BRUSH ENGINEERED MATERIALS INC. 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 28, 2007
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to
Commission
file number
001-15885
BRUSH
ENGINEERED MATERIALS INC.
(Exact
name of Registrant as specified in charter)
|
|
|
Ohio
(State or other jurisdiction of
incorporation or organization)
|
|
34-1919973
(I.R.S. Employer Identification
No.)
|
17876 St. Clair Avenue, Cleveland, Ohio
|
|
44110
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check One)
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No þ
As of October 29, 2007 there were 20,395,859 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
September 28, 2007 are as follows:
1
Consolidated
Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
(Dollars in thousands except share and
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net sales
|
|
$
|
230,928
|
|
|
$
|
200,426
|
|
|
$
|
714,805
|
|
|
$
|
555,227
|
|
Cost of sales
|
|
|
184,655
|
|
|
|
160,715
|
|
|
|
557,367
|
|
|
|
441,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
46,273
|
|
|
|
39,711
|
|
|
|
157,438
|
|
|
|
113,673
|
|
Selling, general and administrative expense
|
|
|
27,456
|
|
|
|
26,848
|
|
|
|
82,690
|
|
|
|
77,951
|
|
Research and development expense
|
|
|
968
|
|
|
|
971
|
|
|
|
3,569
|
|
|
|
3,006
|
|
Other-net
|
|
|
1,679
|
|
|
|
1,258
|
|
|
|
5,537
|
|
|
|
1,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
16,170
|
|
|
|
10,634
|
|
|
|
65,642
|
|
|
|
30,756
|
|
Interest expense
|
|
|
286
|
|
|
|
983
|
|
|
|
1,540
|
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,884
|
|
|
|
9,651
|
|
|
|
64,102
|
|
|
|
27,506
|
|
Income taxes
|
|
|
5,976
|
|
|
|
2,564
|
|
|
|
23,141
|
|
|
|
8,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,908
|
|
|
$
|
7,087
|
|
|
$
|
40,961
|
|
|
$
|
19,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share of common stock: basic
|
|
$
|
0.49
|
|
|
$
|
0.36
|
|
|
$
|
2.02
|
|
|
$
|
0.99
|
|
Weighted average number of common shares outstanding
|
|
|
20,392,000
|
|
|
|
19,784,000
|
|
|
|
20,300,000
|
|
|
|
19,547,000
|
|
Per share of common stock: diluted
|
|
$
|
0.48
|
|
|
$
|
0.35
|
|
|
$
|
1.98
|
|
|
$
|
0.96
|
|
Weighted average number of common shares outstanding
|
|
|
20,730,000
|
|
|
|
20,111,000
|
|
|
|
20,736,000
|
|
|
|
19,998,000
|
|
See notes to consolidated financial statements.
2
Consolidated
Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Sept. 28,
|
|
|
Dec. 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,967
|
|
|
$
|
15,644
|
|
Accounts receivable
|
|
|
116,877
|
|
|
|
86,461
|
|
Inventories
|
|
|
163,798
|
|
|
|
151,950
|
|
Prepaid expenses
|
|
|
16,308
|
|
|
|
13,988
|
|
Deferred income taxes
|
|
|
3,279
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
317,229
|
|
|
|
271,584
|
|
Other assets
|
|
|
13,152
|
|
|
|
13,577
|
|
Related-party notes receivable
|
|
|
98
|
|
|
|
98
|
|
Long-term deferred income taxes
|
|
|
4,655
|
|
|
|
15,575
|
|
Property, plant and equipment
|
|
|
575,512
|
|
|
|
557,861
|
|
Less allowances for depreciation, depletion and amortization
|
|
|
392,647
|
|
|
|
381,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,865
|
|
|
|
175,929
|
|
Goodwill
|
|
|
21,782
|
|
|
|
21,843
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
539,781
|
|
|
$
|
498,606
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
29,908
|
|
|
$
|
28,076
|
|
Current portion of long-term debt
|
|
|
631
|
|
|
|
632
|
|
Accounts payable
|
|
|
30,240
|
|
|
|
30,744
|
|
Other liabilities and accrued items
|
|
|
53,239
|
|
|
|
52,161
|
|
Unearned revenue
|
|
|
2,652
|
|
|
|
314
|
|
Income taxes
|
|
|
1,086
|
|
|
|
4,515
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
117,756
|
|
|
|
116,442
|
|
Other long-term liabilities
|
|
|
11,780
|
|
|
|
11,642
|
|
Retirement and post-employment benefits
|
|
|
59,200
|
|
|
|
59,089
|
|
Long-term income taxes
|
|
|
4,331
|
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
151
|
|
Long-term debt
|
|
|
9,645
|
|
|
|
20,282
|
|
Shareholders equity
|
|
|
337,069
|
|
|
|
291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
539,781
|
|
|
$
|
498,606
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
40,961
|
|
|
$
|
19,282
|
|
Adjustments to reconcile net income to net cash provided from
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
17,944
|
|
|
|
17,668
|
|
Amortization of deferred financing costs in interest expense
|
|
|
321
|
|
|
|
440
|
|
Derivative financial instrument ineffectiveness
|
|
|
42
|
|
|
|
(163
|
)
|
Stock-based compensation expense
|
|
|
2,928
|
|
|
|
1,200
|
|
Decrease (increase) in accounts receivable
|
|
|
(29,122
|
)
|
|
|
(30,951
|
)
|
Decrease (increase) in inventory
|
|
|
(12,440
|
)
|
|
|
(33,966
|
)
|
Decrease (increase) in prepaid and other current assets
|
|
|
(1,941
|
)
|
|
|
(896
|
)
|
Decrease (increase) in deferred income taxes
|
|
|
(3,680
|
)
|
|
|
6,075
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
(3,763
|
)
|
|
|
14,212
|
|
Increase (decrease) in unearned revenue
|
|
|
2,338
|
|
|
|
190
|
|
Increase (decrease) in interest and taxes payable
|
|
|
10,471
|
|
|
|
1,198
|
|
Increase (decrease) in other long-term liabilities
|
|
|
3,286
|
|
|
|
3,013
|
|
Other net
|
|
|
(2,080
|
)
|
|
|
7,123
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from operating activities
|
|
|
25,265
|
|
|
|
4,425
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments for purchase of property, plant and equipment
|
|
|
(17,644
|
)
|
|
|
(9,659
|
)
|
Payments for mine development
|
|
|
(6,778
|
)
|
|
|
(72
|
)
|
Payments for purchase of business net of cash received
|
|
|
|
|
|
|
(25,694
|
)
|
Proceeds from sale of business
|
|
|
2,150
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
46
|
|
|
|
|
|
Other investments net
|
|
|
42
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(22,184
|
)
|
|
|
(35,392
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance (repayment) of short-term debt
|
|
|
1,467
|
|
|
|
7,619
|
|
Proceeds from issuance of long-term debt
|
|
|
15,747
|
|
|
|
26,000
|
|
Repayment of long-term debt
|
|
|
(26,393
|
)
|
|
|
(10,633
|
)
|
Issuance of common stock under stock option plans
|
|
|
4,914
|
|
|
|
9,441
|
|
Tax benefit from exercise of stock options
|
|
|
2,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities
|
|
|
(1,532
|
)
|
|
|
32,427
|
|
Effects of exchange rate changes
|
|
|
(226
|
)
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
1,323
|
|
|
|
1,176
|
|
Cash and cash equivalents at beginning of period
|
|
|
15,644
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,967
|
|
|
$
|
11,818
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
Notes to
Consolidated Financial Statements
(Unaudited)
|
|
Note A
|
Accounting
Policies
|
In managements opinion, the accompanying consolidated
financial statements contain all adjustments necessary to
present fairly the financial position as of September 28,
2007 and December 31, 2006 and the results of operations
for the third quarter and first nine months ended
September 28, 2007 and September 29, 2006. All of the
adjustments were of a normal and recurring nature.
|
|
|
|
|
|
|
|
|
|
|
Sept. 28,
|
|
|
Dec. 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Principally average cost:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
28,036
|
|
|
$
|
36,390
|
|
Work in process
|
|
|
150,741
|
|
|
|
124,670
|
|
Finished goods
|
|
|
52,601
|
|
|
|
56,721
|
|
|
|
|
|
|
|
|
|
|
Gross inventories
|
|
|
231,378
|
|
|
|
217,781
|
|
Excess of average cost over LIFO inventory value
|
|
|
67,580
|
|
|
|
65,831
|
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
163,798
|
|
|
$
|
151,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Note C
|
Pensions
and Other Post-retirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Third Quarter Ended
|
|
|
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,185
|
|
|
$
|
1,253
|
|
|
$
|
75
|
|
|
$
|
74
|
|
|
|
|
|
Interest cost
|
|
|
1,888
|
|
|
|
1,742
|
|
|
|
477
|
|
|
|
476
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(2,200
|
)
|
|
|
(2,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(167
|
)
|
|
|
(178
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
|
|
Amortization of net loss
|
|
|
445
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,151
|
|
|
$
|
1,256
|
|
|
$
|
543
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3,499
|
|
|
$
|
3,760
|
|
|
$
|
226
|
|
|
$
|
222
|
|
Interest cost
|
|
|
5,577
|
|
|
|
5,227
|
|
|
|
1,431
|
|
|
|
1,427
|
|
Expected return on plan assets
|
|
|
(6,497
|
)
|
|
|
(6,235
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(494
|
)
|
|
|
(534
|
)
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Amortization of net loss
|
|
|
1,314
|
|
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,399
|
|
|
$
|
3,768
|
|
|
$
|
1,630
|
|
|
$
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Brush Wellman Inc., one of the Companys wholly owned
subsidiaries, is a defendant in various legal proceedings where
the plaintiffs allege that they have contracted chronic
beryllium disease (CBD) or related ailments as a result of
exposure to beryllium. Management believes that the Company has
substantial defenses and intends to defend these suits
vigorously. The Company has recorded a reserve for CBD
litigation of $2.2 million as of September 28, 2007
and $2.1 million as of December 31, 2006. This reserve
covers existing claims only and unasserted claims could give
rise to additional losses. Defense costs are expensed as
incurred. Final resolution of the asserted claims may be for
different amounts than currently reserved. There were no
settlement payments made during the first nine months of 2007.
Portions of the outstanding claims are covered by varying levels
of insurance.
