Materion Corp (MTRN) 2002 Q1 法說會逐字稿

Please stand by. Good day, everyone, and welcome to the Brush Engineered Materials' first quarter 2002 earnings conference call. Today's call is being recorded. With us today for opening remarks and introductions, I'd like to turn the conference over to Mr. Michael Hasvchak. Please go ahead, sir. VP/TREASURER/SECRETARY: Good afternoon. This is Mike Hasvchak, vice president, secretary and treasurer. With me today is Gordon Harnett, chairman and chief executive officer, John Grampa, vice president finance and chief financial officer, Jim Marrotte, vice president and corporate controller and pat carpenter, director of corporate communications. Our far mat for today's conference call is as follows. I will review the first quarter financial summary in data and present prepared comments. John Grampa will present the company's outlook going forward. Thereafter we will open up the teleconference call for questions. A recorder play back of this call will be available for 30 days by dialing area code 719-457-0820, pass code number 693108. The call will also be available on the company's website, BEMINC.com, for 30 days. To access the replay, click on quarterly earnings conference call on the investor's page. The broadcast requires Real Player software, which is available as a free download from the icon as indicated.

Any forward-looking statements made during this call are based on current expectations. The company's actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors included in to those mentioned elsewhere on the call, the global economy, the condition of the markets which the company serves, whether defined geographically or by segment with the major market segments being telecommunication and computers, optical media, automotive electronics, aerospace and defense, industrial components, and appliances. The company's success in implementing strategic plans in the timely and successful completion of pending expansions projects, the availability of adequate lines of credit and the associated interest rates, other financial factors, including tax rates, exchange rates, energy costs and the cost and availability of insurance, changes in governmental regulatory requirements and the enactment of new legislation that impacts the company's obligations and the conclusion of pending litigation matters in accordance with the company's expectation that there will be no material adverse effects.

Now let's begin with the financial summary. Sales for the first quarter 2002 were $89.6 million versus $145.5 million for first quarter 2001. That's down 38 percent. The net loss for first quarter 2002 was $3.8 million or 23 cents per share versus first quarter 2001 net income of $6.2 million or 37 cents per share. The decline in sales was due primarily from the steep dropoff in demand from the telecommunications and computer markets which began in the second quarter of 2001 and has continued through the first quarter of 2002. Please note that the first quarter of last year was the second highest sales quarter in the history of the company. First quarter sales were down 3 percent from the fourth quarter of 2001. However, after taking into effect the substitution of nonprecious metal or precious metals in products sold by Williams Advanced Materials, Inc., sales were actually up 8 percent, so we think we have seen the bottom of the fourth quarter last year. The dollar versus the Euro and yen was stronger in the first quarter 2002, resulting in unfavorable foreign exchange sales impact compared to first quarter 2001, of slightly less than $1 million. From the earnings side the net loss for the first quarter 2002 was 62 percent less than the net loss for the first quarter 2001 so we are seeing the benefit of the cost reduction initiatives implemented during the second half of last year on the bottom line. Let's discuss our business segments. First, Metal Systems Group. Metal System Group includes Alloy Products, Technical Materials, Inc., which we'll refer to as TMI, and Beryllium Products. Sales for the Metal Systems Group, first quarter 2002 were $55.9 million versus $98.6 million for the first quarter 2001. That's down 43 percent. There was an operating loss of $8.5 million in the first quarter 2002 for the Metal Systems Group versus an operating profit in first quarter 2001 of $6.6 million. Alloy Products. First quarter 2002 were $38.3 million versus first quarter 2001 sales of $71.2 million. That's down 46 percent but up 7 percent from the fourth quarter 2001 sales of $35.7 million. We think Alloy Products have bottomed in the fourth quarter 2001. Sales are beginning to recover, but at a slower pace than we originally predicted due to the continued softness in the telecom and computer markets. Cross-reduction efforts last year have significantly reduced manufacturing overhead costs in Alloy Products.

