Overview

We are an integrated producer of high performance specialty engineered materials used in a variety of electrical, electronic, thermal and structural applications. Our products are sold into numerous markets, including telecommunications and computer, data storage, aerospace and defense, automotive electronics, industrial components, appliance and medical.

Sales were $135.4 million in the first quarter 2009 compared to $226.3 million in the first quarter 2008 as demand for our products declined significantly due to the global economic crisis and the related impact on consumer spending. We believe that the rate of decline in our sales was greater than the fall-off in consumer spending due to the excess inventory positions throughout the supply chain. Lower metal prices also contributed to the sales decline in the first quarter 2009.

Margins and profitability suffered due to the lower sales volume in the first quarter 2009. In response to the weaker economic conditions, we took various actions, including reducing headcount, freezing and cutting wages, reducing work hours, eliminating the 401(k) savings plan match, cancelling or suspending lower priority programs, reducing discretionary spending and other cost-saving initiatives. While these actions net of the related severance costs helped mitigate the impact of the lower sales volume, the operating loss was $11.4 million in the first quarter 2009. The net loss was $0.40 per share.

Total debt increased $10.9 million and cash decreased $5.6 million in the first quarter as a result of the loss, a planned contribution to the pension plan of $12.1 million and other working capital changes. Capital spending, which totaled $6.4 million in the first quarter, has been reduced to high priority and maintenance capital levels.

Results of Operations


                                                      First Quarter
               (Millions, except per share data)    2009        2008


               Sales                               $ 135.4     $ 226.3
               Operating profit (loss)               (11.4 )       8.0
               Income (loss) before income taxes     (11.7 )       7.6
               Net income (loss)                      (8.1 )       4.6
               Diluted earnings per share          $ (0.40 )   $  0.22

Sales of $135.4 million in the first quarter 2009 declined $90.9 million, or 40% from sales of $226.3 million in the first quarter 2008.

Domestic sales declined 37% while international sales declined 46% in the first quarter 2009 from the first quarter 2008. Total international sales of $41.8 million were 31% of total sales in the first quarter 2009 compared to international sales of $76.6 million, or 34% of total sales, in the first quarter 2008. Sales to all major international regions were lower in the first quarter 2009 than in the first quarter 2008. The impact of translating foreign currency denominated sales was an unfavorable $0.3 million in the first quarter 2009 as compared to the first quarter 2008.

Demand from the telecommunications and computer market, our largest market, and the automotive electronics, data storage and other markets that are directly related to consumer spending levels softened considerably due to the weak economic conditions. The demand for our products appears to have fallen at a greater rate than the slowdown in consumer spending due to the high inventory positions in the downstream supply chain. Our products are the raw materials for the final product and there typically are a number of fabricators, assemblers and distributors between the end-use consumer and us. We believe that when the global economic slowdown hit, these fabricators, assemblers and distributors were holding significantly higher levels of inventory than required to meet the current demand. As a result, these inventory levels need to be worked down throughout the supply chain before our order entry level can rebound to prior levels.

Demand from the defense and medical markets, two key markets for us, remained firm during the first quarter 2009 and the outlook for these markets for the balance of the year is positive.

We use ruthenium, gold, silver, platinum, palladium and copper in the manufacture of various products. Our sales are affected by the prices for these metals, as changes in our purchase price are passed on to our customers in the form of higher or lower selling prices. Average prices for all of these metals were lower in the first quarter 2009 than in the first quarter 2008 and accounted for an estimated $15.1 million of the $90.9 million decline in sales.

Due to the weakening consolidated order entry rate, we implemented various cost-saving initiatives beginning late in the fourth quarter 2008 and throughout the first quarter 2009. Total manpower was reduced 12% during the first quarter from year-end 2008 levels and 15% from the end of the third quarter 2008. Compensation levels have been frozen and/or reduced. Work hours in the plants have been reduced in many cases. The Company match for the 401(k) savings plan was first reduced in half and then suspended altogether for the majority of employees. Discretionary spending has been reduced and various projects and initiatives have been cancelled or delayed. These cost-saving initiatives favorably impacted gross margins and selling, general and administrative expenses in the first quarter 2009; however, since many of these actions were put in place during the quarter, the full benefit of these reductions will not be realized until the second quarter 2009. We also paid approximately $1.0 million in severance benefits during the first quarter 2009 that we do not anticipate repeating in subsequent quarters.

