Brush Engineered Materials Inc. Reports Sales of $233.6 Million, Up 25%, and EPS of $0.38 for the Second Quarter of 2007

Brush Engineered Materials Inc. (NYSE:BW) today reported second quarter 2007 sales of $233.6 million, up $46.5 million, or 25%, compared to the second quarter of 2006. Net income for the second quarter was $7.9 million or $0.38 per share, diluted, compared to net income of $7.0 million or $0.35 per share, diluted, for the same quarter of the prior year. Included in the results for the quarter was a charge of approximately $0.15 per share related to an isolated production ramp up quality issue with a new product, which has since been resolved. In addition, a significant decline in the market price of ruthenium occurred in the quarter leading to a non-cash lower of cost or market inventory charge of approximately $0.13 per share. Helping to offset the impact of the above two charges was an expected margin benefit of approximately $0.14 per share related to the sale of ruthenium inventory that was in the production system at the beginning of the year. These three factors combined, negatively affected earnings by approximately $4.3 million pretax or $0.14 per share after tax. Second quarter sales were the second highest quarterly sales in the Company’s history and the eighteenth consecutive quarter where sales were higher than the comparable quarter of the prior year. This sales growth was driven largely by stronger demand from the data storage market for the Company’s new hard disk drive materials, growth in sales to the defense market, improved pricing and the pass through of higher precious metal prices. Metal prices accounted for approximately 3% of the sales increase in the quarter. The Company’s organic sales growth was approximately 22%. International sales were 42% of total sales in the second quarter versus 33% for the second quarter of 2006. Most of the international growth was in Asia where the Company has continued to expand its presence in China, Japan, Korea and Singapore. Gross margin as a percent of sales for the second quarter of 2007 was 18% versus 21% of sales for the second quarter of 2006. The isolated ramp up quality issue, lower cost of market inventory charge and the expected margin benefit related to the sale of ruthenium inventory, all noted above, combined to reduce margins by $4.3 million or approximately 2% of sales in the second quarter. In addition, the sales mix in the quarter and lower production in the Specialty Engineered Alloys segment negatively affected gross margins compared to the prior year. Operating profit in the second quarter was $12.6 million or 5.4% of sales compared to $11.3 million or 6% of sales in the second quarter of 2006. The three items noted above that total $4.3 million, negatively affected operating profit as a percent of sales by 1.8 percentage points. For the first six months of the year, sales were a record $483.9 million, up $129.1 million, or 36%, compared to the same period of the prior year. Sales growth net of metal prices was approximately 31%. The first half net income was $31.1 million or $1.50 diluted per share, up $18.9 million compared to net income of $12.2 million or $0.62 diluted per share for the first half of 2006. BUSINESS SEGMENT REPORTING Beginning with the fourth quarter of 2006, the Company changed its segment reporting to more closely align with the way the business is currently managed. Prior-year results have been adjusted for each segment to reflect the change. Advanced Material Technologies and Services The Advanced Material Technologies and Services segment consists of Williams Advanced Materials Inc. (WAM). The Advanced Material Technologies and Services’ segment sales for the second quarter of 2007 were up 46% to $121.3 million compared to $82.9 million in the second quarter of the prior year. Sales for the first six months of 2007 were $264.9 million, 67% above 2006 first half sales of $158.3 million. Precious metal prices accounted for approximately 8% of the sales growth in the second quarter and 10% in the first half. Operating profit for the second quarter was $4.9 million versus $9.6 million for the second quarter of 2006. Operating profit year to date was $36.8 million, up $18.2 million over the same period last year. The strong sales growth in the second quarter and first half was driven primarily by demand for WAM’s new ruthenium-based magnetic media materials targeted for the data storage market. In addition, wireless telecommunications and photonics product applications also contributed to the strong sales growth throughout the first half of the year. As previously announced, WAM is in the process of expanding its Brewster, New York facility to support the growth of the data storage market and the related perpendicular magnetic recording opportunity. This facility is now operational and is in the ramp up stage of operation. New market segments related to energy, medical and new electronics devices continue to offer opportunities for the core product portfolio at WAM. In addition WAM continues to expand its geographic reach into Asia and Eastern Europe to support its critical customers and new markets. WAM recently announced the opening of a new wholly-owned subsidiary in the Czech Republic to provide manufacturing, distribution and chamber services for the central European markets. WAM is also in the process of constructing a new manufacturing facility in China. Operating profit during the second quarter was negatively impacted by approximately $8.8 million due to the isolated ramp up quality issue of a new product and the lower cost of market charge related to ruthenium inventory noted above. The quality issue has been resolved and WAM has resumed shipping product. Operating profit during the second quarter was favorably affected by approximately $4.5 million from the margin benefit related to the sale of the ruthenium inventory that was in the production system at the beginning of the year. Specialty Engineered Alloys The Specialty Engineered Alloys segment consists of Alloy Products which includes bulk and strip form copper-based alloy products, hydroxide and the Company’s line of ToughMet® materials. Specialty Engineered Alloys’ sales for the second quarter were $75.5 million, up approximately 10%, or $6.6 million, compared to the second quarter 2006 sales of $69.0 million. Year-to-date sales of $145.9 million were up $16.5 million or 13% higher than sales of $129.4 million in the first half of 2006. Operating profit for the second quarter was $1.4 million versus $1.5 million for the second quarter of 2006. Operating profit of $6.7 million for the first half of 2007 was $4.8 million higher than the first half 2006 operating profit of $1.9 million. The increase in sales in the second quarter and first half is due to higher selling prices from the increased percentage of sales subject to the pass through of current base metal prices, particularly copper, favorable product mix and the sale of hydroxide. Alloy Products has continued strong demand from the North American oil and gas and aerospace markets, and strong European sales across all market segments. New products such as ToughMet continue to find their way into new application