In addition we are also beginning to see a return on our six sigma and Leemanufacturing efforts including improved quality and equipment reliability and increased manufacturing yields. For example, our Brush 60 red Alloy strip yield has improved about 15 percent from 2001 levels. Technical Materials, Inc. Sales for TMI in the first quarter 2002 were $11.5 million versus first quarter 2001 of $20.5 million. That's down 44 percent but up 28 percent from the fourth quarter of 2001. The increase in sales from the fourth quarter has been fueled by the automotive electronics market, while the telecommunications, computer and semi-conductor markets remain slow for TMI. Beryllium Products. Beryllium Products' sales in the first quarter 2002 were $6.1 million versus first quarter 2001 of $6.9 million. That's down 11 percent. Beryllium Products is seeing an increase in order rates and government releases for defense applications.

Now, let's go to the Microelectronics Group. The Microelectronics Group includes Williams Advance Materials which will be reader to as WAM and Electronic Products. Microelectronics Group sales for the first quarter 2002 sales were $33.5 million versus first quarter 2001 of $46.9 million. That's down 29 percent. Operating profit was $2.2 million for first quarter 2002 versus first quarter 2001, operating profit of $2.4 million. WAM. Sales for the first quarter 2002 were $25.8 million versus first quarter 2001 of $35.4 million. That's down 27 percent. This decrease for WAM's sales is primarily due to a shift in product mix. Precious metal is a pass through to the customer and we are seeing gold and silver PVD targets shifting to nonprecious metal. WAM continues to see strength in their core products, especially frame wood assemblies. They are, however, experiencing some softness in the wireless and phototonics markets. Electronic Products. Sales for the first quarter 2002 in Electronic Products were $7.7 million versus first quarter 2001 of $11.5 million. That's down 33 percent. Electronic Products is experiencing a pickup for orders in wireless basestations and the military defense business.

Let's talk about our financial position. Cash flow from operations was a positive 400,000 during the first quarter of 2002. Accounts receivable are up $3.1 million from December 31st, 2001. Inventories came down $4.2 million during the first quarter 2002. Capital expenditures were less than $1 million for the first quarter. Capital expenditures should be in the range of $8 to $12 million for the year. The total balance sheet debt is down $4.6 million from December 31st, 2001.

We have amended the financial covenants of our revolving credit agreement and master lease agreements effective December 31st, 2001. At the end of the first quarter we had about $19 million of capacity less on revolver and additional $9.2 million under foreign currency lines associated with our foreign subsidiaries.

On the litigation front, the company is currently engaged in settlement negotiations that will result in the dismissal of 21 chronic beryllium disease pending lawsuits including two class action lawsuits. The net effect of this settlement which we expect to be completed shortly will eliminate approximately half of our chronic beryllium disease plaintiffs outstanding against the company. This settlement is attributable largely to the string of legal victories achieved over the last year. Now I'll turn it over to John Grampa for his comments on the outlook. VICE PRESIDENT FINANCE/CFO: Thank you, Mike. Good afternoon, everybody. I'd like to spend just a minute or two reinforcing some of the comments that were made in the press release as well as reinforce some of the comments made by Mike and then I'll comment on the outlook for the balance of the year. You will note that Q-1 did in fact turn out to be the transition quarter we expected it might be. It was a quarter with notable contrast, one in which we did exceed our expectations in a number of areas and one in which we did fall short in others. In total, though, results were within the range that we shared with you during the January 24th teleconference. Clearly the economy volleyed from last year's steep decline and many of our businesses started to respond in the quarter. Our P&L improved significantly, although we still lost money, we cut the Q-4 2001 loss by 62 percent and continued to reduce debt as well. We reduced debt three consecutive quarters now. One major highlight in the quarter is that we did deliver on the cost reduction and the cash flow improvements that we targeted. In fact, we exceeded these goals by a wide margin. Overhead costs were down $12.8 million from the Q-1 2001 levels and they were down $5.6 million from Q-4 of 2001.

Another significant highlight is the factory performance is now showing noticeable improvements, especially, as Mike pointed out, where it matters most, in our Alloy facilities. The management changes made here during 2001 are clearly paying off. The sixth sigma mentality is setting in, yields are improving significantly, on time shipments are up dramatically, unplanned downtime has improved, output for man hour is also up over 15 percent, and our safety record has improved by over 50 percent. These improvements will start to show in improved margins in the coming quarters.

