Brush Engineered Materials Inc. Reports Second Quarter Results

Brush Engineered Materials Inc. (NYSE:BW) today reported operating results for the second quarter of 2008 that were ahead of the Company’s expectations and announced that its Board of Directors has authorized the Company to repurchase up to 1.0 million, or approximately 5% of the Company’s outstanding shares of common stock. SECOND QUARTER RESULTS Sales for the second quarter of 2008 were $246.6 million and net income was $7.2 million or $0.35 per share diluted. Stronger demand for the Company’s materials, especially from the consumer electronics and heavy industrial-related markets, as well as improved margins, led to the stronger than expected sales and earnings for the quarter. Second quarter earnings were negatively affected by the previously announced significant decline in the market price of ruthenium, an important material for the Company’s products for the media market. The decline in the ruthenium market price led to non-cash lower of cost or market inventory charge in the quarter of approximately $6.0 million pretax or $0.18 per share after tax. Excluding this factor, the operating run rate for the quarter was $0.53 per share. In the prior year, the Company reported a sizable benefit from the sale of product that included a gain related to a significant increase in the market price of ruthenium that had been purchased earlier at a much lower cost. The amount of the gain was approximately $4.5 million pretax or $0.14 per share after tax in the second quarter and approximately $23.0 million pretax or $0.72 per share after tax for the year. The prior year second quarter sales were $233.6 million. The largest factor in the $13.0 million increase in second quarter 2008 sales compared to the prior year was metal prices passed on to customers. This, plus stronger demand from the cell phone handset market for the Company’s Advanced Material Technologies and Services’ products, greater demand for the Company’s Specialty Engineered Alloys’ materials for the industrial markets and increased demand for the Engineered Material Systems’ disk drive arm products helped to offset the previously disclosed significant decline in the sale of ruthenium-based materials for the media market. The prior year second quarter net income was $7.9 million or $0.38 per share diluted. Earnings comparisons to the prior year are affected by the non-cash lower of cost or market inventory charge of $6.0 million pre-tax or $0.18 per share after tax, noted above, as well as a $4.0 million pre-tax or $0.13 per share after tax non-cash lower of cost or market ruthenium inventory charge in the prior year second quarter. In addition, the prior year second quarter included the $4.5 million pre-tax or $0.14 per share after tax gain explained above. STOCK REPURCHASE PLAN The Company’s Board of Directors has authorized the Company to repurchase up to 1.0 million shares, or approximately 5%, of the Company’s outstanding shares of common stock. The primary purpose of the repurchase program is to offset the dilution created through shares issued under company stock-based compensation plans. The authorization provides the Company the flexibility to use its strong balance sheet to repurchase shares while at the same time maintaining an appropriate level of liquidity to support the Company’s primary strategic goals, which include utilizing available capital for organic growth and strategic acquisition opportunities. The plan to repurchase shares does not represent a deviation from the Company’s strategic focus and the Company does not see any change in its growth expectations and acquisition opportunities. The stock repurchases will be made from time to time through brokers on the New York Stock Exchange. The repurchase program may be suspended or discontinued at any time. OUTLOOK The Company is updating the previously provided guidance for the year. At this time, the Company expects earnings for the full year to be in the range of $1.45 to $1.70 per share. This includes the negative affect of the charges taken in the first and second quarters of the year. Excluding the charges, the operating run rate is in the range of $1.75 to $2.00 per share, up as much as 18% compared to the prior year. The guidance assumes that a significant macro-economic downturn does not develop during the second half. In the media market, shipments strengthened as the second quarter developed and as re-qualifications of ruthenium-based products progressed. The Company is also seeing stronger demand thus far in the third quarter and expects to see progressively higher shipments of perpendicular media materials in the third and fourth quarters of the year. Steady progress is also being made in the qualification of materials for other layers. The Company has seen and expects to continue to see strong demand from the cell phone handset market for Advanced Material Technologies and Services’ products, as well as stronger demand for the Company’s