In the third quarter 2006, the Court of Common Pleas in Ottawa
County, Ohio issued a summary judgment in the Companys
favor and awarded the Company damages of $7.8 million to be
paid by the Companys former insurance providers. The
Company had filed the lawsuit against its former insurers in
attempts to resolve a dispute over how insurance coverage should
be applied to incurred legal defense costs and indemnity
payments. The Court ruling agreed with the Companys
position. The damages, which were stipulated to by the
defendants, represent costs previously paid by the Company over
a number of years that were not reimbursed by the insurance
providers. The damages also include accrued interest on those
costs. The award was subsequently increased to $8.8 million
as a result of the defendants stipulating to the attorneys
fess incurred in pursuing this action. The Company believes that
the defendants will appeal this ruling and therefore all or a
portion of the $8.8 million may not realized by the
Company. Given the uncertainty surrounding the timing and
outcome of the appeal process and the possibility for a portion
or all of the award to be reversed, the Company has not recorded
the impact of the award in its Consolidated Financial Statements
as of September 28, 2007.
Williams Advanced Materials Inc. (WAM), one of the
Companys wholly owned subsidiaries, and a small number of
WAMs customers are defendants in a patent infringement
legal case. WAM has provided an indemnity agreement to certain
of those customers under which WAM will pay any damages awarded
by the court. WAM has not made any indemnification payments nor
have they recorded a reserve for losses under these agreements
as of September 28, 2007. WAM believes it has strong
defenses applicable to both WAM and its customers and is
contesting this action. While WAM does not believe that a loss
is probable, should their defenses not prevail, the damages to
be paid may potentially be material to the Companys
results of operations in the period of payment. The court
recently issued a stay in the action against WAM in order to
review the question of the plaintiffs ownership of the
applicable patents.
The Company has an active environmental compliance program and
records reserves for the probable cost of identified
environmental remediation projects. The reserves are established
based upon analyses conducted by the Companys engineers
and outside consultants and are adjusted from time to time based
upon on-going studies and the difference between actual and
estimated costs. The reserves may also be affected by rulings
and negotiations with regulatory agencies. The undiscounted
reserve balance was $5.0 million as of September 28,
2007 and $5.1 million as of December 31, 2006.
Environmental projects tend to be long-term and the final actual
remediation costs may differ from the amounts currently recorded.
|
|
Note E
|
Comprehensive Income
|
The reconciliation between net income and comprehensive income
for the third quarter and first nine months ended
September 28, 2007 and September 29, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net income
|
|
$
|
9,908
|
|
|
$
|
7,087
|
|
|
$
|
40,961
|
|
|
$
|
19,282
|
|
Cumulative translation adjustment
|
|
|
1,426
|
|
|
|
(14
|
)
|
|
|
1,194
|
|
|
|
476
|
|
Change in the fair value of derivative financial instruments
|
|
|
(2,174
|
)
|
|
|
(1,034
|
)
|
|
|
(6,021
|
)
|
|
|
4,732
|
|
Minimum pension and other retirement plan liability
|
|
|
269
|
|
|
|
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
9,429
|
|
|
$
|
6,039
|
|
|
$
|
36,927
|
|
|
$
|
24,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Note F
|
Segment
Reporting
|
Beginning in the fourth quarter 2006 and due largely because the
Company has a new chief operating decision maker, the operating
segments will no longer be aggregated and the Company will
report its four material segments separately. WAM is reported as
Advanced Material Technologies and Services, Alloy Products
reported as Specialty Engineered Alloys, Beryllium Products is
now Beryllium and Beryllium Composites and Technical Materials
Inc. is Engineered Material Systems. Brush Ceramic Products, a
wholly owned subsidiary that formerly was part of Electronic
Products, has been merged into Beryllium and Beryllium
Composites. The remaining portions of Electronic Products, due
to their insignificance, are reported in the reconciling All
Other column in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material
|
|
|
Specialty
|
|
|
Beryllium
|
|
|
Engineered
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Engineered
|
|
|
and Beryllium
|
|
|
Material
|
|
|
|
|
|
All
|
|
|
|
|
(Dollars in thousands)
|
|
and Services
|
|
|
Alloys
|
|
|
Composites
|
|
|
Systems
|
|
|
Subtotal
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Third Quarter 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
119,418
|
|
|
$
|
74,117
|
|
|
$
|
15,159
|
|
|
$
|
18,614
|
|
|
$
|
227,308
|
|
|
$
|
3,620
|
|
|
$
|
230,928
|
|
Intersegment revenues
|
|
|
1,406
|
|
|
|
335
|
|
|
|
209
|
|
|
|
322
|
|
|
|
2,272
|
|
|
|
2
|
|
|
|
2,274
|
|
Operating profit (loss)
|
|
|
12,279
|
|
|
|
2,566
|
|
|
|
2,204
|
|
|
|
1,710
|
|
|
|
18,759
|
|
|
|
(2,589
|
)
|
|
|
16,170
|
|
Third Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
91,994
|
|
|
$
|
73,205
|
|
|
$
|
13,554
|
|
|
$
|
17,039
|
|
|
$
|
195,792
|
|
|
$
|
4,634
|
|
|
$
|
200,426
|
|
Intersegment revenues
|
|
|
1,125
|
|
|
|
2,463
|
|
|
|
270
|
|
|
|
1,287
|
|
|
|
5,145
|
|
|
|
19
|
|
|
|
5,164
|
|
Operating profit (loss)
|
|
|
6,158
|
|
|
|
3,695
|
|
|
|
1,706
|
|
|
|
602
|
|
|
|
12,161
|
|
|
|
(1,527
|
)
|
|
|
10,634
|
|
First Nine Months 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
384,352
|
|
|
$
|
220,028
|
|
|
$
|
46,818
|
|
|
$
|
52,227
|
|
|
$
|
703,425
|
|
|
$
|
11,380
|
|
|
$
|
714,805
|
|
Intersegment revenues
|
|
|
3,879
|
|
|
|
3,403
|
|
|
|
752
|
|
|
|
1,787
|
|
|
|
9,821
|
|
|
|
14
|
|
|
|
9,835
|
|
Operating profit (loss)
|
|
|
49,109
|
|
|
|
9,258
|
|
|
|
6,762
|
|
|
|
3,016
|
|
|
|
68,145
|
|
|
|
(2,503
|
)
|
|
|
65,642
|
|
Assets
|
|
|
190,920
|
|
|
|
239,339
|
|
|
|
38,217
|
|
|
|
27,287
|
|
|
|
495,763
|
|
|
|
44,018
|
|
|
|
539,781
|
|
First Nine Months 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
250,279
|
|
|
$
|
202,569
|
|
|
$
|
36,696
|
|
|
$
|
52,977
|
|
|
$
|
542,521
|
|
|
$
|
12,706
|
|
|
$
|
555,227
|
|
Intersegment revenues
|
|
|
3,196
|
|
|
|
5,753
|
|
|
|
632
|
|
|
|
2,680
|
|
|
|
12,261
|
|
|
|
21
|
|
|
|
12,282
|
|
Operating profit (loss)
|
|
|
24,750
|
|
|
|
5,641
|
|
|
|
2,803
|
|
|
|
3,166
|
|
|
|
36,360
|
|
|
|
(5,604
|
)
|
|
|
30,756
|
|
Assets
|
|
|
150,592
|
|
|
|
233,286
|
|
|
|
36,039
|
|
|
|
29,524
|
|
|
|
449,441
|
|
|
|
37,099
|
|
|
|
486,540
|
|
|
|
Note G
|
Stock-based
Compensation Expense
|
The Company granted 3,000 restricted stock units to certain
employees in the third quarter 2007. The fair value of the
grants was determined using the closing prices on the grant
dates. The fair value will be amortized over the vesting period
of three years. The shares will be forfeited should the
holders employment terminate prior to the end of the
vesting period.
The Company granted approximately 8,000 restricted stock units
to the non-employee directors in the second quarter 2007 under
the 2006 Non-employee Directors Equity Plan. The fair
value of the grant, which was determined using the closing
market price on the grant date of May 1, 2007, was $46.01
per share. The fair value will be amortized over the vesting
period of one year. Should a director terminate prior to the
completion of the vesting period, the director will be entitled
to receive a pro-rata payment of common shares based upon the
number of full months of service rendered since the grant date.
The Company granted approximately 50,000 shares of
restricted stock to certain employees in the first quarter 2007
at a fair value of $44.72 per share. The fair value was
determined using the closing price of the Companys stock
on the grant date of February 15, 2007 and will be
amortized over the vesting period of three years. The shares
will be forfeited should the holders employment terminate
prior to the end of the vesting period. The Company granted
approximately 40,000 stock appreciation rights (SARs) to certain
employees in the first quarter 2007 at a strike price of $44.72
per share. The fair value of the SARs, which was determined on
the grant date of February 15, 2007 using a Black-Scholes
model, was $22.77 per share and will be amortized over the
vesting period of three years. The SARs expire ten years from
the date of the grant.
7
The Company implemented a long-term incentive plan for the 2007
to 2009 time period for executive officers and certain other
employees in the first quarter 2007. Awards under the plan are
based upon the Companys performance during this time
period and any payout at the end of the period may vary
depending upon the degree to which the actual performance
exceeds the pre-determined threshold, target and maximum
performance levels. Under the 2007 to 2009 long-term incentive
plan, awards earned up to the target level will be settled in
shares of the Companys stock. The portion of any awards
earned in excess of the target up to the maximum payout will be
settled in cash based upon the share price of the Companys
stock at the end of the performance period. Compensation expense
is based upon the current performance projections for the
three-year period, the percentage of requisite service rendered
and the market value of the Companys stock on the
February 15, 2007 grant date. The offset to compensation
expense is recorded within shareholders equity. The
compensation expense for the portion of any payout in excess of
target is based upon the market price of the Companys
stock at the end of the period with the offset recorded as a
liability.
Total share-based compensation expense for the above and
previously existing grants and plans was $1.0 million in
the third quarter 2007 and $0.5 million in the third
quarter 2006. For the first nine months of the year, the
comparable expense was $2.9 million in 2007 and
$1.2 million in 2006.
Income taxes were calculated by applying an effective tax rate
of 37.6% against income before income taxes in the third quarter
2007 and 36.1% in the first nine months of 2007. The differences
between the effective rate and the statutory rate in both
periods included the effects of percentage depletion, foreign
source income and deductions, the production deduction and other
factors. The effective tax rate was 26.6% in the third quarter
2006 and 29.9% in the first nine months of 2006. The differences
between the effective and statutory rates in those periods were
primarily the impact of foreign source income and percentage
depletion. The effective tax rate was higher in the third
quarter and first nine months of 2007 than the respective
periods in the prior year due to differences in income levels,
foreign source income, percentage depletion and other factors.
The effective rate in the third quarter 2007 was higher than the
effective rate of 35.6% used in the first six months of 2007 due
to differences in the projected impact of foreign income and
taxes and other factors. The effect of this rate change was an
increase to tax expense and to decrease net income by
approximately $0.3 million, or $0.01 per share, in the
third quarter 2007.
|
|
Note I
|
Income
Taxes Adoption of FIN 48
|
The Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48) as of January 1,
2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. As a result of adopting FIN 48, the
Company recognized a $1.4 million increase to its reserve
for uncertain tax positions, which is included in accrued income
taxes on the Consolidated Balance Sheet. The increase was
accounted for as an adjustment to the retained earnings balance
as of January 1, 2007. The prior years results were
not restated for the adoption of FIN 48.
