- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 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)
<Table>
OHIO 34-1919973
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
17876 ST. CLAIR AVENUE, CLEVELAND, OHIO 44110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
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 November 2, 2001 there were 16,610,755 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.
(formerly Brush Wellman Inc.) and its subsidiaries for the quarter ended
September 28, 2001 are as follows:
Consolidated Statements of Income --
Three and nine months ended September 28, 2001 and September 29, 2000
Consolidated Balance Sheets --
September 28, 2001 and December 31, 2000
Consolidated Statements of Cash Flows --
Nine months ended September 28, 2001 and September 29, 2000
1
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THIRD QUARTER ENDED NINE MONTHS ENDED
(Dollars in thousands except share and -------------------------------- --------------------------------
per share amounts) SEPT. 28, 2001 SEPT. 29, 2000 SEPT. 28, 2001 SEPT. 29, 2000
- ------------------------------------------------------------------------------------------------------------
Net sales............................. $ 106,194 $ 143,926 $ 380,174 $ 416,532
Cost of sales....................... 98,941 115,304 315,311 329,912
----------- ----------- ----------- -----------
Gross Margin.......................... 7,253 28,622 64,863 86,620
Selling, general and administrative
expenses......................... 17,700 21,101 57,977 64,065
Research and development expenses... 1,416 1,870 4,975 5,571
Other-net........................... (1,128) (19) (103) 314
----------- ----------- ----------- -----------
Operating (Loss) Profit............... (10,735) 5,670 2,014 16,670
Interest expense.................... 679 1,227 2,507 3,407
----------- ----------- ----------- -----------
(Loss) Income before income taxes..... (11,414) 4,443 (493) 13,263
Income taxes........................ (3,647) 359 (207) 3,032
----------- ----------- ----------- -----------
Net (Loss) Income..................... $ (7,767) $ 4,084 $ (286) $ 10,231
=========== =========== =========== ===========
Per Share of Common Stock: Basic...... $ (0.47) $ 0.25 $ (0.02) $ 0.63
Weighted average number of common
shares outstanding.................. 16,548,410 16,315,523 16,508,784 16,248,733
Per Share of Common Stock: Diluted.... $ (0.47) $ 0.25 $ (0.02) $ 0.62
Weighted average number of common
shares outstanding.................. 16,548,410 16,521,028 16,508,784 16,392,435
Cash dividends per common share....... $ -- $ 0.12 $ 0.24 $ 0.36
</Table>
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 28, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2001 2000
- ------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents................................. $ 4,474 $ 4,314
Accounts receivable....................................... 71,299 92,334
Inventories............................................... 118,980 115,643
Prepaid expenses.......................................... 8,308 8,525
Deferred income taxes..................................... 33,977 29,263
-------- --------
Total Current Assets.............................. 237,038 250,079
Other Assets................................................ 30,883 31,967
Property, Plant and Equipment............................... 470,048 449,697
Less allowances for depreciation, depletion and
impairment............................................. 295,005 279,237
-------- --------
175,043 170,460
-------- --------
$442,964 $452,506
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................... $ 33,066 $ 25,435
Accounts payable.......................................... 21,765 34,714
Other liabilities and accrued items....................... 34,415 39,021
Dividends payable......................................... 0 1,987
Income taxes.............................................. 6,431 5,535
-------- --------
Total Current Liabilities......................... 95,677 106,692
Other Long-Term Liabilities................................. 22,177 15,878
Retirement and Post-employment Benefits..................... 39,961 39,576
Long-term Debt.............................................. 44,222 43,305
Deferred Income Taxes....................................... 19,204 17,148
Shareholders' Equity........................................ 221,723 229,907
-------- --------
$442,964 $452,506
======== ========
</Table>
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDING
------------------------------
SEPTEMBER 28, SEPTEMBER 29,
(DOLLARS IN THOUSANDS) 2001 2000
- --------------------------------------------------------------------------------------------
NET (LOSS) INCOME........................................... $ (286) $ 10,231
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED FROM OPERATING ACTIVITIES:
Depreciation, depletion and amortization.................. 16,713 17,590
Decrease (Increase) in accounts receivable................ 20,857 (18,713)
Decrease (Increase) in inventory.......................... (3,333) 993
Decrease (Increase) in prepaid and other current assets... (1,724) 803
Increase (Decrease) in accounts payable and accrued
expenses............................................... (17,954) 6,478
Increase (Decrease) in interest and taxes payable......... (628) 1,682
Increase (Decrease) in deferred income taxes.............. (156) (136)
Increase (Decrease) in other long-term liabilities........ 2,985 1,518
Other -- net.............................................. 478 2,253
------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES.......... 16,952 22,699
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment.... (20,651) (13,030)
Payments for mine development............................. (282) (308)
------- --------
NET CASH PROVIDED FROM (USED IN) INVESTING
ACTIVITIES.......................................... (20,933) (13,338)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance/(repayment of) short-term debt..... 7,349 (11,331)
Proceeds from issuance of long-term debt.................. 27,417 23,000
Repayment of long-term debt............................... (26,500) (12,000)
Issuance of Common Stock under stock option plans......... 1,753 3,175
Payments of dividends..................................... (5,967) (5,882)
------- --------
NET CASH PROVIDED FROM (USED IN) FINANCING
ACTIVITIES.......................................... 4,052 (3,038)
Effects of Exchange Rate Changes............................ 89 (240)
------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............. 160 6,083
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 4,314 99
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 4,474 $ 6,182
======= ========
</Table>
See notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- ACCOUNTING POLICIES
In management's opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of
September 28, 2001 and December 31, 2000 and the results of operations for the
third quarter ended September 28, 2001 and September 29, 2000. All of the
adjustments were of a normal and recurring nature.
