Brush Engineered Materials Inc. Reports Third Quarter 2007 Results; Sales Increase 15%, Net Income Increases 40%

Brush Engineered Materials Inc. (NYSE:BW) today reported third quarter 2007 sales of $230.9 million, up $30.5 million, or 15%, and net income of $9.9 million, up $2.8 million, or 40%, both compared to the third quarter of 2006. Earnings per share, diluted, was $0.48 compared to $0.35 per share, diluted, for the same quarter of the prior year. The third quarter was the nineteenth consecutive quarter where sales were higher than the comparable quarter of the prior year and the eighth consecutive quarter of sales growth greater than 15% over the comparable quarter of the prior year. The majority of the sales growth in the quarter was driven by demand from the data storage market for the Company’s new hard disk drive materials as the conversion to perpendicular media continues to ramp up. Increased demand in defense, disc drive arm materials and ToughMet® materials also contributed to the growth in sales. Metal prices passed through to customers accounted for approximately 2% of the sales increase in the quarter. The Company’s organic sales growth was approximately 13%. International sales continued to grow at a faster rate than domestic sales, reaching 40% of total sales in the third quarter compared to 34% in the third quarter of the prior year. The majority of the international growth was in Asia where the Company continues to expand its presence in China, Japan, Korea and Singapore. While sales were weaker than what the Company had expected coming into the quarter due to lower than expected demand for certain of its products in two key markets, cell phone handsets and magnetic media, improved margins helped offset the impact of the lower volumes. Gross margins and operating profit margins continued to improve in the quarter. Gross margin was $46.3 million, up $6.6 million compared to the third quarter 2006 gross margin of $39.7 million. Gross margin as a percent of sales was 20.0% compared to 19.8% for the third quarter of the prior year. Operating profit in the third quarter was $16.2 million or 7.0% of sales compared to $10.6 million or 5.3% of sales in the third quarter of 2006. The operating margin improvements were driven by the leverage from the Company’s sales growth as well as the ongoing initiatives to lower costs and increase operating efficiencies. For the first nine months of the year, sales were a record $714.8 million, up $159.6 million, or 29%, compared to the same period of the prior year. Sales growth net of metal prices was approximately 25%. Net income for the first nine months was $41.0 million, or $1.98, diluted, per share, up $21.7 million compared to net income of $19.3 million, or $0.96, diluted, per share for the same period in 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 sales for the third quarter of 2007 were up 30% to $119.4 million compared to $92.0 million in the third quarter of the prior year. Sales for the first nine months of 2007 were $384.4 million, 54% above the same period last year. Organic growth was approximately 24% in the third quarter and 48% through the first nine months of the year. Precious metal prices passed through to customers accounted for approximately 6% of the sales growth in both the third quarter and the first nine months. Operating profit for the third quarter was $12.3 million, up $6.1 million compared to $6.2 million for the third quarter of 2006. Operating profit year to date was $49.1 million, up $24.3 million compared to the same period last year. The strong sales growth in the third quarter and first nine months of the year continued to be driven primarily by demand for Williams Advanced Materials Inc.’s (WAM) new ruthenium-based magnetic media materials for the data storage market. In addition, wireless telecommunications and photonics product applications, semiconductor and inorganic materials also contributed to the strong sales growth throughout the first nine months of the year. WAM completed the first phase of the expansion of its Brewster, New York facility to support the growth of the data storage market and the related perpendicular magnetic recording opportunity during the second quarter of this year. The successful ramp-up of operations to support additional growth continued during the third quarter. WAM also made good progress in the quarter in its ongoing efforts to qualify its materials for additional opportunities in the magnetic media market. New market opportunities related to energy, medical and new electronics devices also offer growth potential over the core product portfolio. WAM is expanding its geographic reach into Asia with the construction of a new operation in Suzhou, China and plans to expand its operations in Singapore. Operating profit for the third quarter was 10.3% of sales compared to 6.7% for the prior year driven primarily by