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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7006
BRUSH ENGINEERED MATERIALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
OHIO 34-1919973
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
17876 ST. CLAIR AVENUE, CLEVELAND, OHIO 44110
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
216-486-4200
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 4, 2001 there were 16,556,846 shares of Common Stock, no par
value, outstanding.
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PART I FINANCIAL INFORMATION
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Brush Engineered Materials Inc.
and its subsidiaries for the quarter ended March 30, 2001 are as follows:
Consolidated Statements of Income -- Three months ended March 30, 2001
and March 31, 2000
Consolidated Balance Sheets -- March 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows -- Three months ended March 30,
2001 and March 31, 2000
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CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FIRST QUARTER ENDED
--------------------------
MARCH 30, MARCH 31,
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 2001 2000
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Net sales................................................... $ 145,524 $ 135,424
Cost of sales............................................. 111,490 107,129
----------- -----------
Gross Margin................................................ 34,034 28,295
Selling, administrative and general expenses.............. 21,506 21,818
Research and development expenses......................... 1,692 2,014
Other-net................................................. 802 228
----------- -----------
Operating Profit............................................ 10,034 4,235
Interest expense.......................................... 974 1,120
----------- -----------
Income before income taxes.................................. 9,060 3,115
Income taxes.............................................. 2,854 866
----------- -----------
Net Income.................................................. $ 6,206 $ 2,249
=========== ===========
Per Share of Common Stock: Basic............................ $ 0.38 $ 0.14
Weighted average number of common shares outstanding........ 16,467,368 16,206,038
Per Share of Common Stock: Diluted.......................... $ 0.37 $ 0.14
Weighted average number of common shares outstanding........ 16,677,767 16,314,518
Cash dividends per common share............................. $ 0.12 $ 0.12
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MAR. 30, DEC. 31,
(DOLLARS IN THOUSANDS) 2001 2000
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ASSETS
Current Assets
Cash and cash equivalents................................. $ 2,912 $ 4,314
Accounts receivable....................................... 93,804 92,334
Inventories............................................... 128,279 115,643
Prepaid expenses.......................................... 7,638 8,525
Deferred income taxes..................................... 30,082 29,263
-------- --------
Total Current Assets.............................. 262,715 250,079
Other Assets................................................ 32,825 31,967
Property, Plant and Equipment............................... 456,375 449,697
Less allowances for depreciation, depletion and
impairment............................................. 284,081 279,237
-------- --------
172,294 170,460
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$467,834 $452,506
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 29,068 $ 25,435
Accounts payable.......................................... 28,487 34,714
Other liabilities and accrued items....................... 38,089 39,021
Dividends payable......................................... 1,986 1,987
Income taxes.............................................. 9,356 5,535
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Total Current Liabilities......................... 106,986 106,692
Other Long-Term Liabilities................................. 18,287 15,878
Retirement and Post-employment Benefits..................... 39,579 39,576
Long-term Debt.............................................. 51,305 43,305
Deferred Income Taxes....................................... 18,009 17,148
Shareholders' Equity........................................ 233,668 229,907
-------- --------
$467,834 $452,506
======== ========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
----------------------
MARCH 30, MARCH 31,
(DOLLARS IN THOUSANDS) 2001 2000
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NET INCOME.................................................. $ 6,206 $ 2,249
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 5,520 6,331
Decrease (Increase) in accounts receivable................ 412 (11,385)
Decrease (Increase) in inventory.......................... (13,170) 8,414
Decrease (Increase) in prepaid and other current assets... 276 327
Increase (Decrease) in accounts payable and accrued
expenses............................................... (10,785) 2,741
Increase (Decrease) in interest and taxes payable......... 4,467 968
Increase (Decrease) in deferred income taxes.............. (131) (62)
Increase (Decrease) in other long-term liabilities........ 2,574 1,060
Other -- net.............................................. (924) (280)
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NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES.......................................... (5,555) 10,363
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment.... (7,415) (3,480)
Payments for mine development............................. (76) (70)
Proceeds from (Payments for) other investments............ -- --
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES.............. (7,491) (3,550)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance/ (repayment of) short-term debt.... 5,146 (5,665)
Proceeds from issuance of long-term debt.................. 15,500 9,000
Repayment of long-term debt............................... (7,500) (6,000)
Issuance of Common Stock under stock option plans......... 636 5
Purchase of Common Stock for treasury..................... -- --
Payments of dividends..................................... (1,987) (1,959)
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NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES.......................................... 11,795 (4,619)
Effects of Exchange Rate Changes............................ (151) (134)
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NET CHANGE IN CASH AND CASH EQUIVALENTS.............. (1,402) 2,060
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 4,314 99
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 2,912 $ 2,159
======== ========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- ACCOUNTING POLICIES
In management's opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of
March 30, 2001 and December 31, 2000 and the results of operations for the first
quarter ended March 30, 2001 and March 31, 2000.