The situation in the market, though, is mixed and still a little uncertain. We expected first to see the benefit of any economic recovery in our TMI and our Electronic Products businesses and that did in fact occur. In fact, in Q-1, TMI sales were up approximately 30 percent from Q-4 and Electronic Products sales were up nearly 50 percent from Q-4. This is driven in part by improvements in the automotive, the defense, the wireless, and the consumer electronic market segments. What has not shown any sizable sign of recovery is the computer and telecommunications equipment market. These markets represented over 40 percent of our sales in 2001. Recent published economic forecasts for those segments are not encouraging and a significant turn around is not expected soon. Customer inventories, though, are lower and lead times are clearly narrower so any improvement in this segment should quickly translate to added revenue for us. (Inaudible) in recent weeks are up slightly in this segment. As compared with the fourth quarter of last year, sales in the aggregate we're about flat to $89.6 million for the quarter. The year started out more slowly than expected, but by the end of the quarter, our weekly shipment rate was up 11 percent. While sales appear flat versus Q-4, as Mike indicated, a significant substitution of nonprecious metal or precious metal in products sold at WAM affected the reported sales line by approximately $7 million. Without that sales in the first quarter were up approximately 8 percent versus the fourth quarter of 2001. Earnings improved dramatically from a loss of 60 cents per share in the fourth quarter of last year to a loss of 23 cents a share in the first quarter. As indicated in the press release, earnings per share for the second quarter is expected to improve by an additional 5 to 10 cents per share.

Due to the unclear outlook for the computer and telecom equipment markets, it's very difficult to forecast two to three quarters out. But based on what we see today, we do expect quarter-over-quarter improvements in revenue and thus earnings. The revenue increase could be as much as $5 to $10 million per quarter over each quarter and for reference each $5 million of revenue translates to an 8 to 10 cent improvement in earnings share.

In summary, we are encouraged with many of our markets and businesses and are encouraged by what they're beginning to experience in the way of solid improvement trend. We're especially encouraged by the improvement last in the first quarter, sales getting stronger during final weeks of the quarter. We're pleased that our aggressive cost reduction actions and productivity improvement programs are yielding the results we promised and the results we expected and as a result margins are improving. Cost reduction, product improvement and the resulting margin gains are key to our earnings recovery in the near term with sales growth playing a lesser role earlier and over time sales growth becoming more heavily weighted in the earnings potential. While we're still in a period of particularly challenging worldwide economic conditions and while it may take several months yet to completely validate our turnaround, we clearly made good progress in the first quarter. And with that, operator, we'll open the conference for questions.

Thank you. The question-and-answer session will be conducted electronically today. If you'd like to ask a question, you can do so by touching star 1 on your touch-tone telephone. We will proceed in the order that you signal us and take as many questions as time permits. Once again, that's star 1 to ask a question. And we'll pause for just a moment to give everyone the possibility to signal for questions. Our first question will come from Mark Parrwith McDonald Investments.

Hi, gentlemen.

Good afternoon, Mark.

It's not over yet, but it's getting better, huh? John, for clarification, I just want to make sure I understood what you said about the leverage as far as the upside on earnings. You said, say, for example, if sales were $90 million in the first quarter and they were $95 in the second quarter that the loss would be 8 to 10 cents less in the second quarter than the first quarter, everything else being equal? VICE PRESIDENT FINANCE/CFO: That's correct.

Okay. I just want to make sure I've got that. The other question I wanted to ask, if you look at, you know, April sales trends or April shipment trends compared to March, what sort of a trend are you seeing? VICE PRESIDENT FINANCE/CFO: We're up in April by about another 3 percent.

Okay. So, I mean, I'm going to assume that March was probably the strongest month of the quarter. Is that fair? VICE PRESIDENT FINANCE/CFO: That's correct. March was 11 percent stronger on a weekly shipment rate than January.

Okay. And you're up another 3 percent in April and if you -- that would indicate that you're probably looking at at least, you know, if nothing changes, you'd be looking at what, probably at least $10 million more in revenue in the second quarter, wouldn't you? VICE PRESIDENT FINANCE/CFO: Not necessarily. 5 to $10 million, probably. The 11 percent rate that was there in March was also partly there in February, so sequentially improved through the quarter so $5 to $10 million is perhaps a better range.

Okay. But so you've got -- we are looking at a much improved automotive production scenario for the second quarter and that should help. Are there any -- in your defense businesses should get sequentially better in the second quarter as well. VICE PRESIDENT FINANCE/CFO: That's correct.