As of January 1, 2007, the Company had $5.4 million of
unrecognized tax benefits, of which $4.3 million would
affect the effective tax rate if recognized. The gross
unrecognized tax benefits differ from the amount that would
affect the effective tax rate due to the impact of various
offsetting items.
The Company or its subsidiaries files income tax returns in the
United States federal jurisdiction and various state and foreign
jurisdictions. The tax years 1999 through 2006 remain open to
examination for federal and state taxing jurisdictions to which
we are subject. No foreign jurisdiction tax years are open prior
to 2000.
The Company classifies all interest and penalties as income tax
expense. As of January 1, 2007, the Company recorded
$0.1 million of accrued interest and penalties related to
uncertain tax positions. The Company believes that due to a
current audit, it is reasonably possible that the total amount
of unrecognized tax benefits will decrease by approximately
$0.1 million within the next twelve months.
8
|
|
Note J
|
New
Pronouncements
|
The FASB issued Statement No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities -
including an amendment of FASB Statement No. 115 in
the first quarter 2007. The statement allows entities to value
financial instruments and certain other items at fair value. The
statement provides guidance over the election of the fair value
option, including the timing of the election and specific items
eligible for the fair value accounting. Changes in fair values
would be recorded in earnings. The statement is effective for
fiscal years beginning after November 15, 2007. The Company
is evaluating the impact the adoption of this statement will
have, if any, on its consolidated financial statements.
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are an integrated producer of engineered materials used in a
variety of high performance electrical, electronic, thermal,
optical and structural applications. Major markets for our
materials include telecommunications and computer, data storage,
aerospace and defense, automotive electronics, industrial
components and appliance.
Sales in the third quarter 2007 of $230.9 million were
$30.5 million higher than the third quarter 2006. This
growth was fueled by a combination of improved demand from the
data storage, defense and portions of the telecommunications and
computer and other markets, improved pricing in portions of our
business, new products and the pass-through of higher precious
metal prices. International sales continued to grow at a faster
pace than domestic sales.
Gross margin was 20% of sales in the third quarter 2007,
unchanged from the third quarter 2006, but an improvement over
the 18% gross margin earned in the second quarter 2007. Expenses
were slightly higher in the third quarter 2007 than they were in
the third quarter 2006, but they declined as a percent of sales.
Operating profit was $16.2 million in the third quarter
2007, a $5.6 million, or 52%, improvement over the third
quarter 2006. Operating profit has grown over the comparable
quarter in the prior year for nine consecutive quarters.
Cash flow from operations was $25.3 million in the first
nine months of 2007. Cash flow from operations increased in both
the second quarter and third quarter 2007 over the preceding
quarter. In the third quarter 2007, cash flow from operations
was $13.9 million. This strong cash flow, along with the
proceeds from the exercise of stock options and the proceeds
from the sale of a small business, allowed us to fund capital
expenditures, a pension plan contribution and an
$8.8 million reduction in debt in the first nine months of
2007.
The debt to total debt plus equity ratio, a measure of balance
sheet leverage, improved from 14% at year end 2006 to 11% as of
the end of the third quarter 2007.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
Millions, except per share data
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
230.9
|
|
|
$
|
200.4
|
|
|
$
|
714.8
|
|
|
$
|
555.2
|
|
Operating Profit
|
|
|
16.2
|
|
|
|
10.6
|
|
|
|
65.6
|
|
|
|
30.8
|
|
Income Before Income Taxes
|
|
|
15.9
|
|
|
|
9.7
|
|
|
|
64.1
|
|
|
|
27.5
|
|
Net Income
|
|
|
9.9
|
|
|
|
7.1
|
|
|
|
41.0
|
|
|
|
19.3
|
|
Diluted E.P.S.
|
|
$
|
0.48
|
|
|
$
|
0.35
|
|
|
$
|
1.98
|
|
|
$
|
0.96
|
|
Sales of $230.9 million in the third quarter
2007 were 15% higher than third quarter 2006 sales of
$200.4 million while sales of $714.8 million for the
first nine months of 2007 were 29% higher than sales of
$555.2 million in the first nine months of 2006.
9
Sales have grown over the comparable quarter in the prior year
for nineteen consecutive quarters. Sales in the first nine
months of 2007 were the highest in our history.
More than half of the growth in sales in the third quarter and
first nine months of 2007 over the prior year is from sales of
ruthenium-based targets for the data storage market for hard
disk drive applications. The demand for these materials improved
in the third quarter 2007 after having slowed down during the
second quarter 2007 from the first quarter 2007 level, partially
due to seasonality issues. We anticipate demand from this market
to be strong in the fourth quarter 2007 as the perpendicular
magnetic recording (PMR) technology is implemented by our
customers in an increasing portion of their hard disk drive
applications.
Sales of precious metal products for wireless telecommunication
and other applications contributed to the sales increase in the
third quarter and first nine months of 2007. Sales also
increased in the third quarter 2007 and the first nine months of
2007 due to improved pricing on copper-based alloy products sold
into portions of the telecommunications and computer, appliance,
industrial component and other markets. Sales for defense and
government-related applications grew in each of the first three
quarters of 2007 while the demand from the automotive
electronics market, which had been soft in the first six months
of 2007, strengthened during the third quarter 2007.
We use precious metals, including gold, silver, platinum and
palladium in the manufacture of various products. Our sales are
affected by the prices for these metals, as changes in our
purchase price are passed on to our customers in the form of
higher or lower selling prices. The prices for the precious
metals we use on average were higher in the third quarter and
first nine months of 2007 than the comparable periods in 2006
resulting in an estimated $5.2 million increase in sales in
the third quarter 2007 as compared to the third quarter 2006 and
an estimated $15.9 million increase in sales in the first
nine months of 2007 over the first nine months of 2006.
International sales were $91.4 million, or 40% of total
sales, in the third quarter 2007 compared to $67.4 million,
or 34% of total sales, in the third quarter 2006. For the first
nine months of the year, international sales of
$305.6 million in 2007 were 65% higher than international
sales of $185.6 million in 2006. International sales
accounted for 43% of total sales in the first nine months of
2007 compared to 33% of total sales in the first nine months of
2006. A significant portion of the international growth in 2007
came from Asia and a portion of that growth was due to the data
storage market. The effect of translating foreign currency
denominated sales was a favorable $0.7 million in the third
quarter 2007 and a favorable $2.4 million in the first nine
months of 2007 as compared to the same periods in 2006. Domestic
sales grew 5% in the third quarter 2007 and 11% in the first
nine months of 2007 over the respective periods of 2006.
Gross margin was $46.3 million in the third
quarter 2007, an increase of $6.6 million over the gross
margin of $39.7 million in the third quarter 2006. The
gross margin was 20% of sales in both periods. For the first
nine months of the year, the gross margin improved to
$157.4 million in 2007, or 22% of sales, from
$113.7 million, or 20% of sales, in 2006.
The overall increase in sales volume contributed to the margin
improvement in both the third quarter and first nine months of
2007 over to the respective periods of the prior year. Improved
pricing from two of our businesses helped to offset the impact
of the continuing high cost of copper and nickel and also
contributed to the higher margin dollars in 2007. The change in
product mix was slightly favorable in the third quarter and
first nine months of 2007 as compared to the same periods in
2006.
The market price of ruthenium escalated in the second half of
2006 and was significantly higher than the carrying cost of the
inventory as of December 31, 2006. Sales of this existing
lower cost inventory at the current market prices and other
inventory transactions increased total gross margins by
$1.5 million in the third quarter 2007 and
$22.9 million in the first nine months of 2007. A portion
of the lower cost inventory was in the form of refines and other
re-cycle materials that have longer processing times; we
anticipate that the majority of the small volume of material
that is left from last year will be consumed in the fourth
quarter 2007. During the first quarter 2007, we revised our
pricing strategy to allow for changes in the price of ruthenium
purchased going forward to be passed on to customers.
The year-to-date gross margin was adversely affected by an
isolated manufacturing quality issue in the production of
ruthenium targets for the data storage market that resulted in
customer returns, additional costs and inventory losses in the
second quarter 2007. The quality issue was resolved and
shipments resumed to the affected
10
customers in the third quarter 2007. The year-to-date gross
margin was also reduced in the second quarter 2007 by a lower of
cost or market charge on a portion of the ruthenium-based
inventory as the market price of ruthenium declined below the
original price paid for materials purchased earlier in the year.
The total impact of the quality issue (excluding the potential
impact of any lost sales) and the lower of cost or market charge
was $8.8 million, or 1% of sales, in the first nine months
of 2007.
Selling, general and administrative expenses (SG&A)
were $27.5 million in the third quarter 2007
compared to $26.8 million in the third quarter 2006.
Expenses declined from 13% of sales in the third quarter 2006 to
12% of sales in the third quarter 2007. For the first nine
months of the year, SG&A expenses totaled
$82.7 million, or 12% of sales, in 2007 and
$78.0 million, or 14% of sales, in 2006.
Incentive compensation expense was approximately
$0.4 million lower in the third quarter 2007 than the third
quarter 2006 but $1.8 million higher in the first nine
months of 2007 than the first nine months of 2006 due to
differences in our profitability and the impact of changes in
the market price for our common stock on certain compensation
plans. The expense for other share-based compensation plans,
including restricted stock amortization and stock options,
increased $0.2 million in the third quarter 2007 and
$0.8 million in the first nine months of 2007 over the
respective periods in 2006.
Selling and marketing expenses were higher in both the third
quarter and first nine months of 2007 than the comparable
periods in 2006 in order to support the higher level of sales
and as a result of our domestic and international market
penetration efforts.
The exchange rate effect on the translation of Brush
International, Inc.s subsidiaries expenses was an
unfavorable $0.2 million in the third quarter 2007 and
$0.6 million in the first nine months of 2007 as compared
to the respective periods in 2006.
Research and development expenses (R&D) were
$1.0 million in the third quarter 2007, unchanged from the
third quarter 2006. For the first nine months of the year,
R&D expenses increased from $3.0 million in 2006 to
$3.6 million in 2007. Our R&D efforts remain closely
aligned with our marketing and manufacturing operations and are
focused on developing new products and improving processes.
Other-net
expense for the third quarter and first nine months of
2007 and 2006 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Expense)
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Exchange gains (losses)
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
(0.5
|
)
|
|
$
|
1.5
|
|
Directors deferred compensation
|
|
|
(0.6
|
)
|
|
|
(0.3
|
)
|
|
|
(1.2
|
)
|
|
|
(0.7
|
)
|
Derivative ineffectiveness
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
Metal financing fee
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
|
|
(1.4
|
)
|
|
|
(1.5
|
)
|
Loss on sale of business
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
Other items
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
(2.2
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1.7
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
(2.0
|
)
|
Exchange gains and losses are caused by changes in the
U.S. dollars value relative to the strike prices in
the maturing hedge contracts and in other currency transactions.
