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Brush Engineered Materials Inc. Reports Improved Third Quarter Results On Lower Revenue

10/24/2002

Third quarter 2002 sales declined 12% to $93.5 million from $106.2 million in the third quarter of 2001. Sales in the quarter continued to be adversely affected by the overall economic environment and the prolonged weak demand from computer and telecommunications, the Company's largest market.

The Company reduced its third quarter 2002 net loss by 62% to $2.9 million from a net loss of $7.8 million in the same quarter of 2001. Earnings per share diluted was a loss of $0.18 compared to a loss of $0.47 in the third quarter of 2001. The improvement versus the third quarter of 2001 was driven by improved margins and lower costs. Operating margins continued to improve due to the Company's lean manufacturing and Six Sigma initiatives. The lower costs resulted from a number of overhead reduction actions taken since the third quarter of 2001. As a result of a favorable court ruling, the Company was able to increase the recovery portion on insured legal claims that were previously subject to apportionment. This, plus other favorable developments, resulted in a reduction in legal exposure and a $0.07 per share benefit to net income in the quarter.

Sales for the nine months were $283.8 million, down 25% compared to the first nine months of 2001 sales of $380.2 million. The net loss for the first nine months of 2002 was $8.8 million, or $0.53 per share diluted compared to a net loss of $0.3 million or $0.02 per share diluted for the same period last year.

The Company's cash flow remained positive in the quarter. Cash flow from operations was $6.2 million in the quarter bringing the total cash provided by operating activity to $11.8 million for the first nine months of 2002. Balance sheet debt decreased $5.3 million in the third quarter and is down 14% or $10.6 million for the year to date. The Company's balance sheet debt has decreased in each of the five most recent quarters.

BUSINESS SEGMENT REPORTING

Metal Systems Group

The Metal Systems Group consists of Alloy Products, Technical Materials, Inc. (TMI) and Beryllium Products.

The Metal Systems Group's third quarter 2002 sales were $57.0 million, down 8% from 2001 third quarter sales of $61.8 million. Year-to-date sales were $176.4 million, down 28% from sales of $243.8 million for the same period last year.

The third quarter operating loss for the Metal Systems Group was $10.0 million versus a loss of $9.4 million for the third quarter of 2001. The year-to-date operating loss was $23.6 million versus a loss of $4.4 million for the same period last year.

Alloy Products' third quarter sales of $37.8 million and year-to-date sales of $117.1 million were down 20% and 36%, respectively, versus the same periods last year. Alloy third quarter sales were negatively affected in part by customer manufacturing maintenance shutdowns and the continued weakness in the computer and telecommunications markets both domestically and in Europe. Although the automotive electronics and appliance markets remain steady, it is anticipated that fourth quarter sales in Alloy Products may be flat to down as compared to the third quarter due to the continued weakness in the computer and telecommunications markets, expected inventory adjustments in automotive, weakness in Europe and slower growth in Asia.

Alloy Products is broadening its market focus to include utilizing strip form materials in nontraditional markets such as oil and gas, while developing several new alloys for the electronics sector. In addition, Alloy is also expanding its bulk form products market applications with non-beryllium spinodal alloys that are used in bearings and other industrial components.

TMI's third quarter sales of $10.9 million were up 29% over 2001 third quarter sales of $8.4 million while year-to-date sales of $34.8 million were down 16% from the same period last year. Order rates have slowed and sales may be flat to down in the fourth quarter of 2002 as compared to third quarter sales.

Beryllium Products' third quarter 2002 sales of $8.3 million and year-to-date sales of $24.5 million were up 41% and 19% respectively over the same periods last year. Beryllium Products has been experiencing strong growth in all segments of defense throughout 2002. This strength should continue through the fourth quarter and into 2003.

Microelectronics Group

The Microelectronics Group includes Williams Advanced Materials Inc. (WAM) and Electronic Products. (Electronic Products includes Zentrix Technologies Inc. and Brush Ceramic Products Inc.)

The Microelectronics Groups' sales for the third quarter of $34.3 million were down 18% from third quarter 2001 sales of $41.7 million. Year-to-date 2002 sales of $102.3 million were down 22% from the same period last year.

Third quarter operating profit for the Microelectronics Group of $1.3 million was up $1.1 million versus $0.2 million for the third quarter of 2001. Year-to-date operating profit of $5.0 million was up approximately 40% over the same period last year.

