EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
We are an integrated producer of engineered materials used in a
variety of high performance electrical, electronic, thermal and structural
applications. Our products are sold into numerous markets, including
telecommunications and computer, automotive electronics, magnetic and optical
data storage, aerospace/defense and appliance.
We made significant improvements in our sales and profitability and the
overall operating and financial condition of our company in 2004. Sales grew
$95.3 million in 2004 over 2003 and have now grown $123.5 million, or 33%, over
the last two years. Each of our major product lines contributed to the sales
growth in 2004. While the conditions of a number of our end-use markets improved
in 2004, approximately one-third of this sales growth resulted from the
development of new products and applications and market share gains.
Gross margin increased in 2004, not only due to the higher level of sales,
but to improvements on the shop floor and other factors. Despite a significant
increase in the cost of copper, a key raw material for a number of our products,
the benefits from improved manufacturing efficiencies, yields and cost control
programs helped allow gross margin as a percent of sales to improve to 22% in
2004 from 18% in 2003 and 13% in 2002.
After reducing employment levels in each of the prior three years in
response to lower sales and as part of our cost control programs and improved
efficiencies, our employment level increased by 4% in 2004 over 2003, primarily
in order to support the higher sales volumes. However, our sales per employee, a
measure of cost effectiveness, improved to approximately $260,000 in 2004 from
$219,000 in 2003 and $200,000 in 2002.
Our income before income taxes was $16.7 million in 2004 compared to a
loss of $12.7 million in 2003. The 2004 pre-tax earnings also represent a $42.5
million improvement over the loss in 2002.
Our cash flow from operations of $38.9 million was $12.6 million higher
than last year. Accounts receivable and inventory levels increased in 2004 as a
result of and in support of the higher sales volumes. However, we continue to
make strides in improving the utilization of our working capital investments as
evidenced by a shorter average collection period for receivables and improved
yields, efficiencies and inventory turns within our various businesses.
Our balance sheet position was strengthened by the debt refinancing
implemented in December 2003 and the share offering in July 2004. Our total debt
and key off-balance sheet obligations were reduced by $22.1 million in 2004 (and
$103.1 million over the last four years) as a result of the proceeds from the
share offering, the cash flow from operations and the favorable repayment
provisions in the new debt structure. In addition, our cash balance increased by
$44.6 million in 2004. Our debt-to-capital ratio has improved significantly and
our balance sheet leverage has been reduced. The new debt structure also
provided stability through extended maturities, increased borrowing capacity and
revised covenants and other terms.
RESULTS OF OPERATIONS
(Millions, except for share data) 2004 2003 2002
---------- --------- ----------
Net sales............................... $ 496.3 $ 401.0 $ 372.8
Operating profit (loss)................. 25.0 (8.9) (22.6)
Diluted E.P.S........................... 0.85 (0.80) (2.15)
Sales of $496.3 million in 2004 grew 24% over sales of $401.0 million in
2003 after sales in 2003 grew 8% over 2002. Sales in each quarter of both 2004
and 2003 were higher than the comparable quarter in the respective prior year.
Both domestic and international sales were significantly higher in 2004 compared
to 2003, as domestic sales grew 20% over 2003 and international sales grew 32%.
In 2003, domestic sales grew 3% while international sales grew 19%.
The majority of the sales growth in both 2003 and 2004 resulted from
improved demand from the telecommunications and computer market. Sales into this
market, our largest, accounted for approximately 41% of sales in 2004, 35% of
sales in 2003 and 30% of sales in 2002. Sales into the automotive electronics
market grew approximately 10% in 2004 after declining in 2003. Sales for
aerospace/defense and other government applications also grew in both 2004 and
2003. Shipments under the long-term supply agreement for NASA's James Webb Space
Telescope program, which began in 2004 and will continue through 2005,
contributed to this growth. Magnetic and optical data storage remained a large,
important market for us in 2004. In the latter portion of 2004, demand from
various markets softened, which we believe is due to a temporary over-inventory
position among our customers and the downstream supply chain. In addition to
improvements in the underlying markets, sales in 2004 were affected by the
growth in new product sales, including sales of bearing materials into the heavy
equipment market, as well as an increase in market share.
Our sales are affected by metal prices as changes in precious metal and a
portion of the changes in base metal prices, primarily copper, may be passed on
to our customers. Sales may also be impacted by foreign currency exchange rates,
as changes in the value of the dollar relative to the euro, yen and pound
sterling will affect the translated value of foreign currency denominated sales.
Metal prices were higher in 2004 and 2003 than in the respective prior years
while the dollar, on average, weakened against the currencies we sell in during
2004 and 2003. As a result, we estimate that these two factors combined
accounted for $19.8 million of the $95.3 million growth in 2004 sales and $13.7
million of the $28.2 million growth in 2003 sales.
The sales order backlog entering 2005 was $72.9 million, a growth of $7.4
million from the beginning of 2004 as orders received during the year were
greater than sales. Orders were higher than sales in the first half of the year,
but then slowed down in the second half of 2004. The sales order backlog was
$65.5 million at the end of 2003 and $57.7 million at the end of 2002.
The gross margin was $111.1 million, or 22% of sales in 2004, compared to
$73.0 million, or 18% of sales in 2003, and $47.9 million, or 13% of sales in
2002. The higher level of sales was the major cause of the margin improvement in
2004. The change in product mix had a favorable impact on margins; i.e., sales
of products that generate higher margins
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increased more than other products. Manufacturing efficiencies improved in 2004
as compared to 2003, particularly in the first half of the year. Margins were
also higher in 2004 than in 2003 by $6.0 million as cost of sales in 2003
included lease expense on equipment at the Elmore, Ohio facility; in December
2003, this equipment was purchased with the proceeds from the debt refinancing,
thereby eliminating the lease expense but adding depreciation expense.
Offsetting a portion of these margin benefits was the negative impact of the
higher cost of copper, to the extent that the additional cost could not be
passed through to customers, and an increase in other manufacturing overhead
expenses. Margins increased in 2003 over 2002 due to the higher sales in that
year. In addition, the 2003 margin growth was caused by a favorable product mix,
operational improvements on the shop floor, foreign currency translation
benefits and manufacturing cost benefits. Approximately 89% of the sales
increase in 2003 flowed through to gross margin.
Selling, general and administrative expenses (SG&A) were $77.3 million
(16% of sales) in 2004, $68.8 million (17% of sales) in 2003 and $61.3 million
(16% of sales) in 2002. Changes in the incentive compensation expense, as a
result of the significant improvement in our profitability in 2004, caused $5.9
million of the increase in SG&A expenses in 2004. The weaker dollar caused a
$1.1 million increase in the translated value of the international subsidiaries'
expenses in 2004 over 2003. Various sales-related expenses increased in 2004 in
support of the higher sales volumes. Additional compliance costs with Section
404 of the Sarbanes-Oxley Act also contributed to the higher expenses in 2004.
We continue to make progress in reducing our litigation involving chronic
beryllium disease over the last three years. Favorable court rulings and
settlements have allowed us to reduce our caseload and the associated reserves.
As a result of a court ruling in 2002 that we were not party to, we increased
the recoverable portion on the outstanding insured legal claims that previously
were not considered fully recoverable. The application of this ruling allowed
for the potential recovery of the full amount of an insured claim from our
carriers in the event of a loss (whether by settlement or verdict) whereas prior
to this ruling, the percent of the claim to be recovered was based on the
overlap of the insurance coverage period and alleged exposure period. Changes in
the legal reserve and insurance recoverable charged to SG&A expense generated a
net credit (i.e., a reduction to expense) of $0.3 million in 2004, an expense of
$0.2 million in 2003 and a credit of $4.0 million in 2002.
In addition to changes from the movement in the legal reserves and
recoverable accounts, SG&A expenses were higher in 2003 than 2002 due to an
increase in incentive compensation expense and an increase in costs under the
company-owned life insurance program. The translation impact on the foreign
subsidiaries expenses was an unfavorable $1.2 million in 2003. SG&A expenses in
2003 included $0.6 million of the $6.0 million onetime charge associated with
refinancing the debt in 2003. See Debt and Off-balance Sheet Obligations. SG&A
manpower and other activity levels remained relatively unchanged in 2003 as
compared to the latter half of 2002.
Research and development expenses (R&D) were $4.5 million in 2004, $4.2
million in 2003 and $4.3 million in 2002. R&D expenses were approximately 1% of
sales in each of the last three years. Approximately three-fourths of the R&D
spending supports the Metal Systems Group and one-fourth supports the
Microelectronics Group. R&D efforts are focused on developing new products and
applications as well as continuing improvements in our existing products.
The major components of other-net expense for each of the last three years
are as follows:
Income/(Expense)
----------------------------
(Millions) 2004 2003 2002
------ -------- -------
Exchange gains (losses).............. $ (1.8) $ (0.9) $ 1.5
Directors' deferred compensation..... (0.4) (0.9) 1.1
Environmental reserve adjustment..... 1.0 - -
Derivative ineffectiveness........... (0.4) (5.1) 0.3
Impairment charge.................... - - (4.4)
Other items.......................... (2.7) (2.0) (3.5)
------ -------- -------
Total.............................. $ (4.3) $ (8.9) $ (5.0)
====== ======== =======
The change from foreign currency exchange gains in 2002 to exchange losses
in 2003 and 2004 was due to the weakening of the U.S. dollar against the euro,
yen and sterling. The weaker dollar created exchange losses on the foreign
currency hedge contracts as they matured; however, the weaker dollar also had a
positive impact on the translation of foreign currency denominated sales. The
expense on the directors' deferred compensation plan is a function of the
outstanding shares in the plan and movements in the market price of our stock.
In 2002, the price declined, reducing our liability to the plan and creating
income. In 2003 and 2004, the stock price increased, creating an additional
expense. The favorable environmental reserve adjustment in 2004 resulted from
the sale of property formerly used by one of our subsidiaries whereby the buyer
agreed to assume the associated environmental remediation liability. There was
no gain or loss recorded on the sale of the property.
Derivative ineffectiveness represents changes in the fair value of
derivative financial instruments that do not qualify for the favorable hedge
accounting treatment. As a result of the refinancing in December 2003, an
interest rate swap that previously hedged the variable payments on an operating
lease no longer qualified for hedge accounting treatment since the lease was
terminated. The swap's fair value of a loss of $4.6 million was reversed out of
equity and charged against income at that time, accounting for the majority of
the ineffectiveness recorded in 2003. All of the ineffectiveness in 2004 was due
to changes in the fair value of this swap.
In 2002, we recorded asset impairment charges of $4.4 million in
accordance with Financial Accounting Standards Board (FASB) Statement No. 144
that are described in further detail in the segment disclosures and Note C to
the Consolidated Financial Statements.
Other-net expense also includes metal financing fees, which were $0.1
million higher in 2004 than 2003 and $0.6 million lower in 2003 than 2002, bad
debt expense, cash discounts, gains and losses on the sale of fixed assets and
other non-operating items.
Operating profit was $25.0 million in 2004 compared to an operating loss
of $8.9 million in 2003 as a result of the higher margins generated by the
higher sales and other factors partially offset by higher copper costs and
changes in other expenses. The operating loss in 2003 was a $13.7 million
improvement over the $22.6 million loss in 2002.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest expense was $8.4 million in 2004, $3.8 million in 2003 and $3.2
million in 2002. Interest expense was higher in 2004 largely as a result of the
December 2003 refinancing, as balance sheet debt increased by over $50.0 million
due to the purchase of previously leased assets with a portion of the loan
proceeds. The average borrowing rate was higher in 2004 than in 2003 and the
amortization of deferred financing costs included in interest expense was $1.1
million higher in 2004 than in 2003. The higher interest expense in 2004
partially offsets the gross margin benefit generated by the refinancing
previously discussed. A portion of the proceeds from the share issuance in July
2004 was used to reduce debt in the latter portion of 2004, reducing interest
expense accordingly. The fourth quarter expense was $0.5 million less than the
average quarterly expense from the first two quarters of 2004. Prior to the debt
refinancing in December 2003, average debt levels were lower in 2003 than in
2002 and the effective interest rate was slightly higher. The refinancing
increased interest expense by approximately $0.4 million in 2003 over 2002.
Income before income taxes was $16.7 million in 2004 compared to a loss of
$12.7 million in 2003 and a loss of $25.9 million in 2002.
The 2004 income tax expense of $1.1 million included a tax provision of
$10.4 million and a reversal of a portion of the deferred tax valuation
allowances of $9.3 million. The 2003 income tax expense of $0.6 million included
a tax benefit of $4.7 million and a provision for deferred tax valuation
allowances of $5.3 million while the 2002 expense of $9.7 million included a tax
benefit of $10.2 million and a provision for deferred tax valuation allowances
of $19.9 million. In calculating the tax expense or benefit prior to movements
in the valuation allowance, the effects of percentage depletion and foreign
source income were major causes of the differences between the effective and
statutory rates for all three years. The impact of the company-owned life
insurance program also caused a significant difference between the effective and
statutory rates in 2004 and a more minor difference in 2003 and 2002. See Note I
to the Consolidated Financial Statements for a reconciliation of the statutory
and effective tax rates.
The deferred tax valuation allowances were recorded in 2003 and 2002 in
accordance with Statement No. 109, "Accounting for Income Taxes". This statement
requires a company to evaluate its deferred tax assets on its balance sheet for
impairment in the event of recent operating losses. This evaluation process is
not based upon the specific expiration date of the individual deferrals, but
rather on the company's ability to demonstrate that future taxable income will
result in utilization of those assets. As a result of a review in the fourth
quarter 2002, we determined that it was more likely than not that the majority
of our deferred tax assets were impaired and a valuation allowance was recorded
accordingly. In 2003, we increased the valuation allowance to offset the
deferred tax assets that were created by that year's domestic federal and
various foreign tax benefits resulting primarily from operating losses. In 2004,
we generated pre-tax income and the valuation allowance was reduced as a result
of the use of the deferred tax assets to offset a portion of our tax liability
on that income as well as the tax liability created by terminating the
company-owned life insurance program. The resulting net tax expense on the
Consolidated Statements of Income for each of the years presented represents
taxes for state, local and certain foreign jurisdictions. The 2004 tax expense
also included a federal alternative minimum tax liability of $0.4 million, which
required a valuation allowance. The deferred tax valuation allowance on the
balance sheet was also adjusted in each of the last three years for the deferred
tax assets associated with items in other comprehensive income (OCI) within
shareholders' equity. These adjustments were recorded in OCI and did not affect
net income.
As a result of the above, the net income was $15.5 million, or $0.85 per
share, compared to a net loss of $13.2 million, or $0.80 per share, in 2003 and
a net loss of $35.6 million, or $2.15 per share, in 2002.
SEGMENT DISCLOSURES
We aggregate our businesses into two reportable segments - the Metal
Systems Group and the Microelectronics Group (MEG). The parent company and other
corporate expenses, as well as the operating results from BEM Services, Inc. and
Brush Resources Inc., two wholly owned subsidiaries, are not included in either
segment and are shown in the "All Other" column in the segment results contained
in Note M to the Consolidated Financial Statements. BEM Services charges a
management fee for the services it provides, primarily corporate, administrative
and financial oversight, to our other businesses on a cost-plus basis. Brush
Resources sells beryllium hydroxide, produced through its Utah operations, to
outside customers and to businesses within the Metal Systems Group.
The profitability within All Other improved in 2004 over 2003 due to the
$6.0 million one-time charge associated with the refinancing in 2003, $2.0
million in savings resulting from winding down and terminating the company-owned
life insurance program in 2004, a $1.2 million increase in the profitability of
Brush Resources resulting from efficiencies and cost control efforts and lower
corporate legal and other costs. Higher audit and related costs associated with
compliance with Section 404 of the Sarbanes-Oxley Act added approximately $0.8
million to expense in 2004. The profitability within All Other declined in 2003
as compared to 2002 as a result of the $6.0 million one-time charge, the $4.2
million difference in movements in the legal reserve, an increase in the
company-owned life insurance expense and reduced profitability of Brush
Resources, primarily due to lower production activity.
METAL SYSTEMS GROUP
(Millions) 2004 2003 2002
------- -------- --------
Net sales........................... $ 296.0 $ 239.4) $ 227.9
Operating profit (loss)............. 2.7 (16.6) (37.7)
The Metal Systems Group, which is the larger of the two reportable
segments accounting for approximately 60% of total sales and two-thirds of total
assets, consists of Alloy Products, Technical Materials, Inc. (TMI), a wholly
owned subsidiary of the Company, and Beryllium Products. These units manufacture
a variety of engineered materials that provide superior performance in demanding
applications and compete against beryllium and non-beryllium-containing alloys
and other material systems and composites. Because of their superior
performance, these materials are often premium priced. The Elmore, Ohio facility
manufactures finished goods for Alloy
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Products and Beryllium Products as well as materials for further processing and
sale by other operations within Alloy, Beryllium and TMI. Customers typically
use the Company's materials as their raw material input and are also usually one
or more tiers removed from the end-use demand generator in a given market. After
sales bottomed out at $227.9 million in 2002, primarily due to softness in the
telecommunications and computer market, sales grew in both 2003 and 2004.
Margins increased in 2004 as a result of the higher sales and other improvements
and as a result, the Metal Systems Group generated an operating profit of $2.7
million.
Sales to external customers by business unit within the Metal Systems
Group during the 2002 to 2004 time frame were as follows:
(Millions) 2004 2003 2002
-------- --------- ---------
Alloy Products....................... $ 202.9 $ 162.3 $ 151.9
Technical Materials, Inc............. 53.6 41.9 44.4
Beryllium Products................... 39.5 35.2 31.6
-------- --------- ---------
Total Segment Sales................ $ 296.0 $ 239.4 $ 227.9
======== ========= =========
ALLOY PRODUCTS
Alloy Products, our largest unit, manufactures and sells copper-and
nickel-based alloy systems, the majority of which also contain beryllium. Strip
products, the larger of Alloy's two main product families, include thin gauge
precision strip and small diameter rod and wire. These products provide a
combination of high conductivity, high reliability and formability for use as
connectors, contacts, switches, relays and shielding. Major markets for strip
products include telecommunications and computer, automotive electronics and
appliances. Alloy's other major product family is bulk products, which include
plate, rod, bar, tube and other customized forms that, depending upon the
application, may provide superior strength, corrosion or wear resistance or
thermal conductivity. Applications for bulk products include plastic mold
tooling, bearings, bushings, welding rods and telecommunications housing
equipment. Alloy Products are manufactured at our facilities in Ohio and
Pennsylvania and are distributed worldwide through a network of company-owned
service centers and outside distributors and agents.
Alloy Products' sales of $202.9 million were $40.6 million higher than
sales of $162.3 million in 2003, a 25% improvement. Sales in 2003 were a 7%
improvement over sales in 2002. Sales of both strip and bulk products grew in
2004 over 2003 while the 2003 sales improvement was due to strip products as
sales of bulk products declined during that year. Strip product sales volumes
grew 19% in 2004 after growing 5% in 2003. The strip sales growth in 2004 was
across both the higher and lower beryllium-containing alloys. The 2003 growth
was caused by an increase in demand for the higher beryllium-containing and,
therefore, higher priced alloys, while sales volumes of the lower
beryllium-containing alloys declined. Sales of small diameter rod and wire
products also showed double-digit growth in both 2004 and 2003. Bulk sales
volumes were 33% higher in 2004 than in 2003, as sales grew significantly in the
second half of 2004. Bulk volumes were 9% lower in 2003 than in 2002.
Demand from each of Alloy Products' major markets increased in 2004 over
2003. Sales into the telecommunications and computer market provided the biggest
increase in 2004, which was also the case in 2003.
Appliance market sales, primarily in Europe, also grew in each of the last two
years. Sales into the automotive electronics market, after declining in 2003,
rebounded in 2004, returning to the 2002 sales level. Demand from the industrial
components market, including plastic mold tooling, and oil and gas applications,
improved in 2004 after a significant decline in 2003. New products, primarily
within bulk products, and market share gains accounted for approximately 30% of
the growth in sales of Alloy Products in 2004. This new product growth included
sales of non-beryllium-containing bulk products sold into the heavy equipment
market, a sector of the industrial components market.
Domestic sales of Alloy Products increased in 2004 after declining
slightly in 2003. International sales of Alloy Products improved in both 2004
and 2003. The international growth was driven in part by domestic customers
shifting manufacturing operations overseas, particularly to Asia. To maintain
these applications and to generate new applications for Alloy Products,
additional sales and marketing offices have been established in China and South
Asia, augmenting the existing service centers in Japan and Singapore.
TECHNICAL MATERIALS, INC.
TMI manufactures engineered materials systems, including clad inlay and
overlay metals, precious and base metal electroplated systems, electron beam
welded systems, contour profiled systems and solder-coated metal systems. These
specialty strip metal products provide a variety of thermal, electrical or
mechanical properties from a surface area or particular section of the material.
