
at June 30, 2000 and $6.0 million at December 31, 1999. The Company also
recorded a receivable of $4.9 million at March 31, 2000 and $3.9 million at
December 31, 1999 from its insurance carriers as recoveries for insured claims.
Although it is not possible to predict the outcome of the litigation
pending against the Company and its subsidiaries, the Company provides for costs
related to these matters when a loss is probable and the amount is reasonably
estimable. Litigation is subject to many uncertainties, and it is possible that
some of these actions could be decided unfavorably in amounts exceeding the
Company's reserves. An unfavorable outcome or settlement of a pending CBD case
or additional adverse media coverage could encourage the commencement of
additional similar litigation. The Company is unable to estimate its potential
exposure to unasserted claims.
While the Company is unable to predict the outcome of the current or future
CBD proceedings, based upon currently known facts and assuming collectibility of
insurance, the Company does not believe that resolution of these proceedings
will have a material adverse effect on the financial condition or the cash flow
of the Company. However, the Company's results of operations could be materially
affected by unfavorable results in one or more of these cases.
FINANCIAL POSITION
Cash flow from operations was $17.1 million in the first half of 2000. Cash
balances improved from $0.1 million at the end of 1999 to $5.5 million at the
end of the second quarter 2000. Accounts receivable grew $16.7 million in the
first six months of the year due to the record sales level and a slight increase
in the days sales outstanding. While the accounts receivable balance has
increased, bad debt write-offs have remained very minor. Inventories declined by
$4.0 million in the first half of 2000. Alloy strip inventories in the domestic
and international service centers have decreased during 2000 while in process
inventories have increased. Accounts payable and other accruals have increased
during 2000 as a result of the higher activity levels and to finance the higher
receivable balance.
Capital expenditures for property, plant and equipment and mine development
were $6.6 million in the first six months of 2000. Approximately 55% of the
capital spending in 2000 has been for the Metal Systems Group and 40% for the
MEG. Major programs underway include infrastructure and safety improvements in
Elmore, the Pure Tech bonding center and additional plating and bonding
equipment at TMI.
Total balance sheet debt of $74.7 million at the end of the second quarter
represents a $2.3 million decline from December 31, 1999. Short-term debt
declined $8.3 million while long-term debt increased $6.0 million thus far in
2000. Total debt remains $2.0 million higher than at the end of the second
quarter 1999. Effective the end of the second quarter 2000, the Company amended
its revolving credit agreement (the "revolver") and various other lines of
credit with its bank group. Maximum borrowings under the revolver were increased
to $65.0 million from
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$55.0 million as a result of merging a $10.0 million multi-currency line into
the revolver. Certain debt 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 covenants were added. The revolver matures in July 2003.
During the first quarter 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 second quarter, the Company had utilized $8.3
million of this facility.
Two quarterly dividends were paid at $0.12 per share and totaled $3.9
million during the first six months of 2000.
Cash flow from operations was $13.4 million in the first half of 1999.
Accounts receivable increased by $10.8 million and inventories increased $6.1
million during the first six months of 1999. Capital expenditures were $6.1
million during this time period. Total balance sheet debt declined by $5.0
million in the first two quarters of 1999 while dividends paid were $3.9
million. Cash balances increased $0.7 million in the first half of 1999.
Funds being generated by operations, plus the available borrowing capacity,
are believed 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 second quarter of 2000, the number of CBD cases grew from 46
cases (involving 147 plaintiffs), as of March 31, 2000 to 48 cases (involving
151 plaintiffs) as of June 30, 2000. During the second quarter, one case
involving two plaintiffs was voluntarily dismissed, and one case involving two
plaintiffs was settled and dismissed.
As of June 30, 2000, the Company had an aggregate of 29 CBD "employee
cases" involving an aggregate of 29 employees, former employees or surviving
spouses (in 20 of these cases, a spouse has also filed claims as part of their
spouse's case). 17 of the other CBD cases involve third party individual
plaintiffs, with 52 individuals or surviving spouses (and 33 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 are two purported
class actions involving eleven 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders for 2000 was held on May
2, 2000.
(b) At the Annual Meeting, three directors were elected to serve for a term
of three years by the following vote:
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED SHARES VOTED SHARES
"FOR" "AGAINST" "ABSTAINING" "NON-VOTED"
------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
Gordon D. Harnett......................... 15,219,862 -0- 154,478 -0-
William P. Madar.......................... 15,245,877 -0- 128,462 -0-
David H. Hoag............................. 15,243,627 -0- 130,712 -0-
</TABLE>
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<PAGE> 15
The following directors continued their term of office after the meeting:
Joseph P. Keithley, William R. Robertson, John Sherwin, Jr., Albert C.
Bersticker, Dr. Charles F. Brush, III, and David L. Burner. In addition, Robert
M. McInnes retired as a director effective May 2, 2000.
(c) The reorganization of the Company's capital and corporate structure was
ratified and approved by the following vote:
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED SHARES VOTED SHARES
"FOR" "AGAINST" "ABSTAINING" "NON-VOTED"
------------ ------------ -------------- -------------
<S> <C> <C> <C>
11,183,168 2,043,678 330,821 1,816,673
</TABLE>
(d) The selection of Ernst & Young LLP as independent auditors for 2000 was
ratified and approved by the following vote:
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED SHARES VOTED SHARES
"FOR" "AGAINST" "ABSTAINING" "NON-VOTED"
------------ ------------ -------------- -------------
<S> <C> <C> <C>
15,238,199 83,048 53,092 -0-
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4a) Credit agreement dated as of June 30, 2000 among Brush Wellman Inc.
and Brush Engineered Materials Inc. as the borrowers and National City Bank
acting for itself and as agent for certain other banking institutions as
lenders.
(10a) Consolidated Amendment No. 1 to Master Lease Agreement and Equipment
Schedules dated as of June 30, 2000 between Brush Wellman Inc. and National City
Bank acting for itself and as agent for certain participants.
(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
Brush Engineered Materials Inc. filed a report on Form 8-K on May 16, 2000
that included a copy of a press release announcing that the reorganization of
the Company's capital and corporate structure had become effective on that date.
Brush Wellman Inc. (predecessor issuer to Brush Engineered Materials Inc.)
filed a report on Form 8-K on May 16, 2000 that detailed the change in control
between Brush Wellman Inc. and Brush Engineered Materials Inc. This Form 8-K
also announced the approval of Amendment No. 1, dated as of May 16, 2000, to the
Rights Agreement, dated as of January 27, 1998, between the Brush Wellman Inc.
and National City Bank, N.A.
Brush Wellman Inc. (predecessor issuer to Brush Engineered Materials Inc.)
filed a report on Form 8-K on May 9, 2000 that included a copy of a press
release announcing the approval of the reorganization of the Company's capital
and corporate structure.
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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: August 14, 2000
/s/ John D. Grampa
--------------------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
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