the leverage from the increased sales volume. Specialty Engineered Alloys The Specialty Engineered Alloys segment consists of Alloy Products which includes bulk and strip form high performance copper-based alloy products, hydroxide and the Company’s line of ToughMet® materials. Specialty Engineered Alloys’ sales for the third quarter were $74.1 million, up slightly compared to the third quarter 2006 sales of $73.2 million. Year-to-date sales of $220.0 million were up $17.4 million or 9% higher than sales of $202.6 million for the first nine months of 2006. Operating profit for the third quarter was $2.6 million versus $3.7 million for the third quarter of 2006. Operating profit of $9.3 million year-to-date 2007 was $3.7 million higher than operating profit of $5.6 million for the same period last year. The increase in sales for the third quarter is due primarily to higher selling prices and the pass through of higher base metal prices, particularly copper passed through to customers. Alloy Products continues to experience strong demand from its global oil and gas and aerospace markets and new products such as ToughMet® are continuing to find their way into new application opportunities particularly in aerospace, oil and gas and heavy equipment markets. This strength however was offset in the quarter by significantly weaker demand from the telecommunications handset market. Overall demand, in unit volume terms, was down 10% in the quarter. However, Alloy Products began to see some increased demand in handsets in the latter weeks of the quarter. Third quarter operating profit was negatively impacted by the lower sales volume which led to manufacturing inefficiencies and lower production levels. 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 third quarter of 2007 were $15.2 million, up 12%, or $1.6 million, compared to the third quarter of 2006. Year-to-date sales of $46.8 million were up $10.1 million, or 28% higher than the same period last year. Operating profit for the second quarter was $2.2 million versus $1.7 million for the third quarter of 2006. Operating profit for the first nine months of 2007 was $6.8 million, up $4.0 million above operating profit of $2.8 million for the first nine months of 2006. The Beryllium and Beryllium Composites double-digit sales growth for both the third quarter and year to date has been fueled primarily by demand for defense applications. Defense sales of AlBeMet® materials continued to show strength throughout the third quarter driven by tactical optics (including FLIR systems), airborne electronics and space systems. Medical and industrial x-ray and acoustic speaker product applications also contributed to the sales growth for the first nine months of the year. The improvement in operating profit is due to the increase in sales volume. Engineered Material Systems Engineered Material Systems’ sales for the third quarter of 2007 were $18.6 million, up $1.6 million, or 9%, compared to the third quarter 2006 sales of $17.0 million. Sales for the first nine months of 2007 were $52.2 million, down slightly from year-to-date 2006 sales of $53.0 million. Operating profit in the third quarter was $1.7 million compared to an operating profit of $0.6 million for the third quarter of 2006. Operating profit for the first nine months of 2007 was $3.0 million versus $3.2 million for the same period in 2006. The increase in sales for the third quarter was driven by stronger demand for disk drive applications. New products accounted for 20% of Technical Materials, Inc.’s (TMI) sales in the third quarter of 2007. The sales order entry rate also strengthened during the third quarter. The improvement in operating profit for the third quarter was due to the improved sales volume. OUTLOOK Going into the third quarter, the Company expected stronger demand from two of its key markets during the third quarter. Sales of the Company’s products into cell phone handset and magnetic media markets were weaker than expected. The overall cell phone handset market is strong and demand for the materials supplied into that market from the Company’s Advanced Material Technologies and Services Segment was as the Company expected in the third quarter. However, the customers and applications served by the Company’s Specialty Engineered Alloys segment in this market were well below expectations. In magnetic media, or hard disc drives, while the market gained strength following a softer second quarter, the demand from the customers the Company supplies in support of the industry conversion to perpendicular recording technology was also below the Company’s expectations. In both of these markets, conditions improved as the third quarter progressed and demand levels in the final weeks of the quarter were well above those of the first several weeks. Given these trends, the Company at this time expects sales and earnings levels for the fourth