You said even your telecom equipment business has picked up just a little bit. VICE PRESIDENT FINANCE/CFO: The telecom equipment business, Mark, is the wild card in all of this. We see peaks and valleys week after week in the order/entry trend. And we also see the narrowing lead times appear in the form of orders received early in the month for shipment in the month. So it's difficult to predict just exactly what really is happening there, but the trend does not seem to be down. It seems to be up.

I mean, that's guys, are kind of paying sort of attention to the AT&Ts of the world and the Nokias and Ericsons and it seems like the magnitude of recovery in '02 keeps getting scaled back. VICE PRESIDENT FINANCE/CFO: Yes.

And I don't know if there was a big recovery in '02 that ever showed up in your order books or not. Maybe they were talking a good game and, you know, just hasn't unfolded yet. VICE PRESIDENT FINANCE/CFO: We did see an increase in the order book in early to mid-December of 2001 and we saw that hold through the first three, four weeks of January and then we saw it collapse for approximately four weeks and then it bounced back to where it had been, so it is a little uncertain and it is moving around on us a little bit.

Yeah, those guys have no idea what to expect. It's really uncertain out there. I was looking at the reduction in SG&A on a year-over-year basis, is almost astounding and I'm just curious to what extent you can go into, you know, the fixed versus variable components of SG&A, how much is cost production related, how much of it is reduction and accruals for things like bonuses and how much of it is a function of reduced sales volumes? I could give you an easy one here, you know.

Mike, this is Jim Marrotte. The bonus accrual number is in the neighborhood of $2 million. We did have a fairly sizable bonus accrual last year, given the level of profits we were looking at through the first quarter and what we were anticipating at that time for the year.

Right.

The balance comes in two main casualties, it's business and services. It's a significant number of people are no longer with us, with the company, and a lot of the outside service providers we were using, we either scaled back or renegotiated the price levels or brought some of the costs in-house to reduce it.

The guys (inaudible) are just delighted with you guys.

The sales commission is down also a little bit, but that's not a huge number for us in the first place because most of our business is in-house sales anyway. We're not using a lot of agents to a large extent overseas.

Okay. One other question and then I'll pass it on to somebody else. The R&D number was almost in half and down, what, $6 or $700,000 year over year. How much of that -- I mean, what if you cut back on R&D arena? What does that do as far as limiting your ability to grow the business going forward?

Mark, I think there was some head count reduction in R&D as part of the overall reductions in cost last year. A good bit of the effort that is going on across the company right now in the research area is process development work and work to shore up, if you will, the performance inside our factories, especially inside Alloy. I don't think we're giving up anything relative to the long term. Much of the product development for the new alloys for the new facilities were done and complete awhile back. So through this period, we think that the spending level is probably appropriate. I don't know if anyone else has any comments here at the table, but I think it's very appropriate. CEO/PRESIDENT: Hi, Mike, this is Gordon. I would say we're running a fine line and I wouldn't want to see it stay down too long, but in fact Alloy is working on a new product right now and we're enthusiastic about where we think this would fit in the market. So it's not as if we're not investing, if that was your point. It's not a significant reduction and hopefully as things improve we can start to spend a little bit more but right now I think we're at the appropriate level.

Okay. I've got a few other follow-ups but I'll come back and let somebody else ask a question. Thanks, guys.

Up next, Farentino's Metals. We'll hear from Anthony Farentino.

Good afternoon, everyone.

Good afternoon.

Given the outlook for a slow recovery throughout the rest of the year, would you expect to return to profitability sometime in the second half of 2002? VICE PRESIDENT FINANCE/CFO: As I indicated in my remarks about the outlook, every $5 million of revenue is 8 to 10 cents a share. Clearly if we're on the high end of that revenue growth range that I predicted, we'd find ourselves returning to profitability in the fourth quarter. If we're on the low end of that revenue range, we would be probably near break-even in the fourth quarter. And then another way of saying the same thing, would it be approximately -- would it take approximately $100 million in sales on a quarterly basis for the company to reach break-even?

Actually a little bit more than that. The break-even point at today's mix of business, and I will reference also the shift in the mix of precious metal to nonprecious metal or metal substitution inside Williams?