NOTE B -- INVENTORIES
MAR. 30, DEC. 31,
(DOLLARS IN THOUSANDS) 2001 2000
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Principally average cost:
Raw materials and supplies................................ $ 17,799 $ 19,458
In process................................................ 101,940 88,956
Finished goods............................................ 34,877 33,202
-------- --------
Gross inventories.................................... 154,616 141,616
Excess of average cost over LIFO
Inventory value........................................ 26,337 25,973
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Net inventories...................................... $128,279 $115,643
======== ========
NOTE C -- COMPREHENSIVE INCOME
During the first quarter 2001 and 2000, comprehensive income amounted to
$5,168,162 and $1,847,763, respectively. The difference between net income and
comprehensive income is a cumulative translation adjustment of ($589,955) and a
change in the fair value of derivative financial instruments of ($447,877) in
the first quarter 2001. The difference between net income and comprehensive
income in the first quarter 2000 is the cumulative translation adjustment.
NOTE D -- SEGMENT REPORTING
As a result of the recent corporate restructuring, the Company changed how
costs flowed between its businesses. Certain costs that were previously included
in the "All Other" column in the segment disclosures are being charged to Metal
Systems and Microelectronics beginning in the first quarter 2001. Beginning in
2001, the "All Other" column includes the operating results of BEM Services Inc.
and Brush Resources Inc., two wholly-owned subsidiaries of the Company, as well
as the parent company's operating expenses. BEM Services charges a management
fee for the services provided to the other businesses within the Company on a
cost-plus basis. Brush Resources may sell beryllium hydroxide, produced from its
mine and extraction mill in Utah, to outside customers and to businesses within
the Metal Systems Group. Segment results from the prior year have been restated
to reflect these changes on a pro forma basis.
METAL MICRO- TOTAL ALL
SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
(Dollars in thousands) ------- ----------- -------- ------ --------
FIRST QUARTER 2001
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Revenues from external customers...... $98,629 $46,895 $145,524 $ 0 $145,524
Intersegment revenues................. 1,586 829 2,415 4,847 7,262
Segment profit (loss) before interest
and taxes........................... 6,560 2,418 8,978 1,056 10,034
FIRST QUARTER 2000
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Revenues from external customers...... 91,175 41,607 132,782 2,642 135,424
Intersegment revenues................. 1,554 286 1,840 5,267 7,107
Segment profit (loss) before interest
and taxes........................... (739) 2,121 1,382 2,853 4,235
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NOTE E -- DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities" and as amended by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as of January 1, 2001.
The initial adjustment from adopting SFAS Nos. 133 (as amended) did not have a
material impact on earnings and resulted in a $0.4 million charge recorded
against other comprehensive income on the balance sheet.
The Company is exposed to commodity price, interest rate and foreign
currency exchange rate risks and attempts to minimize the effects of these
exposures on earnings through a combination of natural hedges and the use of
derivative financial instruments. The Company may secure commodity swaps to
hedge copper purchases where changes in the copper price cannot be passed
through to the Company's customers. The Company uses interest rate swaps to fix
interest rates on floating rate obligations as appropriate. The Company also
uses forward contracts, options and collars to hedge a portion of its
anticipated foreign currency transactions. The Company has policies approved by
the Board of Directors that establish the parameters for the allowable types of
derivative instruments to be used, the maximum allowable contract periods,
aggregate dollar limitations and other hedging guidelines. The Company will only
secure a derivative if there is an underlying exposure that is not otherwise
covered by a natural hedge. In general, derivatives will be held until maturity.
