Brush Engineered Materials Inc. 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 29, 2007
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to
Commission
file number
001-15885
BRUSH
ENGINEERED MATERIALS INC.
(Exact
name of Registrant as specified in charter)
|
|
|
Ohio
(State or other
jurisdiction of incorporation or organization)
|
|
34-1919973
(I.R.S. Employer
Identification No.)
|
17876 St. Clair Avenue,
Cleveland, Ohio
|
|
44110
|
(Address of principal executive
offices)
|
|
(Zip Code)
|
Registrants telephone number,
including area code:
216-486-4200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check One)
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No þ
As of July 31, 2007 there were 20,390,719 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 29, 2007 are as follows:
1
Consolidated
Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
(Dollars in thousands except share and
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net sales
|
|
$
|
233,563
|
|
|
$
|
187,078
|
|
|
$
|
483,877
|
|
|
$
|
354,801
|
|
Cost of sales
|
|
|
191,782
|
|
|
|
147,259
|
|
|
|
372,712
|
|
|
|
280,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
41,781
|
|
|
|
39,819
|
|
|
|
111,165
|
|
|
|
73,962
|
|
Selling, general and
administrative expense
|
|
|
26,564
|
|
|
|
27,194
|
|
|
|
55,234
|
|
|
|
51,103
|
|
Research and development expense
|
|
|
1,275
|
|
|
|
954
|
|
|
|
2,601
|
|
|
|
2,035
|
|
Other-net
|
|
|
1,325
|
|
|
|
377
|
|
|
|
3,858
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
12,617
|
|
|
|
11,294
|
|
|
|
49,472
|
|
|
|
20,122
|
|
Interest expense
|
|
|
571
|
|
|
|
1,125
|
|
|
|
1,254
|
|
|
|
2,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12,046
|
|
|
|
10,169
|
|
|
|
48,218
|
|
|
|
17,855
|
|
Income taxes
|
|
|
4,107
|
|
|
|
3,201
|
|
|
|
17,165
|
|
|
|
5,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,939
|
|
|
$
|
6,968
|
|
|
$
|
31,053
|
|
|
$
|
12,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share of common stock: basic
|
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
1.53
|
|
|
$
|
0.63
|
|
Weighted average number of common
shares outstanding
|
|
|
20,351,000
|
|
|
|
19,593,000
|
|
|
|
20,254,000
|
|
|
|
19,428,000
|
|
Per share of common stock: diluted
|
|
$
|
0.38
|
|
|
$
|
0.35
|
|
|
$
|
1.50
|
|
|
$
|
0.62
|
|
Weighted average number of common
shares outstanding
|
|
|
20,736,000
|
|
|
|
19,865,000
|
|
|
|
20,709,000
|
|
|
|
19,680,000
|
|
See notes to consolidated financial statements.
2
Consolidated
Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 29,
|
|
|
Dec. 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,074
|
|
|
$
|
15,644
|
|
Accounts receivable
|
|
|
114,097
|
|
|
|
86,461
|
|
Inventories
|
|
|
163,192
|
|
|
|
151,950
|
|
Prepaid expenses
|
|
|
15,262
|
|
|
|
13,988
|
|
Deferred income taxes
|
|
|
3,255
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
307,880
|
|
|
|
271,584
|
|
Other assets
|
|
|
12,886
|
|
|
|
13,577
|
|
Related-party notes receivable
|
|
|
98
|
|
|
|
98
|
|
Long-term deferred income taxes
|
|
|
9,785
|
|
|
|
15,575
|
|
Property, plant and equipment
|
|
|
569,298
|
|
|
|
557,861
|
|
Less allowances for depreciation,
depletion and amortization
|
|
|
388,142
|
|
|
|
381,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,156
|
|
|
|
175,929
|
|
Goodwill
|
|
|
21,782
|
|
|
|
21,843
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
533,587
|
|
|
$
|
498,606
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
30,718
|
|
|
$
|
28,076
|
|
Current portion of long-term debt
|
|
|
631
|
|
|
|
632
|
|
Accounts payable
|
|
|
37,340
|
|
|
|
30,744
|
|
Other liabilities and accrued items
|
|
|
51,471
|
|
|
|
52,161
|
|
Unearned revenue
|
|
|
1,683
|
|
|
|
314
|
|
Income taxes
|
|
|
3,696
|
|
|
|
4,515
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
125,539
|
|
|
|
116,442
|
|
Other long-term liabilities
|
|
|
9,515
|
|
|
|
11,642
|
|
Retirement and post-employment
benefits
|
|
|
57,251
|
|
|
|
59,089
|
|
Long-term income taxes
|
|
|
4,331
|
|
|
|
|
|
Deferred income taxes
|
|
|
128
|
|
|
|
151
|
|
Long-term debt
|
|
|
10,246
|
|
|
|
20,282
|
|
Shareholders equity
|
|
|
326,577
|
|
|
|
291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
533,587
|
|
|
$
|
498,606
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
3
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Net income
|
|
$
|
31,053
|
|
|
$
|
12,195
|
|
Adjustments to reconcile net
income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and
amortization
|
|
|
11,928
|
|
|
|
11,818
|
|
Amortization of deferred financing
costs in interest expense
|
|
|
215
|
|
|
|
301
|
|
Derivative financial instrument
ineffectiveness
|
|
|
(72
|
)
|
|
|
(426
|
)
|
Stock-based compensation expense
|
|
|
1,932
|
|
|
|
696
|
|
Decrease (increase) in accounts
receivable
|
|
|
(27,752
|
)
|
|
|
(13,443
|
)
|
Decrease (increase) in inventory
|
|
|
(12,859
|
)
|
|
|
(22,190
|
)
|
Decrease (increase) in prepaid and
other current assets
|
|
|
(999
|
)
|
|
|
(2,972
|
)
|
Decrease (increase) in deferred
income taxes
|
|
|
(3,672
|
)
|
|
|
4,383
|
|
Increase (decrease) in accounts
payable and accrued expenses
|
|
|
2,069
|
|
|
|
4,761
|
|
Increase (decrease) in unearned
revenue
|
|
|
1,369
|
|
|
|
920
|
|
Increase (decrease) in interest
and taxes payable
|
|
|
7,960
|
|
|
|
773
|
|
Increase (decrease) in other
long-term liabilities
|
|
|
478
|
|
|
|
2,162
|
|
Other net
|
|
|
(202
|
)
|
|
|
6,138
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from
operating activities
|
|
|
11,448
|
|
|
|
5,116
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Payments for purchase of property,
plant and equipment
|
|
|
(11,156
|
)
|
|
|
(5,978
|
)
|
Payments for mine development
|
|
|
(6,195
|
)
|
|
|
(46
|
)
|
Payments for purchase of business
net of cash received
|
|
|
|
|
|
|
(25,694
|
)
|
Proceeds from sale of business
|
|
|
2,150
|
|
|
|
|
|
Proceeds from sale of property,
plant and equipment
|
|
|
51
|
|
|
|
|
|
Other investments net
|
|
|
42
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(15,108
|
)
|
|
|
(31,685
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance (repayment)
of short-term debt
|
|
|
2,591
|
|
|
|
864
|
|
Proceeds from issuance of
long-term debt
|
|
|
15,747
|
|
|
|
26,000
|
|
Repayment of long-term debt
|
|
|
(25,793
|
)
|
|
|
(5,033
|
)
|
Issuance of common stock under
stock option plans
|
|
|
4,864
|
|
|
|
6,960
|
|
Tax benefit from exercise of stock
options
|
|
|
2,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from
financing activities
|
|
|
125
|
|
|
|
28,791
|
|
Effects of exchange rate changes
|
|
|
(35
|
)
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
(3,570
|
)
|
|
|
1,949
|
|
Cash and cash equivalents at
beginning of period
|
|
|
15,644
|
|
|
|
10,642
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period
|
|
$
|
12,074
|
|
|
$
|
12,591
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
Notes to
Consolidated Financial Statements
(Unaudited)
|
|
Note A
|
Accounting
Policies
|
In managements opinion, the accompanying consolidated
financial statements contain all adjustments necessary to
present fairly the financial position as of June 29, 2007
and December 31, 2006 and the results of operations for the
second quarter and first half ended June 29, 2007 and
June 30, 2006. All of the adjustments were of a normal and
recurring nature.
|
|
|
|
|
|
|
|
|
|
|
June 29,
|
|
|
Dec. 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Principally average cost:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
35,214
|
|
|
$
|
36,390
|
|
Work in process
|
|
|
138,472
|
|
|
|
124,670
|
|
Finished goods
|
|
|
51,333
|
|
|
|
56,721
|
|
|
|
|
|
|
|
|
|
|
Gross inventories
|
|
|
225,019
|
|
|
|
217,781
|
|
Excess of average cost over LIFO
inventory value
|
|
|
61,827
|
|
|
|
65,831
|
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
163,192
|
|
|
$
|
151,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Note C
|
Pensions
and Other Post-retirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Second Quarter Ended
|
|
|
Second Quarter Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Components of net periodic
benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,161
|
|
|
$
|
1,254
|
|
|
$
|
75
|
|
|
$
|
74
|
|
Interest cost
|
|
|
1,851
|
|
|
|
1,743
|
|
|
|
477
|
|
|
|
475
|
|
Expected return on plan assets
|
|
|
(2,156
|
)
|
|
|
(2,079
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(164
|
)
|
|
|
(178
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Amortization of net loss/(gain)
|
|
|
436
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,128
|
|
|
$
|
1,256
|
|
|
$
|
543
|
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
First Half Ended
|
|
|
First Half Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Components of net periodic
benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,314
|
|
|
$
|
2,507
|
|
|
$
|
150
|
|
|
$
|
148
|
|
Interest cost
|
|
|
3,689
|
|
|
|
3,485
|
|
|
|
955
|
|
|
|
951
|
|
Expected return on plan assets
|
|
|
(4,297
|
)
|
|
|
(4,157
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(327
|
)
|
|
|
(356
|
)
|
|
|
(18
|
)
|
|
|
(18
|
)
|
Amortization of net loss/(gain)
|
|
|
869
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,248
|
|
|
$
|
2,512
|
|
|
$
|
1,087
|
|
|
$
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Brush Wellman Inc., one of the Companys wholly owned
subsidiaries, is a defendant in various legal proceedings where
the plaintiffs allege that they have contracted chronic
beryllium disease (CBD) or related ailments as a result of
exposure to beryllium. Management believes that the Company has
substantial defenses and intends to defend these suits
vigorously. The Company has recorded a reserve for CBD
litigation of $1.7 million as of June 29, 2007 and
$2.1 million as of December 31, 2006. This reserve
covers existing claims only and unasserted claims could give
rise to additional losses. Defense costs are expensed as
incurred. Final resolution of the asserted claims may be for
different amounts than currently reserved. There were no
settlement payments made during the first six months of 2007.
Portions of the outstanding claims are covered by varying levels
of insurance.