In general, the dollar has been weaker in the first nine months
of 2007 than it was in the comparable period of 2006.
The income or expense on the directors deferred
compensation plan is a function of the outstanding shares in the
plan and the movements in the share price of our stock; the
price increased during the third quarter and first nine months
of both 2007 and 2006.
11
Derivative ineffectiveness results from the changes in the fair
value of an interest rate swap that does not qualify for hedge
accounting treatment. Gains on the swap result from increases in
market interest rates while losses are caused by declines in
interest rates.
We are charged a metal financing fee on the value of the
off-balance sheet precious metal inventory. The fee is
relatively unchanged from the prior year.
In the first quarter of 2007, we sold substantially all of the
operating assets and liabilities of Circuits Processing
Technology, Inc. (CPT), a wholly owned subsidiary that
manufactures thick film circuits, for $2.2 million. CPT,
which was acquired in 1996, was a small operation with limited
growth opportunities. The loss on the sale was approximately
$0.3 million.
Other-net
expense also includes amortization of intangible assets, cash
discounts, gains and losses on the disposal of fixed assets and
other non-operating items.
Operating profit was $16.2 million in the
third quarter 2007, an improvement of $5.6 million over the
$10.6 million profit earned in the third quarter 2006. For
the first nine months of the year, operating profit improved
$34.8 million, from $30.8 million in 2006 to
$65.6 million in 2007. This improvement resulted from the
margin earned on the higher sales offset in part by higher
material costs, the quality issue in the second quarter 2007 and
higher SG&A and
other-net
expenses.
Interest expense was $0.3 million in the
third quarter 2007 compared to $1.0 million in the third
quarter 2006. For the first nine months of the year, interest
expense was $1.5 million in 2007 and $3.2 million in
2006. The average level of outstanding debt was lower in the
third quarter 2007 and first nine months of 2007 than the
comparable periods in 2006. Interest capitalized in association
with long-term capital projects was immaterial in the third
quarter and first nine months of both years.
Income before income taxes was $15.9 million
in the third quarter 2007 compared to $9.7 million in the
third quarter 2006, a $6.2 million, or 65%, improvement.
Income before income taxes was $64.1 million in the first
nine months of 2007, having grown $36.6 million from the
income before income taxes of $27.5 million in the first
nine months of 2006.
The tax expense was calculated by applying a
provision of 37.6% against the income before income taxes in the
third quarter of 2007 while a provision of 26.6% was used in the
third quarter 2006. The effective tax rate was 36.1% in the
first nine months of 2007 and 29.9% in the first nine months of
2006. The effects of percentage depletion, foreign source
income, executive compensation, the production deduction and
other items were the major factors for the difference between
the effective and statutory rates in the third quarter and first
nine months of 2007. The effects of foreign source income and
percentage depletion were the major causes for the difference
between the effective and statutory rates in the third quarter
and first nine months of 2006. The tax rate was higher in the
third quarter and first nine months of 2007 than the comparable
periods in 2006 due to the higher level of taxable income in
2007, differences in foreign tax benefits and other factors.
The effective tax rate was increased in the third quarter 2007
over the rate used in the first half of 2007 mainly due to the
changes in the projected impact of foreign taxes. The higher tax
rate reduced net income by $0.3 million, or $0.01 per
share, in the third quarter 2007.
Net income was $9.9 million in the third
quarter 2007, an improvement of $2.8 million, or 40%, over
the net income of $7.1 million earned in the third quarter
2006. Net income for the first nine months of 2007 was
$41.0 million, $21.7 million higher than the net
income of $19.3 million in the first nine months of 2006.
Diluted earnings per share were $0.48 in the third quarter 2007
and $0.35 in the third quarter 2006, while diluted earnings per
share for the first nine months of the year were $1.98 in 2007
and $0.96 in 2006.
Prior to year-end 2006, we aggregated our businesses into two
reporting segments. The Metal Systems Group included Alloy
Products, Beryllium Products and Technical Materials, Inc. (TMI)
and the Microelectronics Group included Williams Advanced
Materials Inc. (WAM) and Electronic Products. Beginning with
year-end 2006, we are reporting our four largest operating
segments separately. WAM and its subsidiaries are reported as
Advanced Material Technologies and Services. Alloy Products,
including Brush Resources Inc., is reported as Specialty
12
Engineered Alloys. Beryllium Products is now known as Beryllium
and Beryllium Composites while TMI is reported as Engineered
Material Systems.
In addition, Brush Ceramic Products Inc., a wholly owned
subsidiary that previously was part of Electronic Products, has
been merged into the Beryllium Products operating segment and is
part of the Beryllium and Beryllium Composites reporting
segment. Brush Ceramic Products is a small operation that is
under common management with and has similar operating concerns
as Beryllium Products. The remaining portions of Electronic
Products, due to their immateriality and in compliance with the
quantitative thresholds of Statement No. 131, are now
included in the All Other column of our segment reporting. The
All Other column also includes our parent company expenses,
other corporate charges and the operating results of BEM
Services, Inc., a wholly owned subsidiary that provides
administrative and financial oversight services to our other
businesses on a cost-plus basis.
With the appointment of our new chief executive officer in 2006,
we believe these changes to our segment reporting are consistent
with how the company is managed. Prior year data has been
re-cast to be consistent with the current year format.
The operating profit within All Other was $1.1 million
lower in the third quarter 2007 than the third quarter 2006
while the operating profit for the first nine months of the year
was $3.1 million higher in 2007 than in 2006. The
year-to-date improvement was due to lower retirement expenses
recorded at the corporate office, the income difference in the
directors deferred compensation plan between periods, improved
profit contribution from Zentrix Technologies Inc. and other
factors.
Advanced
Material Technologies and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
Sept. 28,
|
|
Sept. 29,
|
|
Sept. 28,
|
|
Sept. 29,
|
Millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Sales
|
|
$
|
119.4
|
|
|
$
|
92.0
|
|
|
$
|
384.4
|
|
|
$
|
250.3
|
|
Operating Profit
|
|
$
|
12.3
|
|
|
$
|
6.2
|
|
|
$
|
49.1
|
|
|
$
|
24.8
|
|
Advanced Material Technologies and Services
manufactures precious, non-precious and specialty metal
products, including vapor deposition targets, frame lid
assemblies, clad and precious metal preforms, high temperature
braze materials, ultra-fine wire and specialty inorganic
materials. Major markets for these products include data
storage, medical and the wireless, semiconductor, photonic and
hybrid sectors of the microelectronics market. Advanced Material
Technologies and Services also has metal cleaning operations and
an in-house refinery that allows for the reclaim of precious
metals from its own or customers scrap. Due to the high
cost of precious metal products, we emphasize quality, delivery
performance and customer service in order to attract and
maintain applications. This segment has domestic facilities in
New York, California and Wisconsin and multiple facilities in
Asia and Europe.
Sales from Advanced Material Technologies and Services of
$119.4 million in the third quarter 2007 were 30% higher
than sales of $92.0 million in the third quarter 2006.
Sales for the first nine months of 2007 of $384.4 million
were 54% higher than sales of $250.3 million in the first
nine months of 2006.
Advanced Material Technologies and Services adjusts its selling
prices daily to reflect the current cost of the precious metals
(primarily gold, silver, platinum and palladium) sold. The cost
of the metal is generally a pass-through to the customer and a
margin is generated on the fabrication efforts irrespective of
the type or cost of the metal used in a given application.
Therefore, the cost and mix of metals sold will affect sales but
not necessarily the margins generated by those sales. The prices
of these metals were higher on average in 2007 which in turn
increased sales by $5.2 million in the third quarter 2007
and $15.9 million in the first nine months of 2007 over the
respective periods in 2006.
The majority of the sales growth for this segment in the third
quarter and first nine months of 2007 was generated by
ruthenium-based products manufactured at the Brewster, New York
facility for media applications within the data storage market.
Both volumes and prices for ruthenium products were higher in
the first nine months of 2007 than in the first nine months of
2006. The higher demand as compared to 2006 was fueled by the
continued
13
development and deployment of the PMR technology, which uses
layers of ruthenium and other materials on hard disk drives
resulting in a significant increase in data storage capacity.
The demand for ruthenium materials improved in the third quarter
2007 after slowing in the second quarter relative to the first
quarter in part due to seasonality of our customers
production schedules.
Sales of vapor deposition targets for photonics and wireless
applications increased in the third quarter 2007 over the third
quarter 2006 and in the first nine months of 2007 over the first
nine months of 2006. These products are manufactured at the
Buffalo, New York facility and a portion of the growth was due
to the metal price effect referenced above. Sales of inorganic
materials from CERAC, incorporated, which was acquired in the
first quarter 2006, and sales of lids from Thin Film Technology,
Inc., which was acquired in the fourth quarter 2005, were minor
contributors to the growth in the segments sales for the
third quarter and first nine months of 2007. Sales through the
recently created Taiwan operation have also contributed to the
sales growth in the first nine months of 2007.
We opened a new facility in the Czech Republic late in the
second quarter 2007 that is designed to provide shield kit
cleaning services to customers in central Europe. We are also
constructing a new manufacturing facility in China and expanding
capacity at two of our New York facilities in order to meet the
growing demand for Advanced Material Technologies and
Services product offerings.
The gross margin on Advanced Material Technologies and
Services sales was $22.1 million (19% of sales) in
the third quarter 2007 and $15.2 million (17% of sales) in
the third quarter 2006. For the first nine months of the year,
gross margin was $79.9 million in 2007 and
$50.0 million in 2006, an improvement of
$29.9 million. The gross margin was 21% of sales in the
first nine months of 2007 compared to 20% in the comparable
period in 2006.
The higher gross sales volume generated additional contribution
margin in both the third quarter 2007 and the first nine months
of 2007 over the respective periods in 2006. The change in
product mix effect was favorable in the third quarter 2007 over
the third quarter 2006 after being slightly unfavorable in the
first six months of 2007.
The previously discussed quality issue and lower of cost or
market charge of $8.8 million was recorded against the
Advanced Material Technologies and Services segment in the
second quarter 2007 and reduced gross margin as a percent of
sales by 2 points in the first nine months of 2007.
The margin benefit from the turnover of the lower cost ruthenium
inventory originally acquired in 2006 of $1.5 million in
the third quarter 2007 and $22.9 million for the first nine
months of 2007 was also recorded against this segment. This
benefit will not repeat to this extent in future periods as the
inventory turns and as a result of a change in our pricing
practice that now bases the selling price of the ruthenium
content of products sold on our purchase price.
