UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2003
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 001-15885
BRUSH ENGINEERED MATERIALS INC.
(Exact name of Registrant as specified in charter)
Ohio 34-1919973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17876 ST. CLAIR AVENUE, CLEVELAND, OHIO 44110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 216-486-4200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
As of July 31, 2003 there were 16,563,098 shares of Common Stock, no
par value, outstanding.
PART I FINANCIAL INFORMATION
BRUSH ENGINEERED MATERIALS INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of Brush Engineered Materials Inc. and its
subsidiaries for the quarter ended June 27, 2003 are as follows:
Consolidated Statements of Income -
Three and six months ended June 27, 2003 and June 28, 2002
Consolidated Balance Sheets -
June 27, 2003 and December 31, 2002
Consolidated Statements of Cash Flows -
Six months ended June 27, 2003 and June 28, 2002
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SECOND QUARTER ENDED FIRST HALF ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 2003 2002 2003 2002
------------ ------------ ----------- -----------
NET SALES $ 101,805 $ 100,749 $ 201,323 $ 190,331
COST OF SALES 82,941 85,679 165,346 165,007
------------ ------------ ----------- -----------
GROSS MARGIN 18,864 15,070 35,977 25,324
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 16,611 16,907 33,909 32,147
RESEARCH AND DEVELOPMENT
EXPENSES 928 1,101 2,036 2,175
OTHER-NET 310 (373) 1,139 (932)
------------ ------------ ----------- -----------
OPERATING PROFIT (LOSS) 1,015 (2,565) (1,107) (8,066)
INTEREST EXPENSE 754 767 1,443 1,500
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 261 (3,332) (2,550) (9,566)
MINORITY INTEREST (22) - (22) -
INCOME TAXES 246 (1,283) 451 (3,683)
------------ ------------ ----------- -----------
NET INCOME (LOSS) $ 37 $ (2,049) $ (2,979) $ (5,883)
============ ============ =========== ===========
PER SHARE OF COMMON STOCK: BASIC $ 0.00 $ (0.12) $ (0.18) $ (0.36)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 16,563,098 16,558,192 16,562,283 16,556,319
PER SHARE OF COMMON STOCK: DILUTED $ 0.00 $ (0.12) $ (0.18) $ (0.36)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 16,639,382 16,558,192 16,562,283 16,556,319
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 27, DEC. 31,
(DOLLARS IN THOUSANDS) 2003 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 1,307 $ 4,357
ACCOUNTS RECEIVABLE 58,329 47,543
INVENTORIES 89,180 94,324
PREPAID EXPENSES 8,306 9,766
DEFERRED INCOME TAXES 193 244
---------------- ---------------
TOTAL CURRENT ASSETS 157,315 156,234
OTHER ASSETS 25,377 25,629
LONG-TERM DEFERRED INCOME TAXES
472 472
PROPERTY, PLANT AND EQUIPMENT 480,043 476,283
LESS ALLOWANCES FOR DEPRECIATION,
DEPLETION AND IMPAIRMENT 334,091 323,739
---------------- ---------------
145,952 152,544
---------------- ---------------
$ 329,116 $ 334,879
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT $ 44,710 $ 27,235
ACCOUNTS PAYABLE 16,217 15,129
OTHER LIABILITIES AND ACCRUED ITEMS 33,854 30,439
INCOME TAXES 885 786
---------------- ---------------
TOTAL CURRENT LIABILITIES 95,666 73,589
OTHER LONG-TERM LIABILITIES 16,921 17,459
RETIREMENT AND POST-EMPLOYMENT BENEFITS 50,010 48,518
LONG-TERM DEBT 12,185 36,219
MINORITY INTEREST IN SUBSIDIARY 50 0
SHAREHOLDERS' EQUITY 154,284 159,094
---------------- ---------------
$ 329,116 $ 334,879
================ ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FIRST HALF ENDED
JUNE 27, JUNE 28,
(Dollars in thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
NET LOSS ($ 2,979) ($ 5,883)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED FROM
OPERATING ACTIVITIES:
Depreciation, depletion and amortization 10,184 10,415
Decrease (Increase) in accounts receivable (10,461) (5,946)
Decrease (Increase) in inventory 5,754 7,897
Decrease (Increase) in prepaid and other current assets 1,724 1,082
Increase (Decrease) in accounts payable and accrued expenses 1,870 2,297
Increase (Decrease) in interest and taxes payable 105 (826)
Increase (Decrease) in deferred income taxes 147 (227)
Increase (Decrease) in other long-term liabilities 173 (4,660)
Other - net 653 1,444
--------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 7,170 5,593
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant and equipment (3,212) (2,299)
Payments for mine development (101) -
Proceeds from sale of property, plant and equipment 8 140
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (3,305) (2,159)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt (4,959) (8,307)
Proceeds from issuance of long-term debt 2,000 12,000
Repayment of long-term debt (4,034) (10,000)
--------- ---------
NET CASH (USED IN) FINANCING ACTIVITIES (6,993) (6,307)
Effects of Exchange Rate Changes 78 (224)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,050) (3,097)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,357 7,014
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,307 $ 3,917
========= =========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ACCOUNTING POLICIES
In management's opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of
June 27, 2003 and December 31, 2002 and the results of operations for the three
and six month periods ended June 27, 2003 and June 28, 2002. All of the
adjustments were of a normal and recurring nature.