In the third quarter 2006, the Court of Common Pleas in Ottawa
County, Ohio issued a summary judgment in the Companys
favor and awarded the Company damages of $7.8 million to be
paid by the Companys former insurance providers. The
Company had filed the lawsuit against its former insurers in
attempts to resolve a dispute over how insurance coverage should
be applied to incurred legal defense costs and indemnity
payments. The Court ruling agreed with the Companys
position. The damages, which were stipulated to by the
defendants, represent costs previously paid by the Company over
a number of years that were not reimbursed by the insurance
providers. The damages also include accrued interest on those
costs. The award was subsequently increased to $8.8 million
as a result of the defendants stipulating to the attorneys
fess incurred in pursuing this action. The Company believes that
the defendants will appeal this ruling and therefore all or a
portion of the $8.8 million may not realized by the
Company. Given the uncertainty surrounding the timing and
outcome of the appeal process and the possibility for a portion
or all of the award to be reversed, the Company has not recorded
the impact of the award in its Consolidated Financial Statements
as of June 29, 2007.
Williams Advanced Materials Inc. (WAM), one of the
Companys wholly owned subsidiaries, and a small number of
WAMs customers are defendants in a patent infringement
legal case. WAM has provided an indemnity agreement to certain
of those customers under which WAM will pay any damages awarded
by the court. WAM has not made any indemnification payments nor
have they recorded a reserve for losses under these agreements
as of June 29, 2007. WAM believes it has strong defenses
applicable to both WAM and its customers and is contesting this
action. While WAM does not believe that a loss is probable,
should their defenses not prevail, the damages to be paid may
potentially be material to the Companys results of
operations in the period of payment. The court is currently
reviewing WAMs motion to transfer the case from New York
to California.
The Company has an active environmental compliance program and
records reserves for the probable cost of identified
environmental remediation projects. The reserves are established
based upon analyses conducted by the Companys engineers
and outside consultants and are adjusted from time to time based
upon on-going studies and the difference between actual and
estimated costs. The reserves may also be affected by rulings
and negotiations with regulatory agencies. The undiscounted
reserve balance was $5.1 million as of June 29, 2007,
unchanged from December 31, 2006. Environmental projects
tend to be long term and the final actual remediation costs may
differ from the amounts currently recorded.
|
|
Note E
|
Comprehensive Income
|
The reconciliation between net income and comprehensive income
for the second quarter and first half ended June 29, 2007
and June 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net income
|
|
$
|
7,939
|
|
|
$
|
6,968
|
|
|
$
|
31,053
|
|
|
$
|
12,195
|
|
Cumulative translation adjustment
|
|
|
(526
|
)
|
|
|
383
|
|
|
|
(232
|
)
|
|
|
490
|
|
Change in the fair value of
derivative financial instruments
|
|
|
(1,256
|
)
|
|
|
4,319
|
|
|
|
(3,847
|
)
|
|
|
5,765
|
|
Minimum pension and other
retirement plan liability
|
|
|
263
|
|
|
|
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
6,420
|
|
|
$
|
11,670
|
|
|
$
|
27,498
|
|
|
$
|
18,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Note F
|
Segment
Reporting
|
Beginning in the fourth quarter 2006 and due largely because the
Company has a new chief operating decision maker, the operating
segments will no longer be aggregated and the Company will
report its four material segments separately. WAM is reported as
Advanced Material Technologies and Services, Alloy Products
reported as Specialty Engineered Alloys, Beryllium Products is
now Beryllium and Beryllium Composites and Technical Materials
Inc. is Engineered Material Systems. Brush Ceramic Products, a
wholly owned subsidiary that formerly was part of Electronic
Products, has been merged into Beryllium and Beryllium
Composites. The remaining portions of Electronic Products, due
to their insignificance, are reported in the reconciling All
Other column in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material
|
|
|
Specialty
|
|
|
Beryllium
|
|
|
Engineered
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
Engineered
|
|
|
and Beryllium
|
|
|
Material
|
|
|
|
|
|
All
|
|
|
|
|
(Dollars in thousands)
|
|
and Services
|
|
|
Alloys
|
|
|
Composites
|
|
|
Systems
|
|
|
Subtotal
|
|
|
Other
|
|
|
Total
|
|
|
|
|
Second Quarter 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
121,277
|
|
|
$
|
75,546
|
|
|
$
|
16,480
|
|
|
$
|
16,864
|
|
|
$
|
230,167
|
|
|
$
|
3,396
|
|
|
$
|
233,563
|
|
Intersegment revenues
|
|
|
1,172
|
|
|
|
(381
|
)
|
|
|
236
|
|
|
|
675
|
|
|
|
1,702
|
|
|
|
12
|
|
|
|
1,714
|
|
Operating profit
|
|
|
4,855
|
|
|
|
1,390
|
|
|
|
2,425
|
|
|
|
726
|
|
|
|
9,396
|
|
|
|
3,221
|
|
|
|
12,617
|
|
Second Quarter 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
82,880
|
|
|
$
|
68,954
|
|
|
$
|
12,745
|
|
|
$
|
18,018
|
|
|
$
|
182,597
|
|
|
$
|
4,481
|
|
|
$
|
187,078
|
|
Intersegment revenues
|
|
|
1,140
|
|
|
|
608
|
|
|
|
193
|
|
|
|
946
|
|
|
|
2,887
|
|
|
|
1
|
|
|
|
2,888
|
|
Operating profit (loss)
|
|
|
9,635
|
|
|
|
1,468
|
|
|
|
947
|
|
|
|
1,164
|
|
|
|
13,214
|
|
|
|
(1,920
|
)
|
|
|
11,294
|
|
First Half 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
264,934
|
|
|
$
|
145,910
|
|
|
$
|
31,658
|
|
|
$
|
33,613
|
|
|
$
|
476,115
|
|
|
$
|
7,762
|
|
|
$
|
483,877
|
|
Intersegment revenues
|
|
|
2,473
|
|
|
|
3,068
|
|
|
|
543
|
|
|
|
1,465
|
|
|
|
7,549
|
|
|
|
12
|
|
|
|
7,561
|
|
Operating profit
|
|
|
36,830
|
|
|
|
6,692
|
|
|
|
4,558
|
|
|
|
1,306
|
|
|
|
49,386
|
|
|
|
86
|
|
|
|
49,472
|
|
Assets
|
|
|
187,819
|
|
|
|
237,841
|
|
|
|
37,891
|
|
|
|
27,136
|
|
|
|
490,687
|
|
|
|
42,900
|
|
|
|
533,587
|
|
First Half 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
158,285
|
|
|
$
|
129,364
|
|
|
$
|
23,142
|
|
|
$
|
35,938
|
|
|
$
|
346,729
|
|
|
$
|
8,072
|
|
|
$
|
354,801
|
|
Intersegment revenues
|
|
|
2,071
|
|
|
|
3,290
|
|
|
|
362
|
|
|
|
1,393
|
|
|
|
7,116
|
|
|
|
2
|
|
|
|
7,118
|
|
Operating profit (loss)
|
|
|
18,592
|
|
|
|
1,946
|
|
|
|
1,097
|
|
|
|
2,564
|
|
|
|
24,199
|
|
|
|
(4,077
|
)
|
|
|
20,122
|
|
Assets
|
|
|
132,534
|
|
|
|
228,041
|
|
|
|
32,786
|
|
|
|
29,172
|
|
|
|
422,533
|
|
|
|
42,127
|
|
|
|
464,660
|
|
|
|
Note G
|
Stock-based
Compensation Expense
|
The Company granted approximately 8,000 restricted stock units
to the non-employee directors in the second quarter 2007 under
the 2006 Non-employee Directors Equity Plan. The fair
value of the grant, which was determined using the closing
market price on the grant date of May 1, 2007, was $46.01
per share. The fair value will be amortized over the vesting
period of one year. Should a director terminate prior to the
completion of the vesting period, the director will be entitled
to receive a pro-rata payment of common shares based upon the
number of full months of service rendered since the grant date.
The Company granted approximately 50,000 shares of
restricted stock to certain employees in the first quarter 2007
at a fair value of $44.72 per share. The fair value was
determined using the closing price of the Companys stock
on the grant date of February 15, 2007 and will be
amortized over the vesting period of three years. The shares
will be forfeited should the holders employment terminate
prior to the vesting period.
The Company granted approximately 40,000 stock appreciation
rights (SARs) to certain employees in the first quarter 2007 at
a strike price of $44.72 per share. The fair value of the SARs,
which was determined on the grant
7
date of February 15, 2007 using a Black-Scholes model, was
$22.77 per share and will be amortized over the vesting period
of three years. The SARs expire ten years from the date of the
grant.
The Company implemented a long-term incentive plan for the 2007
to 2009 time period for executive officers and certain other
employees in the first quarter 2007. Awards under the plan are
based upon the Companys performance during this time
period and any payout at the end of the period may vary
depending upon the degree to which the actual performance
exceeds the pre-determined threshold, target and maximum
performance levels. Under the 2007 to 2009 long-term incentive
plan, awards earned up to the target level will be settled in
shares of the Companys stock. The portion of any awards
earned in excess of the target up to the maximum payout will be
settled in cash based upon the share price of the Companys
stock at the end of the performance period. Compensation expense
is based upon the current performance projections for the
three-year period, the percentage of requisite service rendered
and the market value of the Companys stock on the
February 15, 2007 grant date. The offset to compensation
expense is recorded within shareholders equity. The
compensation expense for the portion of any payout in excess of
target is based upon the market price of the Companys
stock at the end of the period with the offset recorded as a
liability.
Total share-based compensation expense for the above and
previously existing grants and plans was $1.0 million in
the second quarter 2007 and $0.4 million in the second
quarter 2006. For the first six months of the year, the
comparable expense was $1.9 million in 2007 and
$0.7 million in 2006.
Income taxes were calculated by applying an effective tax rate
of 34.1% against income before income taxes in the second
quarter 2007 and 35.6% in the first six months of 2007. The
differences between the effective rate and the statutory rate in
both periods included the effects of percentage depletion,
foreign source income and deductions, the production deduction
and other factors. In 2006, the effective tax rate was 31.5% in
the second quarter 2007 and 31.7% in the first six months of
2006. The differences between the effective and statutory rates
in those periods were primarily the impact of foreign source
income and percentage depletion. The effective tax rate was
higher in the second quarter and first six months of 2007 than
the respective periods in the prior year due to differences in
income levels, foreign source income, percentage depletion and
other factors.
The difference in the effective rate between the second quarter
2007 and the first quarter 2007 was primarily due to a tax law
change enacted by the State of New York effective early in the
second quarter. This favorable rate change reduced tax expense
and increased net income by approximately $0.2 million, or
$0.01 per share, in the second quarter 2007.
|
|
Note I
|
Income
Taxes Adoption of FIN 48
|
The Company adopted Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109 (FIN 48) as of January 1,
2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. As a result of adopting FIN 48, the
Company recognized a $1.4 million increase to its reserve
for uncertain tax positions, which is included in accrued income
taxes on the Consolidated Balance Sheet. The increase was
accounted for as an adjustment to the retained earnings balance
as of January 1, 2007. The prior years results were
not restated for the adoption of FIN 48.
As of January 1, 2007, the Company had $5.4 million of
unrecognized tax benefits, of which $4.3 million would
affect the effective tax rate if recognized. The gross
unrecognized tax benefits differ from the amount that would
affect the effective tax rate due to the impact of various
offsetting items.