Gross margin was $14.6 million, or 11% of sales, in the first quarter 2009 compared to $37.0 million, or 16% of sales, in the first quarter 2008.

The $22.4 million reduction in the gross margin was largely due to the $90.9 million decline in sales in the first quarter 2009 from the first quarter 2008. Manufacturing inefficiencies (net of manufacturing improvements in one facility), primarily due to the lower production volumes and the related impact on manning levels and utilization of equipment, also contributed to the margin decline. The price of ruthenium declined in the first quarter 2009 resulting in a lower of cost or market charge recorded against a portion of the ruthenium inventories of $0.8 million. Other inventory valuation net adjustments reduced gross margins by $0.6 million. The cost-saving initiatives, including the manpower reductions, pay cuts and other programs, helped to offset a portion of the unfavorable impact these items had on gross margin.

The reduction in gross margin as a percent of sales was partially due to certain manufacturing overhead costs, including depreciation, rent, insurance and other items, being relatively fixed in the short term regardless of the sales level.

We determined that the domestic defined benefit pension plan was curtailed due to the significant reduction in force. As a result of the curtailment and the associated remeasurement, we recorded a $1.1 million one-time benefit during the first quarter, $0.8 million of which was recorded against cost of sales and the balance against selling, general and administrative expenses on the Consolidated Statement of Income. The annual expense under the plan was also reduced by $1.0 million from what it would have been had the plan not been curtailed. See Critical Accounting Policies.

Selling, general and administrative expenses (SG&A) totaled $22.5 million in the first quarter 2009 and were $4.2 million lower than the total expense of $26.7 million in the first quarter 2008. SG&A expenses were 17% of sales in the first quarter 2009 and 12% of sales in the first quarter 2008. The lower expenses in 2009 partially resulted from the cost-saving initiatives previously referenced. Discretionary spending items such as travel, dues and subscriptions and advertising were lower in the first quarter 2009 than the first quarter 2008 while commissions were lower as those expenses are a function of the sales volume.

Incentive compensation expense under cash-based plans was $0.5 million lower in the first quarter 2009 than the first quarter 2008 due to the lower levels of profitability in the current year relative to the plan targets. Share-based compensation expense was an additional $0.7 million lower in the first quarter 2009 than the first quarter 2008. In addition to the lower expense from the curtailment of the defined benefit pension plan, the expense on the supplemental retirement plan for certain executives was $0.1 million lower in the first quarter 2009 than in the first quarter 2008.

International SG&A expenses, other than incentive compensation, declined $1.2 million in the first quarter 2009 from the first quarter 2008. This decline includes approximately $0.3 million translation benefit from the movement in exchange rates.

Research and development expenses (R&D) were $1.7 million in the first quarter 2009 compared to $1.5 million in the first quarter 2008. R&D spending increased slightly in the current quarter as a result of increased process and product improvement efforts.

Other-net expense for the first quarter 2009 and 2008 is summarized as follows:

                                                    Income (Expense)
                                                      First Quarter
              (Millions)                            2009          2008


              Exchange/translation gain           $     0.2      $  0.3
              Amortization of intangible assets        (0.9 )      (0.2 )
              Metal financing fees                     (0.9 )      (0.8 )
              Directors' deferred compensation         (0.1 )       0.5
              Other items                              (0.1 )      (0.6 )

              Total                               $    (1.8 )    $ (0.8 )

Exchange and translation gains and losses are a function of the movement in the value of the U.S. dollar versus certain other currencies and in relation to the strike prices in currency hedge contracts.

The amortization of intangible assets was higher in the first quarter 2009 than 2008 due to the finalization of the appraisal in the fourth quarter 2008 of the intangible assets acquired with Techni-Met, Inc. in February 2008.

The income or expense on the directors' deferred compensation plan is a function of the outstanding shares in the plan and the movement in the share price of our stock; expense was recorded in the first quarter 2009 as a result of a slight increase in the share price while income was recorded in the first quarter 2008 due to a decline in the share price in that period. In the first quarter 2009, the Board of Directors amended the deferred compensation plan, eliminating their ability to transfer their deferral balance between stock and other investment options allowable under the plan. As a result of the amendment, effective with the beginning of the second quarter 2009, the shares being held will no longer be marked-to-market against the income statement in accordance with accounting guidelines.