NOTE B -- INVENTORIES
<Table>
<Caption>
SEPTEMBER 28, DECEMBER 31,
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Principally average cost:
Raw materials and supplies............................... $ 18,371 $ 19,458
In process............................................... 82,337 88,956
Finished goods........................................... 44,775 33,202
-------- --------
Gross inventories................................... 145,483 141,616
Excess of average cost over LIFO
Inventory value....................................... 26,503 25,973
-------- --------
Net inventories..................................... $118,980 $115,643
======== ========
</Table>
NOTE C -- COMPREHENSIVE INCOME
The reconciliation between Net Income and Comprehensive Income for the
three and nine month periods ending September 28, 2001 and September 29, 2000 is
as follows:
<Table>
<Caption>
THREE MONTHS ENDING NINE MONTHS ENDING
----------------------------- -----------------------------
SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
(Dollars in thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------
Net Income (Loss)................ $ (7,767) $4,084 $ (286) $10,231
Cumulative Translation
Adjustment..................... 579 (336) (201) (875)
Change in the Fair Value of
Derivative Financial
Instruments................. (5,480) -- (5,493) --
-------- ------ ------- -------
Comprehensive Income............. $(12,668) $3,748 $(5,980) $ 9,356
======== ====== ======= =======
</Table>
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
5
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.
<Table>
<Caption>
METAL MICRO- TOTAL ALL
(Dollars in thousands) SYSTEMS ELECTRONICS SEGMENTS OTHER TOTAL
- -------------------------------------------------------------------------------------------------
THIRD QUARTER 2001
Revenues from external customers.......... $ 61,778 $ 41,656 $103,434 $2,760 $106,194
Intersegment revenues..................... 578 542 1,120 1,311 2,431
Profit (loss) before interest and taxes... (9,393) 208 (9,185) (1,550) (10,735)
THIRD QUARTER 2000
Revenues from external customers.......... $ 93,917 $ 48,498 $142,415 $1,511 $143,926
Intersegment revenues..................... 748 553 1,301 5,239 6,540
Profit (loss) before interest and taxes... 3,572 3,042 6,614 (944) 5,670
FIRST NINE MONTHS 2001
Revenues from external customers.......... $243,809 $130,851 $374,660 $5,514 $380,174
Intersegment revenues..................... 2,516 1,843 4,359 11,697 16,056
Profit (loss) before interest and taxes... (4,445) 3,548 (897) 2,911 2,014
FIRST NINE MONTHS 2000
Revenues from external customers.......... $280,181 $131,923 $412,104 $4,428 $416,532
Intersegment revenues..................... 3,326 1,079 4,405 16,272 20,677
Profit (loss) before interest and taxes... 5,817 7,843 13,660 3,010 16,670
</Table>
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 identifiable 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 $44,000 was charged against income in the first nine months
of 2001, including $26,000 in the third quarter, and was included in other-net
on the Company's consolidated statements of income. All commodity swaps and
foreign currency derivatives outstanding as of September 28, 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 September 28, 2001, the
Company recorded derivative fair values of $1.5 million in prepaid expenses,
$0.3 million in other assets, $2.8 million in other liabilities and accrued
items and $3.9 million in other long-term liabilities on its
6
consolidated balance sheet. Changes in fair values are recorded in income or
other comprehensive income as appropriate under SFAS No. 133 guidelines. The
change in the fair value of the Company's outstanding derivatives and other
current hedging activity resulted in a debit to other comprehensive income of
$6.1 million in the third quarter 2001 and $6.1 million for the first nine
months of 2001. The majority of the change in the third quarter resulted from
the revaluation of a long-term variable-to-fixed interest rate swap and the
revaluation of variable-to-fixed copper price swaps. As a result of derivatives
maturing, $0.6 million was relieved from other comprehensive income and charged
to income in the third quarter 2001 while $1.0 million was charged out of other
comprehensive income against net income during the first nine months of 2001.