The Company or its subsidiaries files income tax returns in the
United States federal jurisdiction and various state and foreign
jurisdictions. The tax years 1999 through 2006 remain open to
examination for federal and state taxing jurisdictions to which
we are subject. No foreign jurisdiction tax years are open prior
to 2000.
The Company classifies all interest and penalties as income tax
expense. As of January 1, 2007, the Company recorded
$0.1 million of accrued interest and penalties related to
uncertain tax positions.
8
The Company believes that due to a current audit, it is
reasonably possible that the total amount of unrecognized tax
benefits will decrease by approximately $0.1 million within
the next twelve months.
|
|
Note J
|
New
Pronouncements
|
The FASB issued Statement No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115 in the first quarter 2007. The statement
allows entities to value financial instruments and certain other
items at fair value. The statement provides guidance over the
election of the fair value option, including the timing of the
election and specific items eligible for the fair value
accounting. Changes in fair values would be recorded in
earnings. The statement is effective for fiscal years beginning
after November 15, 2007. The Company is evaluating the
impact the adoption of this statement will have, if any, on its
consolidated financial statements.
9
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and
Results of Operations
|
Overview
We are an integrated producer of engineered materials used in a
variety of high performance electrical, electronic, thermal and
structural applications. Major markets for our materials include
telecommunications and computer, data storage, aerospace and
defense, automotive electronics, industrial components and
appliance.
Sales in the second quarter 2007 of $233.6 million were
$46.5 million higher than the second quarter 2006 and were
the second highest quarterly total in our history. This growth
was fueled by a combination of improved demand from the data
storage, defense and other markets, improved pricing in portions
of our business, new products and the pass-through of higher
precious metal prices.
Gross margin was a disappointing 18% of sales in the second
quarter 2007 compared to 21% of sales in the second quarter
2006. An isolated manufacturing quality issue, which has been
resolved, coupled with an inventory loss from a lower of cost or
market charge reduced margins by $8.8 million, or 4% of
sales, in the current quarter. The improved pricing helped to
offset the unfavorable margin impact of the higher copper and
nickel prices, which continued to increase during the quarter.
Operating profit of $12.6 million in the second quarter
2007 improved $1.3 million over the second quarter 2006 as
the $8.8 million charge and higher material and overhead
costs offset the majority of the margin benefit generated by the
higher sales volume and improved pricing.
Cash flow from operations was $11.4 million in the first
half of 2007. This strong cash flow, the proceeds from the
exercise of stock options and the proceeds from the sale of a
small business allowed us to fund capital expenditures, a
pension plan contribution and a $7.4 million reduction in
debt in the first six months of 2007.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions, except per share data
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
233.6
|
|
|
$
|
187.1
|
|
|
$
|
483.9
|
|
|
$
|
354.8
|
|
Operating Profit
|
|
|
12.6
|
|
|
|
11.3
|
|
|
|
49.5
|
|
|
|
20.1
|
|
Income Before Income Taxes
|
|
|
12.0
|
|
|
|
10.2
|
|
|
|
48.2
|
|
|
|
17.9
|
|
Net Income
|
|
|
7.9
|
|
|
|
7.0
|
|
|
|
31.1
|
|
|
|
12.2
|
|
Diluted E.P.S
|
|
$
|
0.38
|
|
|
$
|
0.35
|
|
|
$
|
1.50
|
|
|
$
|
0.62
|
|
Sales of $233.6 million in the second quarter
2007 were 25% higher than second quarter 2006 sales of
$187.1 million while sales of $483.9 million for the
first half of 2007 were 36% higher than sales of
$354.8 million in the first half of 2006.
Sales have grown over the comparable quarter in the prior year
for eighteen consecutive quarters. However, sales were lower in
the second quarter 2007 than the first quarter 2007, breaking
the string of nine consecutive quarters of sales growth. Sales
in the first six months of 2007 were the highest in our history.
Over half of the growth in sales in the first six months of 2007
over the prior year is from ruthenium-based targets for the data
storage market for hard disk drive applications. The demand for
these materials slowed down during the second quarter 2007 from
the first quarter 2007 level, partially due to seasonality
issues, but we anticipate demand to improve over the second
quarter level in the second half of the year as the
perpendicular magnetic recording (PMR) technology is implemented
by our customers in an increasing portion of their hard disk
drive applications.
Sales of precious metal products for wireless telecommunication
and other applications contributed to the sales increase in the
second quarter and first six months of 2007. Sales also
increased in the second quarter 2007 and the first six months of
2007 due to improved pricing on copper-based alloy products sold
into the telecommunications
10
and computer, appliance, aerospace and other markets, offsetting
the lower sales volumes of these products. Sales for defense and
government-related applications grew in each of the first two
quarters of 2007 while the demand from the automotive
electronics market was softer in the first six months of 2007
than it was in 2006.
We use precious metals, including gold, silver, platinum and
palladium in the manufacture of various products. Our sales are
affected by the prices for these metals, as changes in our
purchase price are passed on to our customers in the form of
higher or lower selling prices. The prices for the precious
metals we use on average were higher in the second quarter and
first six months of 2007 than the comparable periods in 2006
resulting in an estimated $3.1 million increase in sales in
the second quarter 2007 as compared to the second quarter 2006
and an estimated $10.7 million increase in sales in the
first six months of 2007 over the first six months of 2006.
International sales were $97.8 million, or 42% of total
sales, in the second quarter 2007 compared to
$61.1 million, or 33% of total sales, in the second quarter
2006. For the first six months of the year, international sales
of $214.1 million in 2007 were 81% higher than
international sales of $118.1 million in 2006. A
significant portion of the international growth in 2007 came
from Asia and a portion of that growth was due to the data
storage market. The effect of translating foreign currency
denominated sales was a favorable $0.5 million in the
second quarter 2007 and a favorable $1.7 million in the
first six months of 2007 as compared to the same periods in
2006. Domestic sales grew 8% in the second quarter 2007 and 14%
in the first half of 2007 over the respective periods of 2006.
The gross margin was $41.8 million, or 18% of
sales, in the second quarter 2007 compared to
$39.8 million, or 21% of sales, in the second quarter 2006.
For the first six months of the year, the gross margin improved
to $111.2 million in 2007, or 23% of sales, from
$74.0 million, or 21% of sales, in 2006.
Gross margin was adversely affected in the second quarter 2007
by an isolated manufacturing quality issue in the production of
ruthenium targets for the data storage market that resulted in
customer returns, additional costs and inventory losses. We
believe that we also temporarily lost sales due to this issue.
The quality issue has been resolved and previously affected
customers have subsequently been placing new sales orders.
Margins were also reduced in the second quarter 2007 by a lower
of cost or market charge on ruthenium refine materials as the
market price of ruthenium declined during the second quarter and
these materials, which have a long processing time, were
purchased at the higher prices earlier in the year. The total
impact of the quality issue (excluding the potential impact of
any lost sales) and the lower of cost or market charge was
$8.8 million, or 4% of sales in the second quarter 2007.
The market price of ruthenium escalated in the second half of
2006 and was significantly higher than the carrying cost of the
inventory as of December 31, 2006. Sales of this existing
lower cost inventory at the current market prices and other
inventory transactions increased total gross margins by
$4.5 million in the second quarter 2007 and
$21.4 million in the first six months of 2007. Due to the
inventory turnover, changes in our pricing strategies and the
decline in ruthenium prices in the second quarter 2007, the
benefit from selling this older ruthenium-based inventory was
lower in the second quarter 2007 than the first quarter 2007; we
anticipate the benefit from selling the remaining inventory from
this stream to be lower in the next two quarters than it was in
the second quarter.
The overall increase in sales volume contributed to the margin
improvement as did the improved pricing from two of our
businesses; the improved pricing helped to offset the impact of
the continuing high cost of copper and nickel. The change in
product mix was slightly favorable in the first half of 2007 as
compared to the first half of 2006.
Selling, general and administrative expenses (SG&A)
were $26.6 million in the second quarter 2007
compared to $27.2 million in the second quarter 2006.
Expenses declined from 15% of sales in the second quarter 2006
to 11% of sales in the second quarter 2007. For the first six
months of the year, SG&A expenses totaled
$55.2 million, or 11% of sales, in 2007 and
$51.1 million, or 14% of sales, in 2006.
Incentive compensation expense was approximately
$1.3 million lower in the second quarter 2007 than the
second quarter 2006 but $2.2 million higher in the first
six months of 2007 than the first six months of 2006 due to
differences in our profitability and the impact of changes in
the market price for our common stock on certain compensation
plans. The expense for other share-based compensation plans,
including restricted stock amortization
11
and stock options, increased $0.3 million in the second
quarter 2007 and $0.6 million in the first six months of
2007 over the respective periods in 2006. Selling and marketing
expenses were higher, mainly internationally, in both the second
quarter and first six months of 2007 than the comparable periods
in 2006 in order to support the higher level of sales and as a
result of our market penetration efforts. The exchange rate
effect on the translation of Brush International, Inc.s
subsidiaries expenses was an unfavorable $0.1 million
in the second quarter 2007 and $0.4 million in the first
six months of 2007 as compared to the respective periods in 2006.
Research and development expenses (R&D) were
$1.3 million in the second quarter 2007 and
$1.0 million in the second quarter 2006. For the first six
months of the year, R&D expenses increased from
$2.0 million in 2006 to $2.6 million in 2007. Our
R&D efforts remain closely aligned with our marketing and
manufacturing operations and are focused on developing new
products and improving processes.
Other-net
expense for the second quarter and first half 2007 and
2006 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(Expense)
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Exchange gains (losses)
|
|
$
|
(0.5
|
)
|
|
$
|
0.7
|
|
|
$
|
(0.8
|
)
|
|
$
|
1.3
|
|
Directors deferred
compensation
|
|
|
0.5
|
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
Derivative ineffectiveness
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.4
|
|
Metal financing fee
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
|
|
(0.9
|
)
|
Loss on sale of business
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
Other items
|
|
|
(1.0
|
)
|
|
|
(0.7
|
)
|
|
|
(1.4
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(3.9
|
)
|
|
$
|
(0.7
|
)
|
The weaker U.S. dollar relative to the strike prices in the
hedge contracts that matured resulted in exchange losses in the
second quarter and first half of 2007 as opposed to exchange
gains in the comparable periods of 2006.
The income or expense on the directors deferred
compensation plan is a function of the outstanding shares in the
plan and the movements in the share price of our stock; in the
second quarter 2007, the share price declined resulting in
$0.5 million of income. However, the share price was higher
at the end of the second quarter 2007 than it was at the end of
the prior year which resulted in an expense for the first half
of 2007. The share price increased in both the second quarter
and first six months of 2006.
Derivative ineffectiveness results from the changes in the fair
value of an interest rate swap that does not qualify for hedge
accounting treatment. Gains on the swap result from increases in
market interest rates while losses are caused by declines in
interest rates.
In the first quarter of 2007, we sold substantially all of the
operating assets and liabilities of Circuits Processing
Technology, Inc. (CPT), a wholly owned subsidiary that
manufactures thick film circuits, for $2.2 million. CPT,
which was acquired in 1996, was a small operation with limited
growth opportunities. The loss on the sale was $0.3 million.
