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, aerospace and defense, automotive electronics, industrial components, appliance, medical and data storage.

Sales were $174.1 million in the second quarter 2009 compared to $246.6 million in the second quarter 2008 as the impact of the global economic crisis and the related decline in consumer spending, which began to affect us in the fourth quarter 2008, continued to adversely affect the demand from many of our key markets. Sales in the second quarter 2009, however, were $38.7 million higher than sales of $135.4 million in the first quarter 2009. We believe that the rate of decline in our sales in the first quarter 2009 was greater than the fall-off in consumer spending due to the excess inventory positions throughout the supply chain and that a portion of the improvement in sales in the second quarter over the first quarter was due to the depletion of these excess inventories.

Sales were also lower in the second quarter and first half of 2009 than the respective periods of 2008 due to a lower average metal price pass-through.

Margins and profitability declined due to the lower sales volume in the second quarter and first half of 2009. An unfavorable product mix shift and manufacturing inefficiencies as a result of the lower production volumes also reduced profitability in the current year.

In response to the weaker economic conditions, we took various actions, including reducing headcount, freezing and then 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. These actions, net of the related severance costs that were primarily recorded in the first quarter 2009, helped mitigate the impact of the lower sales volume. The combination of the cost initiatives and improved sales resulted in a loss of $0.04 per share in the second quarter after a loss of $0.40 per share in the first quarter 2009 and income of $0.35 per share in the second quarter 2008.

Despite the net loss for the first half of 2009, debt declined $3.4 million while cash increased $2.5 million. Cash flow from operating activities was a solid $11.7 million in the first six months of 2009, with the second quarter 2009 being particularly strong. Capital spending, net of the reimbursement from the government for the construction of a new primary beryllium facility, continued to be managed to low levels and has been reduced to high-priority and maintenance capital levels.

The debt-to-debt-plus-equity ratio as of the end of the second quarter 2009 was the lowest level since the fourth quarter 2007, which was prior to the $86.5 million acquisition of Techni-Met, Inc.

Results of Operations


                                        Second Quarter Ended             First Half Ended
                                      July 3,          June 27,       July 3,       June 27,
(Millions, except per share data)      2009              2008          2009           2008


Sales                               $     174.1       $    246.6     $   309.5     $    472.9
Operating profit (loss)                    (1.6 )           11.6         (13.0 )         19.6
Income (loss) before income taxes          (1.8 )           11.0         (13.6 )         18.6
Net income (loss)                          (0.8 )            7.2          (8.9 )         11.8
Diluted earnings per share          $     (0.04 )     $     0.35     $   (0.44 )   $     0.57

Sales of $174.1 million in the second quarter 2009 declined $72.5 million, or 29%, from sales of $246.6 million in the second quarter 2008. For the first six months of the year, sales of $309.5 million in 2009 were 35% lower than sales of $472.9 million in 2008.

Domestic sales declined 27% in the second quarter 2009 and 32% in the first half of 2009 from the comparable periods in 2008. International sales were 34% lower in the second quarter 2009 and 39% lower in the first half of 2009 than the same periods in 2008. International sales were 33% of total sales in the first half of 2009 and 35% of sales in the first half of 2008.

Sales to all major international regions were lower in the second quarter 2009 and the first half of 2009 than in the same periods of the prior year. The impact of translating foreign currency denominated sales was an unfavorable $0.6 million in the second quarter 2009 as compared to the second quarter 2008 and an unfavorable $0.9 million in the first half of 2009 compared to the first half of 2008.

While sales were lower thus far in 2009 than the comparable periods of 2008, sales in the second quarter 2009 improved $38.7 million, or 29%, over sales in the first quarter 2009. Both domestic and international sales grew in the second quarter over the first quarter, with the majority of the international growth coming from Asia. The order entry rate also improved in the second quarter over the first quarter 2009.

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 generally beginning in the fourth quarter 2008. 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 then 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. We believe that a portion of the growth in sales in the second quarter over the first quarter 2009 was due to inventories in the supply chain being depleted and needing to be replenished to meet the current consumer demand levels.

Demand from the defense market remained firm during the first half of 2009. The demand from the medical market, which had been strong, softened in the second quarter; we anticipate some improvement in this market over the balance of the year.

