Brush Engineered Materials Inc. Reports Third Quarter 2009 Results
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MAYFIELD HTS., Ohio--(BUSINESS WIRE)-- Brush Engineered Materials Inc. (NYSE: BW) today reported net income for the third quarter of 2009 of $0.1 million or $0.01 per share, diluted, on sales of $190.5 million.
THIRD QUARTER RESULTS
Third quarter sales of $190.5 million were up 9%, or $16.4 million compared to the second quarter 2009 sales of $174.1 million. Sales have improved sequentially in the second and third quarters of 2009. The sales improvement is due primarily to an increase in demand for the Company's materials from the consumer electronics-oriented markets. Metal price inflation was also a factor in the sales increase for the quarter.
The Company recorded net income of $0.1 million versus a net loss of $0.8 million in the second quarter of 2009. In addition to the impact of the higher sales volumes, results for the quarter were favorably affected by ongoing cost reductions and discrete tax items, both of which were expected. Results for the quarter were negatively affected by delays in the shipment of higher margin defense orders, the costs of unexpected manufacturing issues and acquisition-related costs.
Sales of $190.5 million in the third quarter 2009 declined $50 million, or 21% versus sales of $240.5 million in the third quarter 2008. For the first nine months of 2009, sales of $500 million were 30% lower than sales of $713.4 million for the first nine months of 2008. The third quarter net income of $0.1 million was a decline of $9.8 million versus the 2008 third quarter net income of $9.9 million. For the first nine months of the year, the net loss of $8.8 million was down $30.5 million versus net income of $21.7 million for the same period of last year.
ACQUISITION
On October 23, 2009, the Company announced the acquisition of Barr Associates, Inc. through its wholly-owned subsidiary, Williams Advanced Materials Inc., for approximately $55.0 million. Barr Associates in Westford, Massachusetts is a leading manufacturer of precision thin film optical filters that enable complex technologies and components throughout the defense, aerospace, medical, energy, semiconductor, telecommunications, lighting and astronomy markets. The acquisition, expected to be accretive to earnings in 2010, was financed through internally generated cash plus proceeds of approximately $25.0 million from the Company's $240.0 million revolving line of credit. This acquisition continues the transformation of the Company by further broadening its advanced materials technologies, products and markets.
BUSINESS SEGMENT REPORTING
Advanced Material Technologies and Services
The Advanced Material Technologies and Services' segment sales for the third quarter of 2009 were $127.9 million compared to $128.7 million in the third quarter of the prior year. Sales for the first nine months of 2009 were $320.3 million versus $381.9 million for the same period last year. While sales were lower in the third quarter of 2009 versus 2008, third quarter sales were up 14% over the second quarter of 2009.
Operating profit for the third quarter was $8.5 million, up $0.8 million over the third quarter of 2008. Operating profit year to date was $17.6 million versus $18.3 million for the first nine months of last year.
The third quarter sales increase over the second quarter 2009 was due to continued strength in consumer electronics product applications including handsets, semiconductor, photonics and microelectronics packaging. A portion of this increase in demand is related to replenishment of customer inventory levels throughout the supply chain. Sales to the medical market were soft as compared to the first half of 2009 but are anticipated to increase over the remainder of the year.
Sales of ruthenium media targets in the third quarter and first nine months of the year remained weak. However, progress in the re-qualification of materials with key customers has continued and it is anticipated that the Company will have an opportunity to regain some of the market share it lost in 2008.
The operating profit improvement in the third quarter of 2009 versus the third quarter of 2008 is due to the cost savings initiatives earlier in the year. Margins and profitability were negatively affected by approximately $1.0 million due to manufacturing issues and resulting sales returns.
Specialty Engineered Alloys
Specialty Engineered Alloys' sales for the third quarter were $42.9 million, compared to the third quarter of 2008 sales of $77.6 million. Year-to-date sales were $121.1 million versus $231.9 million for the first nine months of the prior year. The operating loss for the third quarter was $6.3 million, which compares to an operating profit of $2.1 million for the third quarter of 2008. The operating loss for the first nine months of 2009 was $26.5 million. For the first nine months of 2008, this segment reported an operating profit of $7.5 million.