Yes. VICE PRESIDENT FINANCE/CFO: If we drop that from our break-even point that we had talked to you all about last teleconference, that is the 25, $30 million drop in revenue that does not affect the bottom line because of the pass through nature of the metal. I would say our break-even is probably in the neighborhood of $420 million, or $105 a quarter.

Okay. Thank you very much.

Moving on, we'll hear a question with John Walden with Paradigm Capital Management.

Good afternoon. I guess following up on that question, I think last year your intention in the cost cutting was to bring the company to a break-even point this year. That sounds like that's -- unless the company comes back faster than you expect, that's not going to happen. Are there additional cost reductions contemplated at this point? VICE PRESIDENT FINANCE/CFO: John, if I understood, this is John Walden?

Yeah, one of my aliases. VICE PRESIDENT FINANCE/CFO: Clearly the cost reductions were taken in an environment where we felt and others felt that the economy was going to turn a little quicker and that the revenue this year would be above the break-even point at sometime in the year, granting to that by the end of the quarter. I think it's pretty obvious now with the start of the year slipping by $5 million to $7 million a quarter that unless that ramps back fairly quickly, we can't get there. Now, if we would see a prolonged or let's say a continuation of the sales levels at where they are now and we'd certainly have to consider additional cost reduction initiatives to bring the company to where we want it to be.

Okay. Good. And the improvements that we're seeing in revenues, take apart the first quarter and take a look at the early part of April, is that inventory restocking or are we on some new programs that you can talk about or signing up customers? CEO/PRESIDENT: John, Gordon. I would say it's not inventory restocking so much, although I think we are starting to see the benefit of elimination of excess inventory in the field. I think some of the recovery we're seeing is probably the getting back to kind of what I would consider to be kind of the trend line for these markets as opposed to operating below them as the inventories were being liquidated.

But yes, we are picking up new applications. I think the best examples of that would be probably in Electronic Products where we are picking up some new packages that are being marketed and sold into the telecommunications industry. I think the other good news is we are seeing lots of inquiries for customers from product, new product designs.

The Alloy organization which took a lot of finite elemental analysis and connecter design help has actually done as many of those in the first quarter of this year as they did in all of last year.

So again, I think it's an indication of the fact that the markets are going to be there. It's just a matter of starting to see some level of spending occur. I do agree with the observation that, you know, it does look like the recovery is getting pushed out, particularly in some of the capital spending in the telecommunications marketplace.

Right. I guess the one area where the spending is going forward is in defense. I guess two questions related to that. It seems as though the takeoff on your beryllium process which is largely defense related has been slower than I would have anticipated. Are there factors that are internal to you or is it just the nature of where you fit into that business that makes a difference? And I think you have defense exposure in the electronics businesses and some of your other businesses. Can you talk about the magnitude and what's happening there? CEO/PRESIDENT: Yeah, the Beryllium Products business, which is virtually -- most of it is defense, as you suggest, it's a little lumpy, but in fact we're expecting to see our volume continue to improve in the balance of the year. The good news there is we probably have better visibility in that market segment than virtually any of the others because there are longer lead times so I think we're confident in seeing continued improvement in the coming quarters. In the Electronic Products area, CPT which is one of their subsidiaries is the one area where we do have some defense business, and yes, we are seeing good buying growth there, going into ground based radar systems, the stinger missile is also an application where they provide circuitry. So, yes, we are seeing some improvement, but at the end of the day, defense for the whole corporation is about 5 percent of our total revenue, so it does not have a huge impact on the total. VICE PRESIDENT FINANCE/CFO: Let me answer that and reinforce it. The defense business was strong in the fourth quarter and stronger in the first quarter. The first quarter uptake was actually shown, as Gordon indicated, in the Electronic Products business unit growth that I mentioned, the Electronics Products had grown 50 percent in the quarter. In the second quarter the business will be even stronger and that growth will show in Beryllium Products.

Good.

Up next we'll hear from Darren Hiteman with Snyder Capital.

Thank you. I guess my first question is to what level of revenue does that operating leverage, that contribution margin apply? I mean, is it -- I mean, last year in the first quarter you did $145 million in revenue. Could you apply that kind of contribution margin to get back to that level? VICE PRESIDENT FINANCE/CFO: I'm not sure I understand what you're asking.

