GORDON D. HARNETT - BRUSH ENGINEERED MATERIALS - (BW)
CEO Interview - published 01/22/01

DOCUMENT # LAP631

GORDON D. HARNETT is Chairman, President and CEO of Brush Engineered Materials Inc., headquartered in Cleveland. Brush Engineered Materials Inc. and its six wholly-owned operating subsidiaries produce and supply high-performance engineered materials including beryllium, beryllium-containing alloys, berylliom ceramic, precious metal products, specialty alloys, eclectronic products and engineered material systems. The company’s subsidiary Brush Wellman Inc. is the only fully integrated producer of beryllium related products in the world. Brush Engineered Materials Inc. with sales over $500 million is listed on the NYSE under the symbol BW. Mr. Barnett joined the company in 1991. He had been Senior Vice President of The B.F. Goodrich Co., with responsibility for the $800 million Specialty Chemical sector since 1988. From 1977 to 1988 he had held a series of senior executive positions with Tremco Inc., a wholly owned subsidiary of B.F. Goodrich, including President and Chief Executive Officer from 1982 to 1988. From 1969 through 1976, Mr. Harnett worked for McKinsey & Co., including a two-year assignment in Tokyo. Mr. Harnett holds a BS in Business Administration from Miami University and an MBA from Harvard University. Mr. Harnett is on the Board of Directors at Lubrizol, National City Bank and PolyOne. He is also a Trustee of Hathaway Brown School, Cleveland Tomorrow and the Achievement Center for Children and is Chairman of Cleveland Development Advisors, Inc.

Sector: Industrial Metals & Minerals

TWST: Could you provide our readers with a brief overview and history of the company?

Mr. Harnett: Brush Engineered Materials Inc. is a company whose history goes back over 70 years. Its largest subsidiary, Brush Wellman Inc. (formerly The Brush Beryllium Company) was founded in 1931 to commercially develop the beryllium technology of Brush Laboratories, established in 1921 by Charles Brush II and Dr. C. B. Sawyer. As you may know, the company’s early interest, and to this day still a large part of the company, involves the element beryllium. Beryllium, which is number four on the periodic table, is the lightest structural metal known to mankind. Beryllium is six times stiffer than steel and a third lighter than aluminum. These properties make beryllium useful in a number of high-tech applications. For a long time, the company was focused exclusively on beryllium materials, either the pure metal form or the ceramic form. Early on, the largest market served was defense aerospace. Later, alloys that contained beryllium were added. Today Brush Engineered Materials is a leading international producer and supplier of high-performance engineered materials. In addition to beryllium, beryllia ceramics and beryllium alloys, the company also produces precious metal products, specialty alloys, electronic products and engineered material systems for high-growth markets such as telecommunications, computer, automotive electronics and optical media.

TWST: With that could you comment on what will be taking place in the next couple of years in those areas?

Mr. Harnett: This past year reflects what’s been happening to us and gives you an indication of what to expect. Throughout most of this past year revenue growth across our various businesses has ranged 20%-35% which is an indication of both how rapidly each of the markets that we serve is growing and the fact that these markets are demanding higher reliability, higher performing engineered materials. I can give you a couple of good examples of that. The telecommunications infrastructure is growing very rapidly as the world continues to become more wireless and yet at the same time more connected. Internet infrastructure equipment, cellular base stations, amplification systems, data storage arrays and handsets all in some way use our materials. These markets are looking for higher performance and higher reliability as well as smaller components. Our materials have been allowing us to capitalize on the need for higher performance and reliability, especially as components get smaller. I see no change in these trends. Another example is our precious metal and metal alloy sputtering targets supplied by our Williams Advanced Materials Inc. subsidiary. Here, we provide the reflective and semi-reflective layer on optical disc media formats such as CD-R-CD-RW, DVD & DVD-R. These applications demand optimal reflectivity, corrosion resistance and extended life. Over the last several years we have seen a phenomenal growth in the materials we supply to the optical media markets.

TWST: What new steps would you like to take over the next couple of years?

Mr. Harnett: For us it continues to be a matter of getting closer to our customers. As a materials provider, this is always a challenge because we are typically two or three steps removed from the true demand generators/end users such as the EMCs, Cisco Systems, Ericksons or Nokias of the world that are providing the hardware and equipment. For us to be successful we have to get to the designers and engineers who are thinking about the next generation of equipment and to understand what the performance needs are going to be. As you probably know, many of these companies don’t even make a lot of what they sell. They are outsourcing a large amount of the components, using contract manufacturers and as a result the supply chain is a challenging one to serve effectively. It is critical and vital that we find these manufacturers and designers wherever they are and help them understand how our materials can enable them to solve their problems and build better, higher reliability products.

TWST: Could you talk about the people you have working for you?

Mr. Harnett: By and large we’re a creative and innovative organization. Our organization has been getting stronger each year. One thing that has helped us over the last several years is that we’ve been able to attract and retain capable people who have solid experience in the industries and markets that we serve. People who speak the language of our customers. Our marketing and sales organization has a good working knowledge of the markets that we choose to serve. For example they can talk connector product design. They can relate to the challenges a customer’s designer might have in meeting density, power, frequency or thermal management issues. And they can help solve problems or create new products. As I like to say, most designers don’t wake up in the morning saying “I need more specialty alloys or beryllium today.” They often don’t know whether, or how, our materials could help them solve a problem. A very focused, targeted marketing effort helps them see what we can contribute to their success.

TWST: Speaking of needing beryllium, could there be a technological change which would render your product less needed?