WAM's third quarter 2002 sales of $27.1 million were down 20% from the third quarter of 2001. However, third quarter value added sales (sales less the cost of metal) were down only 2% from 2001 value added sales. Year-to-date 2002 sales were $80.1 million, down 21% versus $101.9 million for the same period in 2001. Value added 2002 year-to-date sales were down approximately 4% from 2001. WAM's value added sales, although slightly down from last year, should remain steady for the remainder of the year supported by continued strength in optical media and magnetic storage product applications.

Electronic Products' third quarter 2002 sales of $7.2 million were down 8% from 2001 third quarter sales of $7.8 million. Year-to-date sales of $22.2 million were down 23% from 2001 year-to-date sales of $28.9 million. Sales continue to be affected by the depressed wireless infrastructure market. The fourth quarter order entry rate level appears to be about equal to the third quarter. This weakness is expected to continue into 2003.

Company Issues Related to the Economic Environment

The Company is currently addressing three issues that have surfaced due to the difficult conditions in both the economic environment and the U.S. equity markets.

First, the decline in the U.S. equity markets has affected the value of the Company's pension assets during 2002. Accounting regulations require the recognition of an additional liability when the market value of pension plan assets is less than the accumulated benefit obligation at the end of a plan year. As a result, the Company may be required to record a significant non-cash charge to equity in the fourth quarter of 2002. The extent of any charge will be determined based upon actual year-end pension valuations.

Second, the Company has a $22.7 million net deferred tax asset. While the nature of this asset is such that it does not expire for a number of years, if current economic conditions continue, a significant portion or all of this may be considered to be impaired under certain accounting guidelines. Therefore, it is possible that a non-cash charge may be taken in the future. The charge would not affect the Company's pre-tax earnings or cash flow. The charge would also not affect the Company's ability to utilize the deferred tax assets in future periods.

Finally, if an impairment charge for the net deferred tax assets is deemed necessary in the future, a default may occur under certain bank covenants. The Company's current sales and related earnings outlook for the fourth quarter may also adversely affect performance versus certain covenants. Thus, the Company has initiated discussions with its lenders to resolve any issues that may surface in the event that these circumstances do lead to a default.

Outlook

The demand for the Company's products in the computer and telecommunications markets seemed to have bottomed in fourth quarter of 2001 and recovered slightly during the first half of 2002. During the third quarter, additional softness began to appear. The Company continues to see no distinct signs of economic recovery, especially in the computer and telecommunications segments of its markets. Demand is sluggish, lead times are short and limited visibility remains.

Forecasting revenue and thus earnings in this volatile economic environment is difficult, especially when attempting to forecast out more than a quarter. Order entry following the seasonal summer shutdowns in the Company's business has been weaker than previously expected. Assuming no further weakness, it is currently expected that fourth quarter 2002 sales will be down 5% to 10% from the third quarter 2002.

Chairman's Comments

Chairman, President and Chief Executive Officer, Gordon D. Harnett stated, "while the economic environment remains volatile, I'm encouraged by the fact that we're realizing tangible benefits from the aggressive operating improvements our businesses have been putting in place over the past year. These are very visible in the quarter's results. We're confident that once the economic environment begins to improve, our leaner structure, coupled with our lean manufacturing and Six Sigma strategies will deliver greater value going forward."

"Given the continued uncertain and volatile economic environment, we will continue to execute our manufacturing initiatives, reduce working capital intensity, further reduce costs where appropriate, focus our marketing efforts to grow sales in new markets, simplify our distribution system and consider other strategies to improve performance."

Forward-looking Statements

Any forward-looking statements in this announcement, including those in the Outlook Section, 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 include: the global and domestic economy, the condition of the markets which the Company serves, whether defined geographically or by segment, with the major market segments being telecommunications and computer, optical media, automotive electronics, industrial components, aerospace and defense, and appliance; changes in product mix and the financial condition of particular customers; the Company's success in implementing its strategic plans and the timely and successful completion of pending capital expansion projects; the availability of adequate lines of credit and the associated interest rates; other financial factors, including tax rates, exchange rates, pension costs, energy costs and the cost and availability of insurance; changes in government 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 and other matters referred to in the Company's Securities and Exchange Commission filings.

Brush Engineered Materials Inc., is headquartered in Cleveland, Ohio. The Company and its subsidiaries supply worldwide markets with beryllium products, alloy products, electronic products, precious metal products, and engineered material systems.