NOTE B - INVENTORIES
JUNE 27, DEC. 31,
(Dollars in thousands) 2003 2002
- --------------------------------------------------------------------------------
Principally average cost:
Raw materials and supplies $ 22,787 $ 22,572
In process 61,132 65,809
Finished goods 31,181 29,522
------------ --------
Gross inventories 115,100 117,903
Excess of average cost over LIFO
Inventory value 25,920 23,579
------------ --------
Net inventories $ 89,180 $ 94,324
============ ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - COMPREHENSIVE LOSS
The reconciliation between Net Income (Loss) and Comprehensive Loss for the
three and six month periods ended June 27, 2003 and June 28, 2002 is as follows:
SECOND QUARTER ENDED FIRST HALF ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
(Dollars in thousands) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------
Net Income (Loss) $ 37 $ (2,049) $ (2,979) $ (5,883)
Cumulative Translation Adjustment 3 833 (70) 745
Change in the Fair Value of Derivative
Financial Instruments (3,065) (4,559) (1,900) (3,167)
-------- -------- -------- --------
Comprehensive Loss $ (3,025) $ (5,775) $ (4,949) $ (8,305)
======== ======== ======== ========
NOTE D - SEGMENT REPORTING
Metal Micro- Total All
(Dollars in thousands) Systems Electronics Segments Other Total
- --------------------------------------------------------------------------------------------------------
Second Quarter 2003
Revenues from external customers $ 60,670 $ 37,650 $ 98,320 $ 3,485 $101,805
Intersegment revenues 817 246 1,063 4,081 5,144
Profit (loss) before interest and taxes (2,775) 3,473 698 317 1,015
Second Quarter 2002
Revenues from external customers $ 63,537 $ 34,481 $ 98,018 $ 2,731 $100,749
Intersegment revenues 768 474 1,242 3,743 4,985
Profit (loss) before interest and taxes (5,074) 1,467 (3,607) 1,042 (2,565)
First Half 2003
Revenues from external customers $121,877 $ 75,961 $197,838 $ 3,485 $201,323
Intersegment revenues 1,718 518 2,236 7,654 9,890
Profit (loss) before interest and taxes (6,199) 6,010 (189) (918) (1,107)
First Half 2002
Revenues from external customers $119,454 $ 68,026 $187,480 $ 2,851 $190,331
Intersegment revenues 1,367 957 2,324 6,632 8,956
Profit (loss) before interest and taxes (13,599) 3,669 (9,930) 1,864 (8,066)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - INCOME TAXES
An income tax expense of $0.2 million in the second quarter 2003 and $0.5
million in the first half of 2003 was recorded for foreign, state and local
taxes in those jurisdictions where the Company did not record a deferred tax
valuation allowance. A tax benefit for domestic losses and a tax expense for
income generated by certain foreign operations in the first half of 2003 were
offset by changes in the deferred tax valuation allowance. In the fourth quarter
2002, valuation allowances were recorded for domestic and certain foreign
deferred tax assets in accordance with SFAS No. 109, "Accounting for Income
Taxes", due to the uncertainty regarding full realization of these assets. The
Company intends to maintain a valuation allowance until a realization event
occurs to support a reversal of all or a portion of the allowance. In 2002, a
tax rate of 38.5% was applied against the loss before income taxes to calculate
a tax benefit of $1.3 million in the second quarter and $3.7 million in the
first half of that year.
NOTE F - DEBT
The Company's Revolving Credit Agreement (the revolver) matures in April 2004
and, therefore, all outstanding borrowings under the revolver are considered
current debt as of April 2003. Accordingly, borrowings of $27.0 million under
the revolver previously recorded as long-term were classified as short-term debt
on the Consolidated Balance Sheet as of June 27, 2003.
The revolver allows for both short-term and long-term borrowings. The limitation
on outstanding short-term borrowings was revised as part of renegotiating the
agreement in the first quarter 2003. As a result, the Company transferred $5.0
million of short-term borrowings to long-term borrowings under the revolver in
the first quarter 2003 in order to comply with the reduced limitation. This
non-cash transaction combined with the $27.0 million of debt becoming current
during the second quarter 2003 resulted in a $22.0 million increase in
short-term debt and $22.0 million decrease in long-term debt during the first
half of 2003 that did not impact the Consolidated Statement of Cash Flows for
the six month period ended June 27, 2003.
NOTE G - NEW PRONOUNCEMENT
The FAS issued FIN 46, "Consolidation of Variable Interest Entities" in January
2003 effective for periods ending subsequent to June 15, 2003 for variable
interest entities for which an enterprise holds a variable interest that it
acquired prior to February 1, 2003. The release clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from others. The purpose of FIN 46 is to improve the financial reporting
by enterprises with variable interest entities and it is anticipated that
implementation of FIN 46 will result in various enterprises consolidating
variable interest entities into their financial statements rather than treating
them as non-consolidated or off-balance sheet assets and liabilities. The
Company does not believe that implementation of FIN 46 will have a material
impact on its financial statements as it does not have any variable interest
entities that meet these consolidation requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - STOCK-BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and applies the intrinsic value method
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock incentive
plan. In accordance with SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," the following table presents the effect
on net income/(loss) and net income/(loss) per share had compensation cost for
the Company's stock plans been determined consistent with SFAS No. 123.