Major markets for TMI products include telecommunications and computer and
automotive electronics while major applications include connectors, contacts and
semiconductors. TMI manufactures its products at their Lincoln, Rhode Island
facility.
TMI sales grew $11.7 million, or 28%, in 2004 over 2003, after declining
the previous two years. All of TMI's major product lines contributed to the
growth in 2004, with plated products accounting for over 40% of the growth. The
growth in 2004 was due in large part to stronger demand from the
telecommunication and computer market. Sales into the automotive market also
strengthened in the first half of the year. Softer demand from these two markets
was the main reason for the lower sales in 2003 and 2002.
The 2004 sales growth also resulted from TMI's efforts to develop new
products for existing and new markets, including fuel cell and fuse material
applications in the energy market and disk drive arm materials for the
telecommunications and computer market. TMI also is developing products for
medical and defense electronic applications. These new product developments plus
the strengthening of the international marketing efforts are keys to TMI's
growth potential as production capacity within portions of the traditional
markets served by TMI continues to be transferred from the U.S. to Asia. TMI's
profitability improved in 2004 over 2003, as it had in 2003 over 2002.
Order entry rates slowed down late in the fourth quarter 2004, which we
believe is due to excess inventory positions related to automotive,
semiconductors and portions of the telecommunications and computer markets.
BERYLLIUM PRODUCTS
Beryllium Products manufactures pure beryllium and beryllium aluminum
composites in rod, tube, sheet and a variety of customized forms
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MANAGEMENT'S DISCUSSION AND ANALYSIS
at the Elmore, Ohio and Fremont, California facilities. These materials are used
in applications that require high stiffness and/or low density and they tend to
be premium priced due to their unique combination of properties. Defense and
government-related applications, including aerospace, are the largest market for
Beryllium Products, accounting for over 60% of sales, while other markets served
include medical, telecommunications and computer, electronics, optical scanning
and automotive.
Sales from Beryllium Products were $39.5 million in 2004, marking the
fifth consecutive year of growth. Sales in 2004 were 12% higher than the sales
of $35.2 million in 2003 while sales in 2003 were an 11% improvement over 2002
sales of $31.6 million. Sales for defense and government-related applications
remained strong throughout this period. Sales in 2004 included the first
shipments for the Webb telescope program totaling $5.9 million; the majority of
the balance of this $18.0 million supply contract is scheduled to be shipped in
2005. Defense platforms for Beryllium Products are mainly aerospace and missile
system applications. Government budget revisions may divert funds away from
these types of applications that utilize our materials in order to provide
additional support for current military ground operations and, as a result,
sales of Beryllium Products for defense applications may soften in the fourth
quarter 2005 and into 2006. Sales to the medical market, including x-ray window
applications, were strong in 2004 and 2003. Sales to the electronics market for
acoustic components, which had contributed to the growth in Beryllium Products'
sales in 2003 over 2002, were relatively unchanged in 2004 as compared to 2003.
Performance automotive sales were significantly lower in 2004 than in 2003 after
increasing in 2003 over 2002.
METAL SYSTEMS GROSS MARGIN AND EXPENSES
The gross margin on Metal Systems' sales was $69.0 million (23% of sales)
in 2004, an improvement of $29.5 million over the margin of $39.5 million in
2003. The higher sales volumes contributed an additional $20.0 million in
margins in 2004. Operational improvements and manufacturing efficiencies,
primarily at the Elmore, Ohio facility, a favorable change in the product mix
and the foreign currency translation expense generated $15.6 million in
additional margin. The higher cost of copper in 2004 could not be passed through
to customers in all instances, thereby reducing margins by an estimated $7.5
million. The previously discussed $6.0 million margin benefit from the December
2003 refinancing flowed through Metal Systems' gross margin in 2004. Other
manufacturing overhead costs, including manpower, maintenance and supplies, were
higher in 2004 than in 2003.
The 2003 gross margin on Metal Systems' sales was a $21.5 million
improvement over the 2002 gross margin of $18.0 million. Gross margin was 16% of
sales in 2003, double the margin rate of 8% in 2002. The increased sales volumes
improved margins by $2.8 million in 2003 as compared to 2002 while a favorable
change in product mix, operational improvements and the foreign currency
translation effect increased margins by $12.1 million. The mix shift resulted
primarily from strip products, although TMI and Beryllium Products had favorable
mix shifts as well. Operational improvements were made at the Elmore facility,
including yield and machine utilization rates, and at the Lincoln facility,
including yields and cost controls. Manufacturing overhead costs were also lower
in 2003 than in 2002, with the majority of cost reductions coming from the
Elmore facility.
SG&A, R&D and other-net expense within the Metal Systems Group were $10.2
million higher in 2004 than in 2003. However, as a percent of sales, these
expenses declined from 23% in 2003 to 22% in 2004. Increased incentive
compensation accruals resulting from the improved profitability accounted for
approximately 30% of the increase in expenses. The majority of the previously
discussed increase in exchange losses and the unfavorable translation impact on
the foreign subsidiaries' expenses flowed through the Metal Systems Group. Other
sales-related expenses, including commissions, travel and advertising and
various administrative costs, also were higher in 2004 than in 2003.
SG&A, R&D and other-net expenses were $0.5 million higher in 2003 than in
2002 as a result of the foreign currency exchange gain/loss difference and an
increase to incentive compensation accruals. SG&A and R&D manpower levels were
relatively unchanged for the year. The $0.5 million increase was net of the
impact of a one-time asset impairment charge in 2002. We determined that the
projected cash flow from various assets used in the production of beryllium was
less than the carrying value. The assets were written down to their net
realizable values and a $3.1 million charge was recorded against other-net
expense in the fourth quarter 2002. The equipment was shut down due to the use
of alternative input materials and manufacturing processes.
The Metal Systems Group generated a $2.7 million profit in 2004 after
recording an operating loss of $16.6 million in 2003. The improved profitability
resulted from the growth in margins caused by the sales increase, product mix
shift and improved manufacturing performance offset in part by the cost of
copper and other expenses. The loss in 2003 was a $21.1 million improvement over
the $37.7 million loss in 2002. The improvement was caused by the additional
margin generated by the higher sales, favorable mix, operational efficiencies
and manufacturing overhead cost reductions.
MICROELECTRONICS GROUP
(Millions) 2004 2003 2002
---------- ---------- ------------
Net sales...................... $ 195.6 $ 157.3 $ 139.2
Operating profit............... 18.5 12.6 3.8
The Microelectronics Group includes Williams Advanced Materials Inc.
(WAM), a wholly owned subsidiary, and Electronic Products. These businesses
manufacture a variety of high quality precision parts that are sold to
assemblers and other fabricators of electronic components and equipment. Sales
grew 24% in 2004 over 2003 after growing 13% in 2003 over 2002. Operating profit
also improved significantly in both 2004 and 2003 over the prior year. Sales to
external customers by business unit within the MEG during the 2002 to 2004 time
frame were as follows:
(Millions) 2004 2003 2002
-------- --------- ---------
Williams Advanced Materials Inc....... $ 165.7 $ 127.8 $ 109.1
Electronic Products................... 29.9 29.5 30.1
-------- --------- ---------
Total segment sales................. 195.6 $ 157.3 $ 139.2
======== ========= =========
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WILLIAMS ADVANCED MATERIALS INC.
WAM manufactures precious, non-precious and specialty metal products at
its facilities in New York, California and Asia. Specific products include vapor
deposition targets, frame lid assemblies, clad and precious metal preforms, high
temperature braze materials and ultra fine wire. Major markets for WAM's
products include magnetic and optical data storage, medical and the wireless,
semiconductor, photonic and hybrid segments of the microelectronics market. A
key competitive advantage for WAM is its ability to reclaim precious metals,
from its own or customers' scrap, through its in-house refinery. Due to the high
cost of its precious metal products, WAM emphasizes quality, delivery
performance and customer service in order to attract and maintain applications.
Sales from WAM of $165.7 million in 2004 grew 30% over sales of $127.8
million in 2003, while sales in 2003 were 17% higher than sales of $109.1
million in 2002. WAM adjusts its selling prices daily to reflect the current
cost of the precious and non-precious metals sold. The cost of the metal is a
pass-through to the customer and WAM generates its margin on its 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. Metal prices increased on
average in both 2004 and 2003 as compared to the respective prior year, and the
underlying volume growth was less than the growth in sales.
Sales of vapor deposition targets grew in 2004 from the 2003 level as well
as in 2003 over sales on 2002 due to the strong demand from the optical media
market segment for digital versatile disks (DVDs). While this market segment
continued to show strength, alternative materials are putting increasing
pressure on margins. Sales of frame lid assemblies grew in both 2004 and 2003,
partially as a result of the acquisition of various assets of a competitor who
exited the market in the second quarter 2003. Sales of these products also grew
as a result of new product design and application development that provided
cost-effective solutions to WAM's customers. Data storage applications for giant
magnetic resistance film applications were strong in 2004 as in the prior two
years and remain a large market for WAM's products. Demand from the wireless
segment improved in each of the last two years as well. In 2004, WAM also
continued its product development for semiconductor applications, a small but
growing market for WAM's materials.
WAM formed a joint venture in Taiwan in 2003 in order to manufacture and
distribute its products in that portion of the world. In early 2004, WAM bought
out its minority partner. The operation, while still small, contributed to WAM's
sales growth in 2004 and offers an additional long-term growth opportunity for
WAM's products.
ELECTRONIC PRODUCTS
Electronic Products manufactures beryllia ceramics, electronic packages
and circuitry for sale into the telecommunications and computer, medical,
electronics, automotive and defense markets. These products provide specific
thermal and/or electrical conductivity characteristics and are used as
components in a variety of applications, including wireless telecommunications
equipment, fiber optics, lasers for medical and other electronic equipment,
automotive ignition module systems, satellites and radar systems. Electronic
Products are manufactured by Zentrix Technologies Inc. and Brush Ceramic
Products Inc., two wholly owned subsidiaries. Sales from Electronic Products
were $29.9 million in 2004, which was relatively unchanged from sales of $29.5
million generated in 2003 and sales of $30.1 million in 2002.
Sales of beryllia ceramics grew approximately 14% in 2004 over 2003 after
being relatively unchanged in 2003 compared to 2002. The 2004 growth resulted
from improved demand from the telecommunications and computer market. This is a
mature product line with established applications but limited growth
opportunities. A temporary disruption in the sales order pattern from the
largest ceramics customer during a plant relocation offset mild improvements
during 2003. Sales of electronic packages improved in 2004 over 2003 after
declining in 2003 from 2002 sales levels due to changes in the build rates for
telecommunications infrastructure equipment. Sales into the automotive market
were relatively flat in 2004. Sales into this market were lower in 2003 than in
2002. Sales of circuitry, which are manufactured by Circuits Processing
Technology, Inc., (CPT), a wholly owned subsidiary of Zentrix, declined 33% in
2004 from the 2003 sales level as defense applications, which specify CPT's
materials, have been delayed. Sales from CPT had grown in 2003 due to
strengthening defense orders. Defense applications remain the largest market for
circuits and CPT is developing additional commercial applications in order to
diversify their product offerings.
MEG GROSS MARGIN AND EXPENSES
The gross margin on MEG sales was $40.5 million in 2004, $32.8 million in
2003 and $26.4 million in 2002. As a percent of sales, the gross margin was 21%
in both 2004 and 2003 and 19% in 2002. The growth in the gross margin in 2004
due to the higher sales volumes was $9.1 million while the change in product mix
impact was slightly unfavorable. Manufacturing overhead costs were $0.8 million
higher in 2004, primarily within WAM, reflective of the higher level of
production activity.
The margin contribution in 2003 improved $3.3 million over 2002 as a
result of the increased sales. The mix effect, as well as operational
efficiencies (primarily in Electronic Products), generated an additional $1.6
million in gross margin while manufacturing overhead costs and inventory
adjustments were $1.4 million lower in 2003 than in 2002.
SG&A, R&D and other-net expenses within the MEG were $1.8 million higher
in 2004 than in 2003, although as a percent of sales these expenses declined
from 13% in 2003 to 11% in 2004. Administrative costs, including legal expenses,
within WAM, were the major cause of the increase. Costs associated with the
newly created and growing operation in Taiwan also contributed to the increase
in expenses. The precious metal financing fee increased only slightly in 2004
over 2003 despite the increase in metal on hand.
SG&A, R&D and other-net expenses were $2.4 million lower in 2003 than in
2002 in part due to one-time charges of $1.9 million recorded in 2002.
Management determined that the projected cash flow from various assets used by
Electronic Products was less than the carrying value. A charge of $1.3 million
was recorded in other-net expense to write down the assets to their fair value
as determined by an outside appraisal. See Note C to
(19)
MANAGEMENT'S DISCUSSION AND ANALYSIS
the Consolidated Financial Statements. Expenses in 2002 also included severance
costs of $0.6 million as we restructured the management of Electronic Products,
eliminating various positions and closing two small foreign offices. In
addition, expenses were lower in 2003 due to the full year benefit of the
manpower reductions made in 2002. The precious metal financing fee was lower in
2003 than in 2002 as well. Offsetting a portion of these benefits were increased
costs to support the WAM sales growth and higher incentive accruals.
The MEG operating profit was $18.5 million or 9% of sales, in 2004
compared to $12.6 million, or 8% of sales, in 2003 and $3.8 million, or 3% of
sales, in 2002.
INTERNATIONAL SALES AND OPERATIONS
We operate in worldwide markets and our international customer base
continues to expand due to the development of various foreign nations' economies
and the relocation of U.S. businesses overseas. Our international operations are
designed to provide a cost-effective method of capturing the growing overseas
demand for our products. We have service centers in Germany, England, Japan and
Singapore that primarily focus on the distribution of Alloy Products while also
providing additional local support to portions of our other businesses. WAM has
finishing operations in Singapore and the Philippines and a small manufacturing
operation in Taiwan. We also have branch sales offices in various countries,
including the Republic of China and Taiwan, and we utilize an established
network of independent distributors and agents throughout the world. Total
international sales, including sales from international operations as well as
direct exports from the U.S., for the 2002 to 2004 time frame were as follows:
2004 2003 2002
-------- -------- -------
(Millions)
From international operations........ $ 119.8 $ 89.5 $ 71.7
Exports from U.S operations.......... 44.3 34.9 32.6
-------- -------- -------
Total international sales............ $ 164.1 $ 124.4 $ 104.3
======== ======== =======
Percent of total net sales........... 33% 31% 28%
The international sales presented in the above table are included in the
Metal Systems Group and MEG sales figures previously discussed. The majority of
international sales are to the Pacific Rim, Europe and Canada. Sales to Asia and
Europe grew in both 2004 and 2003 resulting from a combination of additional
market penetration, the relocation of U.S. production to overseas locations,
increased market share and a favorable currency exchange effect.
We serve many of the same markets internationally as we do domestically.
Telecommunications and computer and automotive electronics are the largest
international markets for our products. The appliance market for Alloy Products
is a more significant market, primarily in Europe, than it is domestically while
government and defense applications are not as prevalent overseas as they are in
the U.S. Our market share is smaller in the overseas markets than it is
domestically and given the macro-economic growth potential for the international
economies, including the continued transfer of U.S. business to overseas
locations, the international markets may present greater long-term growth
opportunities. We believe that a large portion of the long-term international
growth will come from China and we continue to expand our marketing presence,
distributor arrangements and customer relationships there.
Sales from the international operations are typically denominated in the
local currency, particularly in Europe and Japan. Exports from the U.S. and
sales from the Singapore operations are predominately denominated in U.S.
dollars. Movements in the foreign currency exchange rates will affect the
reported translated value of foreign currency denominated sales while local
competition limits our ability to adjust selling prices upwards to compensate
for short-term exchange rate movements. We have a hedge program with the
objective of minimizing the impact of fluctuating currency values on our
reported results.
LEGAL PROCEEDINGS
One of our subsidiaries, Brush Wellman Inc., is a defendant in proceedings
in various state and federal courts brought by plaintiffs alleging that they
have contracted chronic beryllium disease or other lung conditions as a result
of exposure to beryllium. Plaintiffs in beryllium cases seek recovery under
negligence and various other legal theories and seek compensatory and punitive
damages, in many cases of an unspecified sum. Spouses, if any, claim loss of
consortium.
The following table summarizes the associated activity with beryllium
cases.
December 31,
2004 2003 2002
--------- ---------- -----------
TOTAL CASES PENDING..................... 12 15 33
Total plaintiffs (including spouses).... 56 33 70
Number of claims (plaintiffs) filed
during period ended.................. 6(42) 11(22) 2(4)
Number of claims (plaintiffs)
settled during period ended......... 6(10) 24(47) 34(107)
Aggregate cost of settlements
during period ended
(dollars in thousands)............... $ 370 $ 2,045 $ 4,945
Number of claims (plaintiffs)
otherwise dismissed.................. 3(9) 5(12) 11(20)
Settlement payment and dismissal for a single case may not occur in the
same period. The 2003 data includes five claims that were settled and dismissed
late in the fourth quarter 2003. Payments of the claims were made in 2004 but
are shown in the above table in 2003.
Additional beryllium claims may arise. Management believes that we have
substantial defenses in these cases and intends to contest the suits vigorously.
Employee cases, in which plaintiffs have a high burden of proof, have
historically involved relatively small losses to us. Third-party plaintiffs
(typically employees of customers or contractors) face a lower burden of proof
than do employees or former employees, but these cases are generally covered by
varying levels of insurance. A reserve was recorded for beryllium litigation of
$1.9 million at December 31, 2004 and $2.9 million at December 31, 2003. A
receivable was recorded of $2.3 million at December 31, 2004 and $3.2 million at
December 31, 2003 from our insurance carriers as recoveries for insured claims.
An additional $0.4 million was reserved at December 31, 2004 and $0.9 million at
December 31, 2003 for insolvencies related to claims still outstanding as well
as claims for which partial payments have been received.
(20)
Although it is not possible to predict the outcome of the litigation
pending against us and our subsidiaries, we provide for costs related to these
matters when a loss is probable and the amount is reasonably estimable.
Litigation is subject to many uncertainties, and it is possible that some of
these actions could be decided unfavorably in amounts exceeding our reserves. An
unfavorable outcome or settlement of a pending beryllium case or additional
adverse media coverage could encourage the commencement of additional similar
litigation. We are unable to estimate its potential exposure to unasserted
claims.
While we are unable to predict the outcome of the current or future
beryllium proceedings, based upon currently known facts and assuming
collectibility of insurance, we do not believe that resolution of these
proceedings will have a material adverse effect on our financial condition or
cash flow. However, our results of operations could be materially affected by
unfavorable results in one or more of these cases. As of December 31, 2004,
three purported class actions were pending.
REGULATORY MATTERS. Standards for exposure to beryllium are under review
by the United States Occupational Safety and Health Administration, and by
private standard-setting organizations. One result of these reviews might be
more stringent worker safety standards. More stringent standards may affect
buying decisions by the users of beryllium-containing products. If the standards
are made more stringent or our customers decide to reduce their use of
beryllium-containing products, our operating results, liquidity and capital
resources could be materially adversely affected. The extent of the adverse
effect would depend on the nature and extent of the changes to the standards,
the cost and ability to meet the new standards, the extent of any reduction in
customer use and other factors that cannot be estimated.
FINANCIAL POSITION
WORKING CAPITAL
Cash flow from operations totaled $38.9 million in 2004 compared to $26.3
million in 2003. Cash received from the sale of goods totaled $492.7 million in
2004 and $394.5 million in 2003. Cash paid for goods and expenses was $82.0
million higher in 2004 than in 2003 in order to support the increase in sales
volumes. The cash balance was $49.6 million as of December 31, 2004, an increase
of $44.6 million in the year as the cash flow from operations plus the cash
received from the proceeds of a share offering and the exercise of employee
stock options exceeded the cash used to reduce debt and fund capital
expenditures.
The accounts receivable balance was $59.2 million at year-end 2004, an
increase of $4.1 million from year-end 2003. This increase was due to the higher
sales volumes in 2004 than in 2003 and for the billings for unshipped items
recorded as unearned revenue and not in sales in the fourth quarter 2004. The
impact of these factors was partially offset by the benefit from an improvement
in the average collection period. The days sales outstanding (DSO), a measure of
how quickly receivables are collected, after adjusting for the unearned revenue
effect, improved by approximately 5 days as of year-end 2004 compared to
year-end 2003. The year-ending DSO has improved for five consecutive years.
Accounts written off to bad debt expense remained relatively minor in 2004.
Accounts receivable increased by $7.6 million in 2003 as a result of higher
sales volumes offset in part by a one-day improvement in the DSO in that year.
The 2004 ending inventory balance of $95.3 million was $7.9 million higher
than the year-end 2003 balance. Inventories declined $6.9 million during 2003.