The substantial decline in sales for the third quarter and year to date as compared to the same periods last year was primarily due to the effect of the severe global recession on key markets including telecommunications and computer, oil and gas, aerospace and heavy equipment. Strip volumes have improved over the low levels in the first quarter 2009, growing 30% in the third quarter 2009 and 13% in the second quarter over the immediately preceding quarter. Demand increased in the second and third quarters of 2009 for consumer electronics, particularly handset applications. Automotive electronics and oil and gas product applications began to show a slight improvement during the third quarter. A portion of the increased demand is from customer inventory replenishment throughout the supply chain.
The operating loss for the third quarter and first nine months was due primarily to the significantly lower sales volume, related manufacturing inefficiencies and machine utilization rates associated with the lower volumes. Cost reduction initiatives including headcount reductions, reduced work hours and wage reductions helped mitigate a portion of the loss.
Beryllium and Beryllium Composites
Beryllium and Beryllium Composites' sales for the third quarter of 2009 were $10.2 million compared to third quarter 2008 sales of $17.6 million. For the first nine months of the year, sales were $36.3 million in 2009 versus $45.7 million for the same period last year. There was an operating loss of $0.5 million for the third quarter of 2009 which compares to an operating profit of $2.5 million for the same period last year. Operating profit for the first nine months of 2009 was $2.4 million compared to $5.1 million for the first nine months of 2008.
Demand for defense-related applications softened during the third quarter 2009 due to government funding delays.
Operating profit for the third quarter and year to date as compared to the same periods last year was affected by the differences in sales volume and product mix.
Engineered Material Systems
Engineered Material Systems' sales for the third quarter of 2009 were $9.5 million. This compares to $16.7 million for the third quarter of 2008. Sales for the first nine months of 2009 were $22.4 million compared to sales of $53.9 million for the same period last year. Operating profit in the third quarter was $0.1 million versus an operating profit of $1.6 million for the third quarter of 2008. The operating loss for the first nine months of 2009 was $3.4 million. For the same period last year, an operating profit of $5.0 million was reported for this segment.
The decline in sales for the third quarter and year to date is due to the effect of the severe global recession on key markets including telecommunications and computer, data storage and automotive electronics. Sales for the third quarter were up 27% over the second quarter 2009 sales as a result of increased demand for automotive electronics and other new emerging markets.
The improvement in operating profit in the third quarter versus an operating loss in the second quarter of 2009 is due to cost reduction initiatives and the improvement in sales.
OUTLOOK
While the Company did experience significant widespread weakness and an environment with limited visibility across the majority of its markets earlier in the year, the level of overall business activity began to improve as the first quarter ended and the second quarter began. The improving trend continued throughout the second and third quarters.
Overall, the Company is seeing improvement in its order entry, driven primarily by the consumer electronics-oriented markets. However, certain of its other markets, especially the industrial markets, have not shown any significant signs of improvement and the defense market, which remained strong throughout the first half, weakened in the third quarter.
While it is difficult in this environment to clearly envision future trends, the Company does expect business levels to continue to improve. Traditionally, seasonal factors can affect sales in the fourth quarter. At this time though, due to the improving trends noted earlier and the impact of the Barr Associates acquisition, fourth quarter sales are expected to improve by up to 8% from third quarter levels and be in the range of $195.0 million to $205.0 million. Looking beyond the fourth quarter, the Company expects markets to remain unpredictable and is not assuming a robust economic recovery. Thus, we expect to continue to monitor and where possible, maintain our aggressive cost reduction actions and capital control initiatives.
It is important to continue to reiterate that the Company's outlook is subject to significant variability, especially given the current economic environment. Changes in demand levels, metal price changes, metal supply conditions, new product qualification and ramp-up rates, swings in customer inventory levels, changes in the financial health of key customers, acquisition-related costs and other factors can have a significant effect on actual results. The outlook provided above 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.
CHAIRMAN'S COMMENTS
Richard Hipple, Chairman, President and CEO, stated, "I am encouraged with our quarter-to-quarter improvements as we recover from the downturn in business seen earlier in the year. The combination of the tremendous efforts on cost reductions and the market recovery, in some sectors, is laying the foundation for ongoing improvement.