Then I'll say it differently. You said every $5 million contributes 8 to 10 cents, so if you add $55 million to your revenue base, does that add almost a -- yeah, I guess a dollar share, no, 80 cents a share? VICE PRESIDENT FINANCE/CFO: I would think, yes. And then to put a finer point on some of the new products and design ones, in the downturn it seems like you're performing about in line with your end markets may be or worse because of the inventory correction. Would you expect them to start out performing the end markets, then telecom markets and the computer end market at some point, and if so, when? VICE PRESIDENT FINANCE/CFO: It's the hardest thing for us to predict because a lot of it remains very unclear as to when of the telecom spending begins to come back.

But I'm saying without -- I mean -- without a change in the end market. I mean, all right, it doesn't matter what -- I'm saying when we outperform whatever the end market. VICE PRESIDENT FINANCE/CFO: Let me say it differently. In the first quarter this year, we're down in Alloy almost 50 percent. In many of the markets they're serving, those markets are not down 50 percent. So clearly the inventory effect you're talking about is evident within Alloy.

We believe that some of the recovery that we're talking about in the back half of the year is what you suggest is getting back on that tread line and would start to perform or in line with, you know, the underlying conditions of those markets. I would also say that in many of these cases they probably have now got very little inventory. There's frankly little incentive for them to build inventory right now because they know lead times from the suppliers are extremely short and because of the continued uncertainty and the conditions of these markets. So assuming there is no real fundamental improvement in their putting in inventory, then I think what we're talking about is trying to just get back to the fundamental market conditions and that will help, you know, our revenue picture.

Right. Okay. That makes sense from what's going on from the inventory dynamics, but what about new business ones and when do you start to gain content? VICE PRESIDENT FINANCE/CFO: Again, I think the key there is as an example, when does wireless infrastructure start being put in place? Some of the design wins that Electronic Products sees would come from, you know, large providers of wireless infrastructure. We're seeing some volume there. But then, the rollout of that capital spending for the large telecoms is, I think, unclear. Example being Japan appears to be starting to spend money on wireless because the government has made it a priority to start getting people hooked up to the internet through the latest 3-G technology. So that is interesting. Japan is starting to show some strength. Europe is not right now. I would say that's probably the most problematic of the markets that we serve. And the U.S., as you can read in the paper everyday, probably very difficult to predict, but right now I would say the news generally is not very positive.

Yeah, that's definitely what we're seeing. But are you saying -- are you going to have more content on, say, the 3-G or 2 1/2-G infrastructure than what you had on the -- VICE PRESIDENT FINANCE/CFO: I would say yes. The answer is relatively encouraging there. Both Alloy as well as Electronic Products have got components and more designs. Again, that is reflective of the need for higher performance in many of these applications and they tend to favor higher-performing materials. So these are markets that we have been focused on and I think, again, as they do come back, we believe we will have increasing level of content on these new systems.

Okay. Actually let me follow up on my first question about leverage. I let it go. I mean, your answer is yes to $145 million. Is the answer yes to $200 million? At what part do you start having to lay on more fixed costs? VICE PRESIDENT FINANCE/CFO: That's a good question. I'm not sure I have a good answer to it yet, but obviously my comments to Mark Parr about research, I mean, if we became confident that the market was starting to improve, I would definitely want to start spending more than we are right now in research spending.

As Mark also observed, our SG&A is down. We have cut back on field sales force personnel and if, again, those markets are to come back I am sure we will see some spent. It clearly would not be anywhere close to the kind of growth in revenue that we were just chatting about, and we would remain, you know, very resistant to growth in overhead, but at the same time I can think of areas where I would be the first to support increased spending. So not all of that revenue growth would fall to the bottom line. I would feel very confident that the first $100 million or so a lot of it would, but beyond that, I think there would be pressure to start adding overhead.

All right. Yeah. And I don't think you'll have to answer any questions on while your contribution margin is only 20 percent instead of 40 percent at $240 million in revenue. So that's it. All right. Thank you.

And as a final reminder, if you'd like to ask a question, you can do so by pressing star 1 on your telephone. Up next we'll hear a follow-up question from Mark Parr with McDonald Investments.