Other-net
expense also includes amortization of intangible assets, cash
discounts, gains and losses on the disposal of fixed assets and
other non-operating items.
Operating profit was $12.6 million in the
second quarter 2007, an improvement of $1.3 million over
the $11.3 million profit in the second quarter 2006. For
the first half of the year, operating profit improved
$29.4 million, from $20.1 million in 2006 to
$49.5 million in 2007. This improvement resulted from the
margin earned on the higher sales offset in part by the higher
material costs, the impact of the isolated quality issue and
higher SG&A and
other-net
expenses.
Interest expense was $0.6 million in the
second quarter 2007 compared to $1.1 million in the second
quarter 2006. For the first half of the year, interest expense
was $1.3 million in 2007 and $2.3 million in 2006. The
average level of outstanding debt was lower in the second
quarter 2007 and first six months of 2007 than the comparable
12
periods in 2006. Interest capitalized in association with
long-term capital projects was immaterial in the second quarter
and first half of both years.
Income before income taxes was $12.0 million
in the second quarter 2007 compared to $10.2 million in the
second quarter 2006, a $1.8 million, or 18%, improvement.
Income before income taxes was $48.2 million in the first
half of 2007, having grown $30.3 million from the income
before income taxes of $17.9 million in the first half of
2006.
The tax expense was calculated by applying a
provision of 34.1% against the income before income taxes in the
second quarter of 2007 while a provision of 31.5% was used in
the second quarter 2006. The effective tax rate was 35.6% in the
first half of 2007 and 31.7% in the first half of 2006. The
effects of percentage depletion, foreign source income,
executive compensation, the production deduction and other
factors were the major factors for the difference between the
effective and statutory rates in the second quarter and first
six months of 2007. The effects of foreign source income and
percentage depletion were the major causes for the difference
between the effective and statutory rates in the second quarter
and first six months of 2006. The tax rate was higher in the
second quarter and first half of 2007 than the comparable
periods in 2006 due to the higher level of taxable income in
2007, differences in foreign tax benefits and other factors.
The effective tax rate was lower in the second quarter 2007 than
it was in the first quarter 2007 largely due to the enactment of
favorable tax law change in New York State early in the second
quarter 2007. The lower tax rate created a net income benefit of
$0.2 million, or $0.01 per share, in the second quarter
2007.
Net income was $7.9 million in the second
quarter 2007, an improvement of $0.9 million, or 14%, over
the net income of $7.0 million earned in the second quarter
2006. Net income for the first half of 2007 was
$31.1 million having grown $18.9 million from the net
income of $12.2 million in 2006. Diluted earnings per share
were $0.38 in the second quarter 2007 and $0.35 in the second
quarter 2006, while diluted earnings per share for the first
half of the year were $1.50 in 2007 and $0.62 in 2006.
Prior to year-end 2006, we aggregated our businesses into two
reporting segments. The Metal Systems Group included Alloy
Products, Beryllium Products and Technical Materials, Inc. (TMI)
and the Microelectronics Group included Williams Advanced
Materials Inc. (WAM) and Electronic Products. Beginning with
year-end 2006, we are reporting our four largest operating
segments separately. WAM and its subsidiaries are reported as
Advanced Material Technologies and Services. Alloy Products,
including Brush Resources Inc., is reported as Specialty
Engineered Alloys. Beryllium Products is now known as Beryllium
and Beryllium Composites while TMI is reported as Engineered
Material Systems.
In addition, Brush Ceramic Products Inc., a wholly owned
subsidiary that previously was part of Electronic Products, has
been merged into the Beryllium Products operating segment and is
part of the Beryllium and Beryllium Composites reporting
segment. Brush Ceramic Products is a small operation that is
under common management with and has similar operating concerns
as Beryllium Products. The remaining portions of Electronic
Products, due to their immateriality and in compliance with the
quantitative thresholds of Statement No. 131, are now
included in the All Other column of our segment reporting. The
All Other column also includes our parent company expenses,
other corporate charges and the operating results of BEM
Services, Inc., a wholly owned subsidiary that provides
administrative and financial oversight services to our other
businesses on a cost-plus basis.
With the appointment of our new chief executive officer in 2006,
we believe these changes to our segment reporting are consistent
with how the company is managed. Prior year data has been
re-cast to be consistent with the current year format.
The operating profit within All Other was $5.1 million
higher in the second quarter 2007 than the second quarter 2006
due to lower retirement expenses recorded at the corporate
office, lower incentive compensation expense, the income
difference in the directors deferred compensation plan between
periods, improved profit contribution from Zentrix Technologies
Inc. and other factors.
13
Advanced
Material Technologies and Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
121.3
|
|
|
$
|
82.9
|
|
|
$
|
264.9
|
|
|
$
|
158.3
|
|
Operating Profit
|
|
$
|
4.9
|
|
|
$
|
9.6
|
|
|
$
|
36.8
|
|
|
$
|
18.6
|
|
Advanced Material Technologies and Services
manufactures precious, non-precious and specialty metal
products, including vapor deposition targets, frame lid
assemblies, clad and precious metal preforms, high temperature
braze materials, ultra-fine wire and specialty inorganic
materials. Major markets for these products include data
storage, medical and the wireless, semiconductor, photonic and
hybrid sectors of the microelectronics market. Advanced Material
Technologies and Services also has metal cleaning operations and
an in-house refinery that allows for the reclaim of precious
metals from its own or customers scrap. Due to the high
cost of precious metal products, we emphasize quality, delivery
performance and customer service in order to attract and
maintain applications. This segment has domestic facilities in
New York, California and Wisconsin and international facilities
in Asia and Europe.
Sales from Advanced Material Technologies and Services of
$121.3 million in the second quarter 2007 were 46% higher
than sales of $82.9 million in the second quarter 2006.
Sales for the first half of 2007 of $264.9 million were 67%
higher than sales of $158.3 million in the first half of
2006.
Advanced Material Technologies and Services adjusts its selling
prices daily to reflect the current cost of the precious metals
sold. The cost of the metal is generally a pass-through to the
customer and a margin is generated on the fabrication efforts
irrespective of the type or cost of the metal used in a given
application. Therefore, the cost and mix of metals sold will
affect sales but not necessarily the margins generated by those
sales. The prices of gold, silver, platinum and palladium were
higher on average in the first half of 2007 which in turn
increased sales by $3.1 million in the second quarter 2007
and $10.7 million in the first six months of 2007 over the
respective periods in 2006.
The majority of the sales growth for this segment in the second
quarter and first six months of 2007 was generated by
ruthenium-based products manufactured at the Brewster, New York
facility for media applications within the data storage market.
Both volumes and prices for ruthenium products were higher in
the first quarter 2007 than in the first quarter 2006. The
higher demand as compared to 2006 was fueled by the continued
development and deployment of the PMR technology, which uses
layers of ruthenium and other materials on hard disk drives
resulting in a significant increase in data storage capacity.
The demand slowed in the second quarter 2007 relative to the
first quarter in part due to seasonality of our customers
production schedules.
Sales of vapor deposition targets for photonics and wireless
applications increased in the second quarter 2007 over the
second quarter 2006 and in the first six months of 2007 over the
first six months of 2006. These products are manufactured at the
Buffalo, New York facility and a portion of the growth was due
to the metal price effect referenced above. Sales of inorganic
materials from CERAC, incorporated, which was acquired in the
first quarter 2006, and sales of lids from Thin Film Technology,
Inc., which was acquired in the fourth quarter 2005, contributed
to the growth in the segments sales for the second quarter
and first six months of 2007. Sales through the recently created
offices in Asia have also increased in the first six months of
2007.
We opened a new facility in the Czech Republic in the second
quarter 2007 that is designed to provide shield kit cleaning
services to customers in central Europe. We are also
constructing a new manufacturing facility in China and expanding
two of our New York facilities in order to meet the growing
demand for Advanced Material Technologies and Services
product offerings.
The gross margin on Advanced Material Technologies and
Services sales was $15.9 million (13% of sales) in
the second quarter 2007 and $18.4 million (22% of sales) in
the second quarter 2006. For the first half of the year, gross
margin was $57.9 million in 2007 and $34.8 million, an
improvement of $23.1 million. The gross margin was 22% of
sales in the first half of 2007, unchanged from the same period
in the prior year.
14
The previously discussed quality issue and lower of cost or
market charge of $8.8 million that was recorded against the
Advanced Material Technologies and Services segment reduced the
gross margin as a percent of sales by 7 points in the second
quarter 2007 and 3 points for the first six months of 2007. The
quality issue was resolved by the end of the second quarter.
The margin benefit from the turnover of the lower cost ruthenium
inventory originally acquired in 2006 of $4.5 million in
the second quarter 2007 and $21.4 million for the first six
months of 2007 was also recorded against this segment. This
benefit will not repeat to this extent in future periods as the
inventory turns over and as a result of a change in our pricing
practice that now bases the selling price of the ruthenium
content of products sold on our purchase price.
The higher sales volumes generated additional contribution
margin in both the second quarter 2007 and first six months of
2007 over the respective periods in the prior year. The change
in product mix effect was slightly unfavorable in the first six
months of 2007 compared to the first six months of 2006.
Manufacturing overhead costs were only $1.3 million higher
in the second quarter 2007 and $1.5 million higher in the
first six months of 2007 than same periods in 2006 despite the
significant increase in sales.
Total SG&A, R&D and
other-net
expenses were $11.0 million (9% of sales) in the second
quarter 2007 and $8.7 million (11% of sales) in the second
quarter 2006. These expenses totaled $21.0 million (8% of
sales) in the first half of 2007 compared to $16.2 million
(10% of sales) in the first half of 2006.
The expense increase for both the quarter and year-to-date
period was primarily a result of and in order to support the
higher level of business. Selling and marketing expenses
increased due to market penetration efforts, including costs
incurred by the overseas operations. Administrative costs
increased as a result of additional manpower and costs
associated with managing a growing business. A portion of the
administrative cost increase was associated with legal and other
initial
set-up costs
for the new overseas facilities. Corporate charges were
$0.5 million higher in the second quarter and
$1.1 million higher for the first six months of the year
while incentive compensation expense was $0.2 million
higher in the second quarter and $0.4 million higher in the
first six months of 2007 over the comparable periods in 2006.
The metal financing fee was also slightly higher in the first
six months of 2007 than it was in the same period last year.
Operating profit from Advanced Material Technologies and
Services was $4.9 million in the second quarter 2007
compared to $9.6 million in the second quarter 2006 as the
impact of the quality issue and the lower of cost or market
charge more than offset the margin benefits of the higher sales
volume. For the first half of the year, operating profit was
$36.8 million in 2007 and $18.6 million in 2006, an
improvement of $18.2 million. Operating profit as a percent
of sales also improved from 12% in the first half of 2006 to 14%
in the first half of 2007.