"During these difficult times, we have been able to maintain our strong balance sheet which has now provided the great opportunity for us to acquire Barr Associates, announced last Friday. Barr is a leader in the thin film optical coatings market and the acquisition dramatically extends our technology and market breadth along with our other two coating acquisitions of Thin Film Technology, Inc. and Techni-Met, LLC over the past several years."
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) 407-8033, callers outside the U.S. can dial (201) 689-8033.
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, including the uncertainties related
to the impact of the current global financial crisis;
-- The condition of the markets in 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 fourth quarter and the
year 2009;
-- The successful implementation of cost reduction initiatives;
-- 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
acquisition of Barr Associates, Inc.;
-- The impact of the results of operations of Barr Associates, Inc. on our
ability to achieve fully the strategic and financial objectives related
to the acquisition, including the acquisition being accretive to
earnings;
-- 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, exchange rates,
interest rates, metal financing fees, pension costs and required cash
contributions 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 impacts our obligations and operations;
-- The conclusion of pending litigation matters in accordance with our
expectation that there will be no material adverse effects; and
-- The risk factors set forth in Part I, Item 1A of the Company's Form 10-K
for the year ended December 31, 2008.
Brush Engineered Materials Inc. is headquartered in Mayfield Heights, Ohio. The Company, through its wholly-owned subsidiaries, supplies highly engineered advanced enabling materials to global markets. Products include precious and non-precious specialty metals, inorganic chemicals and powders, specialty coatings, specialty engineered beryllium alloys, beryllium and beryllium composites, and engineered clad and plated metal systems.
Brush Engineered Materials Inc.
Digest of Earnings
October 2, 2009
2009 2008
Third Quarter
Net Sales $190,538,000 $240,494,000
Net Income $126,000 $9,909,000
Share Earnings - Basic $0.01 $0.49
Average Shares - Basic 20,215,000 20,374,000
Share Earnings - Diluted $0.01 $0.48
Average Shares - Diluted 20,421,000 20,612,000
Year-to-date
Net Sales $500,032,000 $713,425,000
Net (Loss) Income ($8,804,000 ) $21,662,000
Share Earnings - Basic ($0.44 ) $1.06
Average Shares - Basic 20,178,000 20,387,000
Share Earnings - Diluted ($0.44 ) $1.05
Average Shares - Diluted 20,178,000 20,616,000
Consolidated Balance Sheets
(Unaudited)
Oct. 2, Dec. 31,
(Dollars in thousands) 2009 2008
Assets
Current assets
Cash and cash equivalents $ 26,909 $ 18,546
Accounts receivable 78,308 87,878
Other receivables 10,091 3,378
Inventories 129,454 156,718
Prepaid expenses 25,874 23,660
Deferred income taxes 9,666 4,199
Total current assets 280,302 294,379
Other assets 30,082 34,444
Related-party notes receivable 98 98
Long-term deferred income taxes 9,945 9,944
Property, plant and equipment 647,253 635,266
Less allowances for depreciation, depletion and 438,083 428,012
amortization
209,170 207,254
Goodwill 35,778 35,778
Total Assets $ 565,375 $ 581,897
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt $ 28,110 $ 30,622
Current portion of long-term debt 0 600
Accounts payable 20,846 28,014
Other liabilities and accrued items 43,327 45,131
Unearned revenue 135 113
Total current liabilities 92,418 104,480
Other long-term liabilities 33,734 19,356
Retirement and post-employment benefits 80,515 97,168
Long-term income taxes 3,029 3,028
Deferred income taxes 727 163
Long-term debt 10,905 10,605
Shareholders' equity 344,047 347,097
Total Liabilities and Shareholders' Equity $ 565,375 $ 581,897
See notes to consolidated financial statements.