The net derivative loss recorded in other comprehensive income was $5.5 million
as of September 28, 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 loss of $0.1 million associated
with translating this debt into dollars was recorded in the cumulative
translation adjustment as of September 28, 2001.
NOTE F -- NEW PRONOUNCEMENT
In June 2001, the Financial Standards Accounting Board issued Statement No.
142, "Goodwill and Other Intangible Assets". Under this statement, goodwill and
other indefinite lived assets will no longer be amortized, but instead will be
reviewed annually, or more frequently under certain circumstances, for
impairment. Intangible assets with finite lives will continue to be amortized
over their useful lives. The amortization provisions of the statement apply to
any goodwill or other intangible assets acquired after June 30, 2001. The
amortization provisions do not apply to goodwill and other intangible assets
acquired prior to July 1, 2001 until adoption of the statement. The Company is
required to adopt the statement by January 1, 2002, but early adoption is
allowed. The Company had goodwill of $7.9 million on its consolidated balance
sheet as of September 28, 2001.
NOTE G -- FINANCING ARRANGEMENTS
The Company received a waiver from its bank group for certain covenants
contained in its $65.0 million revolving credit agreement and its $59.7 million
synthetic lease as of September 28, 2001. The banks agreed to waive the fixed
charge coverage ratio and the funded debt to EBITDAR (earnings before interest,
taxes, depreciation, amortization and certain rent obligations) ratio covenants
through the end of the third quarter 2002. As part of the waiver, the banks took
a security interest in the Company's domestic assets. The banks and the Company
also agreed to discuss amending these agreements during the fourth quarter 2001.
The outstanding borrowings under the revolving credit agreement totaled $46.9
million as of September 28, 2001. The synthetic lease is considered an operating
lease and therefore is an off-balance sheet obligation.
7
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, the realization of savings
from cost reduction initiatives, possible 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
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
--------------- -----------------
(Millions, except per share data) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Sales.............................................. $106.2 $143.9 $380.2 $416.5
Operating Profit (Loss)............................ (10.7) 5.7 2.0 16.7
Diluted Earnings (Loss) Per Share.................. $(0.47) $ 0.25 $(0.02) $ 0.62
</Table>
Sales of $106.2 million in the third quarter 2001 were 26% lower than sales
in the third quarter 2000. Sales have declined for three straight quarters after
establishing record highs in each of the previous five quarters. Sales for the
first nine months of 2001 of $380.2 million were 9% lower than the comparable
period in 2000. The sales fall-off in both the current quarter and the year was
mainly due to softening of demand from the Company's two largest
markets -- telecommunications and computer electronics. Demand from several of
the Company's other markets also declined in the third quarter. Sales from both
of the Company's reportable business segments -- the Metal Systems Group and the
Microelectronics Group (MEG) -- were lower in the third quarter 2001 than in the
third quarter 2000. The fall-off in demand had the largest effect on Alloy
Products and Technical Materials, Inc. within the Metal Systems Group and
Electronic Products within the MEG.
The slow down in sales occurred predominately in the domestic portion of
the business earlier in the year, with the international sales slow down
occurring in the third quarter. International sales were $30.6 million (28.9% of
sales) in the third quarter 2001 compared to $35.7 million (24.8% of sales) in
the third quarter 2000. For the first three quarters, international sales were
$110.8 million in 2001 and $111.8 million in 2000. The Company's sales from its
international service centers are denominated in foreign currencies, primarily
the euro, yen and sterling. The dollar on average has strengthened in 2001
compared to 2000, resulting in a lower translated value of these sales. The
impact of the exchange rate effect on sales was a negative $0.8 million in the
third quarter and a negative $4.1 million for the first nine months of 2001.
The Company is facing increased pressures to reduce its selling prices in
light of the current economic conditions of its major markets. While prices may
have been reduced on particular applications in order to maintain the business,
average prices in general remain equal to or greater than they were a year ago.
Precious metal prices are typically passed through to the customer so
changes in the Company's purchase prices are offset by changes in the sales
value with no impact on margins. Sales were $0.8 million lower in the third
quarter 2001 as compared to the third quarter 2000 as a result of lower average
precious metal prices in the current period. For the year, the precious metal
prices have reduced sales by $0.5 million.
Gross margin in the third quarter 2001 was $7.3 million or 6.8% of sales
compared to $28.6 million or 19.9% of sales in the third quarter 2000. For the
first three quarters of 2001, gross margin was $64.9 million, a decline of $21.7
million from the first three quarters of 2000, while margin as a percent of
sales decreased to 17.1% from 20.8%. All but $0.4 million of the year-to-date
margin decline occurred in the third quarter. The main cause of the lower
margins in the quarter is the lower sales volume and the related reduced
production
8
volumes. The lower volumes reduced the variable margin contribution (sales less
materials and direct manufacturing costs) by $14.4 million in the third quarter
2001 from the third quarter 2000. The aforementioned negative currency effect on
sales also flowed through against margins, the majority of which was in the
Metal Systems Group. The sales mix effect on the third quarter margins was
approximately $0.3 million unfavorable. The balance of the decline in margins in
the current quarter was caused by a combination of an increase in unabsorbed
manufacturing costs, inventory reductions and inventory valuation adjustments.