Specialty
Engineered Alloys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
75.5
|
|
|
$
|
69.0
|
|
|
$
|
145.9
|
|
|
$
|
129.4
|
|
Operating Profit
|
|
$
|
1.4
|
|
|
$
|
1.5
|
|
|
$
|
6.7
|
|
|
$
|
1.9
|
|
Specialty Engineered Alloys manufactures and sells
three main product families:
Strip products, the larger of the product
families, include thin gauge precision strip and small diameter
rod and wire. These copper and nickel beryllium alloys provide a
combination of high strength, high conductivity, high
reliability and formability for use as connectors, contacts,
switches, relays and shielding. Major markets for strip products
include telecommunications and computer, automotive electronics
and appliances;
Bulk products are copper and nickel based alloys
manufactured in plate, rod, bar, tube and other customized forms
that, depending upon the application, may provide superior
strength, corrosion or wear resistance or thermal conductivity.
The majority of bulk products contain beryllium. Applications
for bulk products include plastic mold tooling, bearings,
bushings, welding rods, oil and gas drilling components and
telecommunications housing equipment; and,
15
Beryllium hydroxide is produced by Brush Resources
Inc., a wholly owned subsidiary, at its milling operations in
Utah from its bertrandite mine and purchased beryl ore. The
hydroxide is used primarily as a raw material input in the
manufacture of strip and bulk products and by the Beryllium and
Beryllium Components segment. External sales of hydroxide from
the Utah operations totaled $2.5 million in the second
quarter 2007; there were no sales of hydroxide in 2006 until the
third quarter.
Strip and bulk products are manufactured at facilities in Ohio
and Pennsylvania and are distributed worldwide through a network
of company-owned service centers and outside distributors and
agents.
Sales by Specialty Engineered Alloys of $75.5 million in
the second quarter 2007 were a 10% improvement over sales of
$69.0 million in the second quarter 2006 while sales of
$145.9 million in the first six months of 2007 were 13%
higher than sales of $129.4 million in the first six months
of 2006. This improvement was due to higher selling prices, a
slight favorable change in product mix and the sales of
hydroxide in 2007 as the strip and bulk product volumes sold in
2007 were lower in the comparable periods in 2006. The pricing
improvement resulted from an increased percentage of sales
subject to the pass-through of the current base metal (copper
and nickel) prices. Shipment volumes of strip products declined
6% in the second quarter and 9% in the first six months of 2007
compared to the same periods last year. The majority of this
decline was in the lower priced, lower beryllium-containing
strip alloys while volumes of rod and wire products increased in
2007 over 2006. Bulk product volumes were 8% lower in the second
quarter and 5% lower in the first half of 2007 versus the
comparable periods in 2006.
Sales of Specialty Engineered Alloys into South Asia softened in
the first six months of 2007, primarily from the
telecommunications and computer market, including materials for
handset applications. Sales in Europe, which have been strong
across various market segments in 2007, will tend to soften in
the third quarter due to customer seasonal slowdowns. The
Japanese and North American markets have been firm in the first
half of 2007, with the domestic automotive market starting to
gain strength. New products also continued to contribute to the
growth in Specialty Engineered Alloys sales in 2007. The
book-to-bill ratio for this segment was unfavorable in the
second quarter 2007.
The gross margin on Specialty Engineered Alloy sales was
$14.8 million in the second quarter 2007 compared to
$15.7 million in the second quarter 2006. The margin
declined from 23% of sales in the second quarter 2006 to 20% of
sales in the second quarter 2007. For the first six months of
the year, gross margin of $33.6 million in 2007 improved
$5.4 million from the $28.2 million generated in 2006.
Margin also improved from 22% of sales in 2006 to 23% of sales
in 2007.
The gross margin benefit from the improved pricing was more than
offset by several factors in the second quarter 2007. Sales
volumes were lower than the second quarter 2006 and production
volumes were even lower as inventory was reduced in the second
quarter 2007 while inventory increased in the second quarter
2006. Yield differences and other operating inefficiencies also
served to reduce margins in the second quarter as compared to
the same period in 2006. Yields started to improve late in the
second quarter 2007. The cost of copper and nickel is passed on
to customers based upon the cost at the time of receipt of the
order; the cost of these materials increased sharply during the
current quarter and will be recovered as the orders are shipped.
Over time, our selling price and purchase price are in balance,
but timing differences between the receipt and actual
fulfillment of the order can impact margins in a given period,
especially when there is a significant movement in prices. The
improved pricing more than offset the unfavorable gross margin
impact of the volume differences for the first six months of
2007. Manufacturing overhead spending was relatively unchanged
in the first six months of 2007 from the first six months of
2006.
Total SG&A, R&D and
other-net
expenses of $13.4 million (18% of sales) in the second
quarter 2007 were down $0.9 million from the expense total
of $14.3 million (21% of sales) in the second quarter 2006.
Expenses for the first six months of the year totaled
$26.9 million in 2007 and $26.3 million in 2006.
Expenses declined from 20% of sales in the first six months of
2006 to 18% of sales in the first six months of 2007.
The lower expenses in the second quarter 2007 resulted from a
reduction in incentive compensation expense due to changes in
the level of profitability relative to the plan targets.
Corporate charges were also lower in the current quarter and six
month period than they were a year ago. Offsetting the benefits
of these lower expenses in the first six months of the year was
an increase to selling and marketing expenses, primarily
international, and a
16
difference in foreign exchange gains and losses (in 2007,
Specialty Engineered Alloys incurred exchange losses compared to
exchange gains in 2006).
The operating profit from Specialty Engineered Alloys was
$1.4 million in the second quarter 2007, down
$0.1 million from the operating profit generated in the
second quarter 2006. For the first six months of the year,
operating profit was $6.7 million in 2007 (5% of sales) and
$1.9 million (2% of sales) in 2006.
Beryllium
and Beryllium Composites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
16.5
|
|
|
$
|
12.7
|
|
|
$
|
31.7
|
|
|
$
|
23.1
|
|
Operating Profit
|
|
$
|
2.4
|
|
|
$
|
0.9
|
|
|
$
|
4.6
|
|
|
$
|
1.1
|
|
Beryllium and Beryllium Composites manufactures
beryllium-based metals and metal matrix composites in rod, tube,
sheet, foil and a variety of customized forms at the Elmore,
Ohio and Fremont, California facilities. These materials are
used in applications that require high stiffness
and/or low
density and they tend to be premium priced due to their unique
combination of properties. Beryllium Products also manufactures
beryllia ceramics through our wholly owned subsidiary Brush
Ceramic Products in Tucson, Arizona. Defense and
government-related applications, including aerospace, is the
largest market for Beryllium Products, while other markets
served include medical, telecommunications and computer,
electronics (including acoustics), optical scanning and
automotive.
Sales by Beryllium and Beryllium Composites were
$16.5 million in the second quarter 2007, an improvement of
$3.8 million over the second quarter 2006 while sales in
the first six months of 2007 of $31.7 million improved
$8.6 million (or 37%) over the first six months of 2006.
Sales for defense applications from the Elmore facility
increased in both the second quarter and the first six months of
2007 over the comparable periods in 2006. The order backlog for
defense applications remained strong as well. Sales for medical
and industrial x-ray applications from the Fremont facility were
also higher in the first half of 2007, primarily in the first
quarter. Sales of beryllium blanks for the European nuclear
fusion reactor project (JET) were $1.1 million in the
second quarter 2007 and $1.7 million in the first six
months of 2007; there were no shipments for this project in the
first half 2006. Sales for the James Webb Space Telescope
totaled $1.7 million in the first six months of 2006; sales
for this project were immaterial in 2007 as the project was
substantially completed in 2006. Sales of beryllium aluminum
products improved for the quarter and first six months of the
year while sales of beryllia ceramics were down slightly in the
second quarter 2007 as compared to the second quarter 2006 but
unchanged for the first six months of the year.
The gross margin on Beryllium and Beryllium Composite sales was
$5.9 million in the second quarter 2007, an improvement of
$2.5 million over the gross margin of $3.4 million
earned in the second quarter 2006. The gross margin also
improved from 27% of sales in the second quarter 2006 to 36% of
sales in the second quarter 2007. For the first six months of
the year, gross margin was $10.9 million, or 34% of sales,
in 2007 and $6.0 million, or 26% of sales, in 2006. The
majority of the increase in gross margin in the quarter and six
month periods resulted from the benefits of the higher sales.
The gross margin also increased due to improved scrap
utilization at the Elmore facility and as a result of
improvements at the Fremont facility. Manufacturing overhead
costs for manpower and other items were slightly lower in the
second quarter 2007 than the second quarter 2006 but
$0.3 million higher in the first six months of 2007 than
the first six months of 2006.
SG&A, R&D and
other-net
expenses for Beryllium and Beryllium Composites were
$3.5 million, or 21% of sales, in the second quarter 2007
compared to $2.5 million, or 20% of sales, in the second
quarter 2006. For the first six months of the year, expenses
were $6.4 million in 2007 and $4.9 million in 2006.
The increase in expense was due to higher incentive compensation
accruals, increased selling and marketing efforts, higher
corporate charges and foreign currency exchange losses.
Operating profit for Beryllium and Beryllium Composites was
$2.4 million in the second quarter 2007, an improvement of
$1.5 million over the operating profit of $0.9 million
in the second quarter 2006 while operating
17
profit for the first six months of 2007 of $4.6 million was
a $3.5 million improvement over the profit of
$1.1 million generated in the first six months of 2006.
Operating profit was 14% of sales in the first six months of
2007 and 5% of sales in the first six months of 2006.
Engineered
Material Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
|
|
Second Quarter Ended
|
|
|
Ended
|
|
|
|
June 29,
|
|
|
June 30,
|
|
|
June 29,
|
|
|
June 30,
|
|
Millions
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
16.9
|
|
|
$
|
18.0
|
|
|
$
|
33.6
|
|
|
$
|
35.9
|
|
Operating Profit
|
|
$
|
0.7
|
|
|
$
|
1.2
|
|
|
$
|
1.3
|
|
|
$
|
2.6
|
|
Engineered Material Systems includes clad inlay
and overlay metals, precious and base metal electroplated
systems, electron beam welded systems, contour profiled systems
and solder-coated metal systems. These specialty strip metal
products provide a variety of thermal, electrical or mechanical
properties from a surface area or particular section of the
material. Our cladding and plating capabilities allow for a
precious metal or brazing alloy to be applied to a base metal
only where it is needed, reducing the material cost to the
customer as well as providing design flexibility. Major
applications for these products include connectors, contacts and
semiconductors. The largest markets for Engineered Material
Systems are automotive and telecommunications and computer
electronics, while the energy and defense and medical electronic
markets offer further growth opportunities. Engineered Material
Systems are manufactured at our Lincoln, Rhode Island facility.
Engineered Material Systems sales were $16.9 million
in the second quarter 2007, a decline of 6% from sales of
$18.0 million in the second quarter 2006. For the first six
months of the year, sales of $33.6 million were 6% lower
than sales of $35.9 million in 2006.
The decline in sales in the second quarter 2007 and the first
six months of 2007 from the comparable periods in 2006 was
largely due to softer demand from the automotive electronics
market. A price increase implemented during the first quarter
2007 offset a portion of the lower volume. Sales of materials
for disk drive applications, which were higher in the second
quarter and first six months of 2007 than the same periods last
year, and other new products also offset a portion of the
softness in sales of traditional products from Engineered
Material Systems. The sales order entry rate strengthened across
various product lines late in the second quarter 2007.