All of the Company's commodity swaps, interest rate swaps and foreign
currency derivatives have been designated as cash flow hedges. Hedge
ineffectiveness of $7,000 was charged against income in the first quarter 2001
and was included in other-net on the Company's consolidated statements of
income. All commodity swaps and foreign currency derivatives outstanding as of
March 30, 2001 mature prior to December 31, 2002.
SFAS No. 133 requires the fair value of outstanding derivative instruments
to be recorded on the balance sheet. With the adoption of SFAS No.133, the
Company began recording the fair values of its derivatives in prepaid expenses,
other assets, other liabilities and accrued items and other long-term
liabilities depending on the Company's rights or obligations under each
derivative and the remaining term to maturity. As of March 30, 2001, the Company
recorded derivative fair values of $3.8 million in prepaid expenses, $0.7
million in other assets, $1.4 million in other liabilities and accrued items and
$2.1 million in other long-term liabilities on its consolidated balance sheet.
Changes in fair values are recorded in income or other comprehensive income as
appropriate under SFAS No. 133 guidelines. The current period change in the fair
value of the Company's outstanding derivatives and other current period hedging
activity resulted in a credit to other comprehensive income of $0.2 million. As
a result of derivatives maturing during the first quarter 2001, $0.2 million was
relieved from other comprehensive income and was credited to income. The net
derivative loss recorded in other comprehensive income was $0.4 million as of
March 30, 2001. The Company expects to reclassify $0.7 million of net gain on
derivative instruments from the initial adjustment to other comprehensive income
to earnings during the year ending December 31, 2001.
The Company hedges a portion of its net investment in its Japanese
subsidiary using yen denominated debt. A net gain of $48,000 associated with
translating the debt into dollars was recorded in the cumulative translation
adjustment as of March 30, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD LOOKING STATEMENTS
Portions set forth in this document that are not statements of historical
or current facts are forward-looking statements. The Company's actual future
performance may materially differ from that contemplated by the forward-looking
statements as a result of a variety of factors. These factors include, in
addition to those mentioned elsewhere herein, the condition of the markets which
the Company serves (especially as impacted by events in particular markets,
including telecommunications, automotive electronics, computers, optical media
and microelectronics, or in particular geographic regions), the Company's
success in implementing its strategic plans, the timely and successful
completion of pending capital expansion projects, changes in government
regulatory requirements, the enactment of new legislation that impacts the
Company's obligations and the conclusion of pending litigation matters in
accordance with the Company's expectation that there will be no material adverse
effects.
RESULTS OF OPERATIONS
FIRST QUARTER
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2001 2000 CHANGE
(Millions, except per share data) ------ ------ ------
Sales............................................... $145.5 $135.4 $ 10.1
Operating Profit.................................... 10.0 4.2 5.8
Diluted E.P.S....................................... 0.37 0.14 0.23
Sales of $145.5 million in the first quarter 2001 represent a 7.5%
improvement over sales of $135.4 million in the first quarter 2000. After
establishing record quarterly sales levels for five straight quarters, first
quarter 2001 sales declined slightly from the fourth quarter 2000 level and were
the second highest quarterly sales in the Company's history. Sales from each of
the Company's businesses were higher in the first quarter 2001 than in the first
quarter of the previous year.
Domestic sales grew 7.1% while international sales grew 8.3% from the first
quarter of last year. International sales were 28.6% of total sales in the first
quarter 2001 compared to 28.4% in the first quarter 2000. Because the U.S.
dollar was stronger in 2001 compared to the yen and the European currencies than
it was in 2000, the translation effect on sales was an unfavorable $1.7 million
in the current year.
Approximately $1.0 million of the increased sales in the first quarter
resulted from higher average copper and precious metal prices. In general, metal
prices are passed-through to the customer and the higher prices do not affect
the gross margin dollars. The balance of the sales increase in the first quarter
2001 over the first quarter 2000 resulted from a combination of higher volumes
and improved pricing, particularly on alloy strip and bulk products.
Gross margin was $34.0 million, or 23.4% of sales, in the first quarter
2001 compared to $28.3 million, or 20.9% of sales, in the first quarter 2000.
The 2.5 point improvement in the margin percent resulted from higher selling
prices, improved operating performance and a favorable product mix offsetting
the impact of the unfavorable currency effect.