quarter of the year to be stronger than the third quarter. The current expectation is for fourth quarter sales to be in the $245.0 million to $255.0 million range, up 18% to 23% compared to the same quarter of the prior year. Earnings are expected to be in the range of $0.50 to $0.60 per share. It is important to continue to reiterate that the Company’s sales and earnings estimates are subject to significant variability. Metal price changes, metal supply conditions, fluctuations in demand levels driven by such factors as inventory swings in the market, and new product ramp-up rates in critical markets such as the media market can have a significant effect on actual results. The outlook for the fourth quarter 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 Commenting on the results, Dick Hipple, Chairman, President and CEO, stated, "I am very pleased with the continued growth and improvement in margins noted in the third quarter as well as the progress made with our initiatives to grow with the new perpendicular media technology. I was disappointed to see the softness noted in this market during the first part of the quarter as well as the impact of the downturn in demand for products supplied to the cell phone handset market by our Specialty Engineered Alloys business. It is noteworthy that our sales have now grown over the comparable quarter in the prior year for nineteen straight quarters and operating profit has improved over the comparable quarter for nine consecutive quarters. We are continuing to leverage our materials technology and services by targeting high growth opportunities. We are committed to profitably growing this company and creating value for our shareholders.” CONFERENCE CALL Brush Engineered Materials will conduct a teleconference in conjunction with today's release. The teleconference begins at 2:00 p.m. Eastern Time, October 25, 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   September 28, 2007     2007 2006   Third Quarter   Net Sales $230,928,000 $200,426,000   Net Income $9,908,000 $7,087,000   Share Earnings - Basic $0.49 $0.36   Average Shares - Basic 20,392,000 19,784,000   Share Earnings - Diluted $0.48 $0.35   Average Shares - Diluted 20,730,000 20,111,000     Year-to-date   Net Sales $714,805,000 $555,227,000   Net Income $40,961,000 $19,282,000   Share Earnings - Basic $2.02 $0.99   Average Shares - Basic 20,300,000 19,547,000   Share Earnings - Diluted $1.98 $0.96   Average Shares - Diluted 20,736,000 19,998,000 Consolidated Balance Sheets (Unaudited)     Sept. 28, Dec. 31, (Dollars in thousands)   2007   2006 Assets Current assets Cash and cash equivalents $ 16,967 $ 15,644 Accounts receivable 116,877 86,461 Inventories 163,798 151,950 Prepaid expenses 16,308 13,988 Deferred income taxes 3,279 3,541 Total current assets 317,229 271,584   Other assets 13,152 13,577 Related-party notes receivable 98 98 Long-term deferred income taxes 4,655 15,575   Property, plant and equipment 575,512 557,861 Less allowances for depreciation, depletion and amortization 392,647 381,932 182,865 175,929   Goodwill 21,782 21,843 $ 539,781 $ 498,606     Liabilities and Shareholders' Equity Current liabilities Short-term debt $ 29,908 $ 28,076 Current portion of long-term debt 631 632 Accounts payable 30,240 30,744 Other liabilities and accrued items 53,239 52,161 Unearned revenue 2,652 314 Income taxes 1,086 4,515 Total current liabilities 117,756 116,442   Other long-term liabilities 11,780 11,642 Retirement and post-employment benefits 59,200 59,089 Long-term income taxes 4,331 - Deferred income taxes 0 151 Long-term debt 9,645 20,282   Shareholders' equity 337,069 291,000 $ 539,781 $ 498,606     See notes to consolidated financial statements. Consolidated Statements of Income (Unaudited)               Third Quarter Ended Nine Months Ended (Dollars in thousands except share and per share amounts)   Sept. 28, 2007   Sept. 29, 2006 Sept. 28, 2007   Sept. 29, 2006   Net sales $ 230,928 $ 200,426 $ 714,805 $ 555,227 Cost of sales 184,655 160,715 557,367 441,554 Gross margin 46,273 39,711 157,438 113,673 Selling, general and administrative expense 27,456 26,848 82,690 77,951 Research and development expense 968 971 3,569 3,006 Other-net 1,679 1,258 5,537 1,960 Operating profit 16,170 10,634 65,642 30,756 Interest expense 286 983 1,540 3,250 Income before income taxes 15,884 9,651 64,102 27,506   Income taxes 5,976 2,564 23,141 8,224   Net income $ 9,908 $ 7,087 $ 40,961 $ 19,282   Per share of common stock: basic $ 0.49 $ 0.36 $ 2.02 $ 0.99   Weighted average number of common shares outstanding 20,392,000 19,784,000 20,300,000 19,547,000     Per share of common stock: diluted $ 0.48 $ 0.35 $ 1.98 $ 0.96   Weighted average number of common shares outstanding 20,730,000 20,111,000 20,736,000 19,998,000     See notes to consolidated financial statements. Consolidated Statements of Cash Flows       (Unaudited) Nine Months Ended