The gross margin on Engineered Material Systems sales was
$2.8 million, or 17% of sales, in the second quarter 2007
and $3.5 million, or 19% of sales, in the second quarter
2006. For the first six months of the year, gross margin was
$5.4 million, or 16% of sales, in 2007 and
$6.7 million, or 19% of sales, in 2006.
In addition to the lower volume, margins declined due to an
unfavorable change in product mix during the second quarter 2007
and first six months of 2007. Sales grew in various products
with a higher material content which, in turn, carry lower
contribution margins, while sales for applications with higher
contribution margins declined slightly. Yield and process
improvements have helped to mitigate these unfavorable margin
effects as did a price increase implemented in the first quarter
2007. Year-to-date margins were reduced by non-recurring
expenses incurred in the first quarter 2007 for a safety
training program and equipment relocations and related building
expenses associated with preparing the facility for an
additional capital investment to be made later in 2007.
Total SG&A, R&D and
other-net
expenses were $2.1 million in the second quarter 2007, a
reduction of $0.2 million from the second quarter 2006. For
the first six months of the year, total expenses of
$4.1 million in 2007 were $0.1 million lower than
2006. There were no material differences in the various expense
categories between years.
Operating profit from Engineered Material Systems was
$0.7 million in the second quarter 2007 compared to
$1.2 million in the second quarter 2006 while for the first
six months of the year, operating profit was $1.3 million
in 2007 and $2.6 million in 2006. Operating profit declined
from 7% of sales in the first six months of 2006 to 4% in the
first six months of 2007.
18
Legal
One of our subsidiaries, Brush Wellman Inc., is a defendant in
proceedings in various state and federal courts brought by
plaintiffs alleging that they have contracted chronic beryllium
disease or other claims as a result of exposure to beryllium.
Plaintiffs in beryllium cases seek recovery under negligence and
various other legal theories and seek compensatory and punitive
damages, in many cases of an unspecified sum, as well as other
remedies. Spouses, if any, claim loss of consortium.
The following table summarizes the associated activity with
beryllium cases.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
June 29, 2007
|
|
|
Mar. 30, 2007
|
|
|
|
|
Total cases pending
|
|
|
10
|
|
|
|
12
|
|
Total plaintiffs
|
|
|
32
|
|
|
|
52
|
|
Number of claims (plaintiffs)
filed during period ended
|
|
|
0(0
|
)
|
|
|
0(0
|
)
|
Number of claims (plaintiffs)
settled during period ended
|
|
|
0(0
|
)
|
|
|
0(0
|
)
|
Aggregate cost of settlements
during period ended (dollars in thousands)
|
|
$
|
0
|
|
|
$
|
0
|
|
Number of claims (plaintiffs)
otherwise dismissed
|
|
|
2(20
|
)
|
|
|
1(2
|
)
|
Settlement payment and dismissal for a single case may not occur
in the same period.
Additional beryllium claims may arise. Management believes that
it has substantial defenses in these cases and intends to
continue to contest the suits vigorously. Employee cases, in
which plaintiffs have a high burden of proof, have historically
involved relatively small losses to us. Non-employee plaintiffs
(typically employees of customers or contractors) face a lower
burden of proof than do employees or former employees, but these
cases are generally covered by varying levels of insurance. We
recorded a reserve for beryllium litigation of $1.7 million
as of June 29, 2007 and $2.1 million as of
December 31, 2006. We recorded a receivable for recoveries
from our insurance carriers on insured claims of
$1.8 million as of June 29, 2007 and $2.0 million
as of December 31, 2006. We reserved an additional
$0.4 million at both June 29, 2007 and
December 31, 2006 for insolvencies related to claims still
outstanding as well as claims for which partial payments have
been received.
Although it is not possible to predict the outcome of the
litigation pending against our subsidiaries and us, we provide
for costs related to these matters when a loss is probable and
the amount is reasonably estimable. Litigation is subject to
many uncertainties, and it is possible that some of these
actions could be decided unfavorably in amounts exceeding our
reserves. An unfavorable outcome or settlement of a pending
beryllium case or additional adverse media coverage could
encourage the commencement of additional similar litigation. We
are unable to estimate our potential exposure to unasserted
claims.
While we are unable to predict the outcome of the current or
future beryllium proceedings, based upon currently known facts
and assuming collectibility of insurance, we do not believe that
resolution of these proceedings will have a material adverse
effect on our financial condition or cash flow. However, our
results of operations could be materially affected by
unfavorable results in one or more of these cases. As of
June 29, 2007, two purported class actions were pending.
Regulatory Matters. Standards for exposure to
beryllium are under review by the United States Occupational
Safety and Health Administration and by other governmental and
private standard-setting organizations. One result of these
reviews will likely be more stringent worker safety standards.
More stringent standards may affect buying decisions by the
users of beryllium-containing products. If the standards are
made more stringent or our customers decide to reduce their use
of beryllium-containing products, our operating results,
liquidity and capital resources could be materially adversely
affected. The extent of the adverse effect would depend on the
nature and extent of the changes to the standards, the cost and
ability to meet the new standards, the extent of any reduction
in customer use and other factors that cannot be estimated.
19
Financial
Position
Net cash provided from operating activities was
$11.4 million in the first half of 2007 as net income,
changes in various liabilities and the benefits of depreciation
more than offset the increases in accounts receivable and
inventory. The cash flow provided from operations in the second
quarter 2007 was $16.1 million compared to a use of cash in
operations of $4.7 million in the first quarter 2007. Cash
balances stood at $12.1 million at the end of the second
quarter 2007, a decline of $3.5 million from
December 31, 2006 as the cash flow from operations coupled
with the proceeds from the exercise of stock options and the
sale of a small business were used to fund capital expenditures
and reduce debt in the first six months of 2007.
Accounts receivable increased $27.6 million,
or 32%, during the first half of 2007, largely due to the higher
sales in 2007. Sales in the second quarter 2007 were 12% higher
than sales in the fourth quarter 2006. Receivables also
increased due to a slower average collection time, as the days
sales outstanding (DSO), a measure of the average time to
collect receivables, increased from a very low level as of year
end 2006. Accounts written off to bad debt expense and
adjustments to the bad debt allowance were less than
$0.1 million in the first half of 2007.
Inventories totaled $163.2 million, an
increase of $11.2 million, or 7%, during the first half of
2007. The majority of the inventory increase in the first half
of the year was in Advanced Material Technologies and Services
and specifically at the Brewster facility. These inventories
declined in the second quarter 2007, partially due to the lower
price of ruthenium. Inventories also increased within Beryllium
and Beryllium Composites largely due to the purchase of
beryllium ingot from the government stockpile late in the second
quarter. This material will be used as feedstock during the
upcoming quarters. Inventories within Specialty Engineered Alloy
were lower at the end of the second quarter 2007 than at the end
of last year as inventory pounds declined 4%. Inventories at
Engineered Material Systems also declined slightly. While the
total inventory level has increased, the inventory turnover
ratio, a measure of how efficiently inventory is sold, improved
in the second quarter 2007 over year end 2006.
We use the last in, first out (LIFO) method for valuing a large
portion of our domestic inventories. By so doing, the most
recent cost of various raw materials, including gold, copper and
nickel, is charged to cost of sales in the current period. The
older, and typically lower, costs are used to value the
inventory on hand. Therefore, current changes in the cost of raw
materials subject to the LIFO valuation method have only a
minimal impact on changes in the inventory carrying value. Other
materials, including ruthenium, are not valued using the LIFO
method. Portions of the ruthenium inventory stream can have a
long processing time and therefore these inventories can be
susceptible to a lower of cost or market charge when there is a
significant reduction in rutheniums market price, as was
the case in the second quarter 2007.
Prepaid expenses of $15.3 million as of the
end of the second quarter 2007 increased $1.3 million from
year-end 2006, as various prepaid balances, including insurance,
manufacturing supplies and other items increased due to the
higher level of business activity and the timing of payments.
Prepaid expenses included the fair value of derivatives of
$0.7 million as of the end of the second quarter, an
increase of $0.1 million from December 31, 2006.
Capital expenditures for property, plant and
equipment totaled $11.2 million while expenditures for mine
development activities totaled $6.2 million in the first
half of 2007 as total capital spending exceeded the level of
depreciation for the first time in a number of periods. Spending
within the Advanced Material Technologies and Services segment
totaled $5.8 million and included the construction of two
facilities overseas and the expansion of two domestic facilities
as previously noted. Engineered Material Systems is installing
new equipment and rearranging the existing equipment in order to
create a new efficient high technology work center. Specialty
Engineered Alloys has various projects underway to upgrade
and/or
replace existing discrete pieces of equipment. Brush Resources
continued its work on opening a new bertrandite ore mine in
Utah; we anticipate the mine will start producing ore in 2008.
Other liabilities and accrued items of
$51.5 million at the end of the second quarter 2007 were
$0.7 million lower than the balance at the beginning of the
year. The reduction to the incentive accruals due to the
payments made for 2006 in the first quarter 2007 net of the
expense for the current year was mostly offset by the charge for
payments to be made for the quality issue, higher fringe benefit
accruals and other items. Utility accruals also declined during
2007 due to seasonal differences.
20
Unearned revenue, which is a liability
representing products invoiced to customers but not shipped, was
$1.7 million as of June 29, 2007 compared to
$0.3 million as of December 31, 2006. Revenue and the
associated margin will be recognized for these transactions when
the goods ship, title passes and all other revenue recognition
criteria are met. Invoicing in advance of the shipment, which is
only done is certain circumstances, allows us to collect cash
sooner than we would otherwise.
Other long-term liabilities were $9.5 million
as of the end of the second quarter 2007, a decline of
$2.1 million from the prior year end. This decline was due
to differences for the long-term liability under employee
compensation plans; the liability under a plan that will be paid
in the first quarter 2008 was reclassified from long term as of
December 31, 2006 to short term as of March 30, 2007.
Other long-term liabilities, including the reserve for CBD
litigation and the long-term portion of an interest rate
derivative financial instrument, changed by minor amounts during
the first half of 2007.
The retirement and post-employment obligation balance
was $57.3 million as of June 29, 2007 compared
to $59.1 million at December 31, 2006. This balance
represents the long-term liability under our domestic defined
benefit pension plan, the retiree medical plan and other
retirement plans and post-employment obligations. We made a
$3.8 million contribution to the domestic pension plan in
the first quarter 2007; we do not anticipate making any
additional contributions to the plan during the second half of
2007. The domestic pension plan expense was $2.2 million in
the first six months of 2007 (see Note C to the
Consolidated Financial Statements). The liability also changed
during the quarter as a result of the other plans expenses
less payments made under the retiree medical and other
retirement plans.
Total debt of $41.6 million at the end of the
second quarter 2007 was $7.4 million lower than total debt
of $49.0 million at December 31, 2006. Debt increased
in the first quarter 2007 over the year-end 2006 balance in
order to finance the growth in accounts receivable and
inventories, the payment of the 2006 employee incentive
compensation in March 2007 and the pension plan contribution in
that period. Debt then declined in the second quarter as a
result of the improved cash flow from operations and the
proceeds from the exercise of stock options. As of June 29,
2007, short-term debt totaled $30.8 million and included
foreign currency denominated loans, a gold denominated loan and
short-term domestic borrowings under the revolving credit
agreement. The current portion of long-term debt totaled
$0.6 million as of June 29, 2007 while long-term debt
was $10.2 million, a decline of $10.0 million from the
prior year end. We were in compliance with all of our debt
covenants as of the end of the second quarter 2007.