The metal financing fee was slightly higher in the first quarter 2009 than in the first quarter 2008 due to differences in financing rates.

Other-net also includes bad debt expense, gains and losses on the disposal of fixed assets, cash discounts and other non-operating items.

The operating loss was $11.4 million in the first quarter 2009 compared to an operating profit of $8.0 million in the first quarter 2008. The $19.4 million decline in profitability was primarily due to the lower margin generated by the reduced sales volume and other factors and the higher other-net expenses offset in part by the various cost-saving initiatives.

Interest expense - net was $0.3 million in the first quarter 2009, unchanged from the first quarter 2008. The average outstanding debt level was lower in the first quarter 2009 than the first quarter 2008, but the related impact on expense was offset by changes in the effective borrowing rate and a slight reduction in the amounts capitalized in association with capital projects.

The loss before income taxes was $11.7 million in the first quarter 2009 versus income before income taxes of $7.6 million in the first quarter 2008.

A tax benefit was calculated using an effective rate of 30.5% of the loss before income taxes in the first quarter 2009 while a tax expense was calculated using an effective rate of 39.8% of income before income taxes in the first quarter 2008.

The effects of percentage depletion, foreign source income, the production deduction and other items were the major factors for the difference between the effective and statutory rates in both the first quarter 2009 and 2008. The impact of discrete events recorded in the first quarter 2008 served to increase the effective rate in that period while discrete events had a minor impact on the effective rate in the first quarter 2009.

The net loss was $8.1 million (or $0.40 per share, diluted) in the first quarter 2009 compared to a net income of $4.6 million (or $0.22 per share, diluted) in the first quarter 2008.

Segment Results

We have four reportable segments. Beginning in the first quarter 2009, the operating results for Zentrix Technologies Inc., a small wholly owned subsidiary, are included in the Advanced Material Technologies and Services segment. Previously, Zentrix had been included with the corporate office as part of All Other. We made this change because the Advanced Material Technologies and Services segment management is now responsible for Zentrix and this structure is consistent with our internal reporting and how the Chairman of the Board evaluates the operations. The results for the prior year have been recast to reflect this change. See Note F to the Consolidated Financial Statements.

The operating results for All Other decreased by $0.6 million in the first quarter 2009 from the first quarter 2008. While spending rates and incentive compensation were lower in the first quarter 2009 than in the first quarter 2008, these benefits were offset by the higher expense on the directors' deferred compensation plan, lower charges out to the business units and other factors.

Advanced Material Technologies and Services


                                             First Quarter
                        (Millions)          2009       2008


                        Sales              $ 80.1     $ 124.0
                        Operating profit   $  0.7     $   5.5

Advanced Material Technologies and Services manufactures precious, non-precious and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, ultra-fine wire, specialty inorganic materials, optics, performance coatings and microelectronic packages. Major markets for these products include data storage, medical and the wireless, semiconductor, photonic and hybrid sectors of the microelectronics market. Advanced Material Technologies and Services also has metal cleaning operations and an in-house refinery that allow for the reclaim of precious metals from its own or customers' scrap. Due to the high cost of precious metal products, we emphasize quality, delivery performance and customer service in order to attract and maintain applications. This segment has domestic facilities in New York, California, Connecticut, Wisconsin and Massachusetts and international facilities in Asia and Europe.

Sales from Advanced Material Technologies and Services declined 35% from $124.0 million in the first quarter 2008 to $80.1 million in the first quarter 2009.

Advanced Material Technologies and Services adjusts its selling prices daily to reflect the current cost of the precious and certain other metals that are sold. The cost of the metal is generally a pass-through to the customer and a margin is generated on the fabrication efforts irrespective of the type or cost of the metal used in a given application. Therefore, the cost and mix of metals sold will affect sales but not necessarily the margins generated by those sales. The prices of gold, silver, platinum, palladium and ruthenium were lower on average in the first quarter 2009 than in the first quarter 2008. These lower prices accounted for an estimated $11.0 million of the $43.9 million decline in sales.