Selling, administrative and general expenses (SA&G) were $21.5 million in
the first quarter 2001 compared to $21.8 million in the first quarter 2000. As a
percent of sales, SA&G expenses declined to 14.8% in the first quarter 2001 from
16.1% in the comparable period last year. Costs associated with chronic
beryllium disease, including environmental, health and safety, legal and medical
expenses, while still significant in total, were lower in the current quarter
than in the comparable period last year. Costs related to the corporate
restructuring were also lower thus far in 2001 than they were in the first
quarter 2000. Offsetting a portion of these savings were higher compensation
costs and other inflationary increases.
Research and development expenses (R&D) were $1.7 million in the first
quarter 2001 and $2.0 million in the first quarter 2000. This decrease is
attributable to timing differences on various R&D projects and it is
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anticipated that R&D expenses will approximate last year's levels in the coming
quarters. The majority of the R&D resources support the Metal Systems Group.
Other-net expense was $0.8 million in the first quarter 2001, an increase
of $0.6 million over the 2000 first quarter expense of $0.2 million. Other-net
includes various miscellaneous income and expense items such as exchange gains
and losses, metal financing fees, bad debt expense, cash discounts, amortization
of intangibles, interest income, gain or loss on sales of capital assets and
other non-operating items. Lower exchange gains in the current quarter account
for the majority of the change between periods.
Operating profit of $10.0 million in the first quarter 2001 was 6.9% of
sales, an improvement over operating profit of $4.2 million, or 3.1% of sales,
in the first quarter last year. The higher gross margin coupled with a slight
decline in expenses served to increase profits in the first quarter 2001.
Interest expense was $1.0 million in the first quarter 2001 compared to
$1.1 million in the first quarter 2000. Interest capitalized in association with
long-term capital projects was $0.1 million higher in the current quarter. The
average debt level was slightly lower in the first quarter 2001 than the first
quarter 2000 offsetting the impact of a slightly higher average borrowing rate.
Income before income taxes was $9.1 million in the first quarter 2001 and
$3.1 million in the first quarter 2000. Income taxes were applied at a rate of
31.5% of income before income taxes in the first quarter 2001 and 27.8% in the
first quarter 2000. The increased rate in the first quarter 2001 was based on
higher earnings and lower foreign tax benefits.
Net income of $6.2 million in the first quarter 2001 was $4.0 million
higher than net income in the first quarter 2000. Diluted earnings per share
were $0.37 in the first quarter 2001 and $0.14 in the comparable period last
year.
SEGMENT DISCLOSURES
The Company aggregates its businesses into two reportable segments - the
Metal Systems Group and the Microelectronics Group. Corporate expenses as well
as the operating results from the Company's beryllium mine and extraction mill
in Utah historically were not included in either segment and were shown in the
"All Other" column in the segment footnote.
As a result of the recent corporate restructuring, the Company changed how
costs flow between its various businesses and the corporate office. Certain
costs that previously were recorded at the corporate office, primarily expenses
related to beryllium health and safety and chronic beryllium disease, are being
charged to the responsible businesses beginning in the first quarter 2001.
Beginning in 2001, the "All Other" column in the segment disclosures includes
the operating results of BEM Services, Inc. and Brush Resources Inc., two
wholly-owned subsidiaries of the Company that were created as part of the
restructuring, as well as the parent company's administrative expenses. BEM
Services charges a management fee for the services it provides, primarily
corporate, administrative and financial over-sight, to the other businesses
within the Company on a cost-plus basis. Brush Resources sells beryllium
hydroxide, produced through its Utah operations, to outside customers and to
businesses within the Metal Systems Group. The 2000 segment results presented in
Note D to the Consolidated Financial Statements for the period ended March 30,
2001, as well as in this Management Discussion and Analysis, have been revised
to reflect these changes on a pro forma basis.
METAL SYSTEMS GROUP
FIRST QUARTER
-----------------
2001 2000 CHANGE
(Millions) ----- ----- ------
Sales................................................. $98.6 $91.2 $7.4
Operating Profit/(Loss)............................... 6.6 (0.7) 7.3
The Metal Systems Group is the larger of the Company's reportable segments
and consists of Alloy Strip and Bulk Products, Technical Materials, Inc. (TMI)
and Beryllium Products. Sales from each of these businesses
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increased quarter on quarter and the overall growth rate was 8.2%. As the above
chart indicates, Group profits improved $7.3 million in the first quarter 2001
over first quarter 2000 on a $7.4 million sales increase. The following chart
highlights business unit sales as a percent of the total Metal System Group
sales:
FIRST QUARTER
--------------
2001 2000
---- ----
Percent of Segment Sales:
Alloy Products............................................ 72.2% 73.6%
Technical Materials, Inc.................................. 20.8 20.7
Beryllium Products........................................ 7.0 5.7
Sales of Alloy Products increased 6.2% in the first quarter 2001 over the
first quarter 2000, as shipments of both Strip and Bulk Products were higher.