Approximately 60% of the 2004 inventory build was in Beryllium Products and
primarily as a result of the Webb Telescope project. A portion of the Webb
inventory has already been invoiced to the customer in advance of the sale,
allowing for earlier collection of the cash. Alloy inventory pounds declined 2%
during 2004 after declining 15% during 2003 as a result of the ongoing scrap
utilization and manufacturing yield and improvement processes. However, the
value of Alloy's inventory increased in 2004 as a result of a shift towards more
finished goods and away from work-in-process. WAM's inventory increased each of
the last two years in order to support the higher volume of sales. Inventories
at Brush Resources declined in 2004 after increasing in 2003 when ore was mined
in excess of current production requirements in order to extract the ore from
the existing pits within the allowable safety time frame. The higher cost of
copper, nickel, precious metals and other materials increased the value of the
inventory on a first-in, first-out (FIFO) basis in 2004 compared to 2003;
however, this impact was largely offset by the use of the last-in, last-out
(LIFO) valuation method and the higher metal prices only had a small impact on
the increase in inventory values during 2004. Overall inventory turns were lower
as of year-end 2004, primarily due to the Webb telescope inventory, compared to
year-end 2003 while turns at year-end 2003 improved over the prior year end.
Prepaid expenses increased $2.9 million during 2004 due to the timing of
various payments, including insurance, and an increase in the legal defense
costs to be reimbursed by insurance carriers. Other assets declined $4.0 million
during 2004 due to the termination of the company-owned life insurance program
and the return of the net cash surrender value, a reduction in the legal
indemnity recoverable balance through payments and/or resolution of the
underlying outstanding cases and the amortization of deferred financing costs.
The accounts payable balance was $2.8 million lower at year-end 2004 than
year-end 2003 due to lower material purchases made prior to the end of the year.
Accrued salaries and wages were higher at year-end 2004 than at year-end 2003 as
a result of the higher incentive compensation accruals in 2004. Unearned
revenue, which is a liability representing billings to customers in advance of
the shipment of product, was $7.8 million at December 31, 2004. There was no
unearned revenue recorded as of December 31, 2003. Other long-term liabilities
of $10.8 million at December 31, 2004 declined $3.9 million during 2004 as a
result of reductions in the legal reserves, a reduction in the environmental
remediation reserve and changes in the long-term portion of the fair value of
derivatives.
We paid $1.4 million in 2004 and $1.2 million in 2003 for legal
settlements, primarily for CBD cases, and received $1.0 million in 2004 and $1.6
million in 2003 from our insurance carriers as partial reimbursement for the
insured portions of claims paid in the current and prior years.
DEPRECIATION AND AMORTIZATION
Depreciation, amortization and depletion was $21.2 million in 2004, $19.1
million in 2003 and $20.1 million in 2002. The higher expense in 2004 as
compared to 2003 resulted from the purchase of the previously leased assets for
$51.8 million in December 2003. Absent this transaction,
(21)
MANAGEMENT'S DISCUSSION AND ANALYSIS
depreciation in 2004 would have been lower than 2003 as a result of the lower
capital expenditure levels in the last several years. Amortization of deferred
mine development was $1.2 million in both 2004 and 2003 and $0.3 million in
2002. Mine development costs are amortized based upon the units-of-production
method as ore is extracted from the pits. Amortization of deferred financing
costs included in interest expense was $1.5 million in 2004, $0.4 million in
2003 and $0.2 million in 2002. The increase in 2004 was due to the amortization
of costs associated with the December 2003 refinancing.
CAPITAL EXPENDITURES
Capital expenditures for property, plant and equipment and mine
development totaled $9.2 million in 2004 compared to $6.3 million in 2003.
Spending by the Metal Systems Group totaled $5.5 million in 2004 and $2.8
million in 2003, while the MEG spending totaled $2.7 million in 2004 and $2.9
million in 2003. The majority of the spending was on small infrastructure and
other individual projects. Spending at the Elmore facility accounted for over
half of the Metal Systems Group spending in 2004, while spending within the
various WAM facilities accounted for approximately 60% of the MEG capital
spending. While certain pieces of equipment may have been capacity constrained
or operated near capacity, in general, we had sufficient production capacity to
meet the level of demand throughout 2004. In addition to the $6.3 million of
spending in 2003, as part of the December 2003 refinancing, we purchased $51.8
million of assets previously held under an operating lease that have been in use
at the Elmore facility since 1998 by the Metal Systems Group. In 2004, we
exercised the purchase option in two lease agreements and purchased previously
leased assets at a cost of $0.9 million.
PENSION LIABILITY
Statement No. 87, "Employers' Accounting for Pensions", requires the
recognition of a minimum pension liability if the present value of the
accumulated benefit obligation is greater than the market value of the pension
assets at year end. The market value of the assets in the domestic defined
benefits pension plan was $89.4 million while the present value of the
accumulated benefit obligation was $104.4 million as of December 31, 2004. We,
therefore, increased the pension liability to $15.0 million (with $10.0 million
recorded in retirement and post-employment benefits and $5.0 million recorded in
other short-term liabilities and accrued items) by adjusting the intangible
pension asset by $0.5 million in other assets and recording a pretax charge of
$3.2 million against other comprehensive income (OCI), a component of
shareholders' equity, in the fourth quarter 2004. The 2004 pension expense,
which also increased the pension liability, was $2.7 million. The balance in OCI
as a result of pension plan valuations was $15.8 million as of December 31,
2004. During 2004, the fair value of the pension assets increased as the
investment earnings exceeded the plan payouts and expenses by $3.6 million. The
pension plan assets earned an actual return of 10.6% in 2004. The accumulated
benefit obligation increased $8.9 million in 2004 due to a lower discount rate,
an additional year of service earned by the participants and other actuarial
assumptions. No contributions were made to the qualified pension plan in either
2004 or 2003.
COMMON STOCK
In the third quarter 2004, we issued 2.25 million shares of our common
stock with the net proceeds, after deduction of all expenses, being $38.7
million. The new shares represented 13% of the shares previously issued and
outstanding. Concurrent with the offering, the holders of the 115,000 warrants,
initially granted in conjunction with the debt refinancing in December 2003,
exercised their rights and sold their shares. The exercise and issuance of the
shares for these warrants did not have a material impact on our cash flows.
We received $3.2 million for the exercise of 228,298 employee stock
options in 2004. Proceeds from the exercise of employee stock options were
immaterial in 2003.
DEBT AND OFF-BALANCE SHEET OBLIGATIONS
We refinanced our debt on a long-term basis with the completion of a
$147.5 million arrangement in December 2003. See Note E to the Consolidated
Financial Statements. The new financing included an $85.0 million revolving line
of credit (the "revolver") secured by the Company's working capital and certain
other assets, $20.0 million of term loans secured by real estate and machinery
and equipment and a $7.5 million facility secured by certain export accounts
receivable. The remaining $35.0 million consisted of a subordinated term loan
that is secured by a second lien on the Company's working capital and certain
other assets, real estate and machinery and equipment and is payable at the end
of five years. All of this debt is variable rate based upon spreads over LIBOR
or prime. In December 2004, these financing arrangements were amended to extend
the maturity of the revolver by one year and revise other terms and pricing
levels. In addition, the amendments allowed the Company to prepay the term loans
and re-borrow those funds under the revolver up to the amounts limited by the
original term loan amortization schedules.
Proceeds from the December 2003 refinancing were used to retire the
existing revolving credit agreement that was scheduled to mature in April 2004
and to purchase $51.8 million of leased assets, thereby terminating an existing
off-balance sheet lease obligation. The leased assets had been used at the
Elmore facility in the manufacture of Alloy strip products since 1998. The $51.8
million purchase price was the notional value of the lease at the time of the
purchase and, therefore, while the balance sheet debt increased by $51.8 million
as a result of this transaction in the fourth quarter 2003, the Company's total
obligations, as defined by debt plus off-balance sheet obligations, were
unchanged.
As a result of the refinancing, the Company recorded a $6.0 million
one-time charge in the fourth quarter 2003 to write off deferred costs
associated with the prior financing arrangement and to record derivative
ineffectiveness on an associated interest rate swap. The Company has an interest
rate swap that initially was designated as a hedge of the equipment operating
lease payments. With the termination of the lease, the swap no longer qualified
for hedge accounting and the $4.6 million unfavorable fair value at the time of
the refinancing that previously was deferred into other comprehensive income on
the Consolidated Balance Sheet was charged against the other-net expense on the
Consolidated Income Statement. The Company kept this swap in place, as its cash
flow serves to hedge a
(22)
portion of the outstanding variable rate debt even though the swap does not
technically qualify for hedge accounting. See Note G to the Consolidated
Financial Statements. An additional $0.1 million was recorded against other-net
expense for other deferred costs while $0.7 million was recorded against cost of
sales and $0.6 million against SG&A expense as part of the $6.0 million charge.
Debt issuance costs associated with this refinancing totaling $6.5 million
were deferred and included in other assets on the Consolidated Balance Sheet.
The issuance costs included $4.9 million of cash payments and $1.6 million
representing the fair value of warrants to purchase 115,000 shares of common
stock. These costs are being amortized using the effective interest method over
the life of the debt.
Short-term debt as of December 31, 2004 consisted of $10.5 million of
gold-denominated debt and $1.2 million of foreign currency denominated loans
that are designed as hedges against similarly denominated assets. The current
portion of long-term debt was $19.2 million at the end of 2004. This included
two term loans totaling $18.6 million that contractually only $2.9 million was
due to be repaid in 2005, but that we elected to prepay in the first quarter
2005 given our cash position and the desire to reduce interest expense. We
retain the ability to re-borrow these funds. Repayment of these loans resulted
in a write-off in the first quarter 2005 of $0.6 million of deferred financing
costs that were scheduled to be amortized over the next four years.
The long-term debt balance at December 31, 2004 included an $8.3 million
variable rate industrial bond, a $3.0 million variable rate demand note, a $0.9
million promissory note and $30.0 million under the subordinated term loan.
There were no borrowings outstanding under the revolver as of December 31, 2004.
We were in compliance with all of our debt covenants as of December 31, 2004.
Debt declined throughout the majority of 2003 due to working capital
improvements. Debt increased in the fourth quarter 2003 as a result of the
purchase of the leased assets and increased throughout the first two quarters of
2004 in order to finance the working capital requirements associated with the
higher sales volumes. Debt then declined in the third quarter 2004 as a portion
of the proceeds from the new share issuance were used to pay down the
outstanding borrowings under the revolving credit agreement and $5.0 million of
the subordinated loan.
We have an off-balance sheet operating lease that finances a building at
the Elmore facility with a notional value of $13.1 million outstanding as of
December 31, 2004. Annual payments under this lease are $2.3 million. See Note F
to the Consolidated Financial Statements for further leasing details.
We maintain a portion of our precious metal inventories on a consignment
basis in order to reduce our metal price exposure. See "Market Risk
Disclosures". The notional value of this off-balance sheet inventory was $17.2
million at December 31, 2004 and $11.5 million at December 31, 2003.
Approximately $0.9 million of the $5.7 million increase in the consignment value
was due to higher metal prices at year-end 2004 compared to year-end 2003; the
balance of the increase was due to additional ounces on hand to support the
increase in WAM's business volume.
A summary of the notional value of the outstanding total debt, key
off-balance sheet leases, off-balance sheet copper financing and precious metal
consigned inventories over the 2000 to 2004 time frame is as follows:
Notional Balance Outstanding
--------------------------------------------------
(Millions) 2000 2001 2002 2003 2004
------ ------ ------ ------ ------
Total debt ............. $ 68.7 $ 74.8 $ 63.5 $ 99.2 $ 72.5
Elmore equipment lease.. 59.7 59.7 55.2 - -
Elmore building lease .. 17.9 16.6 15.6 14.2 13.1
Copper financing ....... 8.5 5.9 - - -
Consigned inventory .... 51.1 28.9 15.6 11.5 17.2
------ ------ ------ ------ ------
Total ............... $205.9 $185.9 $149.9 $124.9 $102.8
====== ====== ====== ====== ======
In addition to reducing the notional value of these obligations
approximately in half over this time frame, the cash balance was $45.3 million
higher at the end of 2004 than at the end of 2000.
A summary of contractual payments to be made under long-term debt
agreements, operating leases and material purchase commitments by year is as
follows:
Payments Due In
---------------------------------------------------------------------
There-
(Millions) 2005 2006 2007 2008 2009 after Total
------ ----- ----- ------ ------ ------ ------
Long-term debt repayments... $ 19.2 $ 0.6 $ 0.6 $ 30.7 $ 0.7 $ 9.0 $ 60.8
Building lease payments..... 2.3 2.3 2.3 2.3 2.3 4.8 16.3
Other operating lease
payments.................. 2.5 2.1 1.7 1.7 1.3 1.8 11.1
------ ----- ----- ------ ------ ------ ------
Subtotal non-cancelable
leases.................... 4.8 4.4 4.0 4.0 3.6 6.6 27.4
Purchase commitments........ 14.1 12.2 7.9 - - - 34.2
------ ----- ----- ------ ------ ------ ------
Total.................. $ 38.1 $17.2 $12.5 $ 34.7 $ 4.3 $ 15.6 $122.4
====== ===== ===== ====== ====== ====== ======
The revolving credit agreement, as amended in 2004, matures in 2009 while
the subordinated loan matures in 2008. Management anticipates that new debt
agreements will be negotiated prior to the maturation of these agreements, as
warranted. The voluntary repayment of the term loans is shown in 2005 in the
above table. These loans were contractually repayable in quarterly installments
beginning in 2004. Annual repayments are required to be made against other
portions of our long-term debt in each of the next five years. See Note E to the
Consolidated Financial Statements for additional debt information. The lease
payments represent payments under non-cancelable leases with initial lease terms
in excess of one year as of December 31, 2004. See Note F to the Consolidated
Financial Statements. The purchase commitments include $0.5 million for capital
equipment to be acquired in 2005. The balance of these obligations are for raw
materials to be acquired under long-term supply agreements that end in 2007,
although we have the opportunity to negotiate an extension for one of the
agreements. See Note L to the Consolidated Financial Statements.
(23)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER
We believe that cash flow from operations plus the available borrowing
capacity and the current cash balance are adequate to support operating
requirements, capital expenditures, projected pension plan contributions and
remediation projects. The refinanced debt structure provides improved stability
in terms of maturity dates and improved flexibility in terms of available credit
and covenant structures. The share offering helped to reduce the outstanding
debt and, therefore, the related interest expense, improve liquidity and the
debt-to-capital ratio and increase cash on hand. Cash flow from operations was
positive in 2004 as business levels and profitability improved significantly
while our cost control and working capital management efforts allowed for cash
flow from operations to remain positive despite the operating losses in 2003 and
2002. Capital expenditure limitations have further helped to reduce cash outlays
over the last three years. Coupled with the $49.6 million cash balance,
available borrowings under existing unused lines of credit totaled $40.1 million
as of December 31, 2004.
Portions of the cash balance on hand at December 31, 2004 are invested in
high quality, highly liquid investments with maturities of three months or less.
ENVIRONMENTAL
We have an active program of environmental compliance. We estimate the
probable cost of identified environmental remediation projects and establish
reserves accordingly. The environmental remediation reserve balance was $5.7
million at December 31, 2004 and $6.9 million at December 31, 2003. The primary
cause for the change in the reserve balance during 2004 was the sale of property
that was subject to environmental remediation and the buyer assumed the
remediation liability, which allowed us to reverse a previously established $1.0
million reserve. See Note L to the Consolidated Financial Statements.
ORE RESERVES
Our reserves of beryllium-bearing bertrandite ore are located in Juab
County, Utah. An ongoing drilling program has generally added to proven
reserves. Proven reserves are the measured quantities of ore commercially
recoverable through the open-pit method. Probable reserves are the estimated
quantities of ore known to exist, principally at greater depths, but prospects
for commercial recovery are indeterminable. Ore dilution that occurs during
mining is approximately seven percent. Approximately 87% of beryllium in ore is
recovered in the extraction process. We augment our proven reserves of
bertrandite ore through the purchase of imported beryl ore. This ore, which is
approximately 4% beryllium, is also processed at the Utah extraction facility.
We use computer models to estimate ore reserves, which are subject to
economic and physical evaluation. Development drilling can also affect the total
ore reserves to some degree. There was no development drilling activity in 2004.
The requirement that reserves pass an economic test causes open-pit mineable ore
to be found in both proven and probable geologic settings. Proven reserves have
decreased slightly in each of the last two years while probable reserves have
remained unchanged. We own approx-imately 95% of the proven reserves, with the
remaining reserves leased. Based upon average production levels in recent years,
proven reserves would last in excess of 100 years. Ore reserves classified as
possible are excluded from the following table.
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Proven bertrandite ore
reserves at year end
(thousands of dry tons)..... 6,640 6,687 6,730 7,270 7,690
Grade % beryllium.............. 0.268% 0.267% 0.267% 0.268% 0.263%
Probable bertrandite ore
reserves at year end
(thousands of dry tons)..... 3,519 3,519 3,519 3,081 3,166
Grade % beryllium.............. 0.232% 0.232% 0.232% 0.219% 0.217%
Bertrandite ore processed
(thousands of dry
tons, diluted).............. 39 41 40 48 84
Grade % beryllium, diluted..... 0.248% 0.224% 0.217% 0.224% 0.235%
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the inherent use of
estimates and management's judgment in establishing those estimates. The
following are the most significant accounting policies we use that rely upon
management's judgment.
ACCRUED LIABILITIES. We have various accruals on our balance sheet that
are based in part upon management's judgment, including accruals for litigation,
environmental remediation and workers' compensation costs. We establish accrual
balances at the best estimate determined by a review of the available facts and
trends by management and independent advisors and specialists as appropriate.
Absent a best estimate, the accrual is established at the low end of the
estimated reasonable range in accordance with Statement No. 5, "Accounting for
Contingencies". Litigation and environmental accruals are only established for
identified and/or asserted claims; future claims, therefore, could give rise to
increases to the accruals. The accruals are adjusted as the facts and
circumstances change. The accruals may also be adjusted for changes in our
strategies or regulatory requirements. Since these accruals are estimates, the
ultimate resolution may be greater or less than the established accrual balance
for a variety of reasons, including court decisions, additional discovery,
inflation levels, cost control efforts and resolution of similar cases. Changes
to the accruals would then result in an additional charge or credit to income.
See Note L to the Consolidated Financial Statements.
The accrued legal liability includes the estimated indemnity cost only, if
any, to resolve the claim through a settlement or court verdict. The legal
defense costs are not included in the accrual and are expensed in the period
incurred, with the level of expense in a given year affected by the number and
types of claims we are actively defending. Certain legal claims are subject to
partial or complete insurance recovery. The accrued liability is recorded at the
gross amount of the estimated cost and the insurance recoverable, if any, is
recorded as a separate asset and is not netted against the liability.
(24)
PENSIONS. We have a defined benefit pension plan that covers a large
portion of our current and former domestic employees. We account for this plan
in accordance with Statement No. 87, "Employers' Accounting for Pensions". Under
Statement No. 87, the carrying values of the associated assets and liabilities
are determined on an actuarial basis using numerous actuarial and financial
assumptions. Differences between the assumptions and current period actual
results may be deferred into the net pension asset or liability value and
amortized against future income under established guidelines. The deferral
process generally reduces the volatility of the recognized net pension asset or
liability and current period income or expense. The actuaries adjust their
assumptions to reflect changes in demographics and other factors, including
mortality rates and employee turnover, as warranted. Management periodically
reviews other key assumptions, including the expected return on plan assets, the
discount rate and the average wage rate increase, against actual results, trends
and industry standards and makes adjustments accordingly. These adjustments may
then lead to a higher or lower expense in a future period.
We reduced the expected long-term rate of return on plan assets assumption
to 8.75% at December 31, 2004 from 9.0% as of December 31, 2003. Our experience
indicates that an 8.75% return over the long term is reasonable. Our pension
plan investment strategies are governed by a policy adopted by the Retirement
Plan Review Committee of the Board of Directors. The future return on pension
assets is dependent upon the plan's asset allocation, which changes from time to
time, and the performance of the underlying investments. Should the assets earn
an average return less than 8.75% over time, in all likelihood the future
pension expense would increase. Investment earnings in excess of 8.75% would
tend to reduce the future expense. We establish the discount rate used to
determine the present value of the projected and accumulated benefit obligation
at the end of each year based upon the available market rates for high quality,
fixed income investments. An increase to the discount rate would reduce the
future pension expense and, conversely, a lower discount rate would raise the
future pension expense. As of December 31, 2004, we elected to use a discount
rate of 6.125% compared to a rate of 6.375% as of December 31, 2003. We estimate
that the reduction in the long-term expected rate of return and discount rate,
changes in other actuarial assumptions and valuations and the amortization of
prior differences between actual and expected results will result in a $2.1
million increase in the net expense from our qualified pension plan in 2005 over
2004. If the expected rate of return assumption was changed by 50 basis points
(0.50%) and all other pension assumptions remained constant, the 2005 projected
pension expense would change by approximately $0.5 million. If the December 31,
2004 discount rate were reduced by 25 basis points (0.25%) and all other pension
assumptions remained constant, then the 2005 pension expense would increase by
approximately $0.5 million.