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. The average prices between periods for some metals increased while others decreased during the second quarter. The net impact of the change in metal prices was an estimated $14.0 million reduction in sales in the second quarter 2009 from the second quarter 2008 and an estimated $29.1 million reduction in sales in the first half of 2009 from the first half of 2008.

We implemented various cost-saving initiatives beginning late in the fourth quarter 2008 and throughout the first half of 2009 in response to the weakening order entry rate at that time. By the end of the second quarter, total manpower was reduced by 14% from year-end 2008 levels and 17% from the end of the third quarter 2008. Compensation levels have been frozen and/or reduced. Overtime in the plants was eliminated and regular work hours were 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 second quarter and first half of 2009. We paid approximately $1.0 million in severance benefits associated with the headcount reductions, primarily during the first quarter 2009.

Gross margin was $22.1 million, or 13% of sales, in the second quarter 2009 compared to $44.6 million, or 18% of sales, in the second quarter 2008. For the first six months of the year, gross margin was $36.7 million, or 12% of sales, in 2009 and $81.6 million, or 17% of sales, in 2008.

The $22.5 million reduction in the gross margin in the second quarter and the $44.9 million reduction in the gross margin for the first half of 2009 were largely due to the decline in sales from the comparable periods in 2008. Manufacturing inefficiencies, primarily due to the lower production volumes and the related impact on manning levels and utilization of equipment, also contributed to the margin decline in 2009. The change in product mix was unfavorable in both the second quarter and first half of 2009.

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 gross margin in the first half of 2009 was reduced by lower of cost or market charges on ruthenium-based inventories of $0.8 million and other net inventory valuation adjustments totaling $0.6 million recorded in the first quarter 2009. The gross margin in the second quarter 2008 was reduced by a lower of cost of market charge on ruthenium-based inventories of $6.0 million recorded in that period.

The reduction in gross margin as a percent of sales in both the second quarter and first six months of 2009 from the comparable periods in 2008 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.

In the first quarter 2009, 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 2009, $0.8 million of which was recorded against cost of sales and $0.3 million recorded against selling, general and administrative expenses on the Consolidated Statements of Income. The 2009 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 (SG&A) expenses totaled $20.7 million in the second quarter 2009 and were $7.6 million lower than the total expense of $28.3 million in the second quarter 2008. SG&A expenses of $43.2 million in the first six months of 2009 were $11.8 million lower than expenses of $55.0 million in the first six months of 2008. SG&A expenses were 14% of sales in the first six months of 2009 and 12% of sales in the first six months of 2008. The increased percentage was due to sales being lower in the first six months of 2009 than the first six months of 2008.

The lower SG&A expenses in both the second quarter and first half of 2009 largely resulted from the cost-saving initiatives previously referenced. Discretionary spending items such as travel, dues and subscriptions and advertising were lower in the second quarter and first half of 2009 than the respective periods in 2008 while commissions were lower in 2009 as those expenses are a function of the sales volume.

Incentive compensation expense under cash-based plans was $1.4 million lower in the second quarter 2009 than the second quarter 2008 and $1.9 million lower in the first half of 2009 than the first half of 2008 due to the lower levels of profitability in the current year relative to the plan targets. Share-based compensation expense was an additional $0.2 million lower in the second quarter 2009 than the second quarter 2008 and $0.8 million lower in the first half of 2009 than the first half of 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 $0.3 million lower in the first six months of 2009 than in the first six months of 2008.

International SG&A expenses, other than incentive compensation, declined $1.7 million in the second quarter 2009 from the second quarter 2008 and $2.8 million in the first half of 2009 from the first half of 2008. This decline includes approximately $0.3 million in the second quarter and $0.6 million in the first half of 2009 due to the translation benefits from the movement in exchange rates between periods.

Research and development (R&D) expenses were $1.5 million in the second quarter 2009 compared to $1.6 million in the second quarter 2008. R&D expenses were $3.2 million in the first half of 2009, a slight increase over the expense of $3.1 million in the first half of 2008. We continued to invest in process and product improvement efforts during the second quarter and first half of 2009 in order to enhance long-term growth opportunities.