Improved pricing also served to increase the first quarter sales while the $1.7
million unfavorable currency effect primarily impacted Alloy sales.
Within Strip Products, the current year volume increase was in the higher
margin traditional alloys while the quantities shipped of the lower
beryllium-containing alloys, that typically generate smaller margins, were
unchanged. Strip Products are sold into the telecommunications, computer and
automotive electronic markets. Sales of these products in North America began to
slow down late in the first quarter 2001 and into the early part of the second
quarter while the new order entry rate also has slowed as a result of softening
economic conditions.
The Elmore, Ohio strip manufacturing mill operated more efficiently in the
first quarter 2001 and, as a result, productive output increased compared to the
year ago period. Equipment utilization and yields also improved, which in turn,
had a positive impact on costs and margins.
Bulk Product sales were higher in the first quarter 2001 than in the first
quarter 2000 as a result of the continuing strong demand from the aerospace and
oil and gas markets. Sales of custom engineered products for undersea
communication applications also continued to increase. While the overall market
opportunities and demand for Bulk Products remain solid, demand from the plastic
tooling and welding markets were soft in the first quarter 2001.
Sales from TMI increased 8.6% in the first quarter 2001 over the first
quarter 2000 as a result of expanded marketing and manufacturing efforts for key
applications. The current softness in TMI's major markets -- telecommunications,
automotive electronics and computers -- may cause TMI's overall sales to decline
in the next several quarters. TMI is actively making adjustments to its cost
structure to minimize the impact of any potential short-term downturn in
business on profits.
Sales from Beryllium Products, the Company's smallest business, grew 32.2%
in the first quarter 2001 from the first quarter 2000. This improvement was
driven by increases in sales for defense and commercial applications. Order
rates for defense applications may temporarily slow down as the government
reviews its defense spending programs, affecting sales for the next two
quarters.
Gross margin on Metal System's sales improved $6.9 million in the first
quarter 2001 from the first quarter 2000. The higher margins resulted from the
Alloy price increases, operational improvements in Elmore and increased volumes.
In addition, the increased sales of the higher margin traditional strip products
and beryllium products caused the product mix to be favorable. These factors
combined to more than offset the unfavorable currency effect on international
sales. Gross margin as a percent of the group sales also increased in the first
quarter 2001.
Total SA&G and Other-net expenses for the Metal Systems Group were $0.4
million lower in the first quarter 2001 than in the first quarter 2000. The
lower expense was caused mainly by a decrease in beryllium health and safety
related costs. As a result of the significantly improved margins and the slight
decline in expenses, operating profit was $6.6 million, a $7.3 million
improvement over the first quarter 2000.
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MICROELECTRONICS GROUP
FIRST QUARTER
-----------------
2001 2000 CHANGE
(Millions) ----- ----- ------
Sales.............................................. $46.9 $41.6 $5.3
Operating Profit................................... 2.4 2.1 0.3
The Microelectronics Group (MEG) consists of Williams Advanced Materials
Inc. (WAM) and Electronic Products. Sales from both businesses grew in the
current quarter. The individual business unit sales as a percent of total
segment sales is as follows:
FIRST QUARTER
---------------
2001 2000
---- ----
Percent of Segment Sales:
WAM....................................................... 75.4% 76.6%
Electronic Products....................................... 24.6 23.4
Sales from WAM, a wholly-owned subsidiary of the Company, increased 11.0%
in the first quarter 2001 over the first quarter 2000. Improved sales of
magnetic storage, DVD and fiber optic components accounted for the majority of
the increase. The order entry rate and backlog for Pure Tech, a wholly-owned
subsidiary of WAM, remain very strong, particularly for orders for tantalum
applications. Sales of physical vapor deposition targets, WAM's largest product
line, increased slightly as a result of higher precious metal prices in the
first quarter of 2001 as the value added on target sales (sales less metal
costs) declined by an immaterial amount. WAM's total value added, including Pure
Tech, in the first quarter 2001 grew 18.0% over the first quarter 2000.