products from the medical, oil and gas, and heavy equipment markets throughout the second half. It is important to continue to reiterate though that the Company’s earnings estimates are subject to significant variability. Metal price changes, metal supply conditions, fluctuations in demand levels driven by such factors as customer inventory swings, product qualifications rates, and new product ramp-up rates in critical markets such as the media market can and have had a significant effect on actual results. The outlook for the year is based on the Company’s best estimates at this time and is subject to significant fluctuations due to these as well as other factors. BUSINESS SEGMENT REPORTING Advanced Material Technologies and Services The Advanced Material Technologies and Services’ segment sales for the second quarter of 2008 were up 3% to $125.4 million compared to $121.3 million in the second quarter of the prior year. Sales for the first six months of 2008 were $246.1 million, down 7% versus the same period last year. Operating profit for the second quarter was $4.8 million versus $4.9 million for the second quarter of 2007. Operating profit year to date was $10.1 million versus $36.8 million for the first six months of last year. The operating profit for the second quarter of 2008 was negatively impacted by a $6.0 million lower of cost or market charge related to ruthenium inventory. Subsequent to the charge, the value of the Company’s ruthenium inventory potentially subject to future lower of cost or market adjustments is approximately $14.0 million. In the second quarter of the prior year, operating profit was negatively affected by a similar lower of cost or market charge of approximately $4.0 million. Operating profit for the second quarter and year to date 2007 were positively affected by a non-repeat benefit of $4.5 million and $21.4 million respectively from the sale of product that included a gain related to a significant increase in the market price of ruthenium inventory that had been purchased earlier at a much lower cost. Excluding the aforementioned ruthenium lower of cost or market charges and the first and second quarter 2007 benefit related to the increased ruthenium market price that occurred then, the operating profit for the second quarter of 2008 was $10.8 million versus $4.4 million in the prior year and the operating profit for the first half was $16.1 million versus $19.4 million in the prior year. Absent the impact of ruthenium prices, sales for media applications declined by approximately $22.7 million in the second quarter and $79.7 million for the first half versus the same periods last year. Approximately 57% or $12.9 million of the second quarter decline in media sales is related to manufacturing ruthenium products using customer supplied material versus our own material. For the first half of the year, the shift to customer-supplied material accounted for 28% or $22.5 million of the decline in media sales. Strong growth in sales from the handset, photonics including LED applications for traditional lighting, automotive, medical and back lighting for LCD televisions and wireless product applications offset a portion of the decline in media sales for both the second quarter and first half of 2008. Although, as expected, the segment experienced a decline in media sales for the second quarter and first half of 2008 as compared to the same periods last year, the media volume shipped in the second quarter increased as compared to the first quarter of 2008. Re-qualification of ruthenium materials following a specification change at a major customer that occurred in the fourth quarter of 2007 is complete and shipments to this customer have resumed. In addition, qualifications for the oxide, soft underlayer and new innovative ruthenium products for the perpendicular media market continued to progress during the second quarter. It is anticipated that the media market volume will increase in the third quarter over the second quarter with a stronger ramp up in the fourth quarter of 2008 and through 2009. Operating profit during the second quarter was negatively impacted by the lower cost of market charge related to ruthenium inventory noted above and the reduced volume in the media business. Specialty Engineered Alloys Specialty Engineered Alloys’ sales for the second quarter were $83.0 million, up approximately 10%, or $7.5 million, compared to the second quarter of 2007. Year-to-date sales of $154.3 million were up $8.4 million or 6% compared to the first half of 2007. Operating profit for the second quarter was $4.8 million versus $1.4 million for the second quarter of 2007. Operating profit for the first half of 2008 was $5.5 million compared to the first half of 2007 operating profit of $6.7 million. The increase in sales in both the second quarter and the first half is primarily due to metal price pass throughs, higher selling prices and a favorable translation effect on foreign sales. Specialty Engineered