Sales of vapor deposition targets and other materials manufactured at the Buffalo, New York facility declined significantly in the first quarter 2009 from the first quarter 2008 levels as demand from the wireless and photonic sectors weakened due to the global economic conditions; sales to these sectors in the first quarter were less than half of the levels from the year ago period. Sales from Buffalo for microelectronic packaging and other applications also decreased. With the softening of these markets, refining business levels in turn declined due to the lower quantities of materials available to be processed.

Sales of inorganic chemicals were lower in the first quarter 2009 than the first quarter 2008, although progress continued on development of new applications. Sales of microelectronic packages from Zentrix were slightly lower in the first quarter 2009 than in the first quarter 2008.

Total sales for media applications in the data storage market, including sales of ruthenium-based targets from the Brewster, New York facility, declined slightly in the first quarter 2009 from the first quarter 2008 and remained very weak compared to the volumes shipped in 2007. Progress has been made in re-qualifying our materials with key customers; however, market demand levels were extremely soft in the first quarter 2009 due to the decline in consumer spending and high downstream inventory levels. Sales from Brewster of materials used in magnetic head applications within the data storage market were also soft in the first quarter 2009.

Sales from Techni-Met, a wholly owned subsidiary acquired early in the first quarter 2008, and Thin Film Technology, Inc. (TFT) grew in the first quarter 2009 over the first quarter 2008. Techni-Met's growth was fueled by demand from the medical market while TFT's growth was due to the medical and defense applications. TFT's sales backlog remained quite solid.

The gross margin on Advanced Material Technologies and Services' sales was $11.7 million in the first quarter 2009, a decrease of $4.9 million from the $16.6 million of margin generated in the first quarter 2008. The gross margin was 15% of sales in the first quarter 2009 and 13% of sales in the first quarter 2008. The margin fall-off in dollars was due largely to the lower sales volume in the first quarter 2009.

A lower of cost or market charge of $0.8 million was recorded to write down inventories as a result of a decline in the market price of ruthenium during the first quarter 2009. A net valuation charge of $0.6 million was also recorded on other inventories in the first quarter 2009. Manufacturing overhead costs were $0.7 million higher in the first quarter 2009 than in the first quarter 2008 partially due to owning Techni-Met for a full quarter. The change in product mix was favorable, offsetting a portion of these unfavorable items.

Total SG&A, R&D and other-net expenses were $11.0 million (14% of sales) in the first quarter 2009, a decline of $0.1 million from the expense total of $11.1 million (9% of sales) in the first quarter 2008. Lower selling-related expenses, corporate allocations and incentive compensation and the benefits from various cost-saving initiatives were mostly offset by the higher amortization expense from the intangible assets acquired with Techni-Met, higher metal financing fees, differences in translation and exchange gains and losses and other factors.

Operating profit from Advanced Material Technologies and Services was $0.7 million in the first quarter 2009 and $5.5 million in the first quarter 2008. Operating profit was 1% of sales in the first quarter 2009 and 4% of sales in the first quarter 2008. The decline in segment profitability was due to the lower margin as a result of the significant fall-off in sales and the unfavorable inventory charges.

Specialty Engineered Alloys


                                                 First Quarter
                     (Millions)                 2009        2008


                     Sales                     $  36.9     $ 71.3
                     Operating profit (loss)   $ (10.9 )   $  0.7

Specialty Engineered Alloys manufactures and sells three main product families:

Strip products, the larger of the product families, include thin gauge precision strip and small diameter rod and wire. These copper and nickel beryllium alloys provide a combination of high conductivity, high reliability and formability for use as connectors, contacts, switches, relays and shielding. Major markets for strip products include telecommunications and computer, automotive electronics, appliance and medical;

Bulk products are copper and nickel-based alloys manufactured in plate, rod, bar, tube and other customized forms that, depending upon the application, may provide superior strength, corrosion or wear resistance, thermal conductivity or lubricity. The majority of bulk products contain beryllium. Applications for bulk products include plastic mold tooling, bearings, bushings, welding rods, oil and gas drilling components and undersea telecommunications housing equipment; and,

Beryllium hydroxide is produced by Brush Resources Inc., a wholly owned subsidiary, at its milling operations in Utah from its bertrandite mine and purchased beryl ore. The hydroxide is used primarily as a raw material input for strip and bulk products as well as by the Beryllium and Beryllium Composites segment. There were no external sales of hydroxide from the Utah operations in either the first quarter 2009 or 2008.