Second Quarter Ended First Half Ended
June 27, June 28, June 27, June 28,
(Dollars in thousands except per share amounts) 2003 2002 2003 2002
-------- -------- -------- --------
Net income/(loss), as reported $ 37 $ (2,049) $ (2,979) $ (5,883)
Less stock-based compensation expense
determined under fair value method for
all stock options, net of related income
tax benefit 353 367 581 616
-------- -------- -------- --------
Pro forma net loss $ (316) $ (2,416) $ (3,560) $ (6,499)
======== ======== ======== ========
Basic and diluted loss per share, as reported $ 0.00 $ (0.12) $ (0.18) $ (0.36)
Basic and diluted loss per share, pro forma $ (0.02) $ (0.15) $ (0.21) $ (0.39)
The fair value was estimated on the grant date using the Black-Scholes option
pricing model with the following assumptions for options issued:
Second Quarter Ended First Half Ended
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
-------- -------- -------- --------
Risk free interest rates 2.64% 4.84% 3.64% 4.52%
Dividend yield 0% 0% 0% 0%
Volatility 39.5% 39.6% 39.5% 39.6%
Expected lives (in years) 8 8 8 8
NOTE I - JOINT VENTURE
The Company's Microelectronics Group formed a joint venture in Taiwan in the
second quarter 2003 to provide bonding service for non-precious metal targets as
well as to pursue new applications in the LCD plasma display market and expand
the Company's sales into the semiconductor market. The Company has a 60%
ownership share in the joint venture and therefore it is included in the
Company's consolidated financial statements. The minority partner's share of the
ownership and results of operations are shown as separate line items on the
Consolidated Balance Sheets and Consolidated Statements of Income, respectively,
for the period ended June 27, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
Portions of the narrative set forth in this document that are not statements of
historical or current facts are forward-looking statements. 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 global economy;
- - The condition of the markets which the Company serves, whether defined
geographically or by segment, with the major market segments being
telecommunications and computer, automotive electronics, industrial
components, optical media, aerospace and defense, and appliance;
- - Changes in product mix and the financial condition of particular
customers;
- - The Company's success in implementing its strategic plans and the
timely and successful completion of pending capital expansion projects;
- - The availability of adequate lines of credit and the associated
interest rates;
- - Other financial factors, including tax rates, exchange rates, pension
costs, energy costs and the cost and availability of insurance;
- - The uncertainties concerning the impact resulting from war and
terrorist activities; - Changes in government regulatory requirements
and 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
The Company generated an operating profit in the second quarter 2003 for the
first time since the second quarter 2001, when the precipitous drop in demand
from the telecommunications and computer market, the Company's largest market,
began. The Company also broke even at the net income line, avoiding a net loss
for the first time in the last eight quarters. Sales in the second quarter 2003
were the second highest quarterly sales since the second quarter 2001, but still
below the Company's previously disclosed breakeven sales level. The main reason,
therefore, for the profit improvement was an increase in margin rates and lower
expenses. The gross margin dollars and rate in the second quarter 2003 were also
the highest since the second quarter 2001 and resulted from a favorable product
mix, foreign currency translation effects, operational improvements and reduced
manufacturing overhead costs. Expenses have been reduced as a result of cost
saving programs that management initiated in 2001 (that also continued into
2003) in response to the decline in sales. A federal domestic income tax benefit
was not recorded against the loss before income taxes in the first half 2003 in
accordance with
accounting guidelines (and as previously disclosed) which has a negative impact
on the net income and earnings per share comparisons with 2002.
Second Quarter Ended First Half Ended
-------------------- ----------------
June 27, June 28, June 27, June 28,
Millions, except per share data 2003 2002 2003 2002
- ------------------------------- -------- -------- -------- --------
Sales $101.8 $100.7 $201.3 $190.3
Operating Profit (Loss) 1.0 (2.6) (1.1) (8.1)
Net Income (Loss) 0.0 (2.0) (3.0) (5.9)
Diluted E.P.S. $ 0.00 $(0.12) $(0.18) $(0.36)
Net sales of $101.8 million in the second quarter 2003 were 1% higher than the
second quarter 2002. For the first six months of the year, sales of $201.3
million in 2003 were 6% higher than 2002. Demand from the optical media, defense
and appliance markets was strong in the second quarter 2003 while demand from
the automotive and plastic tooling markets weakened from levels in the first
quarter 2003. Telecommunication and computer market demand was relatively
unchanged. Approximately $0.2 million of the sales growth in the second quarter
2003 and $4.0 million of the growth in the first half of 2003 over the prior
year was due to changes in precious metal pricing and mix which does not impact
the gross margin dollars.
International sales were $32.6 million and 32% of total sales in the second
quarter 2003 compared to $27.0 million and 27% of total sales in the second
quarter 2002. For the first six months of the year, international sales were
$62.3 million (31% of total sales) in 2003 and $53.0 million (28% of total
sales) in 2002. Approximately 40% of the international sales growth in the
second quarter and 45% of the year-to-date growth is due to the foreign currency
translation effect on sales, as the dollar was weaker against the euro, yen and
sterling in 2003 compared to 2002. The underlying growth in international sales
is reflective of the Company's strategy of continued geographic expansion of its
markets.
The gross margin of $18.9 million was 18.5% of sales in the second quarter 2003,
an improvement over the gross margin of $15.1 million and 15.0% of sales in the
second quarter 2002. A favorable product mix effect coupled with lower
manufacturing overhead expenses were the main causes of the improved margins in
the second quarter 2003.
For the first six months of the year, the gross margin was $36.0 million (17.9%
of sales) in 2003 and $25.3 million (13.3% of sales) in 2002 as the margin
improved $10.7 million on an $11.0 million increase in sales. The change in the
product mix, operational improvements and the favorable currency effect
generated an additional $6.1 million in margin in the first half 2003 compared
to the first half 2002. Manufacturing overhead expenses were $2.5 million lower
in the first half of 2003 than the first half 2002 with the
majority of the savings coming from the Metal Systems Group and, specifically,
Alloy Products. The higher sales volumes generated the balance of the margin
improvement.
Selling, general and administrative expenses (SG&A) were $16.6 million (or 16.3%
of sales) in the second quarter 2003, relatively unchanged from the $16.9
million (or 16.8% of sales) in the second quarter 2002. For the first half of
the year, SG&A expenses were $33.9 million (16.8% of sales) in 2003 and $32.1
million (16.9% of sales) in 2002. The main causes of the year-to-date increase
in expenses are an unfavorable impact of the weaker dollar on the translation of
foreign currency denominated expenses and an increase in management compensation
accruals in 2003 due to the improved profitability.
Research and development expenses (R&D) were $0.9 million in the second quarter
2003 and $1.1 million in the second quarter 2002. For the first two quarters of
the year, R&D expenses were $2.0 million in 2003 and $2.2 million in 2002.