Alloys has continued to experience strong demand from the oil and gas, heavy equipment, telecommunications infrastructure, and appliance markets. Shipments to the wireless handset market, which began to decline in the first quarter of 2007 due to weaker demand from a major customer, have now leveled off. Sales of ToughMet® for oil and gas applications, for use in directional drilling, artificial lift equipment and offshore well head control equipment have experienced a compounded growth of over 40% over the last three years. Operating profit for the second quarter of 2008 benefited from a favorable product mix, foreign currency rates, improved yields and improved pricing. Beryllium and Beryllium Composites Beryllium and Beryllium Composites’ sales for the second quarter of 2008 were $14.7 million compared to second quarter 2007 sales of $16.5 million. For the first six months of the year sales were $28.1 million compared to $31.7 million for the same period last year. Operating profit for the second quarter was $2.3 million versus $2.4 million for the second quarter of 2007. Operating profit for the first six months of 2008 was $2.6 million compared to $4.6 million for the first half of 2007. The decline in sales for the second quarter and first half compared to the prior year is primarily due to the impact of the completion, in the prior year, of two large science projects, the Joint European Torus nuclear fusion project and NASA’s James Webb Space Telescope. These projects accounted for $1.2 million of sales in the second quarter and $1.8 million of sales in the first half of 2007. Sales to the defense market began to strengthen during the second quarter and are expected to remain strong for the remainder of the year. The Company recently announced that its wholly-owned subsidiary, Brush Wellman Inc., entered into a Phase II Technology Investment Agreement with the U.S. Department of Defense for the construction and start up of a $90.4 million primary beryllium facility to be used for strategic defense and growing commercial product applications. Operating profit for the second quarter and the first half was negatively impacted by the lower sales volume. Engineered Material Systems Engineered Material Systems’ sales for the second quarter of 2008 were $19.6 million, up $2.7 million or 16% compared to the second quarter of 2007 sales. Sales for the first six months of 2008 were $37.3 million, up $3.7 million or 11% compared to the first half of 2007. Operating profit in the second quarter was $2.0 million compared to an operating profit of $0.7 million for the second quarter of 2007. Operating profit for the first six months of 2008 was $3.4 million, an increase of $2.1 million compared to the first half 2007. The stronger sales for the second quarter and the first half are due to higher sales of materials for disk drive arms, sales of new products to the energy market and continued strength from automotive electronics. The higher sales volume, plus improved yields and productivity from operations led to the improved operating profit for the quarter and the first six months of 2008. CHAIRMAN’S COMMENTS Richard Hipple, Chairman, President, and CEO, stated, "I am encouraged by the continuing strong conditions in our key markets and the margin improvements noted in our key segments. Our execution in the media market will be critical as we move through the second half of the year. We have also maintained a strong balance sheet and continue to generate strong cash flows which allow us the flexibility to support our organic growth, continue to pursue niche acquisitions and, now with the Board authorization, repurchase shares when appropriate, all of which contribute to strengthening shareholder value.” CONFERENCE CALL Brush Engineered Materials’ quarterly earnings conference call will be held today at 11:00 a.m. Eastern Time. The conference call will be available via webcast through the Company’s website at www.beminc.com or through www.InvestorCalendar.com. By phone, please dial (877) 407-0782, callers outside the U.S. can dial (201) 689-8567. NON-GAAP FINANCIAL MEASURES We have presented in this release operating results both including the impact of ruthenium metal pricing and other factors, as required by generally accepted accounting principles, and excluding that effect. Management considers the presentation of operating results excluding the effects of ruthenium metal pricing, including its effect on sales from our products that include a gain or loss related to an increase or reduction in the market price of ruthenium inventory and other factors to be a better representation of our baseline business. A reconciliation of the Non-GAAP financial measures follows.       