In the first quarter 2005, we announced that the benefit payout formula
for salaried employees would be changed going forward. This change will impact
the annual expense beginning in 2006. All else equal, the expense with the
revised payout formula will be lower than it would have been under the prior
formula.
The $15.0 million pension liability recorded as of December 31, 2004 does
not by itself indicate that a cash contribution to the plan is required. This
liability was recorded according to Statement No. 87, while cash contributions
and funding requirements are governed by ERISA and IRS guidelines. Based upon
these guidelines, current assumptions and estimates and our pension plan
objectives, we made a cash contribution to the pension plan of $5.0 million in
the first quarter 2005. The inter-relationship of the many factors affecting the
plan assets and liabilities makes it difficult to project contributions beyond
one year out; however, we estimate additional contributions may be required in
2006. The minimum pension liability under Statement No. 87 will be recalculated
at the measurement date (December 31 of each year) and any adjustments to this
account and other comprehensive income within shareholders' equity will be
recorded at that time accordingly. See Note K to the Consolidated Financial
Statements for additional details on the Company's pension plan.
LIFO INVENTORY. The prices of certain major raw materials, including
copper, nickel, gold, silver and other precious metals, fluctuate during a given
year. Such changes in costs are generally reflected in selling price
adjustments. The prices of labor and other factors of production generally
increase with inflation. Additions to capacity, while more expensive over time
usually result in greater productivity or improved yields. However, market
factors, alternative materials and competitive pricing affect our ability to
offset wage, benefit and other cost increases. This was evident in 2004, as we
could not pass through an estimated $7.5 million of the increased cost of raw
materials to our customers, which then reduced our gross margins as compared to
2003. We use the last-in, first-out (LIFO) method for costing the majority of
our domestic inventories. Under the LIFO method, inflationary cost increases are
charged against the current cost of goods sold in order to more closely match
the cost with the associated revenue. The carrying value of the inventory is
based upon older costs and as a result, the LIFO cost of the inventory on the
balance sheet is typically lower than it would be under most alternative costing
methods. The LIFO impact on the income statement in a given year is dependent
upon the inflation rate effect on raw material purchases and manufacturing
conversion costs, the level of purchases in a given year and the inventory mix
and balance. While overall inventories increased in 2004, inventories at certain
locations declined slightly and the resulting liquidation of LIFO layers reduced
cost of sales by $0.4 million. Assuming no change in the quantity or mix of
inventory from the December 31, 2004 level, a 1% change in the annual inflation
rate would cause a $0.4 million change in the LIFO inventory value.
DEFERRED TAX ASSETS. We record deferred tax assets and liabilities in
accordance with Statement No. 109, "Accounting For Income Taxes". The deferrals
are determined based upon the temporary difference between the financial
reporting and tax bases of assets and liabilities. We review the expiration
dates of the deferrals against projected income levels to determine if the
deferral will or can be realized. If it is determined that it is more likely
than not that a deferral will not be realized, a valuation allowance would be
established for that item. Certain deferrals, including the alternative minimum
tax (AMT) credit, do not have an expiration date. See Note I to the Consolidated
Financial Statements for additional deferred tax details.
(25)
MANAGEMENT'S DISCUSSION AND ANALYSIS
In addition to reviewing the deferred tax assets against their expiration
dates, we evaluated our deferred tax assets for impairment due to the recent
operating losses as previously described and initially recorded a valuation
allowance in 2002. The valuation allowance was adjusted in 2003 and 2004, with
amounts being charged or credited to income, including the use of a net
operating loss carryforward (NOL), or other comprehensive income (OCI) as
appropriate. The deferred tax valuation allowance balance was $23.2 million as
of December 31, 2004.
We terminated a company-owned life insurance program in 2004 that resulted
in the use of an NOL and, therefore, a reduction in the valuation allowance. The
company-owned life insurance program had provided tax savings and cash benefits
for a number of years after its inception in 1986. However, subsequent changes
in the tax code served to reduce and eventually eliminate those benefits and
current projections showed that continuing the program would result in a net
cash outlay and expense going forward. While termination of the program did not
impact income before income taxes on the Consolidated Statement of Income, it
did generate a tax liability calculated on the gross book value of the
outstanding policies. This tax liability was offset by the use of an NOL, which
in turn resulted in a $5.7 million reduction in the deferred tax valuation
allowance available to reverse against future income. Our projections show that
the future annual savings from eliminating the program should exceed this
reduction in the available valuation allowance.
Should we continue to generate a domestic pre-tax profit in subsequent
periods, portions of the valuation allowance may be reversed against the current
period domestic regular federal tax expense, to the extent that the allowance is
available to be reversed, resulting in higher net income and net income per
share for that period. If we are in an AMT position, as we were in 2004, we will
have an AMT liability and expense as the tax code limits the ability to use AMT
loss carryforwards to offset the current year income. Once we establish a trend
of consistent actual and projected positive earnings, or other realization
events occur, portions or all of the remaining valuation allowance may be
reversed back to income. Reversal of the allowance is dependent upon
jurisdiction, as it is possible to reverse a portion of the allowance as a
result of earnings in one country but retain an allowance as a result of losses
in another country. Reversal of the allowance is also subject to an analysis of
our ability to utilize the underlying deferred tax assets. Should we generate
domestic pre-tax losses in subsequent periods, a domestic federal tax benefit
will not be recorded and the valuation allowance recorded against the net
deferred tax assets will increase. This will result in a larger net loss and net
loss per share for that period versus a comparable period when a favorable tax
benefit was recorded. We will continue to record tax provisions or benefits as
appropriate for state and local taxes and various foreign taxes regardless of
the status of this valuation allowance.
UNEARNED REVENUE. Billings under long-term sales contracts in advance of
the shipment of the goods are recorded as unearned revenue, which is a liability
on the balance sheet. Revenue and the related cost of sales and gross margin are
only recognized for these transactions when the goods are shipped, title passes
to the customer and all other revenue recognition criteria are met. The unearned
revenue liability is reversed when the revenue is recognized. The related
inventory also remains on our balance sheet until these criteria are met as
well. Billings in advance of the shipments allow us to collect cash earlier than
billing at the time of the shipment and, therefore, the collected cash can be
used to help finance the underlying inventory.
DERIVATIVES. We may use derivative financial instruments to hedge our
foreign currency, commodity price and interest rate exposures. We apply hedge
accounting when an effective hedge relationship can be documented and
maintained. If a hedge is deemed effective, changes in its fair value are
recorded in OCI until the underlying hedged item matures. If a hedge does not
qualify as effective, changes in its fair value are recorded against income in
the current period. We secure derivatives with the intention of hedging existing
or forecasted transactions only and do not engage in speculative trading or
holding derivatives for investment purposes. Our annual budget and quarterly
forecasts serve as the basis for determining forecasted transactions. The use of
derivatives is governed by policies established by the Board of Directors. The
level of derivatives outstanding may be limited by the availability of credit
from financial institutions. See Note G to the Consolidated Financial Statements
and the "Market Risk Disclosures" section in this Management's Discussion and
Analysis for more information on derivatives.
MARKET RISK DISCLOSURES
We are exposed to precious metal and commodity price, interest rate and
foreign exchange rate differences. While the degree of exposure varies from year
to year, our methods and policies designed to manage these exposures have
remained fairly consistent. We attempt to minimize the effects of these
exposures through a combination of natural hedges and the use of derivatives.
We use gold and other precious metals in manufacturing various MEG and
Metal Systems products. To reduce the exposure to market price changes, precious
metals are maintained on a consigned inventory basis. The metal is purchased out
of consignment when it is ready to ship to a customer as a finished product. Our
purchase price forms the basis for the price charged to the customer for the
precious metal content and, therefore, the current cost is matched to the
selling price and the price exposure is minimized. We maintain a certain amount
of gold in our own inventory, which is typically balanced out by having a loan
denominated in gold for the same number of ounces. Any change in the market
price of gold, either higher or lower, will result in an equal change in the
fair value of the asset and liability recorded on the balance sheet.
We are charged a consignment fee by the financial institutions that
actually own the precious metals. This fee, along with the interest charged on
the gold-denominated loan, is partially a function of the market price of the
metal. Because of market forces and competition, the fee, but not the interest
on the loan, can be charged to customers on a case-by-case basis. To further
limit price and financing rate exposures, under some circumstances we will
require customers to furnish their own metal for processing. This practice is
used more frequently when the rates are high and/or more volatile. Should the
market price of precious metals that we use increase by 15% from the prices on
December 31, 2004, the additional pre-tax cost to us on an annual basis would be
approximately $0.2 million. This calculation assumes no changes in the quantity
of inventory or the underlying fee and interest rates and that none of the
additional fee is charged to customers.
(26)
We also use base metals, primarily copper, in our production processes.
When possible, fluctuations in the purchase price of copper are passed on to
customers in the form of price adders or reductions. When we cannot pass through
the price of copper, margins can be reduced by increases in the market price of
copper. As previously indicated, the price of copper increased significantly
during 2004, reducing margins as we estimate that we are able to pass on the
higher cost of copper on less than half of the affected sales. While we remain
exposed to price movements, we continue to evaluate alternative available
methods for hedging this exposure in a cost-effective manner.
We are exposed to changes in interest rates on our debt and cash balances.
This interest rate exposure is managed by maintaining a combination of
short-term and long-term debt and variable and fixed rate instruments. We also
use interest rate swaps to fix the interest rate on variable debt obligations,
as we deem appropriate. Excess cash is typically invested in high quality
instruments that mature in 90 days or less. Investments are made in compliance
with policies approved by the Board of Directors. We had a cash balance of $49.6
million along with $72.5 million in variable rate debt and variable-to-fixed
interest rate swaps with a notional value of $52.2 million outstanding at
December 31, 2004. If interest rates were to increase 100 basis points (1.0%)
from the December 31, 2004 rates and assuming no changes in debt or cash from
the December 31, 2004 levels, the additional annual net income would be $0.3
million on a pre-tax basis. An increase in interest rates would generate net
interest income since the cash balance exceeded the unhedged variable rate debt
at December 31, 2004.
Our international operations sell products priced in foreign currencies,
mainly the euro, yen and sterling, while the majority of these products' costs
are incurred in U.S. dollars. We are exposed to currency movements in that if
the U.S. dollar strengthens, the translated value of the foreign currency sale
and the resulting margin on that sale will be reduced. We typically cannot
increase the price of our products for short-term exchange rate movements
because of our local competition. To minimize this exposure, we may purchase
foreign currency forward contracts, options and collars in compliance with
approved policies. Should the dollar strengthen, the decline in the translated
value of the margins should be offset by a gain on the contract. A decrease in
the value of the dollar would result in larger margins but potentially a loss on
the contract, depending upon the method used to hedge the exposure. The notional
value of the outstanding currency contracts was $62.2 million as of December 31,
2004 compared to $39.8 million as of December 31, 2003. If the dollar weakened
10% against all currencies from the December 31, 2004 exchange rates, the
increased loss on the outstanding contracts as of December 31, 2004 would reduce
pre-tax profits by approximately $6.2 million. This calculation does not take
into account the increase in margins as a result of translating foreign currency
sales at the more favorable exchange rate, any changes in margins from potential
volume fluctuations caused by currency movements or the translation effects on
any other foreign currency denominated income statement or balance sheet item.
We record the fair values of derivatives on our balance sheet in
accordance with Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". The fair values are determined by
financial institutions and represent the market price for the instrument between
two willing parties as of the balance sheet dates. Changes in the fair value of
outstanding derivatives are recorded in equity or against income as appropriate
under the statement guidelines. The fair value of the outstanding foreign
currency contracts was a liability of $3.9 million at December 31, 2004,
indicating that the average hedge rates were unfavorable compared to the actual
year-end market exchange rates. The fair value of the interest rate swaps was a
loss of $3.3 million as the available interest rates were lower than the rates
fixed under the swap contracts. The net derivative loss recorded in OCI was $4.0
million as of December 31, 2004 compared to $3.2 million at December 31, 2003.
OUTLOOK
We are excited about the progress we have made with our new product
development and the acceptance of these products in the marketplace. We look to
continue the momentum generated from the sales of these products in 2004 into
2005 and beyond. We also will continue our efforts to expand sales
geographically by increasing our market presence in Asia, and China in
particular. While portions of the markets we serve are showing some weakness,
which may be temporary, many of our market segments have remained strong. Our
new sales order entry rate in early 2005 rebounded from the lower rates in the
latter portion of 2004. The scheduled shipments under the Webb telescope project
in 2005 are higher than the 2004 shipments. Therefore, we are estimating that
our sales in 2005 will be 8 to 10% higher than sales in 2004.
The cost of copper may have leveled off somewhat but it remains above the
historical average. Competitive pressures and other factors still limit our
ability to pass through this higher cost in all cases, which in turn negatively
impacts our margins. Other costs may be higher in 2005 as well, including
manpower as a result of changes in wage rates and medical benefit and pension
costs. However, we believe our cost control programs coupled with the ongoing
yield and efficiency improvements will continue to provide benefits and as a
result, we are anticipating the margin rate to improve slightly and our overhead
costs to grow at a slower pace than sales in 2005.
We will continue our efforts to improve the level of our working capital
investments in 2005. The lean sigma techniques will be used to drive further
improvements in our inventory utilization.
We anticipate that capital expenditures should increase in 2005 over the
2004 spending level, but will still be equal to or below the level of
depreciation. We will also evaluate niche acquisitions that have the potential
to augment and complement our existing product offerings.
Our balance sheet remains strong as we enter 2005 as our debt-to-capital
ratio and cash position have significantly improved. The payoff of the $18.6
million term loans in January 2005 further reduced our outstanding debt. Due to
the lower outstanding debt and barring a significant change in capital
expenditure levels or working capital investments, we are estimating that
interest expense will be approximately $2.5 million lower in 2005 than in 2004.
The $30.0 million subordinated loan becomes pre-payable at our option in
December 2005 and we will examine our ability to exercise this option at that
time.
(27)
FORWARD-LOOKING STATEMENTS
Portions of the narrative set forth in this document that are not
statements of historical or current facts are forward-looking statements. 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, in addition to those mentioned elsewhere herein:
- The global economy;
- The condition of the markets the Company serves, whether defined
geographically or by segment, with the major market segments being
telecommunications and computer, automotive electronics, magnetic
and optical data storage, aerospace and defense, industrial
components, and appliance;
- Changes in product mix and the financial condition of customers;
- The Company's success in implementing its strategic plans and the
timely and successful completion of any capital projects;
- The availability of adequate lines of credit and the associated
interest rates;
- Other financial factors, including cost and availability of
materials, tax rates, exchange rates, pension costs, energy costs,
regulatory compliance costs, and the cost and availability of
insurance;
- The uncertainties related to the impact of war and terrorist
activities;
- 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.
REPORTS OF INDEPENDENT AUDITORS AND MANAGEMENT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Brush Engineered Materials Inc.
We have audited the accompanying Consolidated Balance Sheets of Brush
Engineered Materials Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related Consolidated Statements of Income, Shareholders' Equity, and Cash
Flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Brush
Engineered Materials Inc. and subsidiaries at December 31, 2004 and 2003, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Brush
Engineered Materials Inc.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 28, 2005
REPORT OF MANAGEMENT
The management of Brush Engineered Materials Inc. and subsidiaries is
responsible for the contents of the financial statements, which are prepared in
conformity with generally accepted accounting principles. The financial
statements necessarily include amounts based on judgments and estimates.
Financial information elsewhere in the annual report is consistent with that in
the financial statements.
The Company maintains a comprehensive accounting system, which includes
controls designed to provide reasonable assurance as to the integrity and
reliability of the financial records and the protection of assets. However,
there are inherent limitations in the effectiveness of any system of internal
controls and, therefore, it provides only reasonable assurance with respect to
financial statement preparation. An internal audit staff is employed to
regularly test and evaluate both internal accounting controls and operating
procedures, including compliance with the Company's Statement of Policy
regarding ethical and lawful conduct. The role of the independent auditors is to
provide an objective review of the financial statements and the underlying
transactions in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, comprised solely of
Directors who are not members of management, meets regularly with management,
the independent auditors, and the internal auditors to ensure that their
respective responsibilities are properly discharged. The independent auditors
and the internal audit staff have full and free access to the Audit Committee.
/s/ John D. Grampa
John D. Grampa
Vice President Finance and Chief Financial Officer
(28)
REPORTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND CERTIFICATIONS
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Brush Engineered Materials Inc. and subsidiaries is
responsible for establishing and maintaining adequate internal controls over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Brush Engineered Materials Inc. and subsidiaries' internal control
system was designed to provide reasonable assurance to the Company's management
and Board of Directors regarding the preparation and fair presentation of
published financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
/s/ Gordon D.Hamett
Gordon D. Hamett
Chairman, President and CEO
Brush Engineered Materials Inc. and subsidiaries' management assessed the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004. In making this assessment, it used the framework set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria) in Internal Control-Integrated Framework. Based on our assessment we
believe that, as of December 31, 2004, the Company's internal control over
financial reporting is effective.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report
herein.
/s/John D.Grampa
John D. Grampa
Vice President Finance and Chief Financial Office
The Company submitted an unqualified Section 12(a) CEO certification to the NYSE
last year. In addition, the Company filed with the SEC the CEO/CFO certification
required under Section 302 of the Sarbanes-Oxley Act in the Annual Report on
Form 10-K for the year ended December 31, 2003.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Brush
Engineered Materials Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Brush Engineered
Materials Inc. and subsidiaries' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Brush Engineered Materials
Inc. and subsidiaries maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects,
based on the COSO criteria. Also, in our opinion, Brush Engineered Materials
Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Consolidated Balance
Sheets of Brush Engineered Materials Inc. and subsidiaries as of December 31,
2004 and 2003, and the related Consolidated Statements of Income, Shareholders'
Equity, and Cash Flows for each of the three years in the period ended December
31, 2004 and our report dated February 28, 2005 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 28, 2005
(29)
CONSOLIDATED STATEMENTS OF INCOME
Brush Engineered Materials Inc. and Subsidiaries, Years ended December 31, 2004,
2003 and 2002
(Dollars in thousands except per share amounts)
2004 2003 2002
------------- ----------- -----------
Net sales........................................................................... $ 496,276 $ 401,046 $ 372,829
Cost of sales.................................................................... 385,202 328,008 324,932
------------- ----------- -----------
Gross profit........................................................................ 111,074 73,038 47,897
Selling, general and administrative expense...................................... 77,267 68,834 61,293
Research and development expense................................................. 4,491 4,230 4,265
Other - net...................................................................... 4,282 8,918 4,975
------------- ----------- -----------
Operating profit (loss)............................................................. 25,034 (8,944) (22,636)
Interest expense................................................................. 8,377 3,751 3,219
------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 16,657 (12,695) (25,855)
Minority interest................................................................... - (45) -
Income taxes (benefit):
Currently payable................................................................ 1,349 855 (8,018)
Deferred......................................................................... (208) (279) 17,767
------------- ----------- -----------
1,141 576 9,749
------------- ----------- -----------
NET INCOME (LOSS) $ 15,516 $ (13,226) $ (35,604)
============= =========== ===========
Net income (loss) per share of common stock - basic................................. $ 0.87 $ (0.80) $ (2.15)
============= =========== ===========
Weighted average number of shares of common stock outstanding - basic............... 17,865,053 16,562,864 16,557,388
Net income (loss) per share of common stock - diluted............................... $ 0.85 $ (0.80) $ (2.15)
============= =========== ===========
Weighted average number of shares of common stock outstanding - diluted............. 18,163,915 16,562,864 16,557,388
See Notes to Consolidated Financial Statements.