Consolidated
Statements of Income
(Unaudited)
Third Quarter Ended Nine Months Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
(Dollars in
thousands except 2009 2008 2009 2008
share and per share
amounts)
Net sales $ 190,538 $ 240,494 $ 500,032 $ 713,425
Cost of sales 165,347 195,321 438,104 586,655
Gross margin 25,191 45,173 61,928 126,770
Selling, general and
administrative 21,468 26,069 64,707 81,093
expense
Research and 1,720 1,748 4,940 4,889
development expense
Other-net 2,554 4,335 5,784 8,185
Operating profit (551 ) 13,021 (13,503 ) 32,603
(loss)
Interest expense - 221 539 819 1,524
net
Income (loss) before (772 ) 12,482 (14,322 ) 31,079
income taxes
Income tax (benefit) (898 ) 2,573 (5,518 ) 9,417
expense
Net income (loss) $ 126 $ 9,909 $ (8,804 ) $ 21,662
Per share of common $ 0.01 $ 0.49 $ (0.44 ) $ 1.06
stock: basic
Weighted average
number of common 20,215,000 20,374,000 20,178,000 20,387,000
shares outstanding
Per share of common $ 0.01 $ 0.48 $ (0.44 ) $ 1.05
stock: diluted
Weighted average
number of common 20,421,000 20,612,000 20,178,000 20,616,000
shares outstanding
See notes to
consolidated
financial
statements.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
Oct. 2, Sept. 26,
(Dollars in thousands) 2009 2008
Net (loss) income $ (8,804 ) $ 21,662
Adjustments to reconcile net (loss) income to net
cash provided from operating activities:
Depreciation, depletion and amortization 21,635 21,903
Amortization of mine costs 2,620 3,600
Amortization of deferred financing costs in interest 313 272
expense
Derivative financial instrument ineffectiveness - 171
Stock-based compensation expense 2,555 3,410
Changes in assets and liabilities net of acquired
assets and liabilities:
Decrease (increase) in accounts receivable 9,115 (6,434 )
Decrease (increase) in other receivables (6,713 ) 11,263
Decrease (increase) in inventory 27,410 (7,055 )
Decrease (increase) in prepaid and other current 2,048 (2,425 )
assets
Decrease (increase) in deferred income taxes (4,798 ) 25
Increase (decrease) in accounts payable and accrued (8,677 ) (12,133 )
expenses
Increase (decrease) in unearned revenue 19 (1,497 )
Increase (decrease) in interest and taxes payable (637 ) 423
Increase (decrease) in long-term liabilities (17,577 ) 405
Other - net 2,528 1,666
Net cash provided from operating activities 21,037 35,256
Cash flows from investing activities:
Payments for purchase of property, plant and (26,694 ) (22,611 )
equipment
Payments for mine development (460 ) (391 )
Reimbursements for capital equipment under government 15,440 6,052
contracts
Payments for purchase of business net of cash - (87,462 )
received
Proceeds from sale of acquired inventory to - 24,325
consignment line
Other investments - net 1,321 66
Net cash used in investing activities (10,393 ) (80,021 )
Cash flows from financing activities:
Proceeds from issuance (repayment) of short-term debt (2,337 ) 7,116
Proceeds from issuance of long-term debt 7,700 45,900
Repayment of long-term debt (8,000 ) (30,600 )
Issuance of common stock under stock option plans 444 243
Tax benefit from exercise of stock options 47 45
Repurchase of common stock - (2,086 )
Net cash (used in) provided from financing activities (2,146 ) 20,618
Effects of exchange rate changes (135 ) (440 )
Net change in cash and cash equivalents 8,363 (24,587 )
Cash and cash equivalents at beginning of period 18,546 31,730
Cash and cash equivalents at end of period $ 26,909 $ 7,143
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 October 2, 2009 and December 31, 2008 and the results of operations for the third quarter and nine months ended October 2, 2009 and September 26, 2008. 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
Oct. 2, Dec. 31,
(Dollars in thousands) 2009 2008
Principally average cost:
Raw materials and supplies $ 40,085 $ 41,468
Work in process 114,305 139,552
Finished goods 42,389 50,579
Gross inventories 196,779 231,599
Excess of average cost over LIFO inventory value 67,325 74,881
Net inventories $ 129,454 $ 156,718
Notes to Consolidated Financial Statements (Unaudited) Note C - Pensions and Other Post-retirement Benefits As a result of a significant reduction in force, management determined that there was a curtailment of the domestic defined benefit pension plan in the first quarter 2009. The plan assets and liabilities were remeasured as of the curtailment date of February 28, 2009. As part of the remeasurement, management reviewed the key assumptions and determined that the discount rate should be increased to 6.80% from the 6.15% rate assumed at December 31, 2008. The revised rate was determined using the same methodology as was employed at year-end 2008. All other key assumptions, including the expected rate of return on assets, remained unchanged from December 31, 2008. The curtailment reduced the annual expense for 2009 on the domestic plan from a previously estimated $5.3 million to $4.3 million. In addition, the curtailment resulted in the recording of a $1.1 million one-time benefit in the first quarter 2009 as a result of applying the percentage reduction in the estimated future working lifetime of the plan participants against the unrecognized prior service cost benefit. Cost of sales was reduced by $0.8 million and selling, general and administrative expense was reduced by $0.3 million from the recording of the one-time benefit. The Company made contributions totaling $16.2 million to the defined benefit pension plan in the first nine months of 2009 as expected. The following is a summary of the third quarter and first nine months 2009 and 2008 net periodic benefit cost for the domestic defined benefit pension plan and the domestic retiree medical plan.