Cost reductions were made in the quarter, both in the variable cost and
manufacturing overhead areas. However, sales volumes dropped further and faster
than anticipated and therefore the cost reduction efforts, particularly in
manufacturing overhead, were not commensurate with the declining volumes, which
then lead to an increase in unabsorbed costs. Several manufacturing facilities,
including the Elmore, OH and Delta, UT plants, reduced their productive output
in part by taking longer plant shutdowns in the third quarter of this year as
compared to last year. TMI operated on a 32-hour workweek schedule through out
the quarter as part of the cost reduction effort and in order to help balance
output with demand.
Selling, general and administrative (SG&A) expenses were $17.7 million, or
16.7% of sales, in the third quarter 2001, a $3.4 million reduction from the
third quarter 2000. For the first nine months of the year, SG&A expenses were
$58.0 million in 2001 and $64.1 million in 2000. SG&A expenses were 15.3% of
year-to-date 2001 sales, relatively unchanged from the 15.4% of sales in the
first nine months of 2000. The lower expenses in the quarter resulted from cost
reduction initiatives, including layoffs, in light of the declining sales
volumes. Incentive compensation accruals were also significantly lower than in
the comparable quarter last year due to the fall-off in profits. In response to
the lower sales volumes, the Company announced the closing of its California
distribution center. This facility was the smallest of Alloy Products' four
domestic distribution centers and the Company believes that customers can
receive the same high quality of service from one of the other distribution
centers and/or from its network of independent distributors. One-time shutdown
costs for this facility and the severance costs for the layoffs company-wide
totaled approximately $0.8 million in third quarter 2001 and is included in the
$17.7 million SG&A expense. In addition to the above items, the 2001
year-to-date expenses were lower than in 2000 due to non-recurring legal costs
associated with the corporate restructuring and miscellaneous law suits in 2000
and lower medical and environmental, health and safety costs in the first half
of 2001.
Research and development expenses (R&D) were $1.4 million in the third
quarter 2001 and $1.9 million in the third quarter 2000. For the first nine
months, R&D expenses were $5.0 million in 2001 and $5.6 million in 2000. As a
percent of sales, R&D expenses remain unchanged at 1.3%. The spending level
within R&D has been reduced as part of the Company's over-all cost reduction
effort.
Other-net income was $1.1 million in the third quarter 2001 compared to
less than $0.1 million in the third quarter 2000. The metal financing fee on
precious metal and copper inventories was lower in the third quarter 2001 than
the third quarter 2000. In addition, accruals were reduced $0.6 million on an
environmental remediation project in the third quarter 2001 as a result of
revised cost estimates. For the first nine months of the year, Other-net income
was $0.1 million in 2001 versus a net expense of $0.3 million in 2000. The
year-to-date metal financing fee is lower in 2001, offsetting a reduction in the
year-to-date currency exchange gains. Other-net also includes gains and losses
on the disposal of fixed assets, amortization of intangible assets, bad debts,
cash discounts and other non-operating items.
The operating loss was $10.7 million in the third quarter 2001 compared to
an operating profit of $5.7 million in the third quarter 2000. With the loss in
the third quarter, the operating profit for the first nine months of 2001 was
reduced to $2.0 million while profit in the first nine months of 2000 was $16.7
million.
The main cause for the decline in profit is the lower sales and the related
impact from reduced production volumes and inventory adjustments, partially
offset by lower expenses. Prior to the third quarter, the operating profit in
2001 was $1.7 million higher than in the first half of 2000.
Interest expense was $0.7 million in the third quarter 2001 compared to
$1.2 million in the third quarter 2000. For the year thus far, interest expense
was $2.5 million in 2001 and $3.4 million in 2000. The lower expense in the
third quarter 2001 resulted from a decline in the average borrowing rates as
average debt levels were higher in the current quarter. Interest capitalized in
association with long-term projects was unchanged
9
between the third quarter this year and last year, but it was $0.3 million
higher in the first half of 2001 than in the first half of 2000.
The loss before income taxes was $11.4 million in the third quarter and
$0.5 million for the first nine months of 2001. In 2000, the Company had income
before income taxes of $4.4 million in the third quarter and $13.3 million in
the first nine months.
A tax benefit rate of 32.0% was applied against the loss before income
taxes in the third quarter 2001. The 2001 year-to-date tax benefit rate was
42.0%. The third quarter year-to-date tax rate in 2000 was 22.9%. Since the
Company is in a loss position in 2001, normal credits, such as foreign tax
benefits and the depletion allowance, increase the tax benefit rate whereas in
the prior year these credits served to reduce the rate at which the tax expense
was applied.