Thank you. I have just a couple of things. First of all, as far as the CBD settlements that you mentioned, John, what's the anticipated cost associated with that? CEO/PRESIDENT: There's no impact on our earnings. The --

Is it all covered under insurance? CEO/PRESIDENT: Combination of insurance and reserves we had booked for that.

Is there any add back to the bottom line as far as these settlements coming in less than the recoveries? CEO/PRESIDENT: No.

Or less than the reserves, I mean? CEO/PRESIDENT: No.

Does this do anything going forward as far as reduce your legal fees? CEO/PRESIDENT: Oh, yes.

How much of a benefit will you get there?

Well, Mark, this is Jim Marrotte. It's hard to quantify that. The legal fees on cases that we're talking about here were fully insured. However, there is allowed benefit that we get by settlement cases, from a trend perspective, from the knowledge that we learn as far as how to litigate and how to settle these cases. We spend uninsured costs in legal arenas $3 to $4 million a year we're spending on outside attorneys to battle these cases. So we feel very positive that this settlement will help us reduce that cost going forward.

That's kind of what I was getting at. I know Gordon had talked about it being about $1 million a quarter type of number.

It also hopefully limit new cases from being filed and obviously donate a lot of legal reserves for that.

Since the poor lawyers need something else to do, they'll probably be back at you, unfortunately. You've got Enron and Arthur Andersen to keep busy. The other question I had that was of any significance related to the production of metallic beryllium and I'm just curious to what extent you still actively metallizing hydroxide as opposed to, say, buying beryllium back from the government out of the stockpile or, say, buying pre-- already existing material like out of Kazakhstan or whatever. VICE PRESIDENT FINANCE/CFO: Mark, as you may or may not have missed, we've actually closed the Pebbles Plant, and it has been closed for the past two years or close to two years, and our consuming value under the terms of the contract with the DLA, vacuum casting, it was a win-win kind of a situation for us where we were able to work an attractive purchase agreement with the government and at the same time allow us to take a hard look at that part of the facility and think about environmental improvements and other things that could be done with regard to that facility.

So right now all of the metal we are selling, pure metal, is predicated on using vacuum casting from Defense Logistics Agency and there's enough there that will last several years.

Okay. But at this point, given some of the recovery of those end markets that's going on right now, when would you anticipate -- is Delta -- are you still making hydroxide for (inaudible) VICE PRESIDENT FINANCE/CFO: Oh, sure. Yeah. go into the Alloy business.

Okay. So there you're just using hydroxide? VICE PRESIDENT FINANCE/CFO: Yeah, the hydroxide, the different production process, the hydroxide that comes out of Utah that goes into Alloy goes to a lighting art furnace where it is immediately blended with copper to create a master alloy.

Okay. I thought you guys made pebbles to make master alloy. VICE PRESIDENT FINANCE/CFO: No. Avoid it. That's the process.

Given the current scenario with the metallized beryllium supply line that you have established and what you're saying on the end demand side, when would you envision having to restart your pebble facility and is that something that could happen next year or is this more like a '04, '05? VICE PRESIDENT FINANCE/CFO: It's a few years out and we're looking at some options there, some of which are quite unique or different that could, you know, all could look at different sources of supply, even, so we're just, you know, kind of considering what all of our options are. But right now we have the luxury of working with the vacuum cast.

Frankly, there's even more vacuum hot press box back at the DLA so there's not a gun to our head. We have a few years. We're talking to the government and trying to see what the alternatives might be.

Okay. I just was kind of curious about that. Okay.

Lastly, about the liquidity situation, you said available liquidity at the end of the first quarter was about $19 million, and I mean, given your, you know, going back over the last couple of years, how is that liquidity level compare to, let's say, where you have been and is that an acceptable level, are you on the tight side there? You know, how much liquidity do you need to support each $5 million of incremental sales, for example? I'm trying to get some sense that you've got enough liquidity to really get you over the hump here. VICE PRESIDENT FINANCE/CFO: Yeah, Mark, whenever we had sales of $145 to $150 million a quarter a couple of years ago -- Yeah. VICE PRESIDENT FINANCE/CFO: Okay, we had debt levels that maybe would have consumed maybe $12 million of that $19 so there's plenty of liquidity there.