Manufacturing overhead costs were only $1.3 million higher
in the third quarter 2007 and $2.8 million higher in the
first nine months of 2007 than comparable periods in 2006
despite the significant increase in sales.
Total SG&A, R&D and
other-net
expenses were $9.8 million (8% of sales) in the third
quarter 2007 and $9.0 million (10% of sales) in the third
quarter 2006. These expenses totaled $30.8 million (8% of
sales) in the first nine months of 2007, an increase of
$5.6 million over the total expense of $25.2 million
(10% of sales) in the first nine months of 2006.
The increased expense in the third quarter 2007 over the third
quarter 2006 was primarily due to higher incentive accruals
based upon the improved profitability and increased R&D
efforts. Selling and marketing expenses grew slightly in the
third quarter 2007, but were a primary cause for the increased
expenses in the first nine months of the year. These expenses
grew as a result of our market penetration efforts as well as to
support the higher level of business. Administrative costs were
up slightly for the year as a result of additional manpower and
costs associated with managing a growing business. Higher
incentive compensation accruals contributed to the expense
growth for the first nine months of the year as well.
Operating profit from Advanced Material Technologies and
Services was $12.3 million in the third quarter 2007,
having grown $6.1 million over the profit of
$6.2 million earned in the third quarter 2006. For the
first nine months of the year, operating profit was
$49.1 million in 2007 and $24.8 million in 2006, an
improvement of $24.3 million. Operating profit as a percent
of sales also improved from 10% in the first nine months of 2006
to 13% in the first nine months of 2007. The increased profit
was generated by the margins earned on the higher sales
14
volume and the turnover of the lower cost ruthenium inventory
offset in part by the quality issue and lower of cost or market
charge in the second quarter and higher expenses.
Specialty
Engineered Alloys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
Sept. 28,
|
|
Sept. 29,
|
|
Sept. 28,
|
|
Sept. 29,
|
Millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Sales
|
|
$
|
74.1
|
|
|
$
|
73.2
|
|
|
$
|
220.0
|
|
|
$
|
202.6
|
|
Operating Profit
|
|
$
|
2.6
|
|
|
$
|
3.7
|
|
|
$
|
9.3
|
|
|
$
|
5.6
|
|
Specialty Engineered Alloys manufactures and sells
three main product families:
Strip products, the larger of the product
families, include thin gauge precision strip and small diameter
rod and wire. These copper and nickel beryllium alloys provide a
combination of high strength, high conductivity, high
reliability and formability for use as connectors, contacts,
switches, relays and shielding. Major markets for strip products
include telecommunications and computer, automotive electronics
and appliances;
Bulk products are copper and nickel-based alloys
manufactured in plate, rod, bar, tube and other customized forms
that, depending upon the application, may provide superior
strength, corrosion or wear resistance or thermal conductivity.
While the majority of bulk products contain beryllium, a growing
portion of bulk products sales is from non-beryllium containing
alloys as a result of product diversification efforts.
Applications for bulk products include plastic mold tooling,
bearings, bushings, welding rods, oil and gas drilling
components and telecommunications housing equipment; and,
Beryllium hydroxide is produced by Brush Resources
Inc., a wholly owned subsidiary, at its milling operations in
Utah from its bertrandite mine and purchased beryl ore. The
hydroxide is used primarily as a raw material input in the
manufacture of strip and bulk products and by the Beryllium and
Beryllium Components segment. External sales of hydroxide from
the Utah operations totaled $2.7 million in the third
quarter and $5.2 million in the first nine months of 2007;
sales of hydroxide totaled $2.4 million in the first nine
months of 2006, all of which was shipped in the third quarter of
that year.
Strip and bulk products are manufactured at facilities in Ohio
and Pennsylvania and are distributed worldwide through a network
of company-owned service centers and outside distributors and
agents.
Sales by Specialty Engineered Alloys of $74.1 million in
the third quarter 2007 improved $0.9 million over sales of
$73.2 million in the third quarter 2006 while sales of
$220.0 million in the first nine months of 2007 were 9%
higher than sales of $202.6 million in the first nine
months of 2006. The sales improvement in the first nine months
of 2007 was primarily due to higher selling prices and the
timing of the hydroxide shipments. The pricing improvement
resulted from an increased percentage of sales subject to the
pass-through of the current base metal (copper and nickel)
prices.
Shipment volumes of strip products declined 16% in the third
quarter and 12% in the first nine months of 2007 compared to the
same periods last year. The majority of this decline for the
first nine months of the year was in the lower priced, lower
beryllium- containing strip alloys. However, the majority of the
decline in the third quarter 2007 shipments was in the higher
priced, higher beryllium-containing alloys. Volumes of rod and
wire products were also down slightly in the third quarter 2007
compared to the third quarter 2006, but shipments for the first
nine months of the year were still higher than the previous year.
Bulk product volumes were 5% higher in the third quarter 2007
than the third quarter 2006 but 2% lower in the first nine
months of 2007 versus the comparable period in 2006. A portion
of the volume growth in the third quarter was in the lower
priced alloys. Demand for bulk products from the industrial
components market, including applications for oil and gas and
plastics, improved in the third quarter 2007. Sales of
non-beryllium containing alloys for mechanical system
applications were a minor contributor to the sales increase.
Sales of materials for handset applications from the
telecommunications and computer market continued to be soft in
the third quarter particularly in South Asia. The demand for
materials for infra-structure equipment and
15
related applications in the telecommunications and computer
market remained solid. European sales softened slightly in the
third quarter 2007 partially due to customer seasonal slowdowns.
Sales into the Japanese market have remained firm throughout
2007. The growth in new products across various markets and
applications has helped to offset the softness in existing
applications.
The gross margin on Specialty Engineered Alloys sales was
$14.2 million in the third quarter 2007 compared to
$18.0 million in the third quarter 2006. The margin
declined from 25% of sales in the third quarter 2006 to 19% of
sales in the third quarter 2007. For the first nine months of
the year, gross margin was $47.8 million (22% of sales) in
2007 and $46.2 million (23% of sales) in 2006.
The gross margin benefit from the improved pricing in the third
quarter 2007 was more than offset by other factors. The change
in the product mix from both strip and bulk products was
unfavorable in the quarter. Margins also continued to be reduced
by yield differences and other operating inefficiencies,
although improvements were made in the third quarter from the
second quarter 2007 operating levels. Production levels were
lower in the third quarter and first nine months of 2007 versus
the respective periods of 2006 resulting in an increase to
unabsorbed costs and lower margins. The change in product mix
effect was slightly favorable for the first nine months of the
year while manufacturing overhead costs were higher in the first
nine months of 2007 than the comparable period in 2006 by an
immaterial amount.
The cost of copper and nickel is passed on to customers based
upon the cost at the time of receipt of the order; the cost of
these materials increased sharply during the current quarter and
will be recovered as the orders are shipped. Over time, our
selling price and purchase price are in balance, but timing
differences between the receipt and actual fulfillment of the
order can impact margins in a given period, especially when
there is a significant movement in prices.
Total SG&A, R&D and
other-net
expenses of $11.7 million (16% of sales) in the third
quarter 2007 were $2.6 million lower than the expense of
$14.3 million (20% of sales) in the third quarter 2006.
Expenses for the first nine months of the year totaled
$38.6 million in 2007 and $40.6 million in 2006.
Expenses declined from 20% of sales in the first nine months of
2006 to 18% of sales in the first nine months of 2007.
The lower expenses in both the third quarter and first nine
months of 2007 compared to the same periods in 2006 resulted
from a reduction in incentive compensation expense due to
changes in the level of profitability relative to the plan
targets. Corporate charges were also lower in the current
quarter and nine month period than they were a year ago.
Offsetting a portion of the benefits from these lower expenses
in the third quarter and first nine months of the year was an
increase to selling and marketing expenses both domestically and
internationally, and a difference in foreign exchange gains and
losses.
The operating profit from Specialty Engineered Alloys was
$2.6 million in the third quarter 2007 compared to
$3.7 million in the third quarter 2006. For the first nine
months of the year, operating profit was $9.3 million in
2007 (4% of sales) and $5.6 million (3% of sales) in 2006.
Beryllium
and Beryllium Composites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
Sept. 28,
|
|
Sept. 29,
|
|
Sept. 28,
|
|
Sept. 29,
|
Millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Sales
|
|
$
|
15.2
|
|
|
$
|
13.6
|
|
|
$
|
46.8
|
|
|
$
|
36.7
|
|
Operating Profit
|
|
$
|
2.2
|
|
|
$
|
1.7
|
|
|
$
|
6.8
|
|
|
$
|
2.8
|
|
Beryllium and Beryllium Composites manufactures
beryllium-based metals and metal matrix composites in rod,
sheet, foil and a variety of customized forms at the Elmore,
Ohio and Fremont, California facilities. These materials are
used in applications that require high stiffness
and/or low
density and they tend to be premium priced due to their unique
combination of properties. This Segment also manufactures
beryllia ceramics through our wholly owned subsidiary Brush
Ceramic Products in Tucson, Arizona. Defense and
government-related applications, including aerospace, is the
largest market for Beryllium and Beryllium Composites, while
other markets served include medical, telecommunications and
computer, electronics (including acoustics), optical scanning
and automotive.
16
Sales by Beryllium and Beryllium Composites were
$15.2 million in the third quarter 2007, an improvement of
$1.6 million over the third quarter 2006 while sales in the
first nine months of 2007 of $46.8 million improved
$10.1 million (or 28%) over the first nine months of 2006.
We sell beryllium blanks for the European nuclear fusion project
(JET) and various products for the James Webb Space Telescope
(JWST). Sales for these two projects and all other sales for the
third quarter and first nine months of 2007 and 2006 for
Beryllium and Beryllium Composites were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
JET
|
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
2.0
|
|
|
$
|
0.5
|
|
JWST
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
2.7
|
|
All Other
|
|
|
14.2
|
|
|
|
12.1
|
|
|
|
44.0
|
|
|
|
33.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
15.2
|
|
|
$
|
13.6
|
|
|
$
|
46.8
|
|
|
$
|
36.7
|
|
Both the JET and JWST projects are nearing completion and we do
not anticipate significant sales for either project in 2008.
Sales for defense applications from the Elmore facility
increased in both the third quarter and first nine months of
2007 over the comparable periods in 2006 and were responsible
for the majority of the improvement in Beryllium and Beryllium
Composite sales. Sales for medical and industrial x-ray
applications from the Fremont facility were slightly lower in
the third quarter 2007 than the third quarter 2006 but were
higher in the first nine months of 2007 than the first nine
months of 2006. Sales of beryllia ceramics were down slightly in
both the third quarter and first nine months of 2007 compared to
the same periods in 2006.