The net loss was $7.8 million in the third quarter 2001, or $0.47 per
share, and $0.3 million in the first three quarters of 2001, or $0.02 per share.
In 2000, the Company earned $4.1 million, or $0.25 per share, in the third
quarter and $10.2 million, or $0.62 per share, in the first three quarters.
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, as well as the parent company's
operating 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 September 28, 2001, as well as in this Management Discussion and Analysis,
have been revised to reflect these changes on a pro forma basis. Management
believes that these changes should more accurately reflect the operating results
of its businesses on a go forward basis.
METAL SYSTEMS GROUP
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
------------- -----------------
(MILLIONS) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Sales................................................ $61.8 $93.9 $243.8 $280.2
Operating Profit (Loss).............................. (9.4) 3.6 (4.4) 5.8
</Table>
Total Metal Systems Group sales declined $32.1 million, or 34%, in the
third quarter 2001 from the third quarter 2000 while sales for the first nine
months of the year declined $36.4 million, a 13% drop from last year. After
earning a $5.0 million profit in the first half of 2001, the Group lost $9.4
million in the third quarter 2001, mainly as a result of the fall-off in volume.
10
The Metal Systems Group consists of Alloy Products, TMI and Beryllium
Products. The following chart highlights business unit sales as a percent of the
total Metal Systems Group sales:
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
-------------- ------------------
2001 2000 2001 2000
----- ----- ------ ------
Percent of Segment Sales
Alloy............................................... 76.8% 69.9% 74.5% 71.3%
TMI................................................. 13.7 22.9 17.0 22.5
Beryllium Products.................................. 9.5 7.2 8.5 6.2
</Table>
Sales by Alloy Products, the Company's largest business, decreased 27.7% in
the third quarter 2001 from the third quarter 2000. Year-to-date sales of Alloy
Products sales were 9.0% lower in 2001 than 2000. After growing 6% in the first
quarter 2001, Alloy sales have now declined two straight quarters. Alloy
Products consists of two main product lines - strip products and bulk products.
Strip products include precision strip and small diameter rod and wire
manufactured from beryllium copper alloys. Sales of these products were 35.7%
lower in the third quarter 2001 and 12.7% lower in the first three quarters of
2001 than the comparable periods last year as a result of the slow down in
telecommunications and computer electronics, strip products' two largest
markets. Strip pounds sold were 20% less in the first nine months of 2001 than
in the first nine months of 2000. Sales order entry rates for strip products
continued to be lower than in prior periods and there was no appreciable change
in the backlog during the third quarter. Production levels at the Company's
strip manufacturing operations at the Elmore, OH and Reading, PA. facilities
were reduced once again in response to the lower demand and in order to reduce
inventories. During most of 2000, these facilities were capacity constrained and
were unable to meet all of the customer demand.
Sales of bulk products declined 9.6% in the third quarter 2001 from the
third quarter 2000 while year-to-date 2001 sales are slightly higher than in
2000. Bulk products include beryllium and non-beryllium copper alloy products
manufactured in bar, tube, rod, plate and a variety of customized forms. Sales
into the plastic tooling and welding markets continued to lag last year's pace
while sales into the oil and gas, aerospace and undersea communications markets
slowed in third quarter 2001 after growing in the first half of the current
year. Total bulk product pounds sold were 2% less in the first nine months of
2001 than in the first nine months of 2000.
TMI sales were 60.7% lower in the third quarter and 34.2% lower for the
first nine months of 2001 than the comparable periods in 2000. Major
applications for TMI's products, which are manufactured at the Company's
Lincoln, RI facility, include contacts, semiconductors and connectors. The
slowdown in the telecommunications and computer electronics markets began
impacting sales volumes of these products late in the first quarter 2001.
Management believes that the fall-off in these sales is related to the over-all
market conditions and not caused by a loss in market share or technological
obsolescence. Sales order entry rates showed a mild improvement late in the
third quarter 2001. TMI implemented additional cost reduction initiatives in the
second and third quarters, including further reductions in force, cost controls
and reduced work hours and TMI remained profitable for the year despite the
reduced volumes.
Beryllium Products sales in the third quarter 2001 were 13.2% below the
third quarter 2000. However, year-to-date sales have grown 18.9% over last year.
Major markets for these products include defense, medical, optical scanning and
electronics. The decline in sales in the third quarter was due to delays in
government spending on approved defense programs. The Company anticipates that
defense related orders should increase over the next several quarters.
The gross margin on Metal Systems sales was 3.8% of sales in the third
quarter 2001 compared to 20.7% in the third quarter 2000. For the first nine
months of the year, margins were 16.7% in 2001 and 20.1% in 2000. The lower
sales level in the third quarter 2001 versus the third quarter 2000 reduced the
variable margin contribution by $13.2 million. The lower production levels
coupled with the related increase in unabsorbed manufacturing costs and the
inventory reduction were the other main factors for the lower margins in the
quarter and for the year thus far. The negative currency effect also impacted
the Metal Systems Group's margins. The mix effect was unfavorable during the
third quarter in part due to the $1.6 million sale of beryllium containing input
material with no margin.