Other-net expense was $0.3 million in the second quarter 2003 and $1.1 million
in the first half of 2003 compared to other-net income of $0.4 million and $0.9
million in the respective periods of 2002. Lower foreign currency exchange
gains, due to the weaker dollar, was the major difference in the quarter and the
first six months of the year. The unrealized valuation adjustment on a
directors' compensation plan, which is based upon the Company's common stock,
resulted in an expense of $0.2 million in the first half of 2003, the majority
of which was recorded in the second quarter when the market price of the
Company's stock increased. In the first half of 2002, the Company recorded a
favorable unrealized valuation adjustment of $0.5 million. Metal financing fees
were $0.1 million lower in the second quarter 2003 and $0.2 million lower in the
first half of 2003 than in the comparable periods in 2002. Other-net also
includes bad debts, amortization of intangible assets, gain or loss on the sale
of assets, cash discounts and other non-operating items.
Total overhead costs, including manufacturing overhead, SG&A, R&D and other-net
expenses, were only 1% higher in the first six months of 2003 than in the first
six months of 2002 despite the unfavorable currency impact on expenses and
exchange gains and the higher incentive compensation accruals. Total manpower as
of the end of the second quarter 2003 was unchanged from year-end 2002.
The Company generated an operating profit of $1.0 million in the second quarter
2003 compared to an operating loss of $2.6 million in the second quarter 2002.
The 2003 year-to-date operating loss of $1.1 million was a $7.0 million
improvement over the $8.1 million operating loss in the comparable period last
year.
Interest expense was $0.8 million in the second quarter 2003 and $1.4 million in
the first six months of 2003. In 2002, interest expense was $0.8 million and
$1.5 million in the comparable periods. Average debt levels were lower in the
first half 2003 than in the first half 2002 but the average effective borrowing
rates were higher due to the Company's increased credit spreads. Interest
capitalized in association with long-term capital projects was minimal and
unchanged between periods.
Income before income taxes was $0.3 million in the second quarter 2003 versus a
loss before income taxes of $3.3 million in the second quarter 2002. For the
first six months of the year, the loss before income taxes was $2.6 million in
2003 and $9.6 million in 2002.
An income tax expense of $0.2 million was recorded in the second quarter 2003
and $0.5 million in the first half of 2003 for foreign, state and local taxes in
those jurisdictions where the Company did not record a valuation allowance. A
tax benefit for domestic losses and a tax expense for income generated by
certain foreign operations in the first half of 2003 were offset by changes in
the deferred tax valuation allowance. In the fourth quarter 2002, valuation
allowances were recorded for domestic and certain foreign deferred tax assets in
accordance with SFAS No. 109, "Accounting for Income Taxes", due to the
uncertainty regarding full realization of these assets. The Company intends to
maintain a valuation allowance until a realization event occurs to support
reversal of all or a portion of the allowance. In 2002, a tax rate of 38.5% was
applied against the loss before income taxes to calculate a tax benefit of $1.3
million in the second quarter and $3.7 million in the first half of that year.
The benefits from foreign source income and percentage depletion were the main
differences between the effective and statutory rates in the first half of 2002.
The Company broke even at the net income line in the second quarter 2003, a $2.0
million improvement over the second quarter 2003. The first half 2003 net loss
was $3.0 million compared to a net loss of $5.9 million in the first half 2002
as the net loss only improved $2.9 million despite a $7.0 million improvement in
the loss before income taxes due to the difference in tax provisions between
years. Earnings per share was zero in the second quarter 2003 compared to a 12
cent per share loss in the second quarter 2002. For the first six months of the
year, the Company lost 18 cents per share in 2003 and 36 cents per share in
2002.
SEGMENT DISCLOSURES
The Company aggregates its five businesses into two reportable segments - the
Metal Systems Group and the Microelectronics Group (MEG). The "Other" column in
the segment disclosures in the Notes to the Consolidated Financial Statements
includes the results for: Brush Resources Inc., a wholly owned subsidiary that
manages the Company's mining and extraction mill operations and sells beryllium
hydroxide to the outside as well as to the Metal Systems Group; BEM Services
Inc., a wholly owned subsidiary that provides administrative services to the
other units within the Company on a cost-plus basis; and the parent Company's
corporate and administrative expenses. External sales by Brush Resources were
$3.5 million in the second quarter 2003, an $0.8 million increase over the
second quarter 2002 while sales for the first half of 2003 were also $3.5
million, as no external shipments were made in the first quarter 2003, compared
to $2.9 million in the first half of 2002.
METAL SYSTEMS GROUP
Second Quarter Ended First Half Ended
---------------------- -----------------------
June 27, June 28, June 27, June 28,
Millions 2003 2002 2003 2002
- -------- -------- -------- -------- --------
Sales $ 60.7 $ 63.5 $ 121.9 $ 119.5
Operating Loss $ (2.8) $ (5.1) $ (6.2) $ (13.6)
The Metal Systems Group consists of Alloy Products, the Company's largest unit,
Technical Materials, Inc. (TMI), a wholly owned subsidiary, and Beryllium
Products. Sales by each of these units were as follows:
Second Quarter Ended First Half Ended
---------------------- -----------------------
June 27, June 28, June 27, June 28,
Millions 2003 2002 2003 2002
- -------- -------- -------- -------- --------
Alloy Products $ 42.1 $ 41.0 $ 82.5 $ 79.3
TMI 10.7 12.4 22.6 24.0
Beryllium Products 7.9 10.1 16.8 16.2
Sales of Alloy Products in the second quarter 2003 of $42.1 million were 3%
higher than the second quarter 2002 while sales of $82.5 million in the first
six months of 2003 were 4% higher than the comparable period in 2002. Absent the
favorable currency effect, Alloy sales would have been slightly lower in the
quarter and the first half of 2003 than in 2002.
Sales of Alloy strip products, which consist of thin gauge precision strip and
thin diameter rod and wire beryllium alloys, were 6% higher in the second
quarter and 10% higher in the first half of 2003 than in the comparable periods
of 2002. Pounds sold, however, were 4% lower in the second quarter 2003 than in
the second quarter 2002 while year-to-date volumes were unchanged. The
difference between the sales dollar and quantity changes between periods was due
to the favorable currency effect and a mix shift in 2003. Sales of the higher
beryllium-containing alloys, which typically are higher priced and generate
higher contribution margins, increased in the second quarter and first half of
2003 while sales of the lower beryllium-containing alloys declined. The growth
in the higher beryllium-containing strip products sales volumes is largely
overseas and mainly the result of increased market share and the shift of
applications from the U.S. to Asia. Demand for strip products from the
telecommunications and computer market, which had increased slightly in the
first quarter 2003, flattened out in the second quarter 2003 while demand from
the automotive market softened during the second quarter 2003. The demand from
the appliance market, primarily overseas, improved in the current quarter.