Strip and bulk products are manufactured at facilities in Ohio and Pennsylvania and are distributed worldwide through a network of company-owned service centers and outside distributors and agents.

Sales by Specialty Engineered Alloys of $36.9 million in the first quarter 2009 were 48% lower than sales of $71.3 million in the first quarter 2008.

Strip volumes shipped in the first quarter 2009 were 49% lower than in the first quarter 2008. The reduction was across both the higher and lower beryllium-containing alloy product lines. Lower consumer spending and excess inventories in the supply chain resulted in weaker demand from the telecommunications and computer, automotive electronics and other markets for strip products.

Bulk product volumes shipped declined 35% in the first quarter 2009 from the year-ago period. Initially, bulk product shipments were not affected by the global economic slowdown as severely as strip products. However, reductions in demand from the oil and gas (partially driven by the lower prices for crude oil), aerospace and other markets have lead to further declines in shipments in the first quarter 2009.

Lower metal prices in the first quarter 2009 as compared to the first quarter 2008 accounted for an estimated $4.1 million of the $34.4 million difference in sales between periods.

The gross margin on Specialty Engineered Alloys' sales was a negative $1.3 million in the first quarter 2009, a decline of $14.9 million from the gross margin of $13.6 million, or 19% of sales, generated in the first quarter 2008.

The lower margin in 2009 was largely due to the significantly lower sales volume. Margins were also hurt by manufacturing inefficiencies and machine utilization rates as a result of lower production volumes. Headcount reductions, reduced work hours, wage cut-backs and other cost-saving measures offset a portion of the negative volume impact and inefficiencies.

Total SG&A, R&D and other-net expenses were $9.6 million (26% of sales) in the first quarter 2009 and $12.9 million (18% of sales) in the first quarter 2008. The reduction was due to a combination of the cost-saving initiatives, lower incentive accruals, reduced corporate charges and differences in exchange gains and losses between periods.

Specialty Engineered Alloys generated an operating loss of $10.9 million in the first quarter 2009 and an operating profit of $0.7 million in the first quarter 2008. The loss in the first quarter 2009 included severance costs of $0.5 million.

Beryllium and Beryllium Composites


                                             First Quarter
                        (Millions)          2009        2008


                        Sales              $  13.0     $ 13.4
                        Operating profit   $   1.8     $  0.2

Beryllium and Beryllium Composites manufactures beryllium-based metals and metal matrix composites in rod, sheet, foil and a variety of customized forms at the Elmore, Ohio and Fremont, California facilities. These materials are used in applications that require high stiffness and/or low density and they tend to be premium priced due to their unique combination of properties. This segment also manufactures beryllia ceramics through our wholly owned subsidiary, Brush Ceramic Products Inc. in Tucson, Arizona. Defense and government-related applications, including aerospace, is the largest market for Beryllium and Beryllium Composites, while other markets served include medical, telecommunications and computer, electronics (including acoustics), optical scanning and general industrial products.

Sales by Beryllium and Beryllium Composites were $13.0 million in the first quarter 2009, a 3% decrease from sales of $13.4 million in the first quarter 2008.

Defense-related sales were relatively solid in the first quarter 2009, except for an unexpected delay in the deployment of the U.S. missile defense program in Eastern Europe, compared to temporarily soft defense sales in the first quarter 2008. The outlook for defense and scientific applications over the next two quarters remains positive except for missile defense programs. Demand for beryllium products for commercial applications was weak while the demand for x-ray windows softened slightly in the first quarter 2009. Sales of beryllia ceramics also softened due to an excess inventory position of our largest customer for those materials.

The gross margin on Beryllium and Beryllium Composites' sales was $4.7 million, or 36% of sales, in the first quarter 2009, an improvement over the gross margin of $3.3 million, or 24% of sales, in the first quarter 2008. This $1.4 million increase in margins on lower sales was due to manufacturing improvements, including higher yields, greater efficiencies and scrap utilization. The change in product mix effect was favorable as well.

SG&A, R&D and other-net expenses for Beryllium and Beryllium Composites totaled $2.8 million or 22% of sales in the first quarter 2009 and $3.0 million, or 23% of sales, in the first quarter 2008. While this segment's sales and margins have not been as affected by the global economic crisis as the other segments, . . .