opportunities. The wireless handset market remained weaker throughout the first half due to customer inventory builds. Operating profit benefited from a favorable product mix and higher prices associated with the pass through of base metal costs. Beryllium and Beryllium Composites The Beryllium and Beryllium Composites segment consists of Beryllium Products including beryllia ceramic manufactured by Brush Ceramic Products Inc. Beryllium and Beryllium Composites’ sales for the second quarter of 2007 was $16.5 million, up 29% or $3.7 million compared to the second quarter of 2006. Year-to-date sales of $31.7 million were up $8.5 million or 37% higher than the same period last year. Operating profit for the second quarter was $2.4 million, up $1.5 million versus $0.9 million for the second quarter of 2006. Operating profit for the first six months of 2007 was $4.6 million, up $3.5 million above operating profit of $1.1 million for the first half of 2006. The Beryllium and Beryllium Composites double-digit sales growth for both the second quarter and first half of the year has been fueled by demand for defense and medical and industrial x-ray product applications. Also, sales for acoustic speaker applications contributed to the sales growth. Defense sales of AlBeMet® materials continued to show strength throughout the second quarter driven by tactical optics (including FLIR systems), airborne electronics and space systems. The improvement in operating profit is due to the increase in sales volume. Engineered Material Systems The Engineered Material Systems segment is comprised of Technical Materials, Inc. (TMI). Engineered Material Systems’ sales for the second quarter of 2007 were $16.9 million, $1.1 million below the second quarter 2006 sales of $18.0 million. Sales for the first six months of 2007 were $33.6 million, down $2.3 million versus the first half sales of 2006. Operating profit in the second quarter was $0.7 million compared to an operating profit of $1.2 million for the second quarter of 2006. Operating profit for the first six months of 2007 was $1.3 million versus $2.6 million for the first half of 2006. The decline in TMI sales for both the second quarter and first half of the year is due to softer demand from the automotive electronics market offset in part by strength from the new disk drive materials. New products accounted for 28% of TMI sales in the second quarter of 2007. The sales order entry rate strengthened late in the second quarter. Lower volume and unfavorable product mix negatively affected operating profit for both the second quarter and first half. OUTLOOK Beginning in the first quarter of the year, the Company operated within softer than expected market conditions in automotive and certain segments of consumer electronics. These conditions continued into the second quarter and inventory corrections in these markets negatively affected demand. While the second quarter was weaker than expected, due largely to these same factors, as well as a weaker media market and the factors identified that should not recur, the Company remains optimistic about the balance of the year. The Company is currently seeing improvement in conditions in the markets that were weaker earlier and, while cautious, expects this momentum, plus the continued ramp up in demand for the new ruthenium-based media materials to help overcome the effect of the normal seasonal factors that can lead to lower revenues in the third and fourth quarters of the year compared to the first and second quarters. The improvement in market conditions and the continued ramp up of media materials are currently expected to lead to a sequential improvement in sales as the year progresses. Based on this, the Company at this time expects sales for the third quarter to be in the $240.0 to $250.0 million range, up approximately 20% to 25% compared to same quarter of the prior year. Earnings are expected to be in the range of $0.45 to $0.55 per share. It is important to continue to reiterate that the Company's sales and earnings estimates are subject to significant variability, such as that demonstrated in the most recent quarter. Metal prices and supply conditions as well as fluctuations in demand levels driven by inventory swings in the market, and new product ramp up rates in critical markets such as the media market can each have a significant effect on actual results. The outlook for the quarter is based on the Company's best estimates at this time and are subject to significant fluctuations due to these factors. CHAIRMAN’S COMMENTS Commenting on the results, Dick Hipple, Chairman, President and CEO, stated "I am disappointed by the market conditions and operating performance that led to the weaker than expected results in the second quarter, however I am confident that internally we have taken the appropriate corrective operational actions and performance will be on track for the second half of the year. I am encouraged with the continued double-digit sales growth and the strong increase in international sales that we have experienced during the first half of 2007. We are well positioned with our recently completed Brewster, New York facility expansion to accommodate the anticipated future growth in the disk drive media market. We have continued to invest in Asia and Europe to broaden our geographic reach and are actively introducing new products and services to grow existing and new markets.” CONFERENCE CALL Brush Engineered Materials will conduct a teleconference in conjunction with today's release. The teleconference begins at 1:00 p.m. Eastern Time, August 3, 2007. 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. 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 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 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 29, 2007     2007 2006   Second Quarter   Net Sales $233,563,000 $187,078,000   Net Income $7,939,000 $6,968,000   Share Earnings - Basic $0.39 $0.36   Average Shares - Basic 20,351,000 19,593,000   Share Earnings - Diluted $0.38 $0.35   Average Shares - Diluted 20,736,000 19,865,000     Year-to-date   Net Sales $483,877,000 $354,801,000   Net Income $31,053,000 $12,195,000   Share Earnings - Basic $1.53 $0.63   Average Shares - Basic 20,254,000 19,428,000   Share Earnings - Diluted $1.50 $0.62   Average Shares - Diluted 20,709,000 19,680,000 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. Consolidated Statements of Income (Unaudited)   Second Quarter Ended First Half Ended June 29, June 30, June 29, June 30, (Dollars in thousands except share and 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. 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. 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 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.     Note B - Inventories   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   Notes to Consolidated Financial Statements (Unaudited)     Note D - 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.   (Dollars in thousands)     Advanced Material Technologies and Services   SpecialtyEngineeredAlloys   Berylliumand Beryllium Composites EngineeredMaterialSystems   Subtotal   AllOther   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