Sales of Alloy bulk products, which consist of beryllium and
non-beryllium-containing alloys manufactured in plate, rod, bar, tube, ingot and
other customized forms, were down 12% in the second quarter 2003 and 10% in the
first half of 2003 from the same periods in 2002. Sales volumes (as measured in
pounds) declined 7% in the current quarter and 9% in the first half of 2003
compared to the second quarter and first half of last year. The decline in bulk
product sales, particularly in the second quarter 2003, was due in part to
reduced demand from the plastic tooling market as a result of a slowdown in the
U.S. market and inventory adjustments by the Company's major distributors.
During the first quarter 2002, the Company had a large one-time sale of master
alloy that increased sales in that period.
New products manufactured by Alloy Products and targeted for specific
applications within various markets, including oil and gas, heavy equipment,
plastic tooling and telecommunications and computer, have had a minor
contribution to total sales in 2003. Business development activity for these new
products remains very high.
Revenues from TMI were $10.7 million in the second quarter 2003, a 14% decline
from the second quarter 2002 after growing 3% in the first quarter 2003 over the
first quarter 2002. Revenues of $22.6 million in the first half of 2003 were 6%
lower than the comparable period last year. TMI manufactures engineered material
systems for connectors, contacts and semiconductor applications within the
telecommunications and computer and automotive electronics markets. Sales into
the automotive market, which were stable in the first quarter 2003, slowed down
in the middle part of the second quarter 2003 as overall production in the
automotive industry was reduced due to seasonal slow-downs and in preparation
for the change over to the new model year. Sales and order entry rates from the
telecommunications and computer market did not change appreciably in the current
period from the prior year. TMI remained profitable for the quarter and first
six months of 2003 despite the lower sales volumes due to improved margin rates
and a reduction in expenses.
Sales of Beryllium Products in the second quarter 2003 of $7.9 million were 22%
lower than a robust second quarter 2002 while sales for the first half of 2003
were $16.8 million, a 3% improvement over the first half of 2002. Sales and
orders from the government for defense-related applications were strong in the
second quarter 2003 once again while automotive sales remained firm.
The gross margin on Metal Systems Group sales was $10.1 million (16% of sales)
in the second quarter 2003 compared to $7.8 million (12% of sales) in the second
quarter 2002. For the first six months of 2003, gross margin was $19.9 million
(16% of sales) in 2003, an $8.6 million improvement over 2002. Product mix,
currency effects and operational improvements combined to increase margins $2.5
million in the second quarter 2003 and $5.3 million for the first six months of
2003 over the comparable periods in 2002. The lower sales volume in the second
quarter 2003 reduced the margin contribution by $1.9 million while the higher
sales volume from the first six months increased margins by $0.3 million. The
majority of the remaining differences in margins from the quarter and the first
six months was caused by lower manufacturing overhead and inventory provisions
during 2003, with the bulk of the cost savings generated by Alloy Products.
Alloy's overhead costs for manpower, supplies and utility costs all were lower
in 2003 than in 2002 as a result of management's efforts to reduce expenses in
light of the lower sales.
SG&A, R&D and other-net expenses totaled $12.9 million in the second quarter
2003, which was unchanged from the second quarter 2002. For the first six months
of the year, expenses were $26.1 million in 2003 and $24.9 million in 2002. The
weaker dollar caused the translated value of the international subsidiaries'
expenses to increase by $0.3 million in the second quarter and $0.7 million in
the first six months of 2003 compared to 2002. Management incentive compensation
expense was unchanged in the second quarter compared to last year while the
second quarter year-to-date expense was $0.8 million higher in 2003 than 2002.
Exchange gains were also lower in the second quarter and first half of 2003 than
they were in the same periods last year. These expense increases more than
offset the benefit of the previously implemented cost reduction efforts in the
first half of 2003.
The Metal Systems Group operating loss of $2.8 million in the second quarter
2003 was a $2.3 million improvement over the loss in the second quarter 2002.
The operating loss of $6.2 million for the first six months of 2003 was $7.4
million better than the loss of $13.6 million from the year ago period.
MICROELECTRONICS GROUP
Second Quarter Ended First Half Ended
---------------------- -----------------------
June 27, June 28, June 27, June 28,
Millions 2003 2002 2003 2002
-------- -------- -------- --------
Sales $ 37.7 $ 34.5 $ 76.0 $ 68.0
Operating Profit $ 3.5 $ 1.5 $ 6.0 $ 3.7
The MEG includes Williams Advanced Materials Inc. (WAM), a wholly owned
subsidiary, and Electronic Products. Sales by each unit were as follows:
Second Quarter Ended First Half Ended
---------------------- -----------------------
June 27, June 28, June 27, June 28,
Millions 2003 2002 2003 2002
-------- -------- -------- --------
WAM $ 29.8 $ 27.1 $ 60.3 $ 53.0
Electronic Products 7.9 7.4 15.7 15.0
WAM sales of $29.8 million in the second quarter 2003 were 10% higher than sales
in the second quarter 2002 while first half 2003 sales of $60.3 million were 14%
higher than the first half of 2002. Major markets for WAM's products include
optical media, magnetic head, electron tube and the wireless, photonic and
semiconductor and hybrid segments of the microelectronics market. WAM sells
precious, non-precious and
specialty metal products. The cost of the metal content of products sold is a
pass through to the customer. Therefore, sales levels, but not necessarily the
margin levels, are affected by the relative price and mix of metals sold. After
adjusting for the metal price and mix differences, WAM sales volumes grew 9% in
the second quarter 2003 and 6% for the first half of 2003 versus the comparable
periods in 2002. The majority of the growth was in vapor deposition targets (for
the optical media and magnetic head markets) and frame lid assemblies. Specialty
alloy sales have also improved in 2003.