Reconciliation of Non-GAAP Financial Measures Second Quarter   First Half For the threemonths endedJune 29, 2007   For the threemonths endedJune 27, 2008 For the sixmonths endedJune 29, 2007   For the sixmonths endedJune 27, 2008 GAAP Diluted EPS $ 0.38 $ 0.35 $ 1.50 $ 0.57 Gain on sale of ruthenium inventory (0.14 )   0.00 (0.66 ) 0.00 Lower of cost or market ruthenium inventory charge 0.13 0.18 0.13 0.18 Loss on sale of a subsidiary 0.00 0.00 0.02 0.00 Accounts receivable correction related to the prior year 2007 0.00 0.00 0.00 0.09 Change in deferred tax valuation 0.00 0.00 0.00 0.02 Non-recurring purchase accounting costs   0.00     0.00   0.00     0.02 Non-GAAP Operating Run Rate $ 0.37 $ 0.53 $ 0.99 $ 0.88 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 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, appliance and medical; Changes in product mix and the financial condition of customers; Actual sales, operating rates and margins for the year 2008; Our success in developing and introducing new products and new product ramp up rates, especially in the 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, including the recent acquisition of the assets of Techni-Met, Inc.; 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 raw materials (both base and precious metals), tax rates, interest rates, metal financing fees, exchange rates, pension and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, and the impact of the Company’s stock price on the cost of incentive and deferred compensation plans; The uncertainties related to the impact of war and terrorist activities; Changes in government regulatory requirements and the enactment of new legislation that may impact our obligations; and The conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects. Brush Engineered Materials Inc. is headquartered in Cleveland, Ohio. The Company, through its wholly-owned subsidiaries, supplies worldwide markets with beryllium products, alloy products, electronic products, precious metal products, and engineered material systems.       Brush Engineered Materials Inc.   Digest of Earnings   June 27, 2008   2008 2007   Second Quarter   Net Sales $246,584,000 $233,563,000   Net Income $7,158,000 $7,939,000   Share Earnings - Basic $0.35 $0.39   Average Shares - Basic 20,399,000 20,351,000   Share Earnings - Diluted $0.35 $0.38   Average Shares - Diluted 20,653,000 20,736,000     Year-to-date   Net Sales $472,931,000 $483,877,000   Net Income $11,754,000 $31,053,000   Share Earnings - Basic $0.58 $1.53   Average Shares - Basic 20,394,000 20,254,000   Share Earnings - Diluted $0.57 $1.50   Average Shares - Diluted 20,626,000 20,709,000 Consolidated Balance Sheets (Unaudited)     June 27, Dec. 31, (Dollars in thousands)   2008   2007 Assets Current assets Cash and cash equivalents $ 15,163 $ 31,730 Accounts receivable 120,113 97,424 Other receivables 0 11,263 Inventories 181,089 165,189 Prepaid expenses 19,635 17,723 Prepaid income taxes 956 0 Deferred income taxes   5,979   6,107 Total current assets 342,935 329,436   Other assets 32,781 11,804 Related-party notes receivable 98 98 Long-term deferred income taxes 0 1,139   Property, plant and equipment 614,577 583,961 Less allowances for depreciation, depletion and amortization 414,606 397,786 199,971 186,175   Goodwill   39,799   21,899 $ 615,584 $ 550,551     Liabilities and Shareholders' Equity Current liabilities Short-term debt $ 35,624 $ 24,903 Current portion of long-term debt 600 600 Accounts payable 34,991 27,066 Other liabilities and accrued items 44,550 55,936 Unearned revenue 504 2,569 Income taxes   0   2,109 Total current liabilities 116,269 113,183   Other long-term liabilities 14,806 11,629 Retirement and post-employment benefits 59,381 57,511 Long-term income taxes 4,327 4,327 Deferred income taxes 553 182 Long-term debt 50,905 10,005   Shareholders' equity   369,343   353,714 $ 615,584 $ 550,551     See notes to consolidated financial statements. Consolidated Statements of Income (Unaudited)       Second Quarter Ended First Half Ended (Dollars in thousands except share and per share amounts)   June 27,2008   June 29,2007 June 27,2008   June 29,2007     Net sales $ 246,584 $ 233,563 $ 472,931 $ 483,877 Cost of sales   201,736   191,782   391,065   372,712 Gross margin 44,848 41,781 81,866 111,165 Selling, general and administrative expense 28,503 26,564 55,292 55,234 Research and development expense 1,644 1,275 3,141 2,601 Other - net   3,089   1,325   3,850   3,858 Operating profit 11,612 12,617 19,583 49,472 Interest expense - net   649   571   985   1,254 Income before income taxes 10,963 12,046 18,598 48,218   Income taxes   3,805   4,107   6,844   17,165   Net income $ 7,158 $ 7,939 $ 11,754 $ 31,053   Per share of common stock: basic $ 0.35 $ 0.39 $ 0.58 $ 1.53   Weighted average number of common shares outstanding 20,399,000 20,351,000 20,394,000 20,254,000     Per share of common stock: diluted $ 0.35 $ 0.38 $ 0.57 $ 1.50   Weighted average number of common shares outstanding 20,653,000 20,736,000 20,626,000 20,709,000     See notes to consolidated financial statements. Consolidated Statements of Cash Flows (Unaudited)     First Half Ended June 27,   June 29, (Dollars in thousands)     2008   2007   Net income $ 11,754 $ 31,053 