Electronic Products revenues were 18.3% higher in the first quarter 2001
than in the first quarter 2000. This growth was caused by higher sales of thick
film circuitry into the telecommunications market. Circuitry sales in the
quarter were a record high since the Oceanside, California facility was acquired
in 1996. The sales backlog for these products, which started to grow late last
year, remains high and the Company is investing in expanding its productive
capacity for circuits. Sales of beryllia ceramics for automotive and wireless
telecommunications applications declined in the first quarter of the current
year and are not expected to grow in the next several quarters. Powder metal
sales showed modest improvements as a result of higher shipments for fiber optic
applications.
Gross margin on MEG sales improved $0.8 million in the first quarter 2001
over the first quarter 2000. Higher sales volumes, a favorable product mix and
lower manufacturing overhead costs within WAM offset higher costs and product
mix issues that hampered the margin contribution from Electronic Products. Gross
margin as a percent of sales was slightly lower in 2001 mainly due to the higher
precious metal prices.
SA&G expenses increased $0.5 million in the first quarter 2001 over the
first quarter 2000. The increase was caused by higher selling and administrative
costs for supporting the expanded Pure Tech operations and activity. Total
operating profit of $2.4 million in the first quarter 2001 was 14% higher than
the operating profit in the first quarter 2000. WAM's operating profit for the
quarter was a record high.
LEGAL PROCEEDINGS
One of the Company's subsidiaries, Brush Wellman Inc., is a defendant in
proceedings in various state and federal courts brought by plaintiffs alleging
that they have contracted chronic beryllium disease ("CBD") or related ailments
as a result of exposure to beryllium. Plaintiffs in CBD cases seek recovery
under theories of intentional tort and various other legal theories and seek
compensatory and punitive damages, in many cases of an unspecified sum. Spouses,
if any, claim loss of consortium.
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The following table summarizes the activity associated with CBD cases:
QUARTER ENDED YEAR ENDED
MARCH 30, 2001 DECEMBER 31, 2000
-------------- -----------------
Total cases pending......................................... 76 71
Total plaintiffs............................................ 203 192
Number of claims (plaintiffs) filed during period ended..... 5(11) 38(87)
Number of claims (plaintiffs) settled during period ended... 0 2(5)
Aggregate settlements paid during period ended (dollars in
thousands)................................................ $ 0 $ 730
Number of claims (plaintiffs) dismissed..................... 0 2(9)
Additional CBD claims may arise. Management believes Brush Wellman has
substantial defenses in these cases and intends to contest the suits vigorously.
Employee cases, in which plaintiffs have a high burden of proof, have
historically involved relatively small losses to the Company. Third party
plaintiffs (typically employees of Brush Wellman's customers) face a lower
burden of proof than do employees or former employees, but these cases are
generally covered by insurance. In class actions, plaintiffs have historically
encountered difficulty in obtaining class certification. The Company recorded a
reserve for CBD litigation of $9.7 million at March 30, 2001 and $9.1 million at
December 31, 2000. The Company also recorded a receivable of $4.8 million at
March 30, 2001 and $4.7 million at December 31, 2000 from its insurance carriers
as recoveries for insured claims.
Although it is not possible to predict the outcome of the litigation
pending against the Company and its subsidiaries, the Company provides for costs
related to these matters when a loss is probable and the amount is reasonably
estimable. Litigation is subject to many uncertainties, and it is possible that
some of these actions could be decided unfavorably in amounts exceeding the
Company's reserves. An unfavorable outcome or settlement of a pending CBD case
or additional adverse media coverage could encourage the commencement of
additional similar litigation. The Company is unable to estimate its potential
exposure to unasserted claims.
While the Company is unable to predict the outcome of the current or future
CBD proceedings, based upon currently known facts and assuming collectibility of
insurance, the Company does not believe that resolution of these proceedings
will have a material adverse effect on the financial condition or the cash flow
of the Company. However, the Company's results of operations could be materially
affected by unfavorable results in one or more of these cases.