WAM created a joint venture in Taiwan in the second quarter 2003 to pursue new
applications within the plasma display market as well as to provide bonding
services for non-precious metal targets and to increase its marketing presence
in Asia for its existing products. WAM contributed $0.3 million to the joint
venture and has a 60% ownership position. The minority partner contributed
equipment, technology and a customer list.
Electronic Products sales of $7.9 million in the second quarter 2003 increased
7% over the second quarter 2002. For the first six months of the year, sales of
$15.7 million in 2003 were 4% higher than in 2002. Major markets for Electronic
Products include telecommunications and computer, defense and automotive. Sales
of circuits, primarily for defense applications, and beryllia ceramic products
were higher in the second quarter and first half of 2003 than in the same
periods of 2002 while electronic package sales were lower in the quarter and
first six months of 2003 than in 2002.
The gross margin on MEG sales was $8.2 million or 22% of sales in the second
quarter 2003 compared to $6.2 million in the second quarter 2002. For the first
six months, the MEG gross margin was $15.7 million (20% of sales) in 2003, a
$2.3 million increase over the $13.4 million gross margin in 2002.
The improvement in margins in the second quarter 2003 was due to a combination
of higher volumes ($0.9 million), a favorable product mix and currency impact
($0.6 million) and lower manufacturing overheads ($0.5 million). For the first
six months, the product mix and currency effect was a favorable $1.1 million
while the higher volume in 2003 generated an additional $1.1 million in
contribution margin. Manufacturing overhead expenses were slightly lower for the
year, primarily due to cost saving programs in Electronic Products.
SG&A, R&D and other-net expenses of $4.7 million in the second quarter 2003 and
$9.7 million in the first six months of 2003 were unchanged from the comparable
periods last year. Beginning late in 2002, expenses were reduced within
Electronic Products in order to more properly align its cost structure to its
revenue base. These savings were offset by increased selling and marketing
expenses at WAM, higher incentive compensation expenses and other administrative
charges.
The MEG operating profit of $3.5 million in the second quarter 2003 was a $2.0
million improvement over the second quarter 2002. For the first six months of
the year, operating profit was $6.0 million (or 8% of sales) in 2003 and $3.7
million (or 5% of sales) in 2002.
LEGAL
One of the Company's subsidiaries, Brush Wellman Inc. (BWI), is a defendant in
proceedings in various state and federal courts brought by plaintiffs alleging
that they have contracted chronic beryllium disease or other lung conditions as
a result of exposure to beryllium. Plaintiffs in beryllium 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 beryllium cases.
Settlement payment and dismissal for a single case may not occur in the same
period.
Quarter Ended
-----------------------------
Jun 27, 2003 Mar 28, 2003
------------ ------------
Total cases pending ....................................... 22 22
Total plaintiffs .......................................... 55 54
Number of claims (plaintiffs) filed during period ended ... 2(3) 1(6)
Number of claims (plaintiffs) settled during period ended.. 1(1) 12(21)
Aggregate cost of settlements during period ended (dollars
in thousands) .................................... $254 $660
Number of claims (plaintiffs) otherwise dismissed ......... 1(1) 0(1)
Number of claims (plaintiffs) voluntarily withdrawn ....... 0(0) 0(0)
Additional beryllium claims may arise. Management believes that the Company has
substantial defenses in these cases and intends to contest the suits vigorously.
Employee cases, in which plaintiffs have a high burden of proof, have
historically involved relatively small losses to the Company. Third party
plaintiffs (typically employees of customers or contractors) face a lower burden
of proof than do employees or former employees, but these cases are generally
covered by varying levels of insurance. A reserve was recorded for beryllium
litigation of $3.4 million at June 27, 2003 and $4.2 million at December 31,
2002. A receivable was recorded of $4.2 million at June 27, 2003 and $4.9
million at December 31, 2002 from the Company's 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 beryllium 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
beryllium 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. Currently, one purported class action is pending.
BWI has not purchased product liability insurance coverage for beryllium
exposures since July 2001 because the premium in relation to the deductible and
coverage limitations has not been cost effective. BWI therefore is self insured
on product liability claims that have alleged exposure periods (occurrences)
limited to July 2001 to the present. To date, BWI has not received any claims
that are limited to this time period. BWI had varying levels of insurance
coverage prior to July 2001. If a product liability claim arises out of events
that occurred during a time period when BWI had insurance coverage, then under
the current court rulings, the benefits of that insurance coverage apply to the
whole case without any pro-ration. Management continues to evaluate its
insurance options and should the insurance market improve and coverages become
more cost-effective, then BWI may elect to purchase product liability insurance
for its beryllium exposures at that time. The Company continues to have product
liability insurance for its non-beryllium related exposures.
Standards for exposure to beryllium are under review by 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
Cash provided by operations was $7.2 million in the first half of 2003 as the
working capital changes and the effects of depreciation more than offset the net
loss. Cash balances totaled $1.3 million at the end of the second quarter 2003,
a reduction of $3.0 million during the year as the cash was used to fund capital
expenditures and to reduce debt.
The accounts receivable balance of $58.3 million at the end of the second
quarter 2003 was $10.8 million higher than at December 31, 2002. The days sales
outstanding, a measure of the collection period, was higher in the second
quarter 2003 than it was in the fourth quarter 2002 partially as a result of the
increase in international sales, which
typically take longer to collect. Receivables also increased due to the higher
sales as sales in the second quarter 2003 were $12.8 million higher than the
sales in the fourth quarter 2002. Despite the longer collection period and the
higher receivable balance, bad debt expense was only $0.1 million higher in the
first six months of 2003 than it was in the first six months of 2002.