That's my issues. Is there anything you want to say on Brush Bronze, as far as how that thing's doing? VICE PRESIDENT FINANCE/CFO: Actually I'm encouraged. Revenues are up and improving. The alloys are showing good acceptance in some of the targeted markets, plastic mold materials, aircraft pushings and bearings, oil and gas applications, just in the quarter got some corrosion approvals to open up some market opportunities, so we think strategically it still remains the right thing to be doing and I would say that the quarter was generally a positive one relative to Brush Bronze.

Okay. What's your return on capital expectation for that facility this year? VICE PRESIDENT FINANCE/CFO: I don't know that I have a good answer. We probably answer disclose that directly. But it tends to get blurred because of the cost sharing it goes through with Alloy as well.

Well, will it contribute to pretax, you know, net financial costs? VICE PRESIDENT FINANCE/CFO: I think their goal is by the end of the year to be in that kind of situation, yes.

But it's not quite there yet? VICE PRESIDENT FINANCE/CFO: It wasn't there last year and I doubt if it was in the first quarter.

Okay. Thanks. And again, I'm just glad to see that your numbers are in line and the end markets are tough so you guys seem to be hanging in there, that's for sure. VICE PRESIDENT FINANCE/CFO: Hanging in. That's the right term.

Up next we'll hear from Robert Moses with private capital management.

Hi. Could you talk about Elmore? I know you're not running it, but obviously you want to run it from an efficiency standpoint, but it you talk about the quality of product, buffer inventories, if we do see a ramp up, 20 percent ramp up in business over the next six months is this going to be an issue or is it scalable, is it running well, is the material looking good? VICE PRESIDENT FINANCE/CFO: That's a lot of questions as once, Rob, but frankly, the quality is outstanding right now and as Mike had already indicated, yields are up significantly, particularly on the Brush 60, Brush 60 Alloy was one fine example. Variable cost or output for man-hours also up significantly. The facility is stable. Buffer inventories for the first time are in line and that helps us live with the shorter lead times. We're able (inaudible) as those orders come in so I think we're feeling today very confident about the situation at Elmore, and to your point, we'd love to test it.

Okay. Talk about the competitive conditions if you're not hearing directly, what you're hearing about assume they're struggling as you are in terms of end market demands but are they having any issues as to liquidity issues or plant issues or anything you're hearing positive or negative? VICE PRESIDENT FINANCE/CFO: Mike, I'll comment on Edu Kay. I mean, remember, the metal side of Edu Kay represent less than 5 percent of that total corporation.

Right. VICE PRESIDENT FINANCE/CFO: So there would be no issues of liquidity there. They too are seeing the same kinds of down turns we are so they're suffering, you know, the same kind of issues. You can take a look at molding metals and see kind the problems they're metal business is having. So I think the whole industry is suffering. We probably tend to suffer a little more than most only because of the large amount of the telecommunications and high end electronics that represent our end use markets whereas some of the other (inaudible) producers have everything that goes into building construction and all of the other nontraditional amount of electronic uses, so they might not be suffering quite as much, but the whole industry is in pretty difficult times right now.

Last question, it's more of a corporate governance issue. Top management, mid management and people below obviously haven't been paid much in terms of bonuses and, you know, performance has been not so good. Could you talk about, you know, goals this year? Is it more acceptable if you get kind of that incremental, get to break even by the fourth quarter, is that something from a compensation perspective that you guys get returned to a decent bonus? It's a touchy subject, but just kind of curious as to what the board feels is a job well done as you move out of this, perhaps, recession. CEO/PRESIDENT: We didn't try to change our compensation practices as all. We did set some challenging targets. We opened up the range a little bit so there would be some opportunity available but getting to break even for the year is something we saw as critical so that's the kind of thing we're talking about. We also have a small amount available for nonfinancial measures that we would propose to make available, but fundamentally, Rob, we have not altered significantly our traditional measures of pay and as you suggest, we kind of live or die by the numbers. We think the targets are reasonable, and they are reflective of market conditions, but they also would require significant improvement over what we turned in last year.

Understood. Thanks.

And at this time, gentlemen, there appears to be no further questions. I'll turn the conference back over to you, Mr. Hasvchak, for any closing remarks. VP/TREASURER/SECRETARY: Well, thank you for participating. I'll be around the rest of the afternoon for follow-up. If you have any questions, please call me at area code 216-383-6823. Thank you.

That concludes our teleconference for today. Thank you for your participation.