We received $4.9 million for the exercise of approximately
291,000 options to purchase shares of our common stock during
the first half 2007.
We adopted FASB Interpretation No. 48, Accounting for
Uncertainties in Income Taxes, an interpretation of FASB
Statement No. 109 (FIN 48) as of
January 1, 2007. FIN 48 provides guidance on the
financial statement recognition, measurement, treatment and
disclosure of a tax position taken or expected to be taken on a
tax return as well as the associated interest and penalties. As
a result of adopting FIN 48, we increased our accrued
income tax payable by $1.4 million with the offset recorded
as a charge against retained earnings as of January 1,
2007. Prior year results were not restated for the adoption of
FIN 48. Charges to the income statement in the first half
of 2007 as a result of FIN 48 were immaterial.
Total shareholders equity was
$326.6 million at the end of the second quarter 2007
compared to $291.0 million at the beginning of the year.
This $35.6 million increase was primarily due to
comprehensive income of $27.5 million (see Note E to
the Consolidated Financial Statements), the exercise of options
and the tax benefits from the exercise of options less the
$1.4 million charge from the adoption of FIN 48.
The balance outstanding under the off-balance sheet precious
metal consigned inventory arrangements totaled
$47.4 million at the end of the second quarter 2007, a
decrease of $14.7 million during the first six months of
the year due to lower quantities of metal on-hand offset in part
by higher average prices.
There have been no substantive changes in the summary of
contractual obligations under long-term debt agreements,
operating leases and material purchase commitments as of
June 29, 2007 from the year-end 2006 totals as disclosed on
page 28 of our annual report to shareholders for the period
ended December 31, 2006.
21
Net cash provided from operations was $5.1 million in the
first half of 2006 as net income, changes in various liabilities
and the benefits of depreciation more than offset the increases
in accounts receivable and inventory. Accounts receivable
increased $17.6 million, or 25%, in the first half of 2006,
due to the higher sales volume as the DSO improved during the
period. Inventories increased $27.8 million, or 27%, in the
first half 2006 in order to support the higher sales volume. The
inventory turnover ratio was unchanged. The majority of the
inventory increase was in the Advanced Material Technology and
Services and Specialty Alloy Products segments. Capital
expenditures totaled $6.0 million in the first half of 2006
as spending remained below the level of depreciation. In
addition to the $6.0 million of capital spending, we
acquired the stock of CERAC, incorporated for $26.2 million
in the first quarter 2006. Other liabilities and accrued items
increased $6.7 million primarily due to higher incentive
compensation accruals. We received $7.0 million for the
exercise of approximately 491,000 stock options in the first
half of 2006. Total debt of $79.3 million as of the end of
the second quarter was $22.2 million higher than the prior
year end, mainly as a result of funding the CERAC acquisition.
Cash balances stood at $12.6 million as of June 30,
2006, an increase of $2.0 million from December 31,
2005.
We believe funds from operations and the available borrowing
capacity are adequate to support operating requirements, capital
expenditures, projected pension plan contributions, small
acquisitions and environmental remediation projects. In addition
to the $12.1 million of cash on hand, we had approximately
$92.1 million of available borrowing capacity under the
existing lines of credit as of June 29, 2007.
Critical
Accounting Policies
For additional information regarding this and other critical
accounting policies, please refer to pages 29 to 31 of our
annual report to shareholders for the period ended
December 31, 2006.
Market
Risk Disclosures
For additional information regarding market risks, please refer
to pages 31 and 32 of our annual report to shareholders for the
period ended December 31, 2006.
Outlook
While sales were lower in the second quarter 2007 than the first
quarter 2007, the majority of our markets remain in good
condition. We believe that the demand from the data storage
market which softened in the second quarter, caused partially by
the quality issue and partially by seasonality, should start to
strengthen in the third quarter 2007.
Various other markets served by Advanced Material Technologies
and Services continue to be strong and offer growth
opportunities. Demand from the defense market remained strong
early in the third quarter 2007. Our new products have added to
our sales growth while our marketing and research engineers are
continuing their efforts to develop new applications and new
markets. However, portions of the computer and
telecommunications market have softened and competition for
various applications from other material solutions remains
strong.
Gross margins and profitability were reduced by the quality
issue and the lower of cost or market charge in the second
quarter 2007. While the quality issue should be resolved, we
cannot estimate the margin impact of any lower of cost or market
charges in future periods as it is dependent upon the movement
in the market price for ruthenium, which we use primarily in
manufacturing products for data storage applications. The
previously implemented pricing improvements should help mitigate
the unfavorable margin impact of the currently high costs for
other raw materials, including copper and nickel.
We will continue our efforts to manage our overhead and expense
levels. However, we will invest in marketing and other efforts
in order to continue our global sales growth. The expense for
various compensation plans is dependent upon the market price of
our common stock, which has been quite volatile in 2007. The
expense will increase should our share price increase.
While sales and earnings estimates are subject to significant
variability due to changes in demand, metal prices and other
factors, as of early in the third quarter 2007, we are
estimating that sales in the third quarter will be in the range
of $240.0 to $250.0 million and earnings per share in the
range of $0.45 to $0.55.
22
Forward-Looking
Statements
Portions of the narrative set forth in this document that are
not statements of historical or current facts are
forward-looking statements. Our actual future performance may
materially differ from that contemplated by the forward-looking
statements as a result of a variety of factors. These factors
include, in addition to those mentioned elsewhere herein:
|
|
|
|
|
The global and domestic economies;
|
|
|
|
The condition of the markets which we serve, whether defined
geographically or by segment, with the major market segments
being telecommunications and computer, data storage, aerospace
and defense, automotive electronics, industrial components and
appliance;
|
|
|
|
Changes in product mix and the financial condition of customers;
|
|
|
|
Actual sales, operating rates and margins for the year 2007;
|
|
|
|
Our success in developing and introducing new products and new
product ramp up rates, including the actual ramp up of the
perpendicular media market;
|
|
|
|
Our success in passing through the costs of raw materials to
customers or otherwise mitigating fluctuating prices for those
materials, including the impact of fluctuating prices on
inventory values;
|
|
|
|
Our success in integrating newly acquired businesses;
|
|
|
|
Our success in implementing our strategic plans and the timely
and successful completion of any capital projects;
|
|
|
|
The availability of adequate lines of credit and the associated
interest rates;
|
|
|
|
Other financial factors, including cost and availability of
materials, tax rates, exchange rates, pension and other employee
benefit costs, energy costs, regulatory compliance costs, and
the cost and availability of insurance;
|
|
|
|
The uncertainties related to the impact of war and terrorist
activities;
|
|
|
|
Changes in government regulatory requirements and the enactment
of new legislation that impacts our obligations; and,
|
|
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The conclusion of pending litigation matters in accordance with
our expectation that there will be no material adverse effects.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
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For information about our market risks, please refer to pages 31
and 32 of our annual report to shareholders for the period ended
December 31, 2006
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Item 4.
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Controls
and Procedures
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We carried out an evaluation under the supervision and with
participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of June 29, 2007 pursuant to
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures were effective as of the
evaluation date.
There have been no changes in our internal controls over
financial reporting identified in connection with the evaluation
required by
Rule 13a-15
under the Securities Exchange Act of 1934, as amended, that
occurred during the quarter ended June 29, 2007 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
23
PART II
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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Our subsidiaries and our holding company are subject, from time
to time, to a variety of civil and administrative proceedings
arising out of our normal operations, including, without
limitation, product liability claims, health, safety and
environmental claims and employment-related actions. Among such
proceedings are the cases described below.
Beryllium
Claims
As of June 29, 2007, our subsidiary, Brush Wellman Inc.,
was a defendant in 10 proceedings in various state and federal
courts brought by plaintiffs alleging that they have contracted,
or have been placed at risk of contracting, chronic beryllium
disease or other lung conditions as a result of exposure to
beryllium. Plaintiffs in beryllium cases seek recovery under
negligence and various other legal theories and seek
compensatory and punitive damages, in many cases of an
unspecified sum. Spouses of some plaintiffs claim loss of
consortium.
During the second quarter of 2007, the number of beryllium cases
decreased from 12 cases (involving 52 plaintiffs) as of
March 30, 2007 to 10 cases (involving 32 plaintiffs) as of
June 29, 2007. During the second quarter, in one case
(involving two plaintiffs) plaintiffs filed a request for
dismissal. In one purported class action (involving eight named
plaintiffs) the appellate court affirmed dismissal of the claims
of the plaintiffs who alleged only beryllium exposure as an
injury, but reversed dismissal of the five individuals alleged
to be sensitized to beryllium and remanded the case to the
district court for proceedings as to those individuals. In
another purported class action (involving 15 named plaintiffs),
following the circuit courts entry affirming the trial
courts granting of the Companys Motion to Dismiss,
the plaintiffs Petition for Rehearing was denied, and the
case has been finally decided. No cases were filed during the
quarter.
The ten pending beryllium cases as of June 29, 2007 fall
into two categories: eight cases involving non-employee
individual plaintiffs, with 16 individuals (and four spouses who
have filed claims as part of their spouses case, and two
children who have filed claims as part of their parents
case); and two purported class actions involving ten named
plaintiffs, as discussed more fully below. Claims brought by
non-employee plaintiffs (typically employees of our customers or
contractors) are generally covered by varying levels of
insurance.
The first purported class action is Manuel Marin, et al. v.
Brush Wellman Inc., filed in Superior Court of California, Los
Angeles County, case number BC299055, on July 15, 2003. The
named plaintiffs are Manuel Marin, Lisa Marin, Garfield Perry
and Susan Perry. The defendants are Brush Wellman, Appanaitis
Enterprises, Inc., and Doe Defendants 1 through 100. A First
Amended Complaint was filed on September 15, 2004, naming
five additional plaintiffs. The five additional named plaintiffs
are Robert Thomas, Darnell White, Leonard Joffrion, James Jones
and John Kesselring. The plaintiffs allege that they have been
sensitized to beryllium while employed at the Boeing Company.
The plaintiffs wives claim loss of consortium. The
plaintiffs purport to represent two classes of approximately 250
members each, one consisting of workers who worked at Boeing or
its predecessors and are beryllium sensitized and the other
consisting of their spouses. They have brought claims for
negligence, strict liability design defect, strict
liability failure to warn, fraudulent concealment,
breach of implied warranties, and unfair business practices. The
plaintiffs seek injunctive relief, medical monitoring, medical
and health care provider reimbursement, attorneys fees and
costs, revocation of business license, and compensatory and
punitive damages. Messrs. Marin, Perry, Thomas, White,
Joffrion, Jones and Kesselring represent current and past
employees of Boeing in California; and Ms. Marin and
Ms. Perry are spouses. Defendant Appanaitis Enterprises,
Inc. was dismissed on May 5, 2005.