The inventory balance of $89.2 million at the end of the second quarter 2003 was
$5.1 million lower than at year-end 2002. The decrease is primarily in Alloy
Products as a result of the on-going programs to improve inventory utilization.
Yields and other manufacturing improvements have also contributed to the decline
in inventory balances. Inventory turns were 2.9 for the Company in the second
quarter 2003, an improvement over turns in the fourth quarter 2002.
Capital expenditures for property, plant and equipment and mine development were
$3.3 million in the first six months of 2003 compared to $2.3 million in the
first six months of 2002. Capital expenditures by the MEG totaled $1.9 million
in 2003 and $1.3 million in 2002 while Metal Systems Group capital spending was
$0.8 million in 2003 and $0.9 million in 2002. The majority of expenditures
within the MEG was in support of WAM's operations and included the acquisition
of manufacturing assets from a former competitor used in the manufacture of
cover lids for sale into the microelectronics market. The Company continues to
manage its capital spending to relatively low levels in light of the overall
operating performance and other cash requirements.
Accounts payable and other liabilities and accrued expenses totaled $50.1
million as of the end of the second quarter 2003, an increase of $4.5 million
during the year as a result of increased activity levels and unrealized changes
in the fair value of derivative financial instruments and other hedging
liabilities.
Total balance sheet debt stood at $56.9 million at the end of the second quarter
2003 compared to $63.5 million at December 31, 2002. Short-term debt of $44.7
million at the end of the second quarter includes $27.0 million of debt borrowed
under the Company's revolving credit agreement (the revolver) that prior to the
current quarter would have been classified as long-term borrowings. However, the
revolver matures in April 2004 and therefore all borrowings under the agreement
are considered current debt and the $27.0 million was classified accordingly
during the second quarter 2003. The Company is currently in negotiations with
potential lenders to refinance the Company's debt on a long-term basis. The
Company is evaluating various combinations of refinancing options, including,
but not limited to, a new revolving credit agreement, term loan and subordinated
debt. One of the options may result in the conversion of the $53.0 million
off-balance sheet operating lease that finances equipment at the Elmore, Ohio
facility to a term loan. The loan proceeds would be used to purchase the leased
assets. As a result, property plant and equipment on the balance sheet would
increase for the purchased assets and the Company's balance sheet debt would
also increase (but not its over-all obligations or leverage) by a like amount.
The Company has received preliminary term sheets from various lenders and is in
the process of developing, negotiating and analyzing final terms, covenants,
maturities, interest rates and fees for these various options.
Management anticipates that a new long-term financing structure will be in place
prior to the maturity of the current revolver and perhaps as early as the third
quarter 2003. The financing costs under the new financing structure may be
higher than the current costs.
The retirement and post-employment benefit liability of $50.0 million at the end
of the second quarter 2003 increased $1.5 million since year-end 2002 primarily
due to the higher pension expense in the current year.
There were no significant changes in the Company's off-balance sheet lease
obligations during the first half of 2003. Lease payments were made as scheduled
which reduced the outstanding principal balances by $3.0 million. The balance
outstanding under the off-balance sheet precious metal consigned inventory
arrangements declined due to a reduction in the quantities of metal on hand
during the first half of 2003.
Net cash provided by operations was $5.6 million in the first half of 2002.
Accounts receivable increased $7.1 million in the first six months of 2002 as a
result of higher sales in the second quarter 2002 and a two-day increase in the
days sales outstanding. Inventories declined $6.4 million in the first two
quarters of 2002 primarily as a result of improvements in efficiencies and
machine utilization rates within the Metal Systems Group. Accounts payable
increased by $7.2 million in the first half of 2002 while balance sheet debt
declined by $5.3 million. The Company paid $4.4 million to settle numerous CBD
litigation lawsuits in the first half of 2002 and received $2.2 million back
from its insurance carriers as partial recoveries of the insured portions of
these settlements. The cash balance of $3.9 million at the end of the second
quarter was $3.1 million lower than at the end of the prior year.
OUTLOOK
Order entry rates for various Metal Systems Group products slowed down during
the second quarter. While accurately forecasting sales remains difficult, this
lower order entry rate coupled with the normal seasonal manufacturing shutdowns,
indicate that sales may decline in the third quarter 2003 from the second
quarter 2003. However, sales in the third quarter and second half of this year
are expected to be higher than the comparable periods of last year. Sales into
the automotive market are anticipated to improve in the fall of this year while
defense and government-related sales are anticipated to remain strong. The
Company currently is not forecasting any near-term improvement in the general
economy or in the markets it serves and improvements in those markets,
particularly telecommunications and computer, will result in added sales as the
Company has the capacity to quickly respond to an increase in demand. Sales of
new products for new applications also have the potential to generate additional
revenue this year. The favorable product mix and currency effect experienced in
the second quarter 2003 may not continue into subsequent quarters. Several of
the Company's facilities will take scheduled shutdowns during the third quarter
that will put temporary pressures on costs. However, the Company continues to
make operational improvements that help to reduce product costs and improve
response times and inventory utilization. Management also continues to focus on
controlling overhead costs and managing capital
expenditures in line with the overall cash flow. These efforts are part of the
organization's objective to become a stronger, leaner, more broad-based and
consistently profitable company.
CRITICAL ACCOUNTING POLICIES
DEFERRED TAXES: As previously noted, deferred tax benefits related to losses
incurred in the first half of 2003 were offset by provisions for deferred tax
valuation allowances. During the fourth quarter 2002, a valuation allowance was
recorded against domestic and certain foreign deferred tax assets as a result of
recent cumulative losses generated by the Company. Despite the valuation
allowance, the Company retains the ability to utilize the benefits of its
domestic loss carry forwards and other deferred tax assets on future tax
returns. A domestic federal tax benefit will not be recorded in subsequent
periods should the Company continue to generate pre-tax losses. Should the
Company generate a pre-tax profit in subsequent periods, a federal tax expense
will not be recorded either to the extent that the remaining valuation allowance
can be used to offset that expense.