Mr. Harnett: I don’t see that. If anything, I see the opposite. The demand continues to be for higher performing materials. We must remain alert to the cost pressures our customers are under as well as their need for higher performance. When you think about what is happening to the price of PCs or happening to the price of the cellular phone systems, it is obvious there is a lot of competitive pressure in the market. What we can do is find effective ways to help our customers meet cost targets but also meet the need for higher performance as well. Performance needs are not declining. The trends say it’s higher power, it’s higher frequency, it’s faster, smaller and lighter and the need for reliability continues to grow, that gives us an advantage. I was concerned at one time that PCs would be disposable or that their reliability wouldn’t be important. Interestingly enough, we have come to expect that the Internet and all of the related equipment will operate all of the time, 24 hours a day 365 days a year. People get very frustrated if they cannot get online, cannot place an order, cannot make an inquiry. So the backbone has to operate, and has to operate reliably which is great news for our types of materials.

TWST: Can you comment on your market share, the competitive advantages that you may enjoy?

Mr. Harnett: It depends on which of our markets and how you want to define market. I mean, Brush Engineered Materials is somewhat unique in that its subsidiary, Brush Wellman Inc., is the only fully integrated producer of beryllium, beryllium alloys and beryllia ceramics. So if you want to talk in terms of beryllium and beryllium alloys, while we sell some of our feed stocks to others, we do have the largest share of beryllium-containing materials. But the primary competitors in my opinion are alternative materials for solving a performance or technical problem. If you were to look at materials used in connectors, even high reliability connectors, beryllium copper would represent less than 10% of the total market. So we have a relatively small overall market share. As the market continues to demand higher performance that means that there is a large growing segment which will need our materials. Our other subsidiaries, Williams Advanced Materials Inc., Technical Materials, Inc. and Zentrix enjoy solid share positions in their markets as well.

TWST: What benchmarks should investors use in judging your progress over the next couple of years?

Mr. Harnett: I would argue that for us it continues to be the growth in our top line. I think that is a measure of the acceptance our materials are having in the marketplace. We have made significant investments in capacity and believe that we should be able to sustain above average growth rates.

TWST: What are the risks involved?

Mr. Harnett: The largest risk for us is if for some reason, there would be a sudden and significant downturn in the investment in the Internet and telecommunications infrastructure. We are pretty geographically diverse though. Roughly 30% of our total revenue comes from outside the United States, so we not only have market diversity but geographic diversity. The geographic diversity tends to soften the risk for us. Although we serve competitive markets, I don’t see competing materials placing great pressure on us.

TWST: Could you comment on your overseas business?

Mr. Harnett: I think you are going to see the Asian economy come back. It has been somewhat slowed, particularly in Japan. We have operations in Japan, Singapore and good partners in China. Wireless telecommunications is clearly the future. Much of that part of the world will never see hard-wired telephone systems. The use of the Internet is going to expand dramatically so the growth of infrastructure and the opportunities to serve that market look very attractive.

TWST: You mentioned 30% outside of the United States. Can that increase?

Mr. Harnett: Absolutely. It can be more than 30% in my opinion. This is where our customer base is going. Asia and Europe both continue to be attractive market opportunities and we are well positioned in those areas. We believe that those are geographic markets that we must continue to expand in.

TWST: Do you think there is a good chance of expanding your operating margins?

Mr. Harnett: Yes, and I think we have to. We have lost margin in the last few years as a result of some large investments that we have not yet gotten the full advantage of. If you were to go back a few years ago, you would see that our operating margins were better than they are today. That is somewhat reflective of the continued digestion problem we’ve had with these very large increases in capacity so we believe that there is opportunity for margin growth as we become more efficient, going forward.

TWST: Will acquisitions be part of your future?

Mr. Harnett: We have made some small acquisitions. I would believe we will continue to do that. Right now I don’t contemplate any extremely large transactions but definitely targeted acquisitions that help accelerate our growth in our current markets.

TWST: As CEO, what do you think is most important for you to focus your energies on?

Mr. Harnett: In the last couple of years, I have been somewhat inwardly focused on our large expansions. We spent about $120 million recently on a large expansion of our alloy business. That has been a big issue for the company. So compared to previous years, I have spent an inordinate amount of time focused inwardly. I would like to see myself spending a lot more time out in the marketplace in the coming years with our customers and with our sales and marketing organization. You learn a lot more out with your customers than you do sitting behind a desk. So for me, my time needs to be spent in the marketplace talking with our direct customers and our customers’ customers, so that we really can anticipate and respond to trends and opportunities.

TWST: What would you like to say directly to the potential investor, particularly the long-term investor?

Mr. Harnett: I think Brush Engineered Materials is the kind of company that investors ought to be looking for today. In one sense you could argue that we are an old economy kind of company with bricks and mortar. At the same time we’re a company with two-thirds of its revenue coming from the new economy — telecommunications, computers, automotive electronics and optical media, etc. So here’s a company with assets, technology and unique materials serving the high-growth technology segments without perhaps some of the volatility that comes with Internet stocks.

TWST: Is there anything that we have left out of our discussion that you would like to bring up or is there anything that you would like to reemphasize?

Mr. Harnett: We are a kind of a company that has a fair amount of interesting potential. We really like some of the segments that we are in right now. Certainly not just on the beryllium side, but our other metal clad products, our optical systems and some of our electronic materials. It’s going to be an interesting run here for a while. We believe that we have had a good year in 2000 in really getting back on track and are looking forward to the future.

TWST: Thank you. (MC)

GORDON D. HARNETT
 Chairman, President & CEO
 Brush Engineered Materials Inc.
 17876 St. Clair Avenue
 Cleveland, OH 44110
 (216) 383-6823
 (216) 481-2523 - FAX
 www.beminc.com
 e-mail: gordon_harnett@beminc.com

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