(30)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Brush Engineered Materials Inc. and Subsidiaries, Years ended December 31, 2004,
2003 and 2002
(Dollars in thousands)
2004 2003 2002
------------- ----------- -----------
Cash flows from operating activities:
Net income (loss)................................................................... $ 15,516 $ (13,226) $ (35,604)
Adjustments to reconcile net income (loss) to net cash provided from operating
activities:
Depreciation, depletion and amortization......................................... 21,173 19,107 20,147
Amortization of mine development................................................. 1,188 1,228 284
Amortization of deferred financing costs in interest expense..................... 1,465 396 209
Impairment from asset writedown.................................................. - - 4,393
Deferred tax (benefit) expense................................................... (208) (279) 17,767
Derivative financial instruments ineffectiveness................................. 368 5,054 (253)
Decrease (increase) in accounts receivable....................................... (3,624) (6,590) 9,654
Decrease (increase) in inventory................................................. (6,830) 8,646 16,587
Decrease (increase) in prepaid and other current assets.......................... (1,806) 4,871 (1,387)
Increase (decrease) in accounts payable and accrued expenses..................... 223 2,308 (3,914)
Increase (decrease) in unearned revenue.......................................... 7,789 - -
Increase (decrease) in interest and taxes payable................................ 2,101 1,221 (3,086)
Increase (decrease) in other long-term liabilities............................... (1,925) (443) (7,879)
Other - net...................................................................... 3,490 4,019 (1,229)
------------- ----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 38,920 26,312 15,689
Cash flows from investing activities:
Payments for purchase of property, plant and equipment........................... (9,093) (6,162) (5,248)
Payments for mine development.................................................... (57) (157) (166)
Purchase of equipment previously held under operating lease...................... (880) (51,846) -
Proceeds from sale of property, plant and equipment.............................. 711 203 140
Other investments - net.......................................................... (62) - (57)
------------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (9,381) (57,962) (5,331)
Cash flows from financing activities:
Proceeds from issuance (repayment) of short-term debt............................ (274) (9,266) (1,941)
Proceeds from issuance of long-term debt......................................... 2,881 72,000 12,000
Repayment of long-term debt...................................................... (29,346) (26,034) (23,000)
Debt issuance costs.............................................................. (250) (4,636) -
Issuance of common stock......................................................... 38,711 - -
Issuance of common stock under stock option plans................................ 3,236 25 -
------------- ----------- -----------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 14,958 32,089 (12,941)
Effects of exchange rate changes on cash and cash equivalents....................... 84 266 (74)
------------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 44,581 705 (2,657)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,062 4,357 7,014
------------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 49,643 $ 5,062 $ 4,357
============= =========== ===========
See Notes to Consolidated Financial Statements.
(31)
CONSOLIDATED BALANCE SHEETS
Brush Engineered Materials Inc. and Subsidiaries, Years ended December
31, 2004 and 2003
(Dollars in thousands)
2004 2003
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 49,643 $ 5,062
Accounts receivable (less allowance of $1,555
for 2004, and $1,427 for 2003).......................... 59,229 55,102
Inventories............................................... 95,271 87,396
Prepaid expenses.......................................... 8,348 5,454
Deferred income taxes..................................... 275 291
---------- ----------
TOTAL CURRENT ASSETS 212,766 153,305
OTHER ASSETS................................................. 14,876 18,902
LONG-TERM DEFERRED INCOME TAXES.............................. 928 704
PROPERTY, PLANT, AND EQUIPMENT
Land...................................................... 7,305 7,284
Buildings................................................. 98,905 98,576
Machinery and equipment................................... 389,761 385,505
Software.................................................. 20,430 20,008
Construction in progress.................................. 5,122 4,691
Allowances for depreciation............................... (346,883) (329,328)
---------- ----------
174,640 186,736
Mineral resources......................................... 5,029 5,029
Mine development.......................................... 14,385 14,328
Allowances for amortization and depletion................. (16,435) (15,247)
---------- ----------
2,979 4,110
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT-NET 177,619 190,846
GOODWILL..................................................... 7,992 7,859
---------- ----------
TOTAL ASSETS $ 414,181 $ 371,616
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt........................................... $ 11,692 $ 11,923
Current portion of long-term debt......................... 19,209 1,464
Accounts payable.......................................... 13,234 16,038
Salaries and wages........................................ 23,741 17,443
Taxes other than income taxes............................. 2,486 2,379
Other liabilities and accrued items....................... 24,225 17,544
Unearned revenue.......................................... 7,789 -
Income taxes.............................................. 1,591 1,373
---------- ----------
TOTAL CURRENT LIABILITIES 103,967 68,164
OTHER LONG-TERM LIABILITIES.................................. 10,798 14,739
RETIREMENT AND POST-EMPLOYMENT BENEFITS...................... 49,729 49,358
LONG-TERM DEBT............................................... 41,549 85,756
MINORITY INTEREST IN SUBSIDIARY.............................. - 26
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value;
5,000,000 shares authorized, none issued................ - -
Common stock, no par value; authorized 60,000,000
shares; 25,526,516 issued shares (22,919,518 for 2003).. 137,247 93,336
Common stock warrants..................................... - 1,616
Retained income........................................... 196,672 181,156
Common stock in treasury, 6,307,009 shares in 2004
(6,294,128 in 2003)...................................... (105,675) (105,633)
Other comprehensive income (loss)......................... (19,933) (16,794)
Other equity transactions................................. (173) (108)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 208,138 153,573
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 414,181 $ 371,616
========== ==========
See Notes to Consolidated Financial Statements.
(32)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Brush Engineered Materials Inc. and Subsidiaries, Years ended December 31,
2004, 2003 and 2002
(Dollars in thousands except per share amounts)
Common Other
Common Retained Stock in Comprehensive
Stock Warrants Income Treasury Income (loss) Other Total
--------- -------- --------- --------- ------------- --------- ---------
BALANCES AT JANUARY 1, 2002 $ 92,861 $ - $ 229,986 $(105,041) $ (4,350) $ 894 $ 214,350
Net loss........................................ - - (35,604) - - - (35,604)
Foreign currency translation adjustment ........ - - - - 832 - 832
Derivative and hedging activity................. - - - - (5,778) - (5,778)
Minimum pension liability....................... - - - - (13,563) - (13,563)
---------
Comprehensive loss.............................. (54,113)
Other equity transactions....................... 450 - - (75) - (1,392) (1,017)
Forfeiture of restricted stock.................. - - - (129) - 3 (126)
--------- ------ --------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2002 93,311 - 194,382 (105,245) (22,859) (495) 159,094
Net loss........................................ - - (13,226) - - - (13,226)
Foreign currency translation adjustment ........ - - - - 475 - 475
Derivative and hedging activity ................ - - - - 4,623 - 4,623
Minimum pension liability ...................... - - - - 967 - 967
Comprehensive loss ............................. (7,161)
Proceeds from sale of 1,900 shares under option
plans .......................................... 21 - - - - - 21
Income tax benefit from employees' stock options 4 - - - - - 4
Issuance of 115,000 warrants ................... - 1,616 - - - - 1,616
Other equity transactions ...................... - - - (229) - 359 130
Forfeiture of restricted stock ................. - - - (159) - 28 (131)
--------- ------ --------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2003 93,336 1,616 181,156 (105,633) (16,794) (108) 153,573
Net income...................................... - - 15,516 - - - 15,516
Foreign currency translation adjustment......... - - - - 849) - 849
Derivative and hedging activity................. - - - - (809) - (809)
Minimum pension liability....................... - - - - (3,179) - (3,179)
---------
Comprehensive income............................ 12,377
Proceeds from sale of 228,298 shares
under option plans............................ 3,236 - - - - - 3,236
Proceeds from stock offering of 2,250,000
shares........................................ 38,711 - - - - - 38,711
Exercise of 115,000 warrants.................... 1,616 (1,616) - - - - -
Other equity transactions....................... 348 - - 141 - (131) 358
Forfeiture of restricted stock.................. - - - (183) - 66 (117)
--------- ------ --------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2004 $ 137,247 $ - $ 196,672 $(105,675) $ (19,933) $ (173) $ 208,138
========= ====== ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements.
(33)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: The Company is a holding company with subsidiaries that have
operations in the United States, Western Europe and Asia. These operations
manufacture engineered materials used in a variety of markets, including
telecommunications and computer electronics, automotive electronics, magnetic
and optical data storage, aerospace and defense, industrial components,
appliance and medical. The Company's operations are aggregated into two business
segments - the Metal Systems Group and the Microelectronics Group - based upon
the commonalities of their products, manufacturing processes, customers and
other factors. The Metal Systems Group produces strip and bulk alloys (primarily
copper beryllium), beryllium metal products and engineered material systems
while the Microelectronics Group manufactures precious and non-precious vapor
deposition targets, frame lid assemblies, other precious and non-precious metal
products, ceramics, electronic packages and thick film circuits. The Company is
vertically integrated and distributes its products through a combination of
company-owned facilities and independent distributors and agents.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results may differ from
those estimates.
CONSOLIDATION: The Consolidated Financial Statements include the accounts
of Brush Engineered Materials Inc. and its subsidiaries. All of the Company's
subsidiaries are wholly owned as of December 31, 2004. Inter-company accounts
and transactions are eliminated in consolidation.
CASH EQUIVALENTS: All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash equivalents.
ACCOUNTS RECEIVABLE: An allowance for doubtful accounts is maintained for
the estimated losses resulting from the inability of customers to pay the
amounts due. The allowance is based upon identified delinquent accounts,
customer payment patterns and other analyses of historical data and trends.
INVENTORIES: Inventories are stated at the lower of cost or market. The
cost of domestic inventories except ore and supplies is principally determined
using the last-in, first-out (LIFO) method. The remaining inventories are stated
principally at average cost.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on
the basis of cost. Depreciation is computed principally by the straight-line
method, except certain facilities for which depreciation is computed by the
sum-of-the-years digits or units-of-production method. Depreciable lives that
are used in computing the annual provision for depreciation by class of asset
are as follows:
Years
-------------
Land improvements ............................... 5 to 25
Buildings ....................................... 10 to 40
Leasehold improvements .......................... Life of lease
Machinery and equipment ......................... 3 to 15
Furniture and fixtures .......................... 4 to 15
Automobiles and trucks .......................... 2 to 8
Research equipment .............................. 6 to 12
Computer hardware ............................... 3 to 10
Computer software ............................... 3 to 10
Leasehold improvements will be depreciated over the life of the
improvement if it is shorter than the life of the lease. Depreciation expense
was $21.1 million in 2004, $18.6 million in 2003 and $19.8 million in 2002.
Repair and maintenance costs are expensed as incurred.
MINERAL RESOURCES AND MINE DEVELOPMENT: Property acquisition costs are
capitalized as mineral resources on the balance sheet and are depleted using the
units-of-production method based upon recoverable proven reserves. Overburden,
or waste rock, is removed prior to the extraction of the ore from a particular
open pit. The removal cost is capitalized and amortized as the ore is extracted
using the units-of-production method based upon the proven reserves in that
particular pit. Exploration and development expenses, including development
drilling, are charged to expense in the period in which they are incurred.
INTANGIBLE ASSETS: Under Financial Accounting Standards Board (FASB)
Statement No. 142, "Goodwill and Other Intangible Assets", goodwill and other
indefinite-lived intangible assets are not amortized, but instead reviewed
annually at December 31, or more frequently under certain circumstances, for
impairment. The Company determined that a goodwill impairment charge was not
required during 2004 or the preceding two years. Intangible assets with finite
lives are amortized using the straight-line method or effective interest method,
as applicable, over the periods estimated to be benefited, which is generally 20
years or less.
ASSET IMPAIRMENT: In the event that facts and circumstances indicate that
the carrying value of long-lived and intangible assets may be impaired, an
evaluation of recoverability is performed. If an evaluation is required, the
estimated future undiscounted cash flow associated with the asset or asset group
would be compared to the carrying amount to determine if a write-down is
required.
DERIVATIVES: The Company records the changes in the fair values of
derivative financial instruments in accordance with Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company
recognizes all derivatives on the balance sheet at their fair values. If the
derivative is a hedge, depending upon the nature of the hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of the hedged asset, liability or firm commitment through earnings or recognized
in other comprehensive income (loss) until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value, if
any, is recognized in earnings immediately. If a derivative is not a hedge,
changes in its fair value are adjusted through income.
ASSET RETIREMENT OBLIGATION: The Company adopted Statement No. 143,
"Accounting for Asset Retirement Obligations", in the fourth quarter 2002. Under
this statement, a liability must be recorded to recognize the legal obligation
to remove an asset at the time the asset is acquired or when the legal liability
arises. The liability is recorded for the present value of the ultimate
obligation by discounting the estimated future cash flows using a
credit-adjusted risk-free interest rate. The liability is accreted over time,
with the accretion charged to expense. An asset equal to the fair value of the
liability is recorded concurrent with the liability. The asset is then
depreciated over the life of the asset. Adoption of this statement did not have
a material effect on the Company's results of operations or financial position.
(34)
REVENUE RECOGNITION: In accordance with Staff Accounting Bulletin (SAB)
101, the Company recognizes revenue when the goods are shipped and title passes
to the customer. The Company requires persuasive evidence that a revenue
arrangement exists, delivery of the product has occurred, the selling price is
fixed or determinable and collectibility is reasonably assured before revenue is
realized and earned. Billings under long-term sales contracts in advance of the
shipment of the goods are recorded as unearned revenue, which is a liability on
the balance sheet. Revenue is only recognized for these transactions when the
goods are shipped and all other revenue recognition criteria are met.
SHIPPING AND HANDLING COSTS: The Company records shipping and handling
costs for products sold to customers in cost of sales on the Consolidated
Statements of Income.
ADVERTISING COSTS: The Company expenses all advertising costs as incurred.
Advertising costs were $1.0 million in 2004, $0.8 million in 2003 and $0.6
million in 2002.
INCOME TAXES: The Company uses the liability method in measuring the
provision for income taxes and recognizing deferred tax assets and liabilities
on the balance sheet. The Company records a valuation allowance to reduce the
deferred tax assets to the amount that is more likely than not to be realized.
NET INCOME PER SHARE: Basic earnings per share (EPS) is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the assumed
conversion of all dilutive common stock equivalents as appropriate under the
treasury stock method.
RECLASSIFICATION: Certain amounts in prior years have been reclassified to
conform to the 2004 consolidated financial statement presentation.
VARIABLE INTEREST ENTITIES: The FASB issued Financial Interpretation (FIN)
46, "Consolidation of Variable Interest Entities" in January 2003 effective for
periods ending subsequent to June 15, 2003 for variable entities for which an
enterprise holds a variable interest that it acquired prior to February 1, 2003.
The release clarifies the application of Accounting Research Bulletin (ARB) No.
51, "Consolidated Financial Statements" to certain entities in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from others. The Company
adopted FIN 46 as proscribed and its adoption did not have a material impact on
the Company's results of operations or financial position.
STOCK OPTIONS: The Company provides a stock incentive plan for eligible
employees. See Note H to the Consolidated Financial Statements for further
details. The Company has adopted the disclosure-only provisions of Statement No.
123,"Accounting for Stock-Based Compensation"and applies the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No.
25,"Accounting for Stock Issued to Employees"and related interpretations in
accounting for its stock incentive plan. If the Company had elected to recognize
compensation expense for its stock incentive plan awards based on the estimated
fair value of the awards on the grant dates, consistent with the method
proscribed by Statement No. 123 by amortizing the expense over the options'
vesting period, the pro forma net income (loss) and earnings per share (E.P.S.)
would have been as noted below:
(Dollars in thousands, except per share data) 2004 2003 2002
----------- ----------- -----------
Net income (loss) - as reported.............. $ 15,516 $ (13,226) $ (35,604)
Pro forma stock option expense............... (1,882) (1,095) (1,494)
----------- ----------- -----------
Net income (loss) - pro forma................ $ 13,634 $ (14,321) $ (37,098)
=========== =========== ===========
Basic E.P.S. - as reported................... $ 0.87 $ (0.80) $ (2.15)
Basic E.P.S. - pro forma .................... $ 0.76 $ (0.86) $ (2.24)
Diluted E.P.S. - as reported ................ $ 0.85 $ (0.80) $ (2.15)
Diluted E.P.S. - pro forma .................. $ 0.75 $ (0.86) $ (2.24)
Note: The pro forma disclosures shown are not representative of the effects on
net income and earnings per share in future years.
The weighted-average fair value of the Company's stock options used to
compute the pro forma net income and earnings per share disclosures is $7.72,
$2.79 and $6.40 for 2004, 2003 and 2002, respectively. The fair value is the
estimated present value at grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the various grants in
2004, 2003 and 2002:
2004 2003 2002
------ ------ ------
Risk-free interest rate 3.26% 3.63% 4.52%
Dividend yield ........ 0% 0% 0%
Volatility of stock ... 41.8% 39.5% 39.6%
Expected life of option 6 YEARS 8 years 8 years
NEW PRONOUNCEMENTS: The FASB issued Statement No. 151, "Inventory Costs",
in November 2004, which amends ARB No. 43. The statement requires idle facility
expense, excessive spoilage, double freight and rehandling costs to be treated
as current period charges regardless of whether they meet the ARB No. 43
criteria of "so abnormal". In addition, the statement requires fixed overhead
costs to be allocated to conversion cost based upon the normal capacity of the
production facility. The statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company has not
determined the impact the adoption of this statement will have on its results of
operations or financial condition.
The FASB issued FASB Staff Position (FSP) 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004", and FSP 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004"
in December 2004. These FSPs provide accounting and disclosure guidelines
relative to the income tax deductions and repatriation provisions contained in
the American Jobs Creation Act of 2004 (the Act). The FSPs were effective upon
issuance. The Company has not determined what impact, if any, the Act and these
FSPs may have on its results of operations or financial condition.
The FASB issued Statement No. 123 (Revised 2004), "Share-Based Payments",
in December 2004 that revises Statement No. 123, "Accounting for Stock-Based
Compensation", and supercedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees". The revised statement requires
(35)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
compensation cost for all share-based payments, including employee stock
options, to be measured at fair value and charged against income. Compensation
cost would be determined at the date of the award through the use of a pricing
model and charged against income over the vesting period for each award. The
revised statement is effective for periods beginning after June 15, 2005 and
early adoption is allowed. The Company has not determined if it will apply the
modified prospective or retrospective transition method upon adoption nor has it
selected a pricing model to use to calculate the fair value of its awards.
Therefore, the Company has not determined the impact of adopting this revised
statement on its results of operations and financial condition. The pro forma
effect on net income and income per share for 2004, 2003 and 2002 of using the
Black-Scholes model to calculate the fair value of outstanding stock options had
the provisions of Statement No. 123 been applied in those years are set forth
earlier in this note.
NOTE B - INVENTORIES
Inventories in the Consolidated Balance Sheets are summarized as follows:
December 31,
(Dollars in thousands) 2004 2003
-------- -----------
Principally average cost:
Raw materials and supplies.............. $ 22,705 $ 24,990
Work in process......................... 77,438 65,212
Finished goods.......................... 27,538 20,637
-------- -----------
Gross inventories..................... 127,681 110,839
Excess of average cost over LIFO
inventory value......................... 32,410 23,443
-------- -----------
Net inventories....................... $ 95,271 $ 87,396
======== ===========
Average cost approximates current cost. Gross inventories accounted for
using the LIFO method totaled $85.7 million at December 31, 2004 and $73.9
million at December 31, 2003. The liquidation of LIFO inventory layers in 2004
reduced cost of sales by $0.4 million.
NOTE C - IMPAIRMENT CHARGE
The Company recorded asset impairment charges of $4.4 million in the
fourth quarter 2002 in accordance with Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The impairment charges resulted
from the assets' undiscounted projected cash flows being less than their
carrying values. The Metal Systems Group wrote off $3.1 million of equipment and
related facilities formerly used in the production of beryllium. The equipment
has been shut down due to the use of alternate input materials and manufacturing
processes. Management does not believe these assets are salable. The
Microelectronics Group wrote down equipment and a building $1.3 million from its
net book value of $1.9 million to its estimated fair market value of $0.6
million. The fair market value was determined by an appraisal by an independent
firm. The equipment was shut down in 2003 and the majority of the equipment was
subsequently disposed or sold. The building was sold in 2004 for an immaterial
gain. The impairment charges were recorded in other-net on the Company's 2002
Consolidated Statement of Income.
NOTE D - INTEREST
Interest expense associated with active construction and mine development
projects is capitalized and amortized over the future useful lives of the
related assets. The following chart summarizes the interest incurred,
capitalized and paid, as well as the amortization of capitalized interest for
2004, 2003 and 2002.
(Dollars in thousands) 2004 2003 2002
-------- ---------- ----------
Interest incurred.......................... $ 8,553 $ 3,665 $ 3,304
Less capitalized interest.................. 176 (86) 85
-------- ---------- ----------
Total expense.............................. $ 8,377 $ 3,751 $ 3,219
======== ========== ==========
Interest paid.............................. $ 6,103 $ 2,558 $ 3,162
======== ========== ==========
Amortization of capitalized interest
included in cost of sales............... $ 593 $ 623 $ 716
======== ========== ==========
The increase in expense in 2004 over 2003 was due to the additional debt
outstanding resulting from the December 2003 refinancing. Deferred financing
costs within interest expense were also $1.1 million higher in 2004 than in 2003
as a result of this refinancing. See Note E to the Consolidated Financial
Statements.