The gross margin on Beryllium and Beryllium Composites sales was
$5.1 million in the third quarter 2007 compared to
$4.3 million in the third quarter 2006. The gross margin
also improved from 32% of sales in the third quarter 2006 to 34%
of sales in the third quarter 2007. For the first nine months of
the year, gross margin was $16.0 million (34% of sales), in
2007, a $5.6 million improvement over the gross margin of
$10.4 million (28% of sales), in 2006.
The majority of the increase in gross margin in the quarter and
nine month periods resulted from the benefits of the higher
sales volume in the current year. Manufacturing improvements
have also had a minor impact on the margin growth. Manufacturing
overhead spending for manpower, maintenance, supplies and other
items was $1.0 million higher in the first nine months of
2007 than the first nine months of 2006.
SG&A, R&D and
other-net
expenses for Beryllium and Beryllium Composites were
$2.9 million in the third quarter 2007 compared to
$2.6 million in the third quarter 2006. Expenses were 19%
of sales in both periods. For the first nine months of the year,
expenses were $9.3 million (20% of sales) in 2007 and
$7.6 million (21% of sales) in 2006. The increase in
expense was due to higher incentive compensation accruals,
increased selling and marketing efforts (including manpower,
commission and sample expenses) and foreign currency exchange
losses.
Operating profit for Beryllium and Beryllium Composites was
$2.2 million in the third quarter 2007, an improvement of
$0.5 million over the operating profit of $1.7 million
in the third quarter 2006 while operating profit for the first
nine months of 2007 of $6.8 million was a $4.0 million
improvement over the profit of $2.8 million generated in
the first nine months of 2006. Operating profit was 14% of sales
in the first nine months of 2007 and 8% of sales in the first
nine months of 2006.
Engineered
Material Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
Sept. 28,
|
|
Sept. 29,
|
|
Sept. 28,
|
|
Sept. 29,
|
Millions
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Sales
|
|
$
|
18.6
|
|
|
$
|
17.0
|
|
|
$
|
52.2
|
|
|
$
|
53.0
|
|
Operating Profit
|
|
$
|
1.7
|
|
|
$
|
0.6
|
|
|
$
|
3.0
|
|
|
$
|
3.2
|
|
17
Engineered Material Systems includes clad inlay
and overlay metals, precious and base metal electroplated
systems, electron beam welded systems, contour profiled systems
and solder-coated metal systems. These specialty strip metal
products provide a variety of thermal, electrical or mechanical
properties from a surface area or particular section of the
material. Our cladding and plating capabilities allow for a
precious metal or brazing alloy to be applied to a base metal
only where it is needed, reducing the material cost to the
customer as well as providing design flexibility. Major
applications for these products include connectors, contacts and
semiconductors. The largest markets for Engineered Material
Systems are automotive and telecommunications and computer
electronics, while the energy and defense and medical electronic
markets offer further growth opportunities. Engineered Material
Systems are manufactured at our Lincoln, Rhode Island facility.
Engineered Material Systems sales were $18.6 million
in the third quarter 2007, a 9% improvement from sales of
$17.0 million in the third quarter 2006. For the first nine
months of the year, sales were $52.2 million in 2007 and
$53.0 million in 2006.
Sales of materials for disk drive applications were strong once
again in the third quarter 2007, growing significantly over the
year-ago period. The growth in these sales as well as sales for
other new products and applications, including fuses and
switches, have offset a portion of the softness in sales of
traditional products from Engineered Material Systems in the
first nine months of the year. Demand from the automotive
electronics market, which had been soft in the first half of the
year, improved during the third quarter. A price increase
implemented in the first quarter 2007 also helped to offset the
impact of a portion of the lower volumes.
The gross margin on Engineered Material Systems sales was
$3.6 million, or 19% of sales, in the third quarter 2007
and $2.7 million, or 16% of sales, in the third quarter
2006. For the first nine months of the year, gross margin was
$9.0 million, or 17% of sales, in 2007 and
$9.4 million, or 18% of sales, in 2006. The contribution
margin on the higher sales was the main cause for the
improvement in gross margins in the third quarter 2007.
Manufacturing overhead expenses were unchanged in the third
quarter 2007 compared to the third quarter 2006 despite the
increased level of sales.
The lower margin in the first nine months of 2007 as compared to
2006 was due to the lower sales volume and an unfavorable change
in product mix. Sales grew in various products with a higher
material content which, in turn, carry lower contribution
margins, while sales for applications with higher contribution
margins declined slightly. Yield and process improvements have
helped to mitigate these unfavorable margin effects as did the
price increase implemented in the first quarter 2007.
Total SG&A, R&D and
other-net
expenses were $1.9 million in the third quarter 2007, a
reduction of $0.2 million from the third quarter 2007. For
the first nine months of the year, total expenses of
$6.0 million in 2007 were $0.3 million lower than
2006. There were no material differences in the various expense
categories between years.
Operating profit from Engineered Material Systems was
$1.7 million in the third quarter 2007 compared to
$0.6 million in the third quarter 2006 while for the first
nine months of the year, operating profit was $3.0 million
in 2007 and $3.2 million in 2006. Operating profit was 6%
of sales in the first nine months of both 2007 and 2006.
Legal
One of our 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 claims as a result of exposure to beryllium.
Plaintiffs in beryllium cases seek recovery under negligence and
various other legal theories and seek compensatory and punitive
damages, in many cases of an unspecified sum, as well as other
remedies. Spouses, if any, claim loss of consortium.
18
The following table summarizes the associated activity with
beryllium cases.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
Sept 28, 2007
|
|
|
June 29, 2007
|
|
|
|
|
Total cases pending
|
|
|
10
|
|
|
|
10
|
|
Total plaintiffs
|
|
|
32
|
|
|
|
32
|
|
Number of claims (plaintiffs) filed during period ended
|
|
|
0(0
|
)
|
|
|
0(0
|
)
|
Number of claims (plaintiffs) settled during period ended
|
|
|
0(0
|
)
|
|
|
0(0
|
)
|
Aggregate cost of settlements during period ended (dollars in
thousands)
|
|
$
|
0
|
|
|
$
|
0
|
|
Number of claims (plaintiffs) otherwise dismissed
|
|
|
0(0
|
)
|
|
|
2(20
|
)
|
Settlement payment and dismissal for a single case may not occur
in the same period.
Additional beryllium claims may arise. Management believes that
it has substantial defenses in these cases and intends to
continue to contest the suits vigorously. Employee cases, in
which plaintiffs have a high burden of proof, have historically
involved relatively small losses to us. 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. We
recorded a reserve for beryllium litigation of $2.2 million
as of September 28, 2007 and $2.1 million as of
December 31, 2006. We recorded a receivable for recoveries
from our insurance carriers on insured claims of
$2.2 million as of September 28, 2007 and
$2.0 million as of December 31, 2006. We reserved an
additional $0.4 million at both September 28, 2007 and
December 31, 2006 for insolvencies related to claims still
outstanding as well as claims for which partial payments have
been received.
Although it is not possible to predict the outcome of the
litigation pending against our subsidiaries and us, we provide
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 our
reserves. An unfavorable outcome or settlement of a pending
beryllium case or additional adverse media coverage could
encourage the commencement of additional similar litigation. We
are unable to estimate our potential exposure to unasserted
claims.
While we are unable to predict the outcome of the current or
future beryllium proceedings, based upon currently known facts
and assuming collectibility of insurance, we do not believe that
resolution of these proceedings will have a material adverse
effect on our financial condition or cash flow. However, our
results of operations could be materially affected by
unfavorable results in one or more of these cases. As of
September 28, 2007, two purported class actions were
pending.
Regulatory Matters. Standards for exposure to beryllium
are under review by the United States Occupational Safety and
Health Administration and by other governmental and private
standard-setting organizations. One result of these reviews will
likely be more stringent worker safety standards. More stringent
standards may affect buying decisions by the users of
beryllium-containing products. If the standards are made more
stringent or our customers decide to reduce their use of
beryllium-containing products, our 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
Net cash provided from operating activities was
$25.3 million in the first nine months of 2007 as net
income, changes in various liabilities and the benefits of
depreciation more than offset the increases in accounts
receivable and inventory. Cash balances stood at
$17.0 million at the end of the third quarter 2007, an
increase of $1.3 million from December 31, 2006 as the cash
flow from operations coupled with the proceeds from the exercise
of stock options and the sale of a small business were used
primarily to fund capital expenditures and reduce debt in the
first nine months of 2007.
19
Accounts receivable increased $30.4 million,
or 35%, during the first nine months of 2007, partially due to
the higher sales in 2007. Sales in the third quarter 2007 were
11% higher than sales in the fourth quarter 2006. Receivables
also increased due to a slower average collection time, as the
days sales outstanding (DSO), a measure of the average time to
collect receivables, increased from a very low level as of year
end 2006. A portion of the increased DSO is due to the higher
international receivables which tend to take longer to collect.
Accounts written off to bad debt expense and adjustments to the
bad debt allowance were $0.3 million in the first nine
months of 2007, a slight decline from the comparable period in
2006.
Inventories totaled $163.8 million as of the
end of the third quarter 2007, an increase of
$11.8 million, or 8%, during the first nine months of 2007.
The majority of this increase was in Advanced Material
Technologies and Services and specifically at the Brewster
facility as ruthenium-based inventories grew significantly to
support the higher sales to the data storage market. The growth
in ruthenium inventories was due to both higher quantities and
prices. Inventories also increased within Beryllium and
Beryllium Composites largely due to the purchase of beryllium
ingot from the government stockpile late in the second quarter.
This material will be used as feedstock over several quarters.
Inventories within Specialty Engineered Alloys were lower at the
end of the third quarter 2007 than at the end of last year as
inventory pounds declined 5%. Inventories at Engineered Material
Systems also declined in the first nine months of 2007.
While the total inventory level has increased, the inventory
turnover ratio, a measure of how efficiently inventory is sold,
improved in the third quarter 2007 over year end 2006.
We use the last in, first out (LIFO) method for valuing a large
portion of our domestic inventories. By so doing, the most
recent cost of various raw materials, including gold, copper and
nickel, is charged to cost of sales in the current period. The
older, and often times lower, costs are used to value the
inventory on hand. Therefore, current changes in the cost of raw
materials subject to the LIFO valuation method may have only a
minimal impact on changes in the inventory carrying value. Other
materials, including ruthenium, are not valued using the LIFO
method. Portions of the ruthenium inventory stream can have a
long processing time and therefore these inventories can be
susceptible to a lower of cost or market charge when there is a
significant reduction in rutheniums market price, as was
the case in the second quarter 2007.
Prepaid expenses of $16.3 million as of the
end of the third quarter 2007 were $2.3 million higher than
year-end 2006, as various prepaid balances, including insurance,
manufacturing supplies and other items increased due to the
higher level of business activity and the timing of payments.