11
Total SG&A and Other-net expenses were $4.2 million lower in the third
quarter 2001 than in the third quarter 2000 while expenses for the first nine
months of 2001 were $4.8 million lower than the comparable period in 2000. Cost
reduction efforts within TMI and Alloy in response to the declining sales
volumes as well as a lower incentive compensation expense in 2001 were
responsible for the improvement. Sales commissions are also lower in 2001.
Severance and other one-time closure costs totaled $0.6 million in the third
quarter 2001.
The Metal Systems Group lost $9.4 million in the third quarter 2001
compared to a profit of $3.6 million in the third quarter 2000. For the first
nine months of the year, the group lost $4.4 million in 2001 and earned $5.8
million in 2000, a difference of $10.2 million between periods.
MICROELECTRONICS GROUP
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
------------- -----------------
(Millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Sales................................................ $41.7 $48.5 $130.9 $131.9
Operating Profit..................................... 0.2 3.1 3.5 7.8
</Table>
After growing in the first half of 2001 over the first half of 2000, sales
from the Microelectronics Group (MEG) declined $6.8 million, or 14.1%, in the
third quarter 2001. Operating profit also declined from $3.1 million in the
third quarter 2000 to $0.2 million in the third quarter 2001. While year-to-date
sales are only $1.0 million behind the 2000 level, operating profit in 2001 is
$4.3 million lower than last year. The MEG consists of Williams Advanced
Materials Inc. (WAM) and Electronic Products. The following chart highlights
business unit sales as a percent of the total Microelectronics Group sales:
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
-------------- ------------------
2001 2000 2001 2000
----- ----- ------ ------
Percent of Segment Sales
WAM................................................. 81.3% 77.5% 77.9% 76.3%
Electronic Products................................. 18.7 22.5 22.1 23.7
</Table>
Revenues from WAM declined 9.8% in the third quarter 2001 from the third
quarter 2000 while third quarter 2001 year-to-date revenues grew by 1.3%. WAM
manufactures physical vapor deposition targets, specialty alloys and packaging
materials, including frame lid assemblies, bonding wire and solder preforms. The
majority of these products contain precious metals and the comparison of
revenues between periods can be affected by the cost and the mix of precious
metals sold. The value added, which is sales less the cost of precious metals
sold, actually increased by 5.5% in the third quarter and 12.8% for the first
nine months compared to the same periods in 2000. While WAM experienced
softening in orders from the wireless and photonics sectors of the
microelectronic market during the third quarter 2001, the growth in other
applications for targets, including DVD (digital video disk) and GMR (giant
magnetic resistive) materials, has allowed WAM to increase its margins and
profits. Frame lid assembly (FLA) sales and value added increased in the third
quarter 2001 as a result of the acquisition of additional assets used in
manufacturing FLA's from a competitor who withdrew from the market in the second
quarter 2001. Specialty alloy volumes declined slightly in the third quarter
2001 from the third quarter 2000 as a result of the softening in the electronics
market. WAM continued to re-invest in its business and now has manufacturing
operations in four domestic and two foreign locations.
Sales by Electronic Products were 28.8% lower in the third quarter 2001 and
7.5% lower in the first nine months of 2001 versus the comparable periods in
2000. Beryllia ceramics, the largest product line within this business, was
significantly affected by the telecommunications slow down, as sales of these
products were off 44.2% in the third quarter 2001 from the year ago period.
Beryllia ceramics are sold into a mature market with a limited customer base.
Sales of thick film circuits, which had doubled in the first half of this year
over the 2000 level, were essentially flat in the third quarter 2001 compared to
the third quarter 2000. Direct bond copper and powder metal product sales were
also slightly lower in the current year compared to last year.
Gross margin on MEG sales was 12.3% in the third quarter 2001 and 16.8% in
the third quarter 2000. For the first nine months of the year, the gross margin
was 14.9% in 2001 and 17.6% in 2000. The variable margin contribution was $2.1
million lower in the third quarter 2001 as a result of the reduced sales
volumes.
12
Unfavorable inventory adjustments of $0.8 million were recorded against gross
margins in the third quarter 2001 due to obsolescence and other valuation
issues.
Total SG&A and Net-other expenses declined $0.2 million in the third
quarter 2001 from the third quarter 2000. Expenses for the first three quarters
of 2001 were $0.6 million higher than the first three quarters of 2000. Selling
expenses were higher in the quarter and for the year in order to support the
increased WAM activities while administrative and incentive compensation
expenses declined. Severance costs totaled $0.2 million in the third quarter
2001. Precious metal financing fees were $0.3 million lower in the third quarter
2001 and $0.6 million lower in the first three quarters of 2001 compared to the
same periods last year. The savings resulted from reduced quantities of metal on
hand and lower financing rates.