In 1986, the Company purchased company-owned life insurance policies
insuring the lives of certain United States employees. The net contract (income)
expense, including interest expense recorded in selling, general and
administrative expense, was ($0.7) million, $1.4 million and ($0.5) million in
2004, 2003 and 2002, respectively. The related interest expense was $0.3
million, $1.3 million and $1.5 million in 2004, 2003 and 2002, respectively. The
program was terminated and the Company received back the net surrender value in
2004. The contracts had been recorded at cash surrender value, net of policy
loans, in other assets on the Consolidated Balance Sheet.
NOTE E - DEBT
A summary of long-term debt follows:
December 31,
(Dollars in thousands) 2004 2003
-------- ----------
Senior Credit Agreement:
Revolving credit agreement.............. $ - $ 20,000
Senior five-year term note payable in
installments beginning in 2004.......... 11,143 12,000
Senior five-year term note payable in
installments beginning in 2004.......... 7,429 8,000
Variable rate demand bonds payable in
installments beginning in 2005.......... 3,000 3,000
Variable rate promissory note - Utah
land purchase payable in 20 annual
installments through 2021............... 881 915
Variable rate industrial development
revenue bonds payable in 2016........... 8,305 8,305
Subordinated five-year term note........... 30,000 35,000
-------- ----------
60,758 87,220
Current portion of long-term debt.......... (19,209) (1,464)
-------- ----------
Total...................................... $ 41,549 $ 85,756
======== ==========
(36)
Maturities on long-term debt instruments as of December 31, 2004, which
also reflect the voluntary pre-payment of the senior five-year term notes in
2005, are as follows:
(Dollars in thousands)
2005............................ $ 19,209
2006............................ 637
2007............................ 638
2008............................ 30,640
2009............................ 642
Thereafter...................... 8,992
--------
Total........................... $ 60,758
========
In December 2003, the Company refinanced its existing revolving credit
agreement and a synthetic operating lease with a new debt structure totaling
$147.5 million. The refinancing included a five-year $105.0 million senior
secured credit agreement, a five-year $35.0 million subordinated term loan and a
$7.5 million Exim line of credit.
The senior secured credit agreement is with six financial institutions and
at December 31, 2004 provides a maximum availability of $103.6 million. It
consists of an $85.0 million revolving credit line secured by the Company's
working capital and certain other assets, an $11.2 million term note secured by
the Company's real estate and a $7.4 million term note secured by the Company's
machinery and equipment. The credit agreement allows the Company to borrow money
at a premium over LIBOR or prime rate and at varying maturities. At December 31,
2004, there were no borrowings outstanding against the revolving credit line and
$18.6 million outstanding on the two term loans at an average rate of 4.26%. The
rate resets quarterly according to the terms and conditions available under the
agreement. The term notes were originally drawn at $12.0 million and $8.0
million, respectively,in December 2003 and were reduced by quarterly scheduled
installments that began in July 2004. In December 2004, the credit agreement was
amended to extend the maturity to December 3, 2009 and revise certain other
items including pricing, reporting schedules, definitions and allowable
transactions. In addition, the term note provisions were amended to allow
prepayment of the term loans and the re-borrowing of those funds under the
revolver up to amounts limited by the original term loan amortization schedules.
The Company exercised its right to prepay the term notes in full in January
2005.
The $7.5 million Exim facility, which was secured by certain foreign
accounts receivable of the Company, was terminated in December 2004. There were
no outstanding borrowings against this facility at the end of 2003 or during
2004.
The $35.0 million subordinated term note is secured by a second lien on
the Company's working capital, real estate, machinery and equipment and certain
other assets, and is payable in December 2008. The Company prepaid $5.0 million
in July 2004 as allowed without penalty. At December 31, 2004, the Company had
$30.0 million in long-term borrowings outstanding on this note at an average
rate of 16.1%. The rate is based on variable prime plus a premium and resets
quarterly. To hedge a portion of this variability, the Company entered into an
interest rate swap, fixing the rate at 6.98% for a notional value of $10.0
million over the life of the note.
Both the credit agreement and the subordinated term note are subject to
restrictive covenants including leverage, fixed charges and capital
expenditures. The subordinated term note restricts the issuance of dividends.
The senior credit agreement and the subordinated term note are also secured by a
first and second lien on the stock of certain of the Company's direct and
indirect subsidiaries.
Proceeds from the 2003 refinancing were used to retire the existing
revolving credit agreement and to terminate an off-balance sheet operating lease
by purchasing the assets being leased for $51.8 million. See Note F to the
Consolidated Financial Statements. Financing fees of $6.5 million associated
with the debt refinancing were deferred and included in other assets on the
Consolidated Balance Sheet and are being amortized over the life of the
underlying debt. Included in the $6.5 million deferred financing cost was the
fair value of warrants for the purchase of 115,000 shares of the Company's
common stock. The warrants were exercised in July 2004.
The following table summarizes the Company's short-term lines of credit.
Amounts shown as outstanding are included in short-term debt on the Consolidated
Balance Sheets.
DECEMBER 31, 2004
(Dollars in thousands) Total Outstanding Available
-------- ----------- ----------
Domestic........................ $ 36,252 $ - $ 36,252
Foreign......................... 5,084 1,202 3,882
Precious metal.................. 10,490 10,490 -
-------- ----------- ----------
Total........................... $ 53,826 $ 11,692 $ 40,134
======== =========== ==========
December 31, 2003
(Dollars in thousands) Total Outstanding Available
------- ----------- ---------
Domestic........................ 34,634 $ 2,049 $ 32,585
Foreign......................... 4,439 142 4,297
Precious metal.................. 9,732 9,732 -
------- --------- ---------
Total........................... 48,805 $ 11,923 $ 36,882
======= ========= =========
The domestic line is committed and included in the $85.0 million maximum
borrowing under the revolving credit agreement (which is limited by the
available working capital collateral) and for 2003 also includes the $7.5
million Exim facility, each mentioned above. The foreign lines are uncommitted,
unsecured and renewed annually. The precious metal facility (primarily gold) is
secured and renewed annually. The average interest rate on short-term debt was
4.34% and 5.50% as of December 31, 2004 and 2003, respectively.
In November 1996, the Company entered into an agreement with the Lorain
Port Authority, Ohio to issue $8.3 million in variable rate industrial revenue
bonds, maturing in 2016. The variable rate ranged from 1.15% to 2.25% in 2004
and 0.85% to 1.81% during 2003.
In 1994, the Company refunded its $3.0 million industrial development
revenue bonds. The 7.25% bonds were refunded into variable rate demand bonds.
The variable rate ranged from 0.95% to 2.06% during 2004 and from 0.78% to 1.65%
during 2003.
(37)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
The prior revolving credit agreement, as amended, which was terminated in
December 2003, included certain restrictive covenants including interest
coverage, fixed charges, leverage tests, certain rent expenses, capital
expenditure levels, dividend declarations and permitted acquisitions. A portion
of the Company's domestic receivables and inventory up to a maximum of $55.0
million secured the agreement. In January 2003, this agreement was amended to
waive certain covenants effective December 31, 2002. In March 2003, the
agreement was amended to extend the maturity until April 2004 and revise various
covenants.
NOTE F - LEASING ARRANGEMENTS
The Company leases warehouse and manufacturing space, and manufacturing
and computer equipment under operating leases with terms ranging up to 25 years.
Rent expense amounted to $7.6 million, $16.2 million, and $17.3 million during
2004, 2003, and 2002, respectively. The future estimated minimum lease payments
under non-cancelable operating leases with initial lease terms in excess of one
year at December 31, 2004, are as follows: 2005 - $4.8 million; 2006 - $4.4
million; 2007 - $4.0 million; 2008 - $4.0 million; 2009 - $3.6 million and
thereafter - $6.6 million.
The Company has an operating lease for one of its major production
facilities. This facility is owned by a third party and cost approximately $20.3
million to build. Occupancy of the facility began in 1997. Lease payments for
the facility continue through 2011 with options for renewal. The estimated
minimum payments are included in the preceding paragraph. The facility lease is
subject to certain restrictive covenants including leverage, fixed charges and
annual capital expenditures.
In December 2003, the Company terminated an operating lease for certain
equipment located at the Elmore, Ohio facility and purchased the assets for a
residual value of $51.8 million as part of the Company's refinancing. See Note E
to the Consolidated Financial Statements. This leasing arrangement, which began
in 1996, was structured as a synthetic lease, which means it was an operating
lease for financial reporting purposes and a capital lease for federal income
tax purposes. Lease payments for the related equipment began in 1999 and
continued through the initial lease term expiring in 2001. The Company then
exercised its option to renew the lease of the equipment annually for one-year
periods and in 2003 purchased the equipment. The 2003 expense for this lease was
$9.3 million and is included in the rent expense amounts in the above paragraph.
NOTE G - DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE INFORMATION
The Company is exposed to interest rate and foreign currency exchange rate
differences and attempts to minimize the effects of these exposures through a
combination of natural hedges and the use of derivative financial instruments.
The Company has policies approved by the Board of Directors that establish the
parameters for the allowable types of derivative instruments to be used, the
maximum allowable contract periods, aggregate dollar limitations and other
hedging guidelines. The Company will only secure a derivative if there is an
identifiable underlying exposure that is not otherwise covered by a natural
hedge. In general, derivatives will be held until maturity. The following table
summarizes the fair value of the Company's outstanding derivatives and debt as
of December 31, 2004 and 2003.
DECEMBER 31, 2004 December 31, 2003
--------------------- ---------------------
Asset/(liability) Notional Carrying Notional Carrying
(Dollars in thousands) Amount Amount Amount Amount
-------- --------- -------- --------
FOREIGN CURRENCY CONTRACTS
Forward contracts
Yen ........................ $ 16,622 $ (765) $16,242 $ (677)
Euro ....................... 27,842 (2,113) 13,697 (1,307)
Sterling ................... 5,189 (228) 3,536 (155)
-------- --------- -------- --------
Total .................... $ 49,653 $ (3,106) $33,475 $ (2,139)
======== ======== ======= ========
Options
Yen ........................ $ 3,366 $ (18) $ - $ -
Euro ....................... 9,200 (761) 6,290 (749)
-------- --------- -------- --------
Total .................... $ 12,566 $ (779) $ 6,290 $ (749)
======== ======== ======= ========
INTEREST RATE EXCHANGE CONTRACTS
Floating to fixed ........... $ 52,202 $ (3,256) $55,858 $ (5,314)
SHORT- AND LONG-TERM DEBT ...... - (72,450) - (99,143)
(38)
The fair values equal the carrying amounts in the Company's Consolidated
Balance Sheets as of December 31, 2004 and 2003. Statement No. 107 defines fair
value as the amount at which an instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The fair values of the foreign currency forward contracts and options and the
interest rate contracts were calculated by third parties on behalf of the
Company using the applicable market rates at December 31, 2004 and December 31,
2003. The fair value of the Company's debt was estimated using a discounted cash
flow analysis based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The Company records derivatives in its financial statements in accordance
with Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended Statement No. 133.
Each of the Company's interest rate swaps and foreign currency derivative
contracts were designated as cash flow hedges at inception as defined under
these statements. Statement No. 133 requires the fair value of outstanding
derivative instruments to be recorded on the balance sheet. Accordingly,
derivative fair values were included in the balance sheet line items as follows:
Debit/(credit) balance December 31,
(Dollars in thousands) 2004 2003
-------- ---------
Other liabilities and accrued items......... $ (4,216) $ (3,952)
Other long-term liabilities................. (2,925) (4,250)
-------- ---------
Total.................................... $ (7,141) $ (8,202)
======== =========
The balance sheet classification of the fair values is dependent upon the
Company's rights and obligations under each derivative and the remaining term to
maturity. Changes in fair values of derivatives are recorded in income or other
comprehensive income (loss) (hereafter "OCI") as appropriate under Statement No.
133 guidelines. A reconciliation of the changes in fair values and other
derivative activity recorded in OCI for 2004 and 2003 is as follows:
(Dollars in thousands) 2004 2003
--------- ---------
Balance in other comprehensive income
(loss) at January 1...................... $ (3,216) $ (7,839)
Changes in fair values and other current
period activity.......................... (3,336) (107)
Matured derivatives - charged to expense.... 2,527 95
Derivative ineffectiveness -
(credited)/charged to expense............ - 4,635
--------- ---------
Balance in other comprehensive income
(loss) at December 31.................... $ (4,025) $ (3,216)
========= =========
One of the Company's interest rate swaps had a notional value of $42.2
million as of December 31, 2004 and was initially designated as a hedge of the
variable rate portion of an operating lease. As a result of the refinancing in
December 2003, as further described in Notes E and F to the Consolidated
Financial Statements, that lease was terminated and the $4.6 million cumulative
loss previously recorded in OCI that was associated with the swap was charged to
expense on the Consolidated Statements of Income in 2003 as the swap no longer
qualified for hedge accounting treatment. The swap remained in place after the
refinancing as payments under the swap serve as a hedge against the interest
rate payments on the new variable rate debt. However, changes in the fair value
of the swap due to movements in the market interest rates subsequent to the date
of the refinancing are charged to income or expense in the current period.
Hedge ineffectiveness, including amounts charged from OCI and other
adjustments to the fair values of derivatives that did not flow through OCI,
primarily the above referenced interest rate swap, was an expense of $0.4
million in 2004 and $5.1 million in 2003 and was included in other-net expense
on the Consolidated Statements of Income. The Company estimates that
approximately $3.4 million of the balance in OCI as of December 31, 2004 will be
charged to income during 2005 as a result of maturing derivatives.
The Company hedged a portion of its net investment in its Japanese
subsidiary using yen-denominated debt until this loan was repaid in December
2003. A net loss of $0.6 million associated with translating this debt into
dollars was recorded in the cumulative translation adjustment as of December 31,
2004 and 2003. This balance will remain in cumulative translation adjustment and
will only be charged to income should the Company ever liquidate its investment.
(39)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
FOREIGN EXCHANGE HEDGE CONTRACTS
The Company uses forward and option contracts to hedge anticipated foreign
currency transactions, primarily foreign sales. The purpose of the program is to
protect against the reduction in value of the foreign currency transactions from
adverse exchange rate movements. Should the dollar strengthen significantly, the
decrease in the translated value of the foreign currency transactions should be
partially offset by gains on the hedge contracts. Depending upon the method
used, the contract may limit the benefits from a weakening of the dollar. The
Company's policy limits contracts to maturities of two years or less from the
date of issuance. The outstanding contracts as of December 31, 2004 are
scheduled to mature during 2005 and the first six months of 2006. Realized gains
and losses on foreign exchange contracts are recorded in other-net on the
Consolidated Statements of Income. The total exchange gain/(loss), which
includes realized and unrealized losses, was ($1.8) million in 2004, ($0.9)
million in 2003 and $1.5 million in 2002.
INTEREST RATE HEDGE CONTRACTS
The Company attempts to minimize its exposure to interest rate variations
by using combinations of fixed and variable rate instruments with varying
lengths of maturities. Depending upon the interest rate yield curve, credit
spreads, projected borrowing requirements and rates, cash flow considerations
and other factors, the Company may elect to secure interest rate swaps, caps,
collars, options or other related derivative instruments to hedge portions of
its interest rate exposure. Both fixed-to-variable and variable-to-fixed
interest rate swaps may be used.
In December 2003, the Company entered into a five-year variable-to-fixed
interest rate swap with a $10.0 million notional value designated as a hedge of
a portion of its new variable rate debt.
The Company also has the previously discussed $42.2 million interest rate
swap that does not qualify for hedge accounting under the current regulations,
but cash payments made or received under this swap will tend to offset changes
in the interest payments made on portions of its outstanding variable rate debt
not otherwise hedged. The swap matures in 2008 and its notional value declines
over time. Gains and losses on this swap were charged to cost of sales over its
life until the underlying hedged item, an equipment operating lease, was
terminated in December 2003. Gains and losses from that point forward are
recorded as derivative ineffectiveness within other-net on the Consolidated
Statements of Income.
In December 1995, the Company entered into an interest rate swap,
converting to a fixed rate from a variable rate on a $3.0 million industrial
revenue development bond. Gains and losses on this swap were recorded in
interest expense on the Consolidated Statements of Income. This swap matured
during 2002.
NOTE H - CAPITAL STOCK
During the third quarter of 2004, the Company completed a common stock
offering of 2,050,000 newly issued shares and 115,000 secondary shares of common
stock issued by selling shareholders. In addition, pursuant to a partial
exercise of an over allotment option by the underwriters, an additional 200,000
primary shares were issued, bringing the total of primary shares of common stock
issued under the offering to 2,250,000. The net proceeds from the offering,
after deducting fees, were $38.7 million. The majority of proceeds from the
offering was used to repay outstanding borrowings under the Company's revolving
line of credit and $5.0 million of the proceeds was used to repay a portion of
the Company's long-term subordinated debt.
In connection with the Company's refinancing agreement dated December 4,
2003, 115,000 $0.01 common stock warrants were issued to the lenders as part of
their fee. Holders of the warrants were entitled to redeem them for an equal
number of shares of Company common stock. The warrants were recorded as a
component of shareholders' equity at their fair value at the time of issuance.
The holders of the warrants redeemed them in the third quarter 2004 and sold
their shares concurrent with the Company's new share offering.
The Company has 5 million shares of Serial Preferred Stock authorized (no
par value), none of which has been issued. Certain terms of the Serial Preferred
Stock, including dividends, redemption and conversion, will be determined by the
Board of Directors prior to issuance.
On January 27, 1998 the Company's Board of Directors adopted a new share
purchase rights plan and declared a dividend distribution of one right for each
share of common stock outstanding as of the close of business on February 9,
1998. The plan allows for new shares issued after February 9, 1998 to receive
one right subject to certain limitations and exceptions. Each right entitles the
shareholder to buy one one-hundredth of a share of Serial Preferred Stock,
Series A, at an initial exercise price of $110. A total of 450,000 unissued
shares of Serial Preferred Stock will be designated as Series A Preferred Stock.
Each share of Series A Preferred Stock will be entitled to participate in
dividends on an equivalent basis with one hundred shares of common stock and
will be entitled to one vote. The rights will not be exercisable and will not be
evidenced by separate right certificates until a specified time after any person
or group acquires beneficial ownership of 20% or more (or announces a tender
offer for 20% or more) of common stock. The rights expire on January 27, 2008,
and can be redeemed for 1 cent per right under certain circumstances.
(40)
The amended 1995 Stock Incentive Plan authorizes the granting of five
categories of incentive awards: option rights, performance restricted shares,
performance shares, performance units and restricted shares. As of December 31,
2004, no performance units had been granted.
Option rights entitle the optionee to purchase common shares at a price
equal to or greater than market value on the date of grant. Option rights
outstanding under the amended 1995 Stock Incentive Plan and previous plans
generally become exercisable over a four-year period and expire 10 years from
the date of the grant. In 1995, the Company's right to grant options on a total
of 228,565 shares (under the Company's 1979, 1984 and 1989 stock option plans)
was terminated upon shareholder approval of the amended 1995 Stock Incentive
Plan. No further stock awards will be made under the Company's 1979, 1984 and
1989 stock option plans except to the extent that shares become available for
grant under these plans by reason of termination of options previously granted.
The 1990 Stock Option Plan for Non-employee Directors (the "1990 Plan")
was terminated effective May 7, 1998. The 1997 Stock Incentive Plan for
Non-employee Directors replaced the 1990 Plan and provided for a one-time grant
of 5,000 options to up to six new non-employee directors who have not yet
received options under the 1990 Plan at an option price equal to the fair market
value of the shares at the date of the grant. Options are non-qualified and
become exercisable six months after the date of grant. The options generally
expire 10 years after the date they were granted. The 1997 Stock Incentive Plan
for Non-employee Directors was amended on May 1, 2001. The amendment added an
additional 100,000 shares to the Plan and established a grant of up to 2,000
options to each Director annually.
Stock option and restricted share award activities are summarized in the
following table:
2004 2003 2002
--------------------- ----------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- ---------- --------- ---------
STOCK OPTIONS
Outstanding at beginning of year............. 1,474,943 $ 15.78 1,394,688 $ 17.82 1,346,568 $ 18.83
Granted...................................... 242,650 17.01 262,800 5.62 256,750 12.17
Exercised.................................... (228,298) 14.19 (1,900) 12.89 - -
Cancelled.................................... (21,585) 18.38 (180,645) 16.76 (208,630) 17.42
--------- ---------- ---------
Outstanding at end of year................... 1,467,710 16.19 1,474,943 15.78 1,394,688 17.82
========= ========== =========
Exercisable at end of year................... 1,236,930 16.75 1,231,103 16.78 1,166,908 18.18
========= ========== =========
RESTRICTED AWARDS
Awarded and restricted at beginning of year.. 46,950 77,845 60,745
Awarded during the year...................... 13,700 - 33,100
Vested....................................... (14,100) (26,845) (15,700)
Forfeited.................................... (8,000) (4,050) (300)
--------- ---------- ---------
Awarded and restricted at end of year........ 38,550 46,950 77,845
========= ========== =========
The restricted awards are recorded as a component of shareholders' equity
at their fair value as of the grant date. The fair value is subsequently
amortized as deferred compensation expense over the vesting period. Amounts
recorded against selling, general and administrative expense on the Consolidated
Statements of Income totaled $0.1 million in 2004, $0.3 million in 2003 and $0.4
million in 2002.