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

                                                        Income (expense)
                                       Second Quarter Ended             First Half Ended
                                     July 3,          June 27,       July 3,        June 27,
(Millions)                             2009             2008          2009            2008


Exchange/translation gain           $      0.3       $     (1.5 )   $     0.6      $     (1.4 )
Amortization of intangible assets         (0.9 )           (0.2 )        (1.8 )          (0.4 )
Metal financing fees                      (0.7 )           (1.2 )        (1.6 )          (2.0 )
Directors' deferred compensation             -                -          (0.1 )           0.6
Other items                               (0.2 )           (0.2 )        (0.3 )          (0.7 )

Total                               $     (1.5 )     $     (3.1 )   $    (3.2 )    $     (3.9 )

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 second quarter and first half of 2009 than the same periods of 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 metal financing fee was lower in the second quarter 2009 than the second quarter 2008; in the first quarter 2009, the fee was slightly higher than the same quarter in the prior year. The fee is a function of the quantity of metal on hand and the average financing rate.

The income or expense on the directors' deferred compensation plan was a function of the outstanding shares in the plan and the movement in the share price of our common stock. In the first quarter 2009, the Board of Directors amended the deferred compensation plan, eliminating the directors' 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 are no longer marked-to-market against the income statement in accordance with accounting guidelines.

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 $1.6 million in the second quarter 2009 and $13.0 million in the first six months of 2009. In 2008, operating profit was $11.6 million in the second quarter and $19.6 million in first six months of the year. The decline in profitability in both the second quarter and first half of 2009 was primarily due to the lower margin generated by the significantly reduced sales volume and other factors, offset in part by the various cost-saving initiatives and lower other-net expenses.

Interest expense-net of $0.3 million in the second quarter 2009 was approximately half of the expense from the second quarter 2008. The net interest expense was $0.6 million in the first half of 2009 compared to $1.0 million in the first half of 2008. The lower expense was primarily due to lower outstanding debt levels in 2009. Debt had

increased in the first quarter 2008 due to the Techni-Met acquisition in that period, but the subsequent cash flow from operations has allowed the debt balance to be reduced. The effective borrowing rate was lower in the second quarter 2009 than the second quarter 2008 as well. These benefits were partially offset by a slight reduction in the amounts capitalized in association with capital projects.

The loss before income taxes was $1.8 million in the second quarter 2009 and $13.6 million in the first six months of 2009. In 2008, income before income taxes was $11.0 million in the second quarter and $18.6 million in the first six months of the year.

A tax benefit was calculated using an effective rate of 57% of the loss before income taxes in the second quarter 2009 and 34% of the loss before income taxes in the first half of 2009. In 2008, a tax expense was calculated using an effective rate of 35% of income before income taxes in the second quarter and 37% in the first six months of the year.

The effects of percentage depletion, foreign source income and other items were the major factors for the difference between the effective and statutory rates in both the second quarter and first six months of 2009 and 2008. The production deduction was also a major factor affecting the rate in the second quarter and first half of 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 second quarter and first six months of 2009. The percentage impact of tax adjustments that have a relatively fixed dollar amount will also vary due to significant movements in the level of the income or loss before income taxes.

The net loss was $0.8 million (or $0.04 per share, diluted) in the second quarter 2009 compared to net income of $7.2 million (or $0.35 per share, diluted) in the second quarter 2008. For the first six months of the year, the net loss was $8.9 million (or $0.44 per share, diluted) in 2009 versus net income of $11.8 million (or $0.57 per share, diluted) in 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 loss within All Other improved $1.6 million in the second quarter 2009 from the second quarter 2008. The improvement was due largely to the cost saving initiatives, including wage and benefit reductions, and lower incentive compensation expense. For the first half of the year, the operating loss within All Other was $1.0 million better in 2009 than in 2008 as portions of the cost reduction benefits were offset by a higher expense on the directors' deferred compensation plan and other factors.

Advanced Material Technologies and Services


                                Second Quarter Ended             First Half Ended
                              July 3,          June 27,       July 3,       June 27,
         (Millions)            2009              2008          2009           2008


         Sales              $     112.3       $    129.3     $   192.3     $    253.3
         Operating profit   $       8.4       $      5.0     $     9.1     $     10.5

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 13% from $129.3 million in the second quarter 2008 to $112.3 million in the second quarter 2009 while sales in the first half of the year declined 24% from $253.3 million in 2008 to $192.3 million in 2009.