                    Brush Engineered Materials Inc.
                          Digest of Earnings
                          September 27, 2002


                                          2002              2001
                                     --------------     --------------
Third Quarter 2002

 Net Sales                           $  93,481,000      $ 106,194,000

 Net (Loss) Income                     ($2,906,000)       ($7,767,000)

 Share Earnings  - Basic                   ($0.18)            ($0.47)

 Average Shares - Basic                 16,558,417         16,548,410

 Share Earnings  - Diluted                 ($0.18)            ($0.47)

 Average Shares - Diluted               16,558,417         16,548,410


Year-to-date

 Net Sales                           $ 283,812,000      $ 380,174,000


 Net (Loss) Income                     ($8,788,000)         ($286,000)


 Share Earnings  - Basic                   ($0.53)            ($0.02)

 Average Shares - Basic                 16,557,026         16,508,784

 Share Earnings  - Diluted                 ($0.53)            ($0.02)

 Average Shares - Diluted               16,557,026         16,508,784



Consolidated Balance Sheets
(Unaudited)

                                                Sept. 27,   Dec. 31,
(Dollars in thousands)                             2002        2001
----------------------------------------------------------------------
Assets
Current Assets
 Cash and cash equivalents                     $  3,215     $  7,014
 Accounts receivable                             59,412       54,616
 Inventories                                     93,242      109,110
 Prepaid expenses                                 5,656        9,910
 Deferred income taxes                           43,432       38,672
                                               ----------   ----------
     Total Current Assets                       204,957      219,322

Other Assets                                     30,616       33,224

Property, Plant and Equipment                   474,452      469,663
 Less allowances for depreciation,
  depletion and impairment                      314,110      298,367
                                               ----------   ----------
                                                160,342      171,296
                                               ----------   ----------

                                               $395,915     $423,842
                                               ----------   ----------
                                               ----------   ----------


Liabilities and Shareholders' Equity
Current Liabilities
 Short-term debt                               $ 17,958     $ 27,582
 Accounts payable                                15,107       13,869
 Other liabilities and accrued
  items                                          33,618       34,211
 Dividends payable                                    0            0
 Income taxes                                     3,541        3,917
                                               ----------   ----------
     Total Current Liabilities                   70,224       79,578

Other Long-Term Liabilities                      19,579       22,921
Retirement and Post-employment Benefits          39,150       39,552
Long-term Debt                                   46,219       47,251

Deferred Income Taxes                            20,750       20,189

Shareholders' Equity                            199,993      214,350
                                               ----------   ----------
                                               $395,915     $423,842
                                               ----------   ----------
                                               ----------   ----------


See notes to consolidated financial statements.


Consolidated Statements of Income
(Unaudited)

                      Third Quarter Ended         Nine Months Ended
                     Sept. 27,    Sept. 28,     Sept. 27,   Sept. 28,
(Dollars in thousands
 except share and
 per share amounts)     2002         2001         2002         2001
----------------------------------------------------------------------

Net sales          $    93,481  $   106,194  $   283,812  $   380,174
 Cost of sales          81,466       98,941      246,473      315,311
                   ------------ ------------ ------------ ------------
Gross Margin            12,015        7,253       37,339       64,863
 Selling, general
  and administrative
  expenses              13,986       17,700       46,134       57,977
 Research and
  development
  expenses               1,003        1,416        3,177        4,975
    Other-net              952       (1,128)          20         (103)
                   ------------ ------------ ------------ ------------
Operating Profit (Loss) (3,926)     (10,735)     (11,992)       2,014
 Interest expense          776          679        2,275        2,507
                   ------------ ------------ ------------ ------------
Income (Loss) before
 income taxes           (4,702)     (11,414)     (14,267)        (493)

    Income taxes        (1,796)      (3,647)      (5,479)        (207)
                   ------------ ------------ ------------ ------------

Net Income (Loss)  $    (2,906) $    (7,767) $    (8,788) $      (286)
                   ------------ ------------ ------------ ------------
                   ------------ ------------ ------------ ------------

Per Share of Common
 Stock: Basic      $    (0.18)  $    (0.47)  $    (0.53)  $    (0.02)

Weighted average
 number of
 common shares
 outstanding        16,558,417   16,548,410   16,557,026   16,508,784


Per Share of Common
 Stock: Diluted    $    (0.18)  $    (0.47)  $    (0.53)  $    (0.02)

Weighted average
 number of common
 shares outstanding 16,558,417   16,548,410   16,557,026   16,508,784


Cash dividends
 per common share  $      -     $      -     $      -     $     0.24


See notes to consolidated financial statements.