(41)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
The following table provides additional information about stock options
outstanding as of December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted-
average Weighted- Weighted-
Remaining average average
Range of Number Contract Exercise Number Exercise
Option Prices Outstanding Life Price Exercisable Price
- --------------- ----------- --------- --------- ----------- ---------
$ 5.55 - $ 8.10 222,930 8.15 $ 5.63 154,290 $ 5.67
$12.15 - $15.06 308,025 6.04 13.07 267,155 13.21
$15.97 - $18.13 575,280 5.60 17.06 472,580 17.06
$20.64 - $23.78 225,800 5.96 22.33 207,230 22.32
$26.44 - $26.72 135,675 3.34 26.72 135,675 26.72
---------- ---- --------- --------- --------
1,467,710 5.93 $ 16.19 1,236,930 $ 16.75
========== ==== ========= ========= ========
The weighted-average remaining contractual life of options outstanding at
December 31, 2003 and 2002 was 5.99 years and 6.04 years, respectively. The
number of shares available for future grants as of December 31, 2004, 2003 and
2002 was 245,566 shares, 472,331 shares and 550,986 shares, respectively.
NOTE I-INCOME TAXES
Income (loss)before income taxes and income taxes (benefit) are comprised
of the following components, respectively:
(Dollars in thousands) 2004 2003 2002
---------- --------- -----------
Income (loss) before income taxes:
Domestic......................... $ 14,030 $ (14,721) $ (24,996)
Foreign.......................... 2,627 2,071 (859)
---------- --------- -----------
Total before income taxes..... $ 16,657 $ (12,650) $ (25,855)
========== ========= ===========
Income taxes (benefit):
Current income taxes:
Domestic......................... $ 528 $ 158 $ (8,311)
Foreign.......................... 821 697 293
---------- --------- -----------
Total current................. 1,349 855 (8,018)
Deferred income taxes:
Domestic......................... $ 9,280 $ (5,291) $ (1,068)
Foreign.......................... (208) (279) (1,095)
Valuation allowance.............. (9,280) 5,291 19,930
---------- --------- -----------
Total deferred................ (208) (279) 17,767
---------- --------- -----------
Total income taxes (benefit).. $ 1,141 $ 576 $ 9,749
========== ========= ===========
The reconciliation of the federal statutory and effective income tax rates
follows:
2004 2003 2002
----- ------ ------
Federal statutory rate............ 34.0% (34.0)% (34.0)%
State and local income taxes, net
of federal tax effect.......... 0.7 0.9 0.5
Effect of excess of percentage
depletion over cost depletion.. (4.7) (7.6) (2.2)
Company-owned life insurance...... 34.1 3.6 (0.6)
Officers' compensation............ 3.1 0.7 -
Taxes on foreign source income.... (7.2) (3.7) (4.1)
Valuation allowance............... (55.7) 41.8 77.1
Other items....................... 2.6 2.8 1.0
----- ----- ----
Effective tax rate........... 6.9% 4.5% 37.7%
===== ===== ====
In 2004, in accordance with the provisions of Statement No. 109,
"Accounting for Income Taxes," the Company recorded a $9.3 million reduction to
tax expense and valuation allowance due to the utilization of net operating
losses. In addition, the Company recorded a $1.3 million valuation allowance in
2004 to other comprehensive income (OCI) as an increase to the previous balance
of $5.4 million for deferred tax assets associated with the changes for the
minimum pension liability and derivative and hedging activities. No valuation
allowance was required on $1.2 million of net deferred tax assets associated
with certain foreign subsidiaries.
The Company intends to maintain a valuation allowance on the net deferred
tax assets until a realization event occurs to support reversal of all or a
portion of the reserve.
Included in current domestic income taxes, as shown in the Consolidated
Statements of Income, are $0.2 million of state and local income taxes in 2004,
2003 and 2002, annually.
(42)
The Company had domestic and foreign income tax payments (refunds), of
$1.1 million, $(3.3) million and $(1.1) million in 2004, 2003 and 2002,
respectively.
Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting bases and the tax bases of assets
and liabilities. Deferred tax assets and (liabilities) recorded in the
Consolidated Balance Sheets consist of the following at December 31, 2004 and
2003:
(Dollars in thousands) 2004 2003
--------- ----------
Post-retirement benefits other
than pensions................................. $ 12,000 $ 12,072
Alternative minimum tax credit................... 10,981 10,629
Other reserves................................... 2,591 2,518
Environmental reserves........................... 1,969 2,311
Pensions......................................... 4,460 2,416
Derivative instruments and hedging activities.... 2,476 2,051
Inventory........................................ 20 495
Tax credit carryforward.......................... 1,851 1,851
Net operating loss carryforward.................. 23,385 32,232
Capitalized interest expense..................... 237 419
Miscellaneous.................................... - 64
--------- ----------
59,970 67,058
Valuation allowance.............................. (23,175) (30,793)
--------- ----------
Total deferred tax assets........................ 36,795 36,265
Depreciation..................................... (33,148) (33,060)
Mine development................................. (1,858) (2,210)
Miscellaneous.................................... (586) -
--------- ----------
Total deferred tax liabilities................... (35,592) (35,270)
--------- ----------
Net deferred tax asset........................... $ 1,203 $ 995
========= ==========
At December 31, 2004, for income tax purposes, the Company had domestic
net operating loss carryforwards of $62.5 million, which are scheduled to expire
in calendar years 2021 through 2023. The Company also had foreign net operating
loss carryforwards for income tax purposes totaling $5.0 million that do not
expire.
At December 31, 2004, the Company had alternative minimum tax loss
carryforwards of $24.6 million that do not expire. Utilization of these loss
carryforwards is limited, on an annual basis, to 90% of alternative minimum
taxable income. This limitation required the Company to record a $0.4 million
tax liability in 2004.
At December 31, 2004, the Company had research and experimentation tax
credit carryforwards of $1.9 million that are scheduled to expire in calendar
years 2008 through 2020.
A provision has not been made with respect to $10.6 million of unremitted
earnings at December 31, 2004 that have been invested by foreign subsidiaries.
It is not practical to estimate the amount of unrecognized deferred tax
liability for undistributed foreign earnings.
The U.S. Congress passed the American Jobs Creation Act of 2004 (The Act)
in October 2004. The new law contains numerous changes to existing tax laws.
Among other things, the Act will provide a deduction with respect to income of
certain U.S. manufacturing activities and allow for favorable taxing on
repatriation of certain offshore earnings. The Company has not yet determined
what impact, if any, the new law may have on future results of operations and
financial condition.
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
earnings (loss) per share (E.P.S.):
(Dollars in thousands,
except per share data) 2004 2003 2002
----------- ----------- -----------
Numerator for basic
and diluted E.P.S.:
Net income (loss)......... $ 15,516 $ (13,226) $ (35,604)
Denominator for
basic E.P.S.:
Weighted-average
shares outstanding...... 17,865,053 16,562,864) 16,557,388
Effect of dilutive
securities:
Employee stock options... 204,788 - -
Special restricted stock. 36,574 - -
Warrants................. 57,500 - -
----------- ----------- -----------
Diluted potential
common shares........... 298,862 - -
----------- ----------- -----------
Denominator for
diluted E.P.S.:
Adjusted weighted-
average shares
outstanding............. 18,163,915 16,562,864 16,557,388)
----------- ----------- -----------
Basic E.P.S.................. $ 0.87 $ (0.80) $ (2.15)
----------- ----------- -----------
Diluted E.P.S................ $ 0.85 $ (0.80) $ (2.15)
----------- ----------- -----------
Under Statement No. 128, "Earnings per Share," no potential common shares
are included in the computation of diluted per-share amounts when a loss from
continuing operations exists. Accordingly, dilutive securities have been
excluded from the diluted E.P.S calculation of 109,052 for 2003 and 51,337 for
2002.
Options to purchase common stock with exercise prices in excess of the
average share price totaling 361,475 at December 31, 2004; 1,217,643 at December
31, 2003; and 1,394,688 at December 31, 2002 were excluded from the diluted
E.P.S. calculations as their effect would have been anti-dilutive.
(43)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
NOTE K - PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The obligation and funded status of the Company's domestic defined benefit
pension plan, unfunded supplemental retirement plan and retiree medical and life
insurance plan are as follows:
Pension Benefits Other Benefits
----------------------- ---------------------
2004 2003 2004 2003
------ --------- -------- --------
(Dollars in thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.............................. $ 110,469 $ 100,821 $ 45,449 $ 43,453
Service cost......................................................... 4,242 4,116 280 274
Interest cost........................................................ 6,900 6,668 2,572 2,818
Amendments........................................................... 119 - - -
Actuarial (gain) loss................................................ 6,234 4,312 (2,202) 2,336
Benefit payments..................................................... (5,444) (5,413) (3,209) (3,433)
Settlements.......................................................... - (35) - -
--------- --------- -------- --------
Benefit obligation at end of year.................................... 122,520 110,469 42,890 45,449
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year....................... 85,803 78,086 - -
Actual return on plan assets......................................... 8,955 13,058 - -
Employer contributions............................................... 68 72 3,209 3,433
Benefit payments..................................................... (5,443) (5,413) (3,209) (3,433)
--------- --------- -------- --------
Fair value of plan assets at end of year............................. 89,383 85,803 - -
--------- --------- -------- --------
Funded status........................................................ (33,137) (24,666) (42,890) (45,449)
Unrecognized net actuarial loss...................................... 33,189 26,831 8,369 10,826
Unrecognized prior service cost (benefit)............................ 4,991 5,519 (797) (909)
Unrecognized initial net (asset) obligation.......................... - (1) - -
--------- --------- -------- --------
Net amount recognized................................................ $ 5,043 $ 7,683 $(35,318) $(35,532)
========= ========= ======== ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
Accrued benefit liability............................................ $ (15,715) $ (10,395) $(35,318) $(35,532)
Intangible asset..................................................... 4,983 5,482 - -
Accumulated other comprehensive loss................................. 15,775 12,596 - -
--------- --------- -------- --------
Net amount recognized................................................ $ 5,043 $ 7,683 $(35,318) $(35,532)
========= ========= ======== ========
ADDITIONAL INFORMATION
Increase (decrease) in minimum liability included in other
comprehensive loss................................................... $ 3,179 $ (967)
Accumulated benefit obligation for all pension plans................. $ 104,949 $ 96,023
(44)
Pension Benefits Other Benefits
------------------------------------ ---------------------------------
2004 2003 2002 2004 2003 2002
------ --------- -------- -------- -------- --------
(Dollars in thousands)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.......................................... $ 4,242 $ 4,116 $ 4,217 $ 280 $ 274 $ 298
Interest cost ........................................ 6,900 6,668 6,425 2,572 2,818 2,757
Expected return on plan assets ....................... (9,069) (9,359) (10,597) - - -
Amortization of prior service cost (benefit) ......... 646 647 626 (112) (112) (112)
Amortization of initial net (asset) obligation ....... (1) (361) (412) - - -
Recognized net actuarial (gain) loss ................. (10) (26) (113) 255 332 105
Settlement (gain) ................................... - (48) (993) - - -
--------- --------- -------- -------- -------- --------
Net periodic (benefit) cost........................... $ 2,708 $ 1,637 $ (847) $ 2,995 $ 3,313 $ 3,048
========= ========= ======== ======== ======== ========
Pension Benefits Other Benefits
----------------------------------- ------------------------------
2004 2003 2002 2004 2003 2002
----- ----- ------ ----- ----- -----
ASSUMPTIONS
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFIT OBLIGATIONS AT FISCAL YEAR END
Discount rate......................................... 6.125% 6.375% 6.125% 6.375%
Rate of compensation increase ........................ 3.500% 2.750% 3.500% 2.750%
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
NET COST FOR THE FISCAL YEAR
Discount rate......................................... 6.375% 6.750% 7.125% 6.375% 6.750% 7.125%
Expected long-term return on plan assets.............. 9.000% 9.000% 10.000% N/A N/A N/A
Rate of compensation increase ........................ 2.750% 2.000% 5.000% 2.750% 2.000% 5.000%
The Company uses a December 31 measurement date for the above plans.
(45)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
Effective January 1, 2005, the Company revised the expected long-term rate
of return assumption used in calculating the annual expense for its domestic
pension plan in accordance with Statement No. 87, "Employers' Accounting for
Pensions". The assumed expected long-term rate of return was decreased to 8.75%
from 9.0%, with the impact being accounted for as a change in estimate.
Effective January 1, 2003, the Company revised the expected long-term rate of
return to 9.0% from 10.0%, with the impact being accounted for as a change in
estimate.
Management establishes the expected long-term rate of return assumption by
reviewing its historical trends and analyzing the current and projected market
conditions in relation to the plan's asset allocation and risk management
objectives. Management consults with outside investment advisors and actuaries
when establishing the rate and reviews their assumptions with the Retirement
Plan Review Committee of the Board of Directors. The actual return on plan
assets was 10.6% in 2004 and 19.7% in 2003. The 10-year average return was 9.0%
as of year-end 2004 and 7.9% as of year-end 2003. Management believes that the
8.75% expected long-term rate of return assumption is achievable and reasonable
given current market conditions and forecasts, asset allocations, investment
policies and investment risk objectives.
The rate of compensation increase assumption was changed to use a graded
assumption beginning at 2% for the 2003 fiscal year and increasing 0.75% per
year until it reaches 5% for the 2007 fiscal year and later.
2004 2003
------ -----
ASSUMED HEALTH CARE TREND RATES AT
FISCAL YEAR END
Health care trend rate assumed for next year........... 10.000% 8.000%
Rate that the trend rate gradually declines to
(ultimate trend rate)............................... 5.000% 6.000%
Year that the rate reaches the ultimate
trend rate.......................................... 2010 2008
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage-Point 1-Percentage-Point
Increase Decrease
------------------ ------------------
2004 2003 2004 2003
(Dollars in thousands) ------- -------- ------- -------
Effect on total of service and
interest cost components........ $ 135 $ 155 $ (119) $ (137)
Effect on post-retirement
benefit obligation.............. 1,856 2,439 (1,644) (2,147)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. In accordance with
FSP 106-1, as updated by FSP 106-2, all measures of the accumulated
post-retirement benefit obligation or net periodic post-retirement benefit cost
in the financial statements or accompanying notes reflect the effects of the Act
on the plan for the entire fiscal year.
DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT
AND MODERNIZATION ACT OF 2003
2004
---------
(Dollars in thousands)
Effect on accumulated post-retirement benefit obligation
attributed to past service as of January 1st....................... $ (3,322)
Effect on amortization of actuarial gains, service cost,
and interest cost components of net periodic
post-retirement benefit cost....................................... $ (443)
PLAN ASSETS
The Company's domestic defined benefit pension plan weighted-average asset
allocation at fiscal year-end 2004 and 2003 and target allocation are as
follows:
Percentage of Pension
Target Plan Assets at
Allocation Fiscal Year End
Range 2004 2003
---------- ------- ---------
ASSET CATEGORY
Equity securities..... 35-75% 67% 73%
Debt securities....... 10-25% 18% 20%
Real estate........... 0-5% 7% 6%
Other................. 0-15% 8% 1%
----- --- ---
Total............... 100% 100% 100%
The Company's pension plan investment strategy, as approved by the
Retirement Plan Review Committee, is to employ an allocation of investments that
will generate returns equal to or better than the projected long-term growth of
pension liabilities so that the plan will be self-funding. The return objective
is to earn a real return (i.e., the actual return less inflation) of 6.0% as
measured on a 10-year moving-average basis. The allocation of investments is
designed to maximize the advantages of diversification while mitigating the risk
to achieve the return objective. Risk is defined as the annual variability in
value and is measured in terms of the standard deviation of investment return.
Under the Company's investment policies, allowable investments include domestic
equities, international equities, fixed income securities, alternative
securities (which include real estate, private venture capital investments and
hedge funds) and tactical allocation (a mix of equities and bonds). Ranges, in
terms of a percentage of the total assets, are established for each allowable
class of security. Derivatives may be used to hedge an existing security or as a
risk reduction strategy. Management reviews the asset allocation on an annual or
more frequent basis and makes revisions as deemed necessary.
None of the plan assets noted above are invested in the Company's common
stock.
(46)
CASH FLOWS
EMPLOYER CONTRIBUTIONS
The Company contributed $5.0 million to its defined pension benefit plan
in the first quarter 2005 and does not expect to make any additional
contributions to this plan during 2005. The Company expects to contribute $3.6
million to its other benefit plans in 2005.
ESTIMATED FUTURE BENEFIT PAYMENTS
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
DURING FISCAL YEARS Pension Other
(Dollars in thousands) Benefits Benefits
- -------------------------- -------- --------
2005...................... $ 4,717 $ 3,582
2006...................... 4,897 3,259
2007...................... 5,089 3,333
2008...................... 5,427 3,396
2009...................... 5,843 3,473
2010 through 2014 ........ 37,314 17,380
OTHER BENEFIT PLANS
The Company also has accrued unfunded retirement arrangements for certain
directors. The projected benefit obligation was $0.1 million at December 31,
2004 and $0.1 million at December 31, 2003. A corresponding accumulated benefit
obligation of $0.1 million at December 31, 2004 and $0.1 million at December 31,
2003 has been recognized as a liability and is included in retirement and
post-employment benefits. Certain foreign subsidiaries have funded and accrued
unfunded pension and other post-employment arrangements. The liability for these
plans was $5.3 million at December 31, 2004 and $4.7 million at December 31,
2003 and was included in retirement and post-employment benefits on the
Consolidated Balance Sheets.
The Company also sponsors a defined contribution plan available to
substantially all U.S. employees. Company contributions to the plan are based on
matching a percentage of employee savings up to a specified savings level. The
Company's annual contributions were $1.0 million in 2004, 2003 and 2002. The
Company doubled its matching percentage effective January 1, 2005.
NOTE L - CONTINGENCIES AND COMMITMENTS
CBD CLAIMS
The Company is a defendant in proceedings in various state and federal
courts by plaintiffs alleging that they have contracted chronic beryllium
disease (CBD) or related ailments as a result of exposure to beryllium.
Plaintiffs in CBD cases seek recovery under theories of negligence and various
other legal theories and seek compensatory and punitive damages, in many cases
of an unspecified sum. Spouses, if any, claim loss of consortium. Additional CBD
claims may arise.
Management believes the Company has substantial defenses in these cases
and intends to contest the suits vigorously. Employee cases, in which plaintiffs
have a high burden of proof, have historically involved relatively small losses
to the Company. Third-party plaintiffs (typically employees of customers) face a
lower burden of proof than do the Company's employees, but these cases are
generally covered by varying levels of insurance.
Although it is not possible to predict the outcome of the litigation
pending against the Company and its subsidiaries, the Company provides for costs
related to these matters when a loss is probable and the amount is reasonably
estimable. Litigation is subject to many uncertainties, and it is possible that
some of the actions could be decided unfavorably in amounts exceeding the
Company's reserves. An unfavorable outcome or settlement of a pending CBD case
or additional adverse media coverage could encourage the commencement of
additional similar litigation. The Company is unable to estimate its potential
exposure to unasserted claims. The Company recorded a reserve for CBD litigation
of $1.9 million at December 31, 2004 and $2.9 million at December 31, 2003. The
reserve is included in other long-term liabilities on the Consolidated Balance
Sheets. The reserve declined in both 2004 and 2003 due to settlement payments as
well as for changes in estimates for the outstanding claims as a result of
favorable rulings and agreements, net of increases for new cases filed. An asset
of $2.3 million was recorded in other assets on the Consolidated Balance Sheets
at December 31, 2004 and $3.2 million at December 31, 2003 for recoveries from
insurance carriers for outstanding insured claims and for prior settlements
initially paid directly by the Company to the plaintiff on insured claims. An
additional $0.4 million was reserved at December 31, 2004 and $0.9 million at
December 31, 2003 for insolvencies related to claims still outstanding as well
as for claims for which partial payments have been received.
While the Company is unable to predict the outcome of the current or
future CBD proceedings, based upon currently known facts and assuming
collectibility of insurance, the Company does not believe that resolution of
these proceedings will have a material adverse effect on the financial condition
or cash flow of the Company. However, the Company's results of operations could
be materially affected by unfavorable results in one or more of these cases.
ENVIRONMENTAL PROCEEDINGS
The Company has an active program for environmental compliance that
includes the identification of environmental projects and estimating their
impact on the Company's financial performance and available resources.