The second purported class action is Gary Anthony v. Small
Tube Manufacturing Corporation d/b/a Small Tube Products
Corporation, Inc., et al. filed in the Court of Common Pleas of
Philadelphia County, Pennsylvania, case number 000525, on
September 7, 2006. The case was removed to the
U.S. District Court for the Eastern District of
Pennsylvania, case number 06-CV-4419, on October 4, 2006.
The only named plaintiff is Gary Anthony. The defendants are
Small Tube Manufacturing Corporation, d/b/a Small Tube Products
Corporation, Inc.; Admiral Metals Inc.; Tube Methods, Inc.; and
Cabot Corporation. The plaintiff purports to sue on behalf of a
class of current and former employees of the U.S. Gauge
facility in Sellersville, Pennsylvania who have ever been
exposed to
24
beryllium for a period of at least one month while employed at
U.S. Gauge. The plaintiff has brought claims for
negligence. Plaintiff seeks the establishment of a medical
monitoring trust fund, cost of publication of approved
guidelines and procedures for medical screening and monitoring
of the class, attorneys fees and expenses. Defendant Tube
Methods, Inc. filed a third-party complaint against Brush
Wellman Inc. in that action on November 15, 2006. Tube
Methods alleges that Brush supplied beryllium-containing
products to U.S. Gauge, and that Tube Methods worked on
those products, but that Brush is liable to Tube Methods for
indemnification and contribution. Brush moved to dismiss the
Tube Methods complaint on December 22, 2006. On
January 12, 2007, Tube Methods filed an amended third-party
complaint, which Brush moved to dismiss on January 26, 2007.
As reported above, one purported class action has been remanded
to the trial court for proceedings as to the five individuals
who allege beryllium sensitization following the appellate
courts affirming of the trial courts grant of
summary judgment in the Companys favor. The third
purported class action was Neal Parker, et al. v. Brush
Wellman Inc., filed in the Superior Court of Fulton County,
State of Georgia, case number 2004CV80827, on January 29,
2004. The case was removed to the U.S. District Court for
the Northern District of Georgia, case number 04-CV-606, on
May 4, 2004. The named plaintiffs were Neal Parker, Wilbert
Carlton, Stephen King, Ray Burns, Deborah Watkins, Leonard
Ponder, Barbara King and Patricia Burns. The defendants were
Brush Wellman; Schmiede Machine and Tool Corporation;
Thyssenkrupp Materials NA Inc., d/b/a Copper and Brass Sales;
Axsys Technologies Inc.; Alcoa, Inc.; McCann Aerospace
Machining Corporation; Cobb Tool, Inc.; and Lockheed Martin
Corporation. Messrs. Parker, Carlton, King and Burns and
Ms. Watkins were current employees of Lockheed.
Mr. Ponder was a retired employee; and Ms. King and
Ms. Burns were family members. The plaintiffs brought
claims for negligence, strict liability, fraudulent concealment,
civil conspiracy and punitive damages. The plaintiffs sought a
permanent injunction requiring the defendants to fund a
court-supervised medical monitoring program, attorneys
fees and punitive damages. On March 29, 2005, the Court
entered an order (1) directing plaintiffs to amend their
pleading to segregate out those plaintiffs who endured only
subclinical, cellular and subcellular effects from those who
sustained actionable tort injuries, and stating that following
such amendment, the Court would enter an order dismissing the
claims asserted by the former subset of claimants;
(2) dismissing Count I of the Complaint, which sought the
creation of a medical monitoring fund; and (3) dismissing
the claims against Axsys Technologies Inc. On April 20,
2005, the plaintiffs filed a Substituted Amended Complaint for
Damages, contending that each of the eight named plaintiffs and
the individuals listed on the attachment to the original
Complaint, and each of the putative class members sustained
personal injuries; however, they alleged that they identified
five individuals whose injuries manifested themselves such that
they had been detected by physical examination
and/or
laboratory test. On May 23, 2005, the defendants filed a
Motion to Enforce the March 29, 2005 Order, which argued
that the five plaintiffs identified in the Amended Complaint had
only beryllium sensitization, which is not an actionable tort
injury as defined in the March 29, 2005 Order. On
March 10, 2006, the Court entered an order construing this
motion as a Motion for Summary Judgment and granted summary
judgment in the Companys favor; however, the plaintiffs
filed an appeal. On April 18, 2007, the Eleventh Circuit
Court of Appeals affirmed in part and reversed in part the trial
courts grant of summary judgment, holding that Georgia
tort law requires a current physical injury and that allegations
of subclinical and cellular damage do not satisfy the physical
injury requirement. However, with respect to the five named
individuals with alleged beryllium sensitization, there was a
genuine issue of material fact that precluded summary judgment,
and the case has been remanded to the district court for further
proceedings. Those five individuals are Messrs. Parker,
Carlton, Brown, Griffin and Walker. Defendants and Plaintiffs
filed motions for reconsideration, which the Eleventh Circuit
denied on June 6, 2007.
As reported above, one purported class action has been finally
decided. The fourth class action was George Paz, et
al. v. Brush Engineered Materials Inc., et al., filed in
the U.S. District Court for the Southern District of
Mississippi, case number 1:04CV597, on June 30, 2004. The
named plaintiffs were George Paz, Barbara Faciane, Joe Lewis,
Donald Jones, Ernest Bryan, Gregory Condiff, Karla Condiff, Odie
Ladner, Henry Polk, Roy Tootle, William Stewart, Margaret Ann
Harris, Judith Lemon, Theresa Ladner and Yolanda Paz. The
defendants were Brush Engineered Materials Inc., Brush Wellman
Inc., Wess-Del Inc., and the Boeing Company. Plaintiffs sought
the establishment of a medical monitoring trust fund as a result
of their alleged exposure to products containing beryllium,
attorneys fees and expenses, and general and equitable
relief. The plaintiffs purported to sue on behalf of a class of
present or former Defense Contract Management Administration
(DCMA) employees who conducted quality assurance work at Stennis
Space Center and the Boeing Company at its facility in Canoga
Park, California; present and former employees of Boeing at
Stennis; and spouses and children of those individuals.
25
Messrs. Paz and Lewis and Ms. Faciane represented
current and former DCMA employees at Stennis. Mr. Jones
represented DCMA employees at Canoga Park. Messrs. Bryan,
Condiff, Ladner, Polk, Tootle and Stewart and Ms. Condiff
represented Boeing employees at Stennis. Ms. Harris,
Ms. Lemon, Ms. Ladner and Ms. Paz were family
members. We filed a Motion to Dismiss on September 28,
2004, which was granted and judgment was entered on
January 11, 2005; however, the plaintiffs filed an appeal.
Brush Engineered Materials Inc. was dismissed for lack of
personal jurisdiction on the same date, which plaintiffs did not
appeal. On April 7, 2006, the U.S. Court of Appeals
for the Fifth Circuit, in case number
05-60157,
certified the question regarding whether Mississippi has a
medical monitoring cause of action to the Mississippi Supreme
Court. In case number 2006-FC-007712-SCT, the Mississippi
Supreme Court issued an opinion that the laws of Mississippi do
not allow for a medical monitoring cause of action without an
accompanying physical injury on January 4, 2007. Plaintiffs
filed a motion for rehearing, which was denied by the
Mississippi Supreme Court on March 1, 2007. On
March 29, 2007, the Fifth Circuit entered and filed its
judgment affirming the District Courts granting of the
Companys Motion to Dismiss. On April 6, 2007,
plaintiffs filed a Petition for Panel Rehearing, which was
denied by the Fifth Circuit on June 18, 2007, and the case
is now closed.
Other
Claims
One of our subsidiaries, Williams Advanced Materials Inc.
(WAM), is a party to two patent litigations in the
U.S. involving Target Technology Company, LLC of Irvine, CA
(Target). Both actions involve patents directed to
technology used in the production of DVD-9s, which are high
storage capacity DVDs. The patents at issue concern certain
silver alloys used to make the semi-reflective layer in DVD-9s,
a thin metal film that is applied to a DVD-9 through a process
known as sputtering. The raw material used in the sputtering
process is called a target. Target alleges that WAM manufactures
and sells infringing sputtering targets to DVD manufacturers.
In the first action, filed in April 2003 by WAM against Target
in the U.S. District Court, Western District of New York
(case
no. 03-CV-0276A
(SR)) (the NY Action), WAM has asked the Court for a
judgment declaring certain Target patents invalid
and/or
unenforceable and awarding WAM damages. Target counterclaimed
alleging infringement of those patents and seeking a judgment
for infringement, an injunction against further infringement and
damages for past infringement. Following certain proceedings in
which WAM was denied an injunction to prevent Target from suing
and threatening to sue WAMs customers, Target filed an
amended counterclaim and a third party complaint naming certain
of WAMs customers and other entities as parties to the
case and adding related other patents to the NY Action. The
action now is awaiting a review by the District Court Judge of
the grant by the Magistrate Judge of WAMs motion to
transfer the NY Action to the Central District of California,
where the second litigation between the parties is pending.
In the second litigation, Target in September 2004 filed in the
U.S. District Court, Central District of California (case
no. SAC04-1083
DOC (MLGx)) a separate action for infringement of one of the
same patents named in the NY Action (the CA Action),
naming as defendants WAM and certain of WAMs customers who
purchase certain WAM sputtering targets. Target seeks a judgment
that the patent is valid and infringed by the defendants, a
permanent injunction, damages adequate to compensate Target for
the infringement, treble damages and attorneys fees and
costs. In April 2007, Sony DADC U.S., Inc. (Sony)
intervened in the CA Action claiming ownership of that patent
and others of the patents that Target is seeking to enforce in
the NY Action. Sonys claim is based on its prior
employment of the patentee and Targets founder, Hanphire
H. Nee, and includes a demand for damages against both Target
and Nee. WAM on behalf of itself and its customers has a
paid-up
license from Sony under any rights that Sony has in those
patents. Trial of the CA action is currently scheduled for
August 2008.
26
On April 17, 2003, the Company filed a complaint in the
Court of Common Pleas for Ottawa County, Ohio, case number
03-CVH-089, seeking a declaration of certain rights under
insurance policies issued by Lloyds of London, certain London
Market companies and certain domestic insurers, and damages and
breach of contract. On August 30, 2006, the court granted
Brushs motion for partial summary judgment in its
entirety. The parties then stipulated to the amount of damages
and prejudgment interest resulting from those breaches of
contract of approximately $7.3 million, subject to
reduction if an appellate court modifies or amends the grant of
partial summary judgment. The defendants attempt to appeal
on an interlocutory basis was denied. The parties agreed
separately to approximately $0.5 million in damages related
to claims not covered by the partial summary judgment order.
Trial of the bad faith claim is set for December 2007. The
damage award was subsequently increased to $8.8 million as
a result of the defendants stipulating to the attorneys
fees incurred in pursuing this action.
(a) Exhibits
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11
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Statement regarding computation of
per share earnings
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31
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.1
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Certification of Chief Executive
Officer required by
Rule 13a-14(a)
or 15d-14(a)
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31
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.2
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Certification of Chief Financial
Officer required by
Rule 13a-14(a)
or 15d-14(a)
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32
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Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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27
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 6, 2007
John D. Grampa
Senior Vice President Finance
and Chief Financial Officer
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