Consolidated Statements of Cash Flows
(Unaudited)
                                                    Nine Months Ended
                                                   Sept. 27, Sept. 28,
(Dollars in thousands)                               2002     2001
----------------------------------------------------------------------

Net (Loss) Income                                   ($8,788) ($   286)
Adjustments to Reconcile Net Income to Net Cash
  Provided From Operating Activities:
  Depreciation, depletion and amortization           15,484    16,713
  Decrease (Increase) in accounts receivable         (3,936)   20,857
  Decrease (Increase) in inventory                   17,131    (3,333)
  Decrease (Increase) in prepaid and other
   current assets                                     1,434    (1,724)
  Increase (Decrease) in accounts payable
   and accrued expenses                              (2,070)  (17,954)
  Increase (Decrease) in interest and taxes payable  (2,503)     (628)
  Increase (Decrease) in deferred income taxes         (283)     (156)
  Increase (Decrease) in other
   long-term liabilities                             (5,667)    2,985
  Other - net                                         1,008       478
                                                    --------  --------
   Net Cash Provided From (Used in)
    Operating Activities                             11,810    16,952


Cash Flows from Investing Activities:
  Payments for purchase of property,
   plant and equipment                               (3,899)  (20,651)
  Payments for mine development                         (58)     (282)
  Proceeds from sale of property,
   plant and equipment                                  140       --
                                                    --------  --------

   Net Cash Provided From (Used in)
    Investing Activities                             (3,817)  (20,933)

Cash Flows from Financing Activities:
  Proceeds from issuance/ (repayment of)
   short-term debt                                  (10,633)    7,349
  Proceeds from issuance of long-term debt           12,000    27,417
  Repayment of long-term debt                       (13,000)  (26,500)
  Issuance of Common Stock under stock option plans     --      1,753
  Purchase of Common Stock for treasury                 --        --
  Payments of dividends                                 --     (5,967)
                                                    --------  --------
   Net Cash Provided From (Used in)
    Financing Activities                            (11,633)    4,052
Effects of Exchange Rate Changes                       (159)       89
                                                    --------  --------
    Net Change in Cash and Cash Equivalents          (3,799)      160
   Cash and Cash Equivalents at Beginning of Period   7,014     4,314
                                                    --------  --------
    Cash and Cash Equivalents at End of Period        3,215     4,474
                                                    --------  --------
                                                    --------  --------

See notes to consolidated financial statements.



Notes to Consolidated Financial Statements
(Unaudited)

Note A - Accounting Policies

In management's opinion, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
financial position as of September 27, 2002 and December 31, 2001 and
the results of operations for the three and nine month periods ended
September 27, 2002 and September 28, 2001. All of the adjustments were
of a normal and recurring nature.

Note B - Inventories


                                         Sept. 27,   Dec. 31,
(Dollars in thousands)                     2002       2001
----------------------------------------------------------------------

Principally average cost:
  Raw materials and supplies             $ 17,277   $ 17,510
  In process                               68,491     75,458
  Finished goods                           34,213     41,789
                                         --------   --------
     Gross inventories                    119,981    134,757

Excess of average cost over LIFO
   Inventory value                         26,739     25,647
                                         --------   --------
   Net inventories                       $ 93,242   $109,110
                                         --------   --------
                                         --------   --------

 Notes to Consolidated Financial Statements
 (Unaudited)

 Note D - Segment Reporting




(Dollars in           Metal     Micro-     Total    All
 thousands)          Systems  Electronics Segments  Other     Total
                    --------- --------- --------- ---------- --------
Third Quarter 2002
------------------
Revenues from
 external customers $ 56,966  $ 34,269  $ 91,235  $   2,246  $ 93,481

Intersegment revenues    894       444     1,338      3,275     4,613

Profit (loss) before
 interest and taxes   (9,975)    1,290    (8,685)     4,759    (3,926)


Third Quarter 2001
------------------
Revenues from
 external customers $ 61,778  $ 41,656  $103,434  $   2,760  $106,194

Intersegment revenues    578       542     1,120      1,311     2,431

Profit (loss) before
 interest and taxes   (9,393)      208    (9,185)    (1,550)  (10,735)


First Nine Months 2002
----------------------
Revenues from
 external customers $176,420  $102,295  $278,715  $   5,097  $283,812

Intersegment revenues  2,261     1,401     3,662      9,907    13,569

Profit (loss) before
 interest and taxes  (23,574)    4,959   (18,615)     6,623   (11,992)


First Nine Months 2001
----------------------
Revenues from
 external customers $243,809  $130,851  $374,660  $   5,514  $380,174

Intersegment revenues  2,516     1,843     4,359     11,697    16,056

Profit (loss) before
 interest and taxes   (4,445)    3,548      (897)     2,911     2,014


Contact:
     Brush Engineered Materials Inc.
     Investors: Michael C. Hasychak, 216/383-6823
     Media: Patrick S. Carpenter, 216/383-6835
     http://www.beminc.com


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