Sept. 28, Sept. 29, (Dollars in thousands)     2007   2006   Net income $ 40,961 $ 19,282 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation, depletion and amortization 17,944 17,668 Amortization of deferred financing costs in interest expense 321 440 Derivative financial instrument ineffectiveness 42 (163 ) Stock-based compensation expense 2,928 1,200 Decrease (increase) in accounts receivable (29,122 ) (30,951 ) Decrease (increase) in inventory (12,440 ) (33,966 ) Decrease (increase) in prepaid and other current assets (1,941 ) (896 ) Decrease (increase) in deferred income taxes (3,680 ) 6,075 Increase (decrease) in accounts payable and accrued expenses (3,763 ) 14,212 Increase (decrease) in unearned revenue 2,338 190 Increase (decrease) in interest and taxes payable 10,471 1,198 Increase (decrease) in other long-term liabilities 3,286 3,013 Other - net (2,080 ) 7,123   Net cash provided from operating activities 25,265 4,425     Cash flows from investing activities: Payments for purchase of property, plant and equipment (17,644 ) (9,659 ) Payments for mine development (6,778 ) (72 ) 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 46 - Other investments - net 42   33   Net cash used in investing activities (22,184 ) (35,392 )   Cash flows from financing activities: Proceeds from issuance (repayment) of short-term debt 1,467 7,619 Proceeds from issuance of long-term debt 15,747 26,000 Repayment of long-term debt (26,393 ) (10,633 ) Issuance of common stock under stock option plans 4,914 9,441 Tax benefit from exercise of stock options 2,733   -   Net cash provided from (used in) financing activities (1,532 ) 32,427 Effects of exchange rate changes (226 ) (284 ) Net change in cash and cash equivalents 1,323 1,176 Cash and cash equivalents at beginning of period 15,644   10,642   Cash and cash equivalents at end of period $ 16,967   $ 11,818       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 September 28, 2007 and December 31, 2006 and the results of operations for the third quarter and first nine months ended September 28, 2007 and September 29, 2006. All of the adjustments were of a normal and recurring nature.         Note B - Inventories   Sept. 28, Dec. 31, (Dollars in thousands)             2007   2006   Principally average cost: Raw materials and supplies $ 28,036 $ 36,390 Work in process 150,741 124,670 Finished goods 52,601   56,721   Gross inventories 231,378 217,781   Excess of average cost over LIFO inventory value 67,580   65,831   Net inventories $ 163,798   $ 151,950           Note C - Pensions and Other Post-retirement Benefits   Pension Benefits Other Benefits Third Quarter Ended Third Quarter Ended Sept. 28, Sept. 29, Sept. 28, Sept. 29, (Dollars in thousands) 2007 2006 2007 2006   Components of net periodic benefit cost   Service cost $ 1,185 $ 1,253 $ 75 $ 74 Interest cost 1,888 1,742 477 476 Expected return on plan assets (2,200 ) (2,078 ) - - Amortization of prior service cost (167 ) (178 ) (9 ) (9 ) Amortization of net loss 445   517   -   -   Net periodic benefit cost $ 1,151   $ 1,256   $ 543   $ 541     Pension Benefits Other Benefits Nine Months Ended Nine Months Ended Sept. 28, Sept. 29, Sept. 28, Sept. 29, (Dollars in thousands) 2007 2006 2007 2006   Components of net periodic benefit cost   Service cost $ 3,499 $ 3,760 $ 226 $ 222 Interest cost 5,577 5,227 1,431 1,427 Expected return on plan assets (6,497 ) (6,235 ) - - Amortization of prior service cost (494 ) (534 ) (27 ) (27 ) Amortization of net loss 1,314   1,550   -   -   Net periodic benefit cost $ 3,399   $ 3,768   $ 1,630   $ 1,622   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   Specialty Engineered Alloys   Beryllium Composites and Beryllium   Engineered Material Systems   Subtotal   All Other   Total Third Quarter 2007 Revenues from external customers $ 119,418 $ 74,117 $ 15,159 $ 18,614 $ 227,308 $ 3,620 $ 230,928   Intersegment revenues 1,406 335 209 322 2,272 2 2,274   Operating profit (loss) 12,279 2,566 2,204 1,710 18,759 (2,589 ) 16,170     Third Quarter 2006 Revenues from external customers $ 91,994 $ 73,205 $ 13,554 $ 17,039 $ 195,792 $ 4,634 $ 200,426   Intersegment revenues 1,125 2,463 270 1,287 5,145 19 5,164   Operating profit (loss) 6,158 3,695 1,706 602 12,161 (1,527 ) 10,634     First Nine Months 2007 Revenues from external customers $ 384,352 $ 220,028 $ 46,818 $ 52,227 $ 703,425 $ 11,380 $ 714,805   Intersegment revenues 3,879 3,403 752 1,787 9,821 14 9,835   Operating profit (loss) 49,109 9,258 6,762 3,016 68,145 (2,503 ) 65,642   Assets 190,920 239,339 38,217 27,287 495,763 44,018 539,781     First Nine Months 2006 Revenues from external customers $ 250,279 $ 202,569 $ 36,696 $ 52,977 $ 542,521 $ 12,706 $ 555,227   Intersegment revenues 3,196 5,753 632 2,680 12,261 21 12,282   Operating profit (loss) 24,750 5,641 2,803 3,166 36,360 (5,604 ) 30,756   Assets 150,592 233,286 36,039 29,524 449,441 37,099 486,540