Operating profit for the MEG was $0.2 million in the third quarter 2001, a
$2.9 million decline from the third quarter 2000. Year-to-date operating profit
was $3.5 million in 2001 and $7.8 million in 2000. Year-to-date operating profit
as a percent of sales was 2.9% in 2001 and 5.9% in 2000.
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.
The following table summarizes the activity associated with CBD cases:
<Table>
<Caption>
QUARTER ENDED QUARTER ENDED
SEPT. 28, 2001 JUNE 29, 2001
-------------- -------------
Total cases pending...................................... 80 79
Total plaintiffs......................................... 208 211
Number of claims (plaintiffs) filed during period
ended.................................................. 9(15) 3(8)
Number of claims (plaintiffs) settled during period
ended.................................................. 0 0
Aggregate settlements paid during period ended (dollars
in thousands).......................................... $ 0 $ 0
Number of claims (plaintiffs) dismissed.................. 8(16) 0
Number of claims (plaintiffs) voluntarily withdrawn...... 0(2) 0
</Table>
Additional CBD claims may arise. Management believes it 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 $11.8 million at September 28, 2001 and $9.1 million at December
31, 2000. The Company also recorded a receivable of $5.0 million at September
28, 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.
13
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
While the Company had a $0.3 million net loss for the first three quarters
of 2001, cash flow from operations was $17.0 million during the period. The
difference was primarily a result of the effects of depreciation and changes in
working capital. Cash balances were $4.5 million at the end of the third quarter
2001, an increase of $0.2 million from December 31, 2000.
Accounts receivable declined $21.0 million since the beginning of the
current year. The lower sales volume in the current year is responsible for this
reduction. The days sales outstanding increased by approximately four days since
the fourth quarter 2000, but it did improve slightly in the third quarter 2001
over the second quarter 2001.
Inventories increased $3.3 million during the first nine months of 2001.
However, inventories declined $10.7 million during the third quarter 2001 as a
result of lower production volumes and plant shutdowns. The majority of the
decrease in inventories in the third quarter was in the Metal Systems Group and
Alloy Products in particular. Alloy inventory pounds declined 14.9% during the
first three quarters of 2001, with the majority of the decrease coming from
Elmore's work-in-process inventories. Scrap inventories at Elmore were also
reduced significantly during the first three quarters of 2001. Inventory turns
were unchanged from the second quarter, indicating that the inventory reduction
in the third quarter was in line with the decreased sales volumes. Turns have
slowed, however, since the fourth quarter 2000.
Capital expenditures were $20.9 million for the first three quarters of
2001. The Company slowed down the spending rate in the third quarter as capital
expenditures totaled $15.8 million in the first half of the year and only $5.1
million in the third quarter. Approximately 55% of the year-to-date expenditures
support the Metal Systems Group. Major projects for this Group include bulk
product annealing equipment in Elmore, strip product annealing and pickling
equipment in the Reading facility and precious metal plating equipment at TMI.
Major capital projects within the MEG include a capacity expansion at the
Company's thick film circuit manufacturing facility in Oceanside, CA. and the
acquisition of the FLA manufacturing assets by WAM. The Company also purchased
the land and mineral rights that were previously leased by its mining operations
in Utah and land adjacent to its Utah milling facility for $1.3 million. The
purchased mineral rights cover approximately 95% of the Company's proven
beryllium reserves.
Accounts payable and other liabilities and accrued items were a combined
$17.6 million lower at the end of the third quarter 2001 than at the beginning
of the year as a result of reduced business volumes in the current year and
payment of the accrued incentive compensation for 2000 in early 2001. Other
long-term liabilities grew $6.3 million as a result of changes to the legal
liability reserves and changes in the carrying value of various derivative
financial instruments.
Total balance sheet debt stood at $77.3 million at the end of the third
quarter, an increase of $8.5 million since year-end 2000. The increase in debt
occurred in the first half of the year as, even with the slow down in business
and the operating loss in the third quarter, total debt was reduced by $6.5
million from the end of the second quarter 2001. For the year, short-term debt
increased $7.6 million and long-term debt increased $0.9 million. Short-term
debt includes $17.7 million of foreign currency denominated loans and $7.1
million of a precious metal denominated facility. The increase in long-term debt
was used to finance the majority of the Utah land purchase. The Company received
a waiver from its bank group for certain covenants contained in its
14
revolving credit agreement and a synthetic lease obligation effective as of
September 28, 2001. As part of that waiver, the banks took a security interest
in the Company's domestic assets. The Company and its bank group agreed to
discuss amending these agreements during the fourth quarter 2001. It is possible
that, if amended, the agreements will eliminate, revise or add various
covenants.