Capital expenditures for property, plant and
equipment totaled $17.6 million while expenditures for mine
development activities totaled $6.8 million in the first
nine months of 2007. Total capital spending exceeded
depreciation by $6.5 million over the first nine months of
the year. Spending within the Advanced Material Technologies and
Services segment totaled $7.3 million and included the
construction of two facilities overseas and the expansion of two
domestic facilities as previously noted. Engineered Material
Systems is installing new equipment and rearranging the existing
equipment in order to create a new efficient high technology
work center. Specialty Engineered Alloys has various projects
underway to upgrade
and/or
replace existing discrete pieces of equipment, including various
infra-structure projects. Brush Resources continued its work on
opening a new bertrandite ore mine in Utah; we anticipate the
mine will start producing ore in 2008.
Other liabilities and accrued items of
$53.2 million at the end of the third quarter 2007 were
$1.0 million higher than the balance at the beginning of
the year. Accruals for fringe benefits and other miscellaneous
expenses increased during the first three quarters of 2007. The
fair value of outstanding derivative contracts, primarily euro
hedge contracts, became more unfavorable as a result of the
decline in the dollars value relative to the rates in the
outstanding contracts. These increases were partially offset by
a reduction in accrued salaries, partially due to the payment of
the 2006 accrued incentive compensation in the first quarter
2007.
Unearned revenue, which is a liability
representing products invoiced to customers but not shipped, was
$2.7 million as of September 28, 2007 compared to
$0.3 million as of December 31, 2006. Revenue and the
associated margin will be recognized for these transactions when
the goods ship, title passes and all other revenue recognition
criteria are met. Invoicing in advance of the shipment, which is
only done in certain circumstances, allows us to collect cash
sooner than we would otherwise.
20
Other long-term liabilities were
$11.8 million as of the end of the third quarter 2007, an
increase of $0.2 million from the prior year end. Unearned
income, which is a liability account representing reimbursements
under a contract with the U.S. government for capitalized
costs associated with the construction of a new beryllium
manufacturing facility, increased $2.1 million in the first
three quarters of 2007. This liability, which will continue to
grow as future reimbursements are received, will be relieved to
income ratably with the depreciation expense once the facility
is completed (in three to four years). The long-term portion of
certain employee compensation plans declined in the first three
quarters of 2007 offsetting the majority of the increase in
unearned income.
The retirement and post-employment benefits balance
was $59.2 million as of September 28, 2007, up
slightly from December 31, 2006. This balance represents
the long-term liability under our domestic defined benefit
pension plan, the retiree medical plan and other retirement
plans and post-employment obligations. We made a
$3.8 million contribution to the domestic pension plan in
the first quarter 2007; we do not anticipate making any
additional contributions to the plan during the fourth quarter
2007. The domestic pension plan expense was $3.4 million in
the first nine months of 2007 (see Note C to the
Consolidated Financial Statements). The liability also changed
during the quarter as a result of the expense and payments made
under the various other plans.
Total debt of $40.2 million at the end of the
third quarter 2007 was $8.8 million lower than total debt
of $49.0 million at December 31, 2006. Debt increased
in the first quarter 2007 over the year-end 2006 balance in
order to finance the growth in accounts receivable and
inventories, the payment of the 2006 employee incentive
compensation and the pension plan contribution in that period.
Debt then declined in each of the following two quarters as a
result of the improved cash flow from operations and the
proceeds from the exercise of stock options. Short-term debt
includes foreign currency denominated loans, a gold denominated
loan and short-term domestic borrowings under the revolving
credit agreement. Long-term debt totaled $9.6 million as of
September 28, 2007, a decline of $10.7 million from
the prior year end. The current portion of long-term debt
totaled $0.6 million as of September 28, 2007. We were
in compliance with all of our debt covenants as of the end of
the third quarter 2007.
We adopted FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes, an interpretation of FASB
Statement No. 109 (FIN 48) as of
January 1, 2007. FIN 48 provides guidance on the
financial statement recognition, measurement, treatment and
disclosure of a tax position taken or expected to be taken on a
tax return as well as the associated interest and penalties. As
a result of adopting FIN 48, we increased our accrued
income tax payable by $1.4 million with the offset recorded
as a charge against retained earnings as of January 1,
2007. Prior year results were not restated for the adoption of
FIN 48. Charges to the income statement in the first nine
months of 2007 as a result of FIN 48 were immaterial.
Total shareholders equity was
$337.1 million at the end of the third quarter 2007, an
increase of $46.1 million over the $291.0 million
balance at the beginning of the year. The primary cause of the
increase was due to comprehensive income of $36.9 million
(see Note E to the Consolidated Financial Statements). In
addition, equity increased $4.9 million during the first
nine months of 2007 as a result of the exercise of approximately
294,000 options to purchase shares of our common stock. Equity
was also affected by the tax benefits associated with the
exercise of options, the $1.4 million charge from the
adoption of FIN 48 and other factors.
The balance outstanding under the off-balance sheet precious
metal consigned inventory arrangements totaled
$58.3 million at the end of the third quarter 2007, a
decrease of $5.8 million during the first nine months of
the year due to lower quantities of metal on-hand offset in part
by higher average prices.
There have been no substantive changes in the summary of
contractual obligations under long-term debt agreements,
operating leases and material purchase commitments as of
September 28, 2007 from the year-end 2006 totals as
disclosed on page 28 of our annual report to shareholders
for the period ended December 31, 2006.
Net cash provided from operations was $4.4 million in the
first nine months of 2006 as net income, changes in various
liabilities and the benefits of depreciation more than offset
the increases in accounts receivable and inventory. Accounts
receivable increased $34.5 million, or 49%, in the first
nine months of 2006, due primarily to the higher sales volume.
The slightly higher DSO also contributed to the higher
receivable balance. Inventories increased $39.7 million, or
38%, in the first nine months of 2006 in order to support the
higher sales volume. The inventory turnover ratio was unchanged.
The majority of the inventory increase was in the Advanced
Material Technologies and Services and Specialty Engineered
Alloys segments. Capital expenditures totaled $9.7 million
in
21
the first nine months of 2006 as spending remained below the
level of depreciation. In addition to the $9.7 million of
capital spending, we acquired the stock of CERAC, incorporated
for $26.2 million in the first quarter 2006. Other
liabilities and accrued items increased $12.1 million
primarily due to higher incentive compensation accruals. Total
debt of $80.5 million as of the end of the third quarter
was $23.3 million higher than the prior year end, mainly as
a result of funding the CERAC acquisition. We received
$9.4 million for the exercise of approximately 642,000
stock options in the first nine months of 2006. Cash balances
stood at $11.8 million as of September 29, 2006, an
increase of $1.2 million from December 31, 2005.
We believe funds from operations and the available borrowing
capacity are adequate to support operating requirements, capital
expenditures, projected pension plan contributions, small
acquisitions and environmental remediation projects. In the
first three quarters of 2007, our equity has grown
$46.1 million while our debt has declined
$8.8 million. In addition to the $17.0 million of cash
on hand, we had approximately $95.4 million of available
borrowing capacity under the existing lines of credit as of
September 28, 2007.
Critical
Accounting Policies
For additional information regarding this and other critical
accounting policies, please refer to pages 29 to 31 of our
annual report to shareholders for the period ended
December 31, 2006.
Market
Risk Disclosures
For additional information regarding market risks, please refer
to pages 31 and 32 of our annual report to shareholders for the
period ended December 31, 2006.
Outlook
The demand from the data storage market for ruthenium targets
continues to grow due to the industrys ongoing conversion
to the PMR technology for hard disk drives and our product
qualification efforts at various customers. In September 2007,
our Brewster facility shipped a record number of ruthenium
targets. This increased demand has put a strain on capacity and
lead times. We have and will continue to expand Brewsters
capacity in order to satisfy this higher level of demand; new
equipment has been installed in 2007 and additional equipment is
scheduled to be installed in the first quarter 2008.
The demand from other markets continued to be strong early in
the fourth quarter 2007, including from portions of the
telecommunications and computer market and the industrial
components market. Sales of disk drive arm materials, while
still strong, may decline slightly in the fourth quarter 2007
from the third quarter levels. Various defense applications have
been delayed, but the overall demand from defense remains solid.
We are also encouraged by the recent improvement in demand from
the automotive electronics market but are disappointed by the
softness in demand from the cell phone handset market for
materials supplied by our Specialty Engineered Alloys business.
Margins across our businesses have been steady to improving. The
quality issue that affected Advanced Material Technologies and
Services margins earlier in the year has been resolved. We
have made some progress in resolving the yield and other
operational issues affecting margins from Specialty Engineered
Alloys. The price increases implemented within the past year as
well as changes in our pricing practices have helped to mitigate
the impact of changes in the cost of raw materials over the long
term. On the down side, we continue to face stiff price
competition in the market place, particularly against our higher
margin generating products.
As of early in the fourth quarter, we are estimating that sales
in the fourth quarter 2007 will be in the range of $245.0 to
$255.0 million and earnings per share will be in the range
of $0.50 to $0.60.
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. Our actual future performance may
materially differ from that contemplated by the
22
forward-looking statements as a result of a variety of factors.
These factors include, in addition to those mentioned elsewhere
herein:
|
|
|
|
|
The global and domestic economies;
|
|
|
|
The condition of the markets which we serve, whether defined
geographically or by segment, with the major market segments
being telecommunications and computer, data storage, aerospace
and defense, automotive electronics, industrial components and
appliance;
|
|
|
|
Changes in product mix and the financial condition of customers;
|
|
|
|
Actual sales, operating rates and margins for the year 2007;
|
|
|
|
Our success in developing and introducing new products and new
product ramp up rates, including the actual ramp up of the
perpendicular media market;
|
|
|
|
Our success in passing through the costs of raw materials to
customers or otherwise mitigating fluctuating prices for those
materials, including the impact of fluctuating prices on
inventory values;
|
|
|
|
Our success in integrating newly acquired businesses;
|
|
|
|
Our success in implementing our strategic plans and the timely
and successful completion of any capital projects;
|
|
|
|
The availability of adequate lines of credit and the associated
interest rates;
|
|
|
|
Other financial factors, including cost and availability of
materials, tax rates, exchange rates, pension and other employee
benefit costs, energy costs, regulatory compliance costs, and
the cost and availability of insurance;
|
|
|
|
The uncertainties related to the impact of war and terrorist
activities;
|
|
|
|
Changes in government regulatory requirements and the enactment
of new legislation that impacts our obligations; and
|
|
|
|
The conclusion of pending litigation matters in accordance with
our expectation that there will be no material adverse effects.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
For information about our market risks, please refer to pages 31
and 32 of our annual report to shareholders for the period ended
December 31, 2006
|
|
Item 4.
|
Controls
and Procedures
|
We carried out an evaluation under the supervision and with
participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of September 28, 2007 pursuant to
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures were effective as of the
evaluation date.