Environmental expenditures that relate to current operations, such as wastewater
treatment and control of airborne emissions, are either expensed or capitalized
as appropriate. The Company records reserves for the probable costs for
environmental remediation projects. The Company's environmental engineers
perform routine ongoing analyses of the remediation sites and will use outside
consultants to assist in their analyses from time to time. Accruals are based
upon their analyses and are established
(47)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
at either the best estimate or, absent a best estimate, at the low end of the
estimated range of costs. The accruals are revised for the results of on going
studies and for differences between actual and projected costs. The accruals are
also affected by rulings and negotiations with regulatory agencies. The timing
of payments often lags the accrual, as environmental projects typically require
a number of years to complete. The Company established undiscounted reserves for
environmental remediation projects of $5.7 million at December 31, 2004 and $6.9
million at December 31, 2003. The current portion of the reserve totaled $1.2
million at December 31, 2004 and is included in other liabilities and accrued
items while the remaining $4.5 million of the reserve at December 31, 2004 is
considered long term and is included in other long-term liabilities on the
Consolidated Balance Sheet. These reserves cover existing or currently foreseen
projects. It is possible that additional environmental losses may occur beyond
the current reserve, the extent of which cannot be estimated.
In 2004, the Company sold property that was subject to a Voluntary Action
Plan. This property had been formerly used as a manufacturing site by one of the
Company's subsidiaries. Under the terms of the sale, the buyer assumed the
environmental remediation responsibilities and agreed to indemnify the Company
against any environmental claims arising from this property. This transaction
enabled the Company to reverse a previously recorded environmental remediation
reserve associated with this property of $1.0 million to income. The reserve was
also reduced in 2004 as a result of payments on various projects that totaled
$0.2 million. The environmental reserve was reduced by $0.6 million in 2003 as a
result of revised estimates of the required remediation work and related costs,
primarily for RCRA projects, SWMU closure and other projects at the Company's
Elmore, Ohio site. Payments against the reserve totaled $0.2 million in 2003.
The environmental expense was $0.6 million in 2002.
LONG-TERM OBLIGATION
The Company has a long-term supply arrangement with Ulba/ Kazatomprom of
the Republic of Kazakhstan and their marketing representative, Nukem, Inc. of
Connecticut. The agreement was signed in 2000 and amended in 2001, 2003 and
2004. The 2003 amendment reduced the previous purchase commitments for copper
beryllium master alloy, added commitments to purchase beryllium vacuum cast
billets and extended the contract period to 2012. All materials under the
arrangement are sourced from Ulba/ Kazatomprom. The annual base purchase
commitments total approximately $5.3 million in 2005, $5.4 million in 2006 and
$5.5 million in 2007. The price per pound escalates each year through 2007. A
new price will be renegotiated for the years 2008 through 2012. If a new price
cannot be agreed to by December 31, 2007 then the material purchases will
terminate with the 2008 delivery volumes. The contract allows for the Company to
purchase additional quantities of copper beryllium master alloy up to an annual
maximum of 150,000 pounds of beryllium contained in the master alloy. The
purchase of beryllium vacuum cast billets can be plus or minus 10% of the annual
base quantity. The 2004 amendment allowed for a onetime purchase of 15,000
pounds of beryllium vacuum cast material to be shipped in early 2005 at a cost
of approximately $1.5 million in addition to the base purchase commitment for
that year. Purchases of beryllium-containing materials from Nukem were $5.9
million in 2004 and immaterial in both 2003 and 2002.
The Company has agreements to purchase stated quantities of beryl ore,
beryllium metal and copper beryllium master alloy from the Defense Logistics
Agency of the U.S. Government. The agreements expire in 2007. Annual purchase
commitments total approximately $6.8 million in 2005 and 2006 and $2.4 million
in 2007. The beryllium component of the contract price is adjusted quarterly
from these stated totals based upon fluctuations in the non-seasonally adjusted
consumer price index. The Company may elect to take delivery of the materials in
advance of the commitment dates. Purchases under these agreements totaled
approximately $6.6 million in 2004, $5.9 million in 2003 and $3.8 million in
2002. The purchased material will serve as raw material input for operations
within two of the Company's subsidiaries, Brush Wellman Inc. and Brush Resources
Inc.
OTHER
One of the Company's subsidiaries, Williams Advanced Materials Inc. (WAM)
is a defendant in a U.S. legal case where the plaintiff is alleging patent
infringement by WAM and a small number of WAM's customers. WAM has provided an
indemnity agreement to certain of those customers, under which WAM will pay any
damages awarded by the court. WAM believes it has numerous and strong defenses
applicable to both WAM and the indemnified customers and is contesting this
action. WAM earlier filed suit against this plaintiff in the U.S. for wrongful
intimidation of its customers and requested that certain of the plaintiff's
patents be invalidated. WAM also filed a suit in Australia to revoke a
corresponding patent. The Australian court has already ruled in WAM's favor
while the U.S. action is ongoing. WAM has not made any indemnification payments
on behalf of any of its customers as of December 31, 2004, nor have they
recorded a reserve for losses under these indemnification agreements as of
December 31, 2004. WAM does not believe a range of potential losses, if any, can
be estimated at the present time.
The Company is subject to various other legal or other proceedings that
relate to the ordinary course of its business. The Company believes that the
resolution of these proceedings, individually or in the aggregate, will not have
a material adverse impact upon the Company's consolidated financial statements.
The Company has outstanding letters of credit totaling $9.2 million
related to workers' compensation, consigned precious metal guarantees and
environmental remediation issues that expire in 2005.
(48)
NOTE M - SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
Selected financial data by business segment as proscribed by Statement
No.131, "Disclosures about Segments of an Enterprise and Related Information,"
for 2004, 2003 and 2002 are as follows:
Metal Micro- Total
(Dollars in thousands) Systems electronics Segments All Other Total
- -------------------------------------------------- --------- ----------- ---------- ---------- ---------
2004
Revenues from external customers.................. $ 296,007 $ 195,565 $ 491,572 $ 4,704 $ 496,276
Intersegment revenues............................. 3,513 1,149 4,662 16,888 21,550
Depreciation, depletion and amortization.......... 14,040 3,870 17,910 4,451 22,361
Profit before interest and taxes.................. 2,685 18,540 21,225 3,809 25,034
Assets............................................ 277,040 76,776 353,816 60,365 414,181
Expenditures for long-lived assets................ 5,500 2,673 8,173 977 9,150
2003
Revenues from external customers.................. $ 239,404 $ 157,323 $ 396,727 $ 4,319 $ 401,046
Intersegment revenues............................. 2,414 1,119 3,533 17,994 21,527
Depreciation, depletion and amortization.......... 11,250 4,020 15,270 5,065 20,335
Profit (loss) before interest and taxes........... (16,590) 12,618 (3,972) (4,972) (8,944)
Assets............................................ 258,958 74,137 333,095 38,521 371,616
Expenditures for long-lived assets................ 2,830 2,930 5,760 559 6,319
2002
Revenues from external customers.................. $ 227,884 $ 139,180 $ 367,064 $ 5,765 $ 372,829
Intersegment revenues............................. 3,118 1,566 4,684 12,171 16,855
Depreciation, depletion and amortization.......... 12,060 3,930 15,990 4,441 20,431
Profit (loss) before interest and taxes........... (37,657) 3,845 (33,812) 11,176 (22,636)
Assets............................................ 223,986 71,832 295,818 39,061 334,879
Expenditures for long-lived assets................ 1,930 2,370 4,300 1,114 5,414
(49)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Engineered Materials Inc. and Subsidiaries, December 31, 2004
Segments are evaluated using earnings before interest and taxes. The "All
Other" column includes the operating results of BEM Services, Inc. and Brush
Resources Inc., two wholly owned subsidiaries of the Company, as well as the
parent company's and other corporate expenses. BEM Services charges a management
fee for the services provided to the other businesses within the Company on a
cost-plus basis. Brush Resources sells beryllium hydroxide, produced from its
mine and extraction mill in Utah, to external customers and to businesses within
the Metal Systems Group. Assets shown in All Other include cash, computer
hardware and software, deferred taxes, capitalized interest and the operating
assets for Brush Resources. Inventories for Metal Systems and Microelectronics
are shown at their FIFO values with the LIFO reserve included under the All
Other column. Intersegment revenues are eliminated in consolidation. The
revenues from external customer totals are presented net of the intersegment
revenues. Assets for the Metals Systems Group include $0.9 million of equipment
purchased in 2004 and $51.8 million of equipment purchased in 2003 that were
previously held under operating leases.
The Company's sales from U.S. operations to external customers, including
exports, were $376.5 million in 2004, $311.5 million in 2003, and $301.1 million
in 2002. Revenues attributed to countries based upon the location of customers
and long-lived assets deployed by the Company by country are as follows:
2004 2003 2002
(Dollars in thousands) ---------- --------- ------------
REVENUES
United States............................................ $ 332,193 $ 276,668 $ 268,548
All other................................................ 164,083 124,378 104,281
---------- --------- ------------
Total.................................................... $ 496,276 $ 401,046 $ 372,829
========== ========= ============
LONG-LIVED ASSETS
United States............................................ $ 171,188 $ 185,168 $ 147,263
All other................................................ 6,431 5,678 5,281
---------- --------- ------------
Total.................................................... $ 177,619 $ 190,846 $ 152,544
========== ========= ============
No individual country, other than the United States, or customer accounted
for 10% or more of the Company's revenues for the years presented. Revenues from
outside the U.S. are primarily from Europe and Asia.
NOTE N - RELATED PARTY TRANSACTIONS
The Company had outstanding loans of $0.4 million with six employees,
including two executive officers, as of December 31, 2004 and December 31, 2003.
The loans were made in the first quarter 2002 pursuant to life insurance
agreements between the Company and the employees. The portion of the premium
paid by the Company is treated as a loan from the Company to the employee and
the loans are secured by the insurance policies, which are owned by the
employees. The agreements require the employee to maintain the insurance
policy's cash surrender value in an amount at least equal to the outstanding
loan balance. The loan is payable from the insurance proceeds upon the
employee's death or at an earlier date due to the occurrence of specified
events. The loans bear an interest rate equal to the applicable federal rate.
NOTE O - OTHER COMPREHENSIVE INCOME
The following table summarizes the net gain/(loss) by component within
other comprehensive income as of December 31, 2004, 2003 and 2002:
December 31,
2004 2003 2002
(Dollars in thousands) -------- ---------- ----------
Foreign currency translation
adjustment........................... $ (133) $ (982) $ (1,457)
Change in the fair value of
derivative financial instruments..... (4,025) (3,216) (7,839)
Minimum pension liability.............. (15,775) (12,596) (13,563)
-------- ---------- ----------
Total.................................. $(19,933) $ (16,794) $ (22,859)
======== ========== ==========
(50)
NOTE P - QUARTERLY DATA (UNAUDITED)
The following tables summarize selected quarterly financial data for the
years ended December 31, 2004 and 2003:
2004
-------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------- ----------- ----------- ---------- ------------
(Dollars in thousands except per share data)
Net sales........................................ $ 125,862 $ 128,639 $ 125,766 $ 116,009 $ 496,276
Gross profit..................................... 29,577 29,441 25,584 25,472 111,074
Percent of sales............................... 23.5% 22.9% 21.1% 22.0% 22.4%
Net income....................................... $ 3,754 $ 6,571 $ 3,431 $ 1,760 $ 15,516
Net income per share of common stock:
Basic.......................................... 0.23 0.39 0.18 0.09 0.87
Diluted........................................ 0.22 0.38 0.18 0.09 0.85
Stock price range:
High........................................... 21.69 21.70 21.40 22.68
Low............................................ 14.95 15.43 17.43 15.60
2003
-------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
(Dollars in thousands except per share data) ---------- ----------- ---------- ---------- ------------
Net sales...................................... $ 99,518 $ 101,805 $ 94,156 $ 105,567 $ 401,046
Gross profit................................... 17,113 18,864 14,370 22,691 73,038
Percent of sales............................. 17.2% 18.5% 15.3% 21.5% 18.2%
Net income (loss).............................. $ (3,016) $ 37 $ (3,060) $ (7,187) $ (13,226)
Net income (loss) per share of common stock:
Basic........................................ (0.18) - (0.18) (0.43) (0.80)
Diluted...................................... (0.18) - (0.18) (0.43) (0.80)
Stock price range
High......................................... 6.15 8.92 10.45 15.60
Low.......................................... 4.80 5.06 7.70 10.20
Fourth quarter 2003 results include a $6.0 million pre-tax charge to write
off deferred costs and recognize derivative ineffectiveness as a result of the
debt refinancing.
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SELECTED FINANCIAL DATA
Brush Engineered Materials Inc. and Subsidiaries
(Dollars in thousands except for share data)
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
FOR THE YEAR
Net sales....................................... $ 496,276 $ 401,046 $ 372,829 $ 472,569 $ 563,690
Cost of sales................................... 385,202 328,008 324,932 404,574 444,951
Gross profit.................................... 111,074 73,038 47,897 67,995 118,739
Operating profit (loss)......................... 25,034 (8,944) (22,636) (14,069) 22,986
Interest expense................................ 8,377 3,751 3,219 3,327 4,652
Income (loss) from continuing operations
Before income taxes........................... 16,657 (12,695) (25,855) (17,396) 18,334
Income taxes (benefit).......................... 1,141 576 9,749 (7,122) 4,169
Net income (loss)............................... 15,516 (13,226) (35,604) (10,274) 14,165
Earnings per share of common stock:
Basic net income (loss)....................... 0.87 (0.80) (2.15) (0.62) 0.87
Diluted net income (loss)..................... 0.85 (0.80) (2.15) (0.62) 0.86
Dividends per share of common stock ............ - - - 0.24 0.48
Depreciation and amortization................... 23,826 20,731 20,640 21,609 22,664
Capital expenditures............................ 9,093 6,162 5,248 23,130 21,306
Mine development expenditures................... 57 157 166 154 332
YEAR-END POSITION
Working capital................................. 108,799 85,141 82,645 110,894 143,387
Ratio of current assets to current liabilities.. 2.0 TO 1 2.2 to 1 2.1 to 1 2.4 to 1 2.3 to 1
Property and equipment:
At cost....................................... 540,937 535,421 476,283 469,663 449,697
Cost less depreciation and impairment......... 177,619 190,846 152,544 171,296 170,460
Total assets.................................... 414,181 371,616 334,879 403,653 452,506
Other long-term liabilities .................... 60,527 64,097 65,977 62,473 55,454
Long-term debt.................................. 41,549 85,756 36,219 47,251 43,305
Shareholders' equity............................ 208,138 153,573 159,094 214,350 229,907
Book value per share:
Basic......................................... 11.65 9.27 9.61 12.98 14.11
Diluted....................................... 11.46 9.21 9.58 12.87 13.98
Weighted-average number of
shares of stock outstanding:
Basic......................................... 17,865,053 16,562,864 16,557,388 16,518,691 16,292,431
Diluted....................................... 18,163,915 16,671,916 16,608,725 16,650,587 16,448,667
Shareholders of record.......................... 1,683 1,791 1,864 1,981 2,101
Number of employees............................. 1,912 1,833 1,862 1,946 2,500
Minority interest of $45,000 decreased the net loss for 2003.
In addition to the capital expenditures shown above, the Company purchased $0.9
million of assets in 2004 and $51.8 million of assets in 2003 that were
previously held under operating leases and used by the Company.
Changes in deferred tax valuation allowances decreased income tax expense by
$9.3 million in 2004 and increased income tax expense by $5.3 million and $19.9
million in 2003 and 2002, respectively.
A special charge reduced net income by $16.5 million in 1998.
See Notes to Consolidated Financial Statements.
(52)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 455,707 $ 409,892 $ 433,801 $ 376,279 $ 369,618 $ 345,878
363,773 325,173 324,463 271,149 268,732 253,938
91,934 84,719 109,338 105,130 100,886 91,940
10,558 (10,313) 36,024 34,305 29,086 25,098
4,173 1,249 553 1,128 1,653 2,071
6,385 (11,562) 35,471 33,177 27,433 23,027
(54) (4,430) 9,874 8,686 6,744 4,477
6,439 (7,132) 25,597 24,491 20,689 18,550
0.40 (0.44) 1.58 1.55 1.28 1.15
0.40 (0.44) 1.56 1.53 1.27 1.15
0.48 0.48 0.46 0.42 0.36 0.26
27,037 24,589 19,329 22,954 20,911 19,619
16,758 36,732 53,155 26,825 24,244 17,214
288 433 9,526 3,663 787 543
124,831 100,992 100,599 128,172 125,156 116,708
2.3 to 1 2.1 to 1 2.3 to 1 2.9 to 1 2.9 to 1 2.8 to 1
440,234 421,467 463,689 404,127 374,367 350,811
170,939 164,469 173,622 130,220 121,194 116,763
428,406 403,690 383,852 355,779 331,853 317,133
53,837 49,955 48,025 47,271 45,445 43,354
42,305 32,105 17,905 18,860 16,996 18,527
220,638 221,811 236,813 219,257 200,302 186,940
13.62 13.63 14.60 13.84 12.40 11.61
13.55 13.50 14.41 13.72 12.30 11.57
16,198,885 16,267,804 16,214,718 15,846,358 16,159,508 16,102,350
16,279,591 16,424,747 16,429,468 15,980,481 16,289,795 16,156,159
2,330 2,313 2,329 2,407 2,351 2,521
2,257 2,167 2,160 1,926 1,856 1,833
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BRUSH ENGINEERED MATERIALS INC.
DIRECTORS, OFFICERS, FACILITIES AND SUBSIDIARIES
BOARD OF DIRECTORS CORPORATE AND EXECUTIVE OFFICERS OFFICES AND FACILITIES
AND COMMITTEES OF THE BOARD
GORDON D. HARNETT(1,2) MANUFACTURING FACILITIES
ALBERT C. BERSTICKER(2,3,4) Chairman, President and CEO Brewster, New York
Retired Chairman and CEO Buffalo, New York
Ferro Corporation JOHN D. GRAMPA(1,2) Delta, Utah
Vice President Finance and Elmore, Ohio
Chief Financial Officer Fremont, California
GORDON D. HARNETT(2) Lincoln, Rhode Island
Chairman, President and CEO Lorain, Ohio
Brush Engineered Materials Inc. RICHARD J. HIPPLE(2) Newburyport, Massachusetts
President, Alloy Products Oceanside, California
JOSEPH P. KEITHLEY(2,3,4,5) Reading, Pennsylvania
Chairman, President and CEO DANIEL A. SKOCH(1,2) Santa Clara, California
Keithley Instruments, Inc. Senior Vice President Singapore
Administration Subic Bay, Philippines
WILLIAM B. LAWRENCE (1,4) Taipei, Taiwan
Former Executive Vice President, MICHAEL C. HASYCHAK(1) Tucson, Arizona
General Counsel & Secretary Vice President, Treasurer and Secretary Wheatfield, New York
TRW, Inc.
JAMES P. MARROTTE(1)
WILLIAM P. MADAR(2,3,4) Vice President, Controller
Retired Chairman and Former CEO
Nordson Corporation JOHN J. PALLAM(1)
Vice President, General Counsel
WILLIAM G. PRYOR(3,4,5) CORPORATE OFFICES
Retired President GARY W. SCHIAVONI(1) Cleveland, Ohio
Van Dorn Demag Corporation Assistant Treasurer and Assistant Secretary
Former President and CEO 1 Corporate Officers
Van Dorn Corporation 2 Executive Officers DOMESTIC SERVICE CENTERS
Elmhurst, Illinois
N. MOHAN REDDY(1,4) Fairfield, New Jersey
Professor OPERATING GROUPS Warren, Michigan
The Weatherhead School of Management Alloy Products
Case Western Reserve University RICHARD J. HIPPLE, PRESIDENT
INTERNATIONAL SERVICE CENTERS
WILLIAM R. ROBERTSON(1,4,5) Beryllium Products AND SALES OFFICES
Managing Partner MICHAEL D. ANDERSON, PRESIDENT Fukaya, Japan
Kirtland Capital Partners Singapore
Brush International, Inc. Stuttgart, Germany
STEPHEN FREEMAN, PRESIDENT Theale, England
JOHN SHERWIN, JR.(1,2,4,5) Tokyo, Japan
President Brush Resources Inc.
Mid-Continent Ventures, Inc. ALEX C. BOULTON, PRESIDENT
1 Audit Committee Technical Materials, Inc.
2 Executive Committee ALFONSO T. LUBRANO, PRESIDENT INTERNATIONAL REPRESENTATIVE
3 Governance Committee OFFICES
4 Organization and Compensation Hong Kong
Committee Williams Advanced Materials Inc. Shanghai, China
5 Retirement Plan Review Committee RICHARD W. SAGER, PRESIDENT Taipei, Taiwan
Zentrix Technologies Inc.
RICHARD W. SAGER, PRESIDENT
CHARLES F. BRUSH, III
Director Emeritus
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