Dividends paid totaled $6.0 million in the first nine months of 2001.
Subsequent to the dividend payment in July, the Company announced the suspension
of the normal $0.12 per share quarterly dividend. The dividend was suspended in
order to improve the Company's future cash and debt positions in light of the
current operating loss and market conditions. The dividend payments were
typically $2.0 million per quarter.
The Company received $1.8 million of cash for the purchase of common stock
under stock option plans during the first three quarters of 2001. All of this
cash was received in the first half of the year.
Cash flow from operations was $22.7 million in the first nine months of
2000. Accounts receivable grew $21.8 million during that time frame as a result
of the record sales volumes and an increase in the days sales outstanding.
Inventories decreased by $2.1 million as the Company entered into an off balance
sheet agreement to finance $8.3 million of its copper-based inventory. Capital
expenditures were $13.3 million during the first three quarters of 2000. The
Company paid three quarterly dividends at $0.12 per share totaling $5.9 million.
Total balance sheet debt declined $1.9 million during the first nine months of
2000.
Funds generated by operations plus the available borrowing capacity are
believed to be adequate to support operating requirements, capital expenditure
requirements and remediation projects. Excess cash, if any, is invested in money
market 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.
OUTLOOK
Due to the degree of softening in the Company's major markets and the
suddenness with which the global economic conditions affected the Company's
sales, it is currently difficult to project business levels with a high degree
of reliability. Major customers and end-use demand generators for the Company's
products have indicated that their forecasts are changing rapidly and that they
do not have much visibility into their future requirements. The Company's
current outlook, therefore, does not call for any significant improvement in
sales volumes in the near term. While the Company remains confident in the
long-term potential of its various markets, it is unable to project when those
markets and the over-all economy will improve. Sales in the fourth quarter 2001
may be lower than in the third quarter 2001 at least in part due to the fourth
quarter having fewer shipping days than the third quarter.
Given the reduced sales volumes, the Company has and will continue to
adjust its cost structure to improve its profitability. During the first nine
months of 2001, the Company reduced its workforce by approximately 13%. More
reductions are anticipated to occur in the fourth quarter. Plant shutdowns,
reduced work weeks and spending control and efficiency programs are being used
to lower the Company's break-even point. In addition, the Company has and will
continue to implement plans to improve its cash flows. The rate of spending on
capital programs has been slowed down and it is anticipated that capital
expenditures in 2002 will be lower than in 2001. As previously noted,
inventories were reduced in the third quarter and the quarterly dividend has
been suspended. The Company will continue to evaluate its investment options in
order to generate the optimal return on its working and fixed capital
investments. The Company believes that a large portion of the recent changes in
its cost structure are of a permanent nature and therefore will allow for a more
rapid growth in profitability once its markets improve.
15
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 third quarter of 2001, the number of CBD cases grew from 79
cases (involving 211 plaintiffs) as of June 29, 2001 to 80 cases (involving 208
plaintiffs), as of September 28, 2001. During the third quarter, eight cases
involving fourteen plaintiffs were dismissed. In one additional case, one
plaintiff and his spouse voluntarily dismissed their claims, but the case
remains pending with other plaintiffs.
The 80 pending CBD cases fall into three categories: 45 "employee cases"
involving an aggregate of 46 Brush Wellman employees, former employees or
surviving spouses (in 27 of these cases, a spouse has also filed claims as part
of his or her spouse's case); 32 cases involving third party individual
plaintiffs, with 67 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 13 individuals (and
one spouse who has filed a claim as part of her 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.
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 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,
16
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.
CLAIMS CONCLUDED SINCE THE END OF SECOND QUARTER 2001
As previously reported in the Form 10-Q for the second quarter of 2001, a
Consent Decree related to alleged violations of the Pima County Air Code was
pending between Brush Wellman and the Pima County Air Quality Control District.
On August 21, 2001, Brush Wellman and the District filed that Consent Decree and
an accompanying Settlement Agreement in Arizona Superior Court. Under the Decree
and the Agreement, Brush Wellman paid a civil penalty of $145,000, and the
matter was dismissed on August 27, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
(10) Second Amendment to the Deferred Compensation Plan for
Non-Employee Directors (as amended through September 11,
2001).
(11) Statement re computation of per share earnings (filed as
Exhibit 11 to Part I of this report).
</Table>
(b) Reports on Form 8-K
Brush Engineered Materials Inc. filed a report on Form 8-K on August 28,
2001 that included a copy of a press release revising sales forecasts for the
remainder of the year.
Brush Engineered Materials Inc. filed a report on Form 8-K on September 12,
2001 that included a copy of a press release suspending future dividend payments
and revising forecasts for the remainder of the year.
17
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.
<Table>
BRUSH ENGINEERED MATERIALS INC.
Dated: November 13, 2001
/s/ John D. Grampa
--------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer
</Table>
18