While sales were lower in the second quarter and first six months of 2009 than the respective periods of 2008, sales in the second quarter 2009 were 40% higher than sales 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 net lower average prices of gold, silver, platinum, palladium and ruthenium accounted for an estimated $9.3 million of the $17.0 million decline in sales in the second quarter and $20.4 million of the $61.0 million decline in sales in the first half of 2009 compared to the first half of 2008.

Sales of vapor deposition targets and other materials manufactured at the Buffalo, New York facility were lower in the second quarter 2009 than in the second quarter 2008, while sales for the first half of 2009 were significantly lower than the first half of 2008. The decline in sales in the second quarter and first six months of 2009 was due to weak demand from the wireless, photonic, microelectronic packaging and other market segments due to the global economic conditions. With the softening of these markets, refining business levels in turn declined due to the lower quantities of materials available to be processed. However, market conditions improved in the second quarter 2009 and sales from the Buffalo facility grew in the second quarter 2009 over the first quarter 2009 and were largely responsible for the growth in total segment sales in the second quarter over the first quarter 2009.

Sales from Techni-Met, a wholly owned subsidiary acquired early in the first quarter 2008, declined 5% in the second quarter 2009 from the second quarter 2008, but for the first half of the year, sales were still 15% higher in 2009 than in 2008. The majority of Techni-Met's products are used in medical applications and we believe that their shipment levels will improve over the balance of 2009.

Sales from Thin Film Technology, Inc. (TFT) continued to be strong in the second quarter 2009 and grew over 20% in the first half of 2009 from the first half of 2008. This growth was due to medical and defense applications and their sales backlog as of the end of the second quarter was quite solid.

Sales of inorganic chemicals were lower in both the second quarter and first half of 2009 than the comparable periods in 2008. Demand from the markets served by these products remained soft during the first half of 2009 and we anticipate it will remain soft during the second half of the year.

Sales of microelectronic packages from Zentrix were higher in the second quarter 2009 than in the second quarter 2008 and were essentially unchanged in the first six months of 2009 from the first six months of 2008.

Total sales for media applications in the data storage market, including sales of ruthenium-based targets from the Brewster, New York facility, in the second quarter and first half of 2009 were very weak as they were for the majority of 2008. We have made progress re-qualifying our materials with key customers; certain materials have been re-qualified while the process is continuing for others. Demand from the data storage market had been depressed in the first quarter 2009 due to the lower consumer spending levels and other factors; however, the market appeared to be gaining some strength late in the second quarter 2009.

Sales for magnetic head applications from the Brewster facility showed improvement in the second quarter 2009.

The gross margin on Advanced Material Technologies and Services' sales was $18.3 million in the second quarter 2009, a $1.3 million increase over the $17.0 million of margin generated in the second quarter 2008. The gross margin was 16% of sales in the second quarter 2009 and 13% of sales in the second quarter 2008. For the first

half of the year, gross margin was $30.0 million (16% of sales) in 2009 compared to $33.6 million (13% of sales) in 2008.

The gross margin improved in the second quarter 2009 despite the lower sales as a result of a $6.0 million lower of cost or market charge recorded in the second quarter 2008. Manufacturing overhead costs were also $0.3 million lower in the second quarter 2009 than in the second quarter 2008 largely due to the cost saving initiatives. The lower sales volume, an unfavorable change in the product mix and other factors combined to reduce margins by $5.0 million in the second quarter 2009 as compared to the second quarter 2008.

In addition to the aforementioned $6.0 million lower of cost or market charge, the gross margin comparison between the first half of 2009 and the first half of 2008 was affected by the margin lost due to the lower sales, a lower of cost or market charge of $0.8 million recorded in the first quarter 2009 and an inventory valuation charge of $0.6 million recorded in the first quarter 2009. In addition, manufacturing overhead costs were $0.3 million higher in the first half of 2009 than the first half of 2008 as the cost savings were more than offset by owning Techni-Met for a full six months in 2009 and other factors.

Total SG&A, R&D and other-net expenses were $9.9 million (9% of sales) in the second quarter 2009, a decline of $2.1 million from the expense total of $12.0 million (9% of sales) in the second quarter 2008. These expenses totaled $20.9 million (11% of sales) in the first half of 2009 and $23.1 million (9% of sales) in the first half of 2008.

The lower expense in the second quarter 2009 was partially due to the impact of the cost-saving initiatives implemented during the first and second quarters of 2009. Selling-related expenses and corporate allocations were also lower in the . . .