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation, depletion and amortization 17,271 11,928 Amortization of deferred financing costs in interest expense 177 215 Derivative financial instrument ineffectiveness 163 (72 ) Stock-based compensation expense 2,460 1,932 Decrease (increase) in accounts receivable (15,152 ) (27,752 ) Decrease (increase) in other receivables 11,263 - Decrease (increase) in inventory (9,710 ) (12,859 ) Decrease (increase) in prepaid and other current assets (1,455 ) (999 ) Decrease (increase) in deferred income taxes 14 (3,672 ) Increase (decrease) in accounts payable and accrued expenses (8,166 ) 2,069 Increase (decrease) in unearned revenue (2,065 ) 1,369 Increase (decrease) in interest and taxes payable (1,144 ) 7,960 Increase (decrease) in other long-term liabilities 5,461 478 Other - net   (566 )   (202 ) Net cash provided from operating activities 10,305 11,448   Cash flows from investing activities: Payments for purchase of property, plant and equipment (14,637 ) (11,156 ) Payments for mine development (152 ) (6,195 ) Payments for purchase of business net of cash received (87,462 ) - Proceeds from sales of inventory to consignment 24,325 - Proceeds from sale of business - 2,150 Proceeds from sale of property, plant and equipment - 51 Other investments - net   66     42   Net cash used in investing activities (77,860 ) (15,108 )   Cash flows from financing activities: Proceeds from issuance of short-term debt 10,414 2,591 Proceeds from issuance of long-term debt 40,900 15,747 Repayment of long-term debt - (25,793 ) Issuance of common stock under stock option plans 174 4,864 Tax benefit from exercise of stock options   28     2,716   Net cash provided from financing activities 51,516 125 Effects of exchange rate changes   (528 )   (35 ) Net change in cash and cash equivalents (16,567 ) (3,570 ) Cash and cash equivalents at beginning of period   31,730     15,644   Cash and cash equivalents at end of period $ 15,163   $ 12,074       See notes to consolidated financial statements. Notes to Consolidated Financial Statements (Unaudited)               Note A - Accounting Policies   In management's opinion, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position as of June 27, 2008 and December 31, 2007 and the results of operations for the second quarter and first half ended June 27, 2008 and June 29, 2007. Sales and income before income taxes were reduced in the first quarter 2008 by $2.6 million to correct a billing error that occurred in 2007 that was not material to the 2007 results. All other adjustments were of a normal and recurring nature.       Note B - Inventories   June 27, Dec. 31, (Dollars in thousands) 2008 2007   Principally average cost: Raw materials and supplies $ 37,385 $ 30,338 Work in process 156,534 156,789 Finished goods   66,110     54,530   Gross inventories 260,029 241,657   Excess of average cost over LIFO inventory value   78,940     76,468   Net inventories $ 181,089   $ 165,189       Note C - Pensions and Other Post-retirement Benefits   Pension Benefits Other Benefits Second Quarter Ended Second Quarter Ended June 27, June 29, June 27, June 29, (Dollars in thousands) 2008 2007 2008 2007   Components of net periodic benefit cost   Service cost $ 1,270 $ 1,161 $ 76 $ 75 Interest cost 1,976 1,851 532 477 Expected return on plan assets (2,180 ) (2,156 ) - - Amortization of prior service cost (161 ) (164 ) (9 ) (9 ) Amortization of net loss   294     436     -     -   Net periodic benefit cost $ 1,199   $ 1,128   $ 599   $ 543     Pension Benefits Other Benefits First Half Ended First Half Ended June 27, June 29, June 27, June 29, (Dollars in thousands) 2008 2007 2008 2007   Components of net periodic benefit cost   Service cost $ 2,540 $ 2,314 $ 152 $ 150 Interest cost 3,952 3,689 1,063 955 Expected return on plan assets (4,360 ) (4,297 ) - - Amortization of prior service cost (322 ) (327 ) (18 ) (18 ) Amortization of net loss   589     869     -     -   Net periodic benefit cost $ 2,399   $ 2,248   $ 1,197   $ 1,087   Notes to Consolidated Financial Statements (Unaudited)     Note D - Segment Reporting                   (Dollars in thousands) Advanced Material Technologies and Services   Specialty Engineered Alloys   Beryllium and Beryllium Composites   Engineered Material Systems   Subtotal   All Other   Total Second Quarter 2008 Revenues from external customers $ 125,350 $ 83,029 $ 14,711 $ 19,574 $ 242,664 $ 3,920 $ 246,584   Intersegment revenues 1,724 1,125 170 416 3,435 1 3,436   Operating profit (loss) 4,751 4,750 2,346 2,003 13,850 (2,238 ) 11,612     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     First Half 2008 Revenues from external customers $ 246,054 $ 154,326 $ 28,075 $ 37,260 $ 465,715 $ 7,216 $ 472,931   Intersegment revenues 3,354 3,194 293 751 7,592 8 7,600   Operating profit (loss) 10,077 5,454 2,573 3,365 21,469 (1,886 ) 19,583   Assets 246,554 255,384 43,981 28,117 574,036 41,548 615,584     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