Standards for exposure to beryllium are under review by governmental
agencies, including the United States Occupational Safety and Health
Administration, and by private standard setting organizations. One result of
these reviews might be more stringent worker safety standards. More stringent
standards, as well as other factors such as the adoption of beryllium disease
compensation programs and publicity related to these reviews may also affect
buying decisions by the users of beryllium containing products. If the standards
are made more stringent or the Company's customers decide to reduce their use of
beryllium containing products, the Company's operating results, liquidity and
capital resources could be materially adversely affected. The extent of the
adverse effect would depend on the nature and extent of the changes to the
standards, the cost and ability to meet the new standards, the extent of any
reduction in customer use and other factors that cannot be estimated.
FINANCIAL POSITION
Net cash used in operating activities was $5.6 million in the first quarter
2001 as the cash generated by net income and adjusted for depreciation was more
than offset by working capital changes, particularly an increase in inventory
and a decrease in accounts payable and accrued expenses. In the first quarter
2000, net income was $4.0 million lower, but cash provided by operations was
$10.4 million as the working capital changes and other adjustments had a
favorable impact on cash.
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Accounts receivable grew $1.5 million during the first quarter 2001. The
average collection period at the end of the quarter increased by approximately
one day from the end of the previous year. Bad debts and adjustments to the
allowance for doubtful accounts were less than $0.1 million in the first
quarters of both 2001 and 2000.
Inventories increased $12.6 million since year-end 2000 from a combination
of factors. The improved manufacturing performance of the Elmore strip mill in
the first quarter enabled strip finished goods inventories to be replenished
after being reduced to very low levels in 2000 due to the high customer demand
and inconsistent supply. In addition, inventories were built at several
locations in order to meet the anticipated growing demand within that particular
business or to cover a planned plant shutdown in subsequent quarters. In the
first quarter 2000, the Company entered into an off-balance sheet agreement to
finance a portion of its copper inventories. By the end of that quarter, the
Company had utilized $8.3 million of this facility, which accounted for the
majority of the decrease in owned inventory during the period. In the first
quarter 2001, the Company paid down $1.0 million of the facility. Overall
inventory turns declined to 2.9 at the end of the quarter from 3.3 at the end of
2000.
Accounts payable and accrued expenses were reduced $7.3 million during the
first quarter 2001 from a higher than normal balance at December 31, 2000,
partially due to timing differences of payments. The reduction also resulted
from paying the accrued incentive compensation expense to employees based on the
improved operating performance for 2000.
Capital expenditures totaled $7.5 million in the first quarter 2001, an
increase from the $3.6 million expended in the first quarter 2000. Expenditures
by the Metal Systems Group were $4.4 million and include the ongoing strip
annealing furnace project in the Reading, Pennsylvania facility and TMI product
capacity expansion projects. MEG capital expenditures were $2.3 million in the
first quarter 2001 and include the circuitry capacity expansion project.
Total debt increased $11.6 million in the first quarter 2001 in order to
fund the cash used in operating activities and the capital expenditures.
Short-term debt increased $3.6 million and long-term debt increased $8.0 million
since year-end 2000. There were several changes in the bank group that provide
credit to the Company during the quarter, but the underlying agreements and
level of available credit under the revolving credit agreement and precious
metal facilities remained substantially unchanged.
Issuance of common stock under stock option plans generated $0.6 million in
cash in the first quarter 2001 compared to an immaterial amount in the first
quarter 2000. Dividends paid on outstanding shares remained unchanged between
the two quarters at $2.0 million, or $0.12 per share.
Cash balances declined by $1.4 million during the first quarter 2001 for
the reasons previously cited, leaving a balance at the end of the quarter of
$2.9 million. During the first quarter 2000, cash balances improved by $2.1
million and ended the period at $2.2 million.
Funds generated by operations plus the available borrowing capacity are
believed adequate to support operating requirements, capital expenditures,
remediation projects and dividends. Excess cash, if any, is invested in money
market accounts or other high quality investments.
MARKET RISK DISCLOSURE
For information regarding the Company's market risks, refer to page 21 of
the annual report to shareholders for the year ended December 31, 2000.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject, from time to time, to a
variety of civil and administrative proceedings arising out of their normal
operations, including, without limitation, product liability claims, health,
safety and environmental claims and employment-related actions. Among such
proceedings are the cases described below.