Pension Benefits Other Benefits
Third Quarter Ended Third Quarter Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
(Dollars in thousands) 2009 2008 2009 2008
Components of net periodic benefit
cost
Service cost $ 1,067 $ 1,270 $ 72 $ 76
Interest cost 2,164 1,976 482 532
Expected return on plan assets (2,445 ) (2,180 ) - -
Amortization of prior service cost (135 ) (161 ) (9 ) (9 )
Amortization of net loss 375 294 - -
Net periodic benefit cost $ 1,026 $ 1,199 $ 545 $ 599
Pension Benefits Other Benefits
Nine Months Ended Nine Months Ended
Oct. 2, Sept. 26 Oct. 2, Sept. 26
(Dollars in thousands) 2009 2008 2009 2008
Components of net periodic benefit
cost
Service cost $ 3,249 $ 3,811 $ 217 $ 228
Interest cost 6,321 5,928 1,446 1,595
Expected return on plan assets (7,061 ) (6,541 ) - -
Amortization of prior service cost (414 ) (483 ) (27 ) (27 )
Amortization of net loss 1,184 883 - -
Curtailment Gain (1,069 ) - - -
Net periodic benefit cost $ 2,210 $ 3,598 $ 1,636 $ 1,796
Notes to Consolidated Financial Statements (Unaudited) Note D - Segment Reporting Segment information for 2008 has been recast to include Zentrix Technologies Inc. in the Advanced Material Technologies and Services segment. Zentrix's results previously were reported in All Other. Beginning in 2009, Zentrix is being managed by Advanced Material Technologies and Services and is included with that segment's financial results in the Company's internal reporting.
Advanced
Material Specialty Beryllium Engineered
Technologies Engineered and Material All
Beryllium
(Dollars in and Services Alloys Composites Systems Subtotal Other Total
thousands)
Third
Quarter 2009
Revenues
from $ 127,912 $ 42,931 $ 10,171 $ 9,524 $ 190,538 $ - $ 190,538
external
customers
Intersegment 155 2,621 63 409 3,248 - 3,248
revenues
Operating
profit 8,534 (6,308 ) (472 ) 95 1,849 (2,400 ) (551 )
(loss)
Third
Quarter 2008
Revenues
from $ 128,668 $ 77,586 $ 17,580 $ 16,660 $ 240,494 $ - $ 240,494
external
customers
Intersegment 380 738 36 472 1,626 - 1,626
revenues
Operating
profit 7,731 2,074 2,548 1,612 13,965 (944 ) 13,021
(loss)
First Nine
Months 2009
Revenues
from $ 320,256 $ 121,063 $ 36,285 $ 22,428 $ 500,032 $ - $ 500,032
external
customers
Intersegment 330 3,896 141 952 5,319 - 5,319
revenues
Operating
profit 17,629 (26,501 ) 2,387 (3,355 ) (9,840 ) (3,663 ) (13,503 )
(loss)
Assets 213,961 202,367 66,447 19,892 502,667 62,708 565,375
First Nine
Months 2008
Revenues
from $ 381,938 $ 231,912 $ 45,655 $ 53,920 $ 713,425 $ - $ 713,425
external
customers
Intersegment 1,277 3,932 329 1,223 6,761 - 6,761
revenues
Operating
profit 18,251 7,528 5,121 4,977 35,877 (3,274 ) 32,603
(loss)
Assets 229,727 257,314 49,261 25,294 561,596 31,138 592,734
Source: Brush Engineered Materials Inc.
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