There have been no changes in our internal controls over
financial reporting identified in connection with the evaluation
required by
Rule 13a-15
under the Securities Exchange Act of 1934, as amended, that
occurred during the quarter ended September 28, 2007 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
23
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Our subsidiaries and our holding company are subject, from time
to time, to a variety of civil and administrative proceedings
arising out of our 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
As of September 28, 2007, our subsidiary, Brush Wellman
Inc., was a defendant in ten proceedings in various state and
federal courts brought by plaintiffs alleging that they have
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 negligence and various other legal theories and
seek compensatory and punitive damages, in many cases of an
unspecified sum. Spouses of some plaintiffs claim loss of
consortium.
During the third quarter of 2007, the number of beryllium cases
remained unchanged at ten cases (involving 32 plaintiffs) as of
June 29, 2007 and as of September 28, 2007. During the
third quarter, in one case (involving four plaintiffs) the court
granted the Companys Motion for Summary Judgment; however,
the plaintiffs have the right to file an appeal. No cases were
filed during the quarter.
The ten pending beryllium cases as of September 28, 2007
fall into two categories: eight cases involving non-employee
individual plaintiffs, with 16 individuals (and four spouses who
have filed claims as part of their spouses case, and two
children who have filed claims as part of their parents
case); and two purported class actions involving ten named
plaintiffs, as discussed more fully below. Claims brought by
non-employee plaintiffs (typically employees of our customers or
contractors) are generally covered by varying levels of
insurance.
The first purported class action is Manuel Marin, et al. v.
Brush Wellman Inc., filed in Superior Court of California, Los
Angeles County, case number BC299055, on July 15, 2003. The
named plaintiffs are Manuel Marin, Lisa Marin, Garfield Perry
and Susan Perry. The defendants are Brush Wellman, Appanaitis
Enterprises, Inc., and Doe Defendants 1 through 100. A First
Amended Complaint was filed on September 15, 2004, naming
five additional plaintiffs. The five additional named plaintiffs
are Robert Thomas, Darnell White, Leonard Joffrion, James Jones
and John Kesselring. The plaintiffs allege that they have been
sensitized to beryllium while employed at the Boeing Company.
The plaintiffs wives claim loss of consortium. The
plaintiffs purport to represent two classes of approximately 250
members each, one consisting of workers who worked at Boeing or
its predecessors and are beryllium sensitized and the other
consisting of their spouses. They have brought claims for
negligence, strict liability design defect, strict
liability failure to warn, fraudulent concealment,
breach of implied warranties, and unfair business practices. The
plaintiffs seek injunctive relief, medical monitoring, medical
and health care provider reimbursement, attorneys fees and
costs, revocation of business license, and compensatory and
punitive damages. Messrs. Marin, Perry, Thomas, White,
Joffrion, Jones and Kesselring represent current and past
employees of Boeing in California; and Ms. Marin and
Ms. Perry are spouses. Defendant Appanaitis
Enterprises, Inc. was dismissed on May 5, 2005.
The second purported class action is Gary Anthony v. Small
Tube Manufacturing Corporation d/b/a Small Tube Products
Corporation, Inc., et al. filed in the Court of Common Pleas of
Philadelphia County, Pennsylvania, case number 000525, on
September 7, 2006. The case was removed to the
U.S. District Court for the Eastern District of
Pennsylvania, case number 06-CV-4419, on October 4, 2006.
The only named plaintiff is Gary Anthony. The defendants are
Small Tube Manufacturing Corporation, d/b/a Small Tube Products
Corporation, Inc.; Admiral Metals Inc.; Tube Methods, Inc.; and
Cabot Corporation. The plaintiff purports to sue on behalf of a
class of current and former employees of the U.S. Gauge
facility in Sellersville, Pennsylvania who have ever been
exposed to beryllium for a period of at least one month while
employed at U.S. Gauge. The plaintiff has brought claims
for negligence. Plaintiff seeks the establishment of a medical
monitoring trust fund, cost of publication of approved
guidelines and procedures for medical screening and monitoring
of the class, attorneys fees and expenses. Defendant Tube
Methods, Inc. filed a third-party complaint against Brush
Wellman Inc. in that action on November 15, 2006. Tube
Methods alleges that Brush supplied beryllium-containing
products to U.S. Gauge, and that Tube Methods worked on
those products, but
24
that Brush is liable to Tube Methods for indemnification and
contribution. Brush moved to dismiss the Tube Methods complaint
on December 22, 2006. On January 12, 2007, Tube
Methods filed an amended third-party complaint, which Brush
moved to dismiss on January 26, 2007; however, the Court
denied the motion on September 28, 2007.
Other
Claims
One of our subsidiaries, Williams Advanced Materials Inc.
(WAM), is a party to two patent litigations in the
U.S. involving Target Technology Company, LLC of Irvine, CA
(Target). Both actions involve patents directed to
technology used in the production of DVD-9s, which are high
storage capacity DVDs. The patents at issue concern certain
silver alloys used to make the semi-reflective layer in DVD-9s,
a thin metal film that is applied to a DVD-9 through a process
known as sputtering. The raw material used in the sputtering
process is called a target. Target alleges that WAM manufactures
and sells infringing sputtering targets to DVD manufacturers.
In the first action, filed in April 2003 by WAM against Target
in the U.S. District Court, Western District of New York
(case
no. 03-CV-0276A
(SR)) (the NY Action), WAM has asked the Court for a
judgment declaring certain Target patents invalid
and/or
unenforceable and awarding WAM damages. Target counterclaimed
alleging infringement of those patents and seeking a judgment
for infringement, an injunction against further infringement and
damages for past infringement. Following certain proceedings in
which WAM was denied an injunction to prevent Target from suing
and threatening to sue WAMs customers, Target filed an
amended counterclaim and a third party complaint naming certain
of WAMs customers and other entities as parties to the
case and adding related other patents to the NY Action. The
action is stayed pending resolution of the ownership issue in
the CA Action, discussed more fully below.
In the second litigation, Target in September 2004 filed in the
U.S. District Court, Central District of California (case
no. SAC04-1083
DOC (MLGx)) a separate action for infringement of one of the
same patents named in the NY Action (the CA Action),
naming as defendants WAM and certain of WAMs customers who
purchase certain WAM sputtering targets. Target seeks a judgment
that the patent is valid and infringed by the defendants, a
permanent injunction, damages adequate to compensate Target for
the infringement, treble damages and attorneys fees and
costs. In April 2007, Sony DADC U.S., Inc. (Sony)
intervened in the CA Action claiming ownership of that patent
and others of the patents that Target is seeking to enforce in
the NY Action. Sonys claim is based on its prior
employment of the patentee and Targets founder, Hanphire
H. Nee, and includes a demand for damages against both Target
and Nee. WAM on behalf of itself and its customers has a
paid-up
license from Sony under any rights that Sony has in those
patents. Trial of the CA action is currently scheduled for
August 2008.
On April 17, 2003, the Company filed a complaint in the
Court of Common Pleas for Ottawa County, Ohio, case number
03-CVH-089, seeking a declaration of certain rights under
insurance policies issued by Lloyds of London, certain London
Market companies and certain domestic insurers, and damages and
breach of contract. On August 30, 2006, the court granted
Brushs motion for partial summary judgment in its
entirety. The parties then stipulated to the amount of damages
and prejudgment interest resulting from those breaches of
contract of approximately $7.3 million, subject to
reduction if an appellate court modifies or amends the grant of
partial summary judgment. The defendants attempt to appeal
on an interlocutory basis was denied. The parties agreed
separately to approximately $0.5 million in damages related
to claims not covered by the partial summary judgment order.
Trial of the bad faith claim had been set for December 2007, but
has been adjourned to January 2008. The damage award was
subsequently increased to $8.8 million as a result of the
defendants stipulating to the attorneys fees incurred in
pursuing this action.
|
|
Item 5.
|
Other
Information
|
On September 28, 2007, the Company and certain of its
subsidiaries entered into an Amended and Restated Precious
Metals Agreement with The Bank of Nova Scotia (the
Metals Agreement). The Metals Agreement
replaces the Precious Metals Agreement, dated as of
March 24, 2005, among the Company, certain of its
subsidiaries and The Bank of Nova Scotia (as assignee of Bank of
America Precious Metals, which in turn was the
successor-in-interest
to Fleet Precious Metals Inc.), as such agreement had been
previously amended (the Original Metals
Agreement). The Metals Agreement provides the Company
and certain of its subsidiaries with access to gold, silver,
platinum and palladium, with a maximum availability of
$85 million or the value of 109,675 troy ounces of gold,
whichever is less. This availability is comprised of a precious
metals consignment facility, gold loan facility, storage
facility and forward contract facility.
25
As compared to the Original Metals Agreement, the Metals
Agreement provides the Company and certain of its subsidiaries
with more favorable pricing terms, the ability to sub-consign
precious metals to customers and the flexibility to enter into
additional precious metals arrangements with other metals
providers up to an aggregate availability, when combined with
the availability under the Metals Agreement, of
$140 million. If secured, any such additional precious
metals arrangements will be subject to a collateral agency and
intercreditor agreement, pursuant to which The Bank of Nova
Scotia will act as the collateral agent for itself and the other
secured precious metals providers.
The Metals Agreement matures on September 30, 2010, but
that date may be accelerated if the Company does not extend,
refinance or replace its existing senior credit facility with
JPMorgan Chase Bank, N.A., as administrative agent, on or before
June 30, 2009. The Company believes it will extend,
refinance or replace its senior credit facility on time and,
accordingly, maintain the original maturity date under the
Metals Agreement.
The Metals Agreement contains certain customary representations
and warranties. It also contains affirmative and negative
covenants that are generally consistent with those contained in
the Companys senior credit facility which, among other
things, limit the Companys and certain of its
subsidiaries ability to incur additional indebtedness,
create liens and engage in certain significant transactions. In
addition, the Metals Agreement requires the Company and its
consolidated subsidiaries to maintain certain leverage and fixed
charge coverage ratios. The Metals Agreement contains certain
customary events of default, including, but not limited to
failure to make required payments when due, breaches of
representations and warranties, failure to observe certain
covenants and the occurrence of certain bankruptcy or insolvency
events.
(a) Exhibits
|
|
|
|
|
|
4
|
.1
|
|
Amended and Restated Precious Metals Agreement, dated
September 28, 2007, by and among Brush Engineered Materials
Inc., certain of its subsidiaries and The Bank of Nova Scotia
(filed as Exhibit 99.1 to the Current Report on
Form 8-K
filed by the Company on October 2, 2007), incorporated
herein by reference.
|
|
11
|
|
|
Statement regarding computation of per share earnings
|
|
31
|
.1
|
|
Certification of Chief Executive Officer required by Rule
13a-14(a) or 15d-14(a)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer required by Rule
13a-14(a) or 15d-14(a)
|
|
32
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
26
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.
John D. Grampa
Senior Vice President Finance
and Chief Financial Officer
Dated: November 2, 2007
27