PENSIONS: Market interest rates have declined during 2003 and, if this trend
continues, the discount rate used to value the pension plan liabilities at
year-end 2003 may be lower than the 6.75% rate used at year-end 2002. A lower
discount rate coupled with other pension valuation assumptions and actual plan
performance may result in an increase in the minimum pension liability and an
additional charge to other comprehensive income within shareholders' equity to
be recorded at December 31, 2003. The amount of any potential charge cannot be
estimated at the present time due to the number and complexity of the variables
involved. The Company may be required to make a cash contribution to the pension
plan in 2004.
For additional information regarding the Company's critical accounting policies,
please refer to pages 21 and 22 of the Company's annual report to shareholders
for the period ended December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For information regarding the Company's market risks, please refer to
pages 23 and 24 of the Company's annual report to shareholders for the period
ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President, Chairman and Chief
Executive Officer, and Vice President Finance and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's management has concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
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.
BERYLLIUM CLAIMS
There are claims pending in various state and federal courts against
Brush Wellman Inc., one of the Company's subsidiaries, by some of its employees,
former employees or their surviving spouses and by third party individuals
(typically employees of customers or of independent contractors) alleging that
they contracted, or have been placed at risk of contracting, chronic beryllium
disease or other lung conditions as a result of exposure to beryllium.
Plaintiffs in beryllium cases seek recovery under theories of intentional tort
and various other legal theories and seek compensatory and punitive damages, in
many cases of an unspecified sum. Spouses, if any, claim loss of consortium.
During the second quarter of 2003, the number of beryllium cases since
March 28, 2003 (22 cases) remained the same, while the number of plaintiffs
increased from 54 plaintiffs as of March 28, 2003 to 55 plaintiffs as of June
27, 2003. Two third party cases (involving three plaintiffs) were filed. During
the second quarter, one third party case (involving two plaintiffs) was settled;
however, the Company is awaiting final court dismissal. One employee case
(involving one plaintiff) was settled and dismissed. One employee case
(involving one plaintiff) was voluntarily dismissed by the plaintiff.
The 22 pending beryllium cases fall into three categories: four
"employee cases" involving an aggregate of four Brush Wellman employees, former
employees or surviving spouses (in three of these cases, a spouse has also filed
claims as part of his or her spouse's case); 17 cases involving third-party
individual plaintiffs, with 18 individuals (and 15 spouses who have filed claims
as part of their spouse's case, and nine children who have filed claims as part
of their parent's case); and one purported class action involving six
individuals, as discussed more fully below. Employee cases, in which plaintiffs
have a higher burden of proof, have historically involved relatively small
losses to the Company. Third-party plaintiffs (typically employees of our
customers or contractors) face a lower burden of proof than do employees or
former employees, but these cases are generally covered by varying levels of
insurance.
In the one purported class action in which Brush Wellman is seeking
review of the appellate court's reversal of the trial court's denial of class
certification, the named plaintiffs allege that past exposure to beryllium has
increased their risk of contracting
chronic beryllium disease and possibly cancer, although they do not claim to
have actually contracted any disease. They seek medical monitoring funds to be
used to detect medical problems that they believe may develop as a result of
their exposure, and seek punitive damages. This purported class action was
brought by named plaintiffs on behalf of tradesmen who worked in one of Brush
Wellman's facilities as employees of independent contractors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders for 2003 was held on
May 6, 2003.
(b) At the Annual Meeting, three directors were elected to serve for
terms of three years each by the following vote:
Shares Voted Shares Voted Shares Voted Shares
"For" "Against" "Abstaining" "Non-Voted"
------------ ------------ ------------ -----------
Gordon D. Harnett 15,345,065 0 407,390 0
David H. Hoag 15,359,498 0 392,956 0
William P. Madar 15,374,540 0 377,914 0
The following directors continued their term of office after the
meeting: Albert C. Bersticker, Dr. Charles F. Brush, III, Joseph P.
Keithley, N. Mohan Reddy, Ph.D, William R. Robertson and John Sherwin,
Jr..
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4 Indenture Modification between Toledo-Lucas Port Authority,
dated as of May 30, 2003.
4.1 Lease Modification from National City Bank, Trustee as Lessor
to Brush Wellman, Inc. as Lessee, dated as of May 30, 2003.
10 Amended and Restated Inducement Agreement with the Prudential
Insurance Company of America dated May 30, 2003
11 Statement re computation of per share earnings (filed as
Exhibit 11 to Part I of this report)
31.1 Rule 13a-14(a) Certifications
31.2 Rule 13a-14(a) Certifications
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
In a report on Form 8-K filed April 24, 2003, Brush Engineered
Materials Inc. incorporated in Item 7 its April 24, 2003 press release,
reporting on its earnings for the first quarter of 2003. The press
release, with summary financial information, was furnished pursuant to
Items 9 and 12.
In a report on Form 8-K filed May 9, 2003, Brush Engineered Materials
Inc. issued a press release announcing that the Chairman's speech at
the annual meeting, held on May 6, 2003, had been posted to its
website.
In a report on Form 8-K filed May 23, 2003, Brush Engineered Materials
Inc. issued a press release announcing that William G. Pryor has
accepted the appointment to the Board of Directors of Brush Engineered
Materials Inc. effective May 23 2003.
In a report on Form 8-K filed July 24, 2003, Brush Engineered Materials
Inc. incorporated in Item 9 its July 24, 2003 press release, reporting
on its earnings for the second quarter of 2003. The press release, with
summary financial information, was furnished pursuant to Item 12.
In a report on Form 8-K filed August 7, 2003, Brush Engineered
Materials Inc. issued a press release announcing that William B.
Lawrence has accepted the appointment to the Board of Directors of
Brush Engineered Materials Inc. effective August 7, 2003.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BRUSH ENGINEERED MATERIALS INC.
Dated: August 11, 2003
/s/ John D. Grampa
---------------------------
John D. Grampa
Vice President Finance
and Chief Financial Officer