CBD CLAIMS
There are claims pending in various state and federal courts against Brush
Wellman, one of the Company's subsidiaries, by its employees, former employees
or surviving spouses and third party individuals alleging that they contracted,
or have been placed at risk of contracting, chronic beryllium disease ("CBD") or
related ailments as a result of exposure to beryllium. Plaintiffs in CBD cases
seek recovery under theories of intentional tort and various other legal
theories and seek compensatory and punitive damages, in many cases of an
unspecified sum. Spouses, if any, claim loss of consortium.
During the first quarter of 2001, the number of CBD cases grew from 71
cases (involving 192 plaintiffs), as of December 31, 2000, to 76 cases
(involving 203 plaintiffs), as of March 31, 2001.
The 76 pending CBD cases fall into three categories: 42 "employee cases"
involving an aggregate of 42 Brush Wellman employees, former employees or
surviving spouses (in 24 of these cases, a spouse has also filed claims as part
of his or her spouse's case, and in one case, one child has filed a claim as
part of his parent's case); 31 cases involving third party individual
plaintiffs, with 66 individuals (and 44 spouses who have filed claims as part of
their spouse's case, and ten children who have filed claims as part of their
parent's case); and three purported class actions involving 14 individuals (and
two spouses who have filed claims as part of their spouse's case). Employee
cases, in which plaintiffs have a high burden of proof, have historically
involved relatively small losses to the Company. Third party plaintiffs
(typically employees of our customers) face a lower burden of proof than do
employees or former employees, but these cases are generally covered by
insurance, at least partially.
In the three purported class actions that are pending against Brush
Wellman, the named plaintiffs allege that past exposure to beryllium has
increased their risk of contracting CBD, though most of them do not claim to
have actually contracted it. They seek medical monitoring funds to be used to
detect medical problems that they believe may develop as a result of their
exposure and, in some cases, also seek compensatory and punitive damages.
One of the three purported class actions pending against Brush Wellman was
brought by named plaintiffs on behalf of tradesmen who worked in one of Brush
Wellman's facilities as employees of independent contractors. The two others
were brought on behalf of current and former employees of Brush Wellman's
present and former customers and vendors.
A fourth purported class action, brought against Brush Wellman by named
plaintiffs on behalf of current and former employees of Brush Wellman's present
and former customers, was dismissed during the third quarter of 2000. That
dismissal became final during the fourth quarter. The allegations made and the
relief sought by the named plaintiffs in that case were similar to the
allegations made and the relief sought in the purported class actions that are
still pending.
OTHER CLAIMS
Brush Wellman's Egbert subsidiary has been named as a defendant in a number
of lawsuits alleging asbestos-induced illness, arising out of the conduct of a
friction materials business whose operating assets Egbert sold in 1986. In each
of the pending cases, Egbert is one of a large number of defendants named in the
respective complaints. Egbert is a party to an agreement with the predecessor
owner of its operating assets, Pneumo Abex Corporation (formerly Abex
Corporation), and five insurers, regarding the handling of these cases. Under
the agreement, the insurers share some expenses of defense, and Egbert, Pneumo
Abex Corporation and the insurers
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share payment of settlements and/or judgments. In each of the pending cases,
both expenses of defense and payment of settlements and/or judgments are subject
to a limited separate reimbursement agreement under which a successor owner of
the business is obligated. A number of cases of this type have been disposed of
to date, some by voluntary dismissal, others by summary judgment, one by jury
verdict of no liability, and still others upon payment of nominal amounts in
settlement. There are at present 23 asbestos cases pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) First Amendment to Credit Agreement dated as of March 30, 2001 among
Brush Wellman Inc. and Brush Engineered Materials Inc. as the
borrowers and National City Bank acting for itself and as agent for
certain other banking institutions as lenders.
(10) Consolidated Amendment No. 2 to Master Lease Agreement and Equipment
Schedules dated as of March 30, 2001 between Brush Wellman Inc. and
National City Bank acting for itself and as agent for certain
participants.
(11) Statement re computation of per share earnings (filed as Exhibit 11 to
Part I of this report).
(b) Reports on Form 8-K
There have been no reports on Form 8-K during the quarter ended March 30,
2001.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BRUSH ENGINEERED MATERIALS INC.
Dated: May 11, 2001
/s/ John D. Grampa
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John D. Grampa
Vice President Finance
and Chief Financial Officer
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