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EXHIBIT 13
BRUSH WELLMAN INC. 1996 ANNUAL REPORT
BLUEPRINT FOR GROWTH
[PHOTO]
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[PHOTO]
Brush Wellman has completed a major transition which began in the early 1990's.
For the future, the Company's Blueprint for Growth involves improving the base
business, expanding alloy capabilities, and building a microelectronics
business. Brush Wellman products are described below.
Alloy Products are tailored metallurgically to specific customer performance
requirements. Copper berylium alloys exhibit high electrical and thermal
conductivities, high strength and hardness, good formability and excellent
resistance to corrosion, wear and fatigue. These properties make the alloys
ideal choices for a variety of demanding applications in computers,
telecommunications, automotive electronics, energy systems, plastic molds and
consumer products.
Berylium is a unique material exhibiting physical and mechanical properties
unmatched by any other metal. It is one of the lightest structural materials
known, has specific stiffness six times greater than steel. It possesses high
heat absorbing capability and has dimensional stability over a wide range of
temperatures. Beryllium Products, including AlbeMet(R) and Brush Wellman's new
E-Materials, are used primarily in defense and commercial aerospace
applications.
Ceramic products offer unique solutions for thermal management applications.
Beryllia ceramic is an effective electrical insulator and it has excellent
thermal conductivity. It has high strength and hardness, and a low dielectric
constant. Ceramic Products are used in automotive and power electronic systems,
wireless telecommunications, thermoelectric cooling systems, and lasers.
Engineered Material Systems, manufactured by technical Materials, Inc. are
combinations of precious and non-precious metals in continuous strip form and
are used in complex electronic and electrical components in telecommunications
systems, automobiles and computers.
Precious Metal Products are produced by Williams Advanced Materials Inc. for a
variety of high reliability applications in electrical and electronic
interconnection, packaging and processing markets, principally in North America
and the Far East.
FINANCIAL HIGHLIGHTS
(Dollars in millions except per share amounts) 1996 1995 % Change
-------- --------- ---------
Sales ...................................................... $376.3 $369.6 +2%
Net Income................................................... 24.5 20.7 +18%
Net Income per share ........................................ 1.52 1.26 +21%
Dividends per share.......................................... 0.42 0.36 +16%
Shareholders' equity per share............................... 13.46 12.46 +8%
[GRAPH]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net Sales
(in millions) $265.0 $295.5 $345.9 $369.6 $376.3
Net Income
(in millions) $10.5 $6.5 $18.6 $20.7 $24.5
Net Income
Per Share $0.65 $0.40 $1.14 $1.26 $1.52
Return On
Shareholders' Equity 6.2% 3.8% 9.9% 10.3% 11.2%
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[LOGO] Brush Wellman Inc.
is a leading supplier of high performance engineered materials. Since its
founding in 1931, the Company has concentrated its operations and skills on the
advancement of beryllium-based materials. Today, Brush Wellman is the only fully
integrated supplier of beryllium, beryllium-containing alloys and beryllia
ceramic in the world. Brush Wellman also supplies high quality specialty metal
systems and precious metal products. Brush Wellman markets its products around
the world through Company-owned service, distribution and technical centers in
England, Germany, Japan and the United States, as well as through a worldwide
network of independent distributors. In addition, Brush Wellman recycles
beryllium and copper through its Resource Recovery operations.
Brush Wellman is headquartered in Cleveland, Ohio. Its stock is traded on
the New York Stock Exchange and identified by the symbol BW.
[LOGO]
To Our Shareholders
The employees of Brush Wellman can take pride in achieving another annual sales
and production record, as well as a 21% increase in earnings per share in 1996.
Sales have now increased for four consecutive years, and have established record
levels in each of the last three years. Clearly, we are succeeding in developing
new applications for our products, and are effectively delivering high quality
products, on time, to our customers. To equip the Company to fully capitalize on
future opportunities to grow, the Board of Directors during 1996 approved a plan
to significantly modernize and expand the alloy strip capabilities at the our
Elmore, Ohio facility. This major investment is a part of Brush Wellman's
Blueprint for Growth.
1996 FINANCIAL RESULTS
For the year 1996, Brush Wellman Inc. achieved earnings per share of $1.52,
and net income of $24.5 million. This represents an increase of 21% over 1995
earnings of $1.26 per share, and an 18% improvement in net income compared with
$20.7 million net income in 1995. Sales during 1996 totaled a record $376
million, a 2% increase over 1995 sales of $370 million.
Sales of Alloy Products in North America continued to grow in 1996,
reflecting high levels of demand for these materials in electronics
applications, and our continuing success in developing new applications in
automotive electronics, appliances, telecommunications, commercial aircraft and
sporting goods markets. International Sales were down relative to last year, due
to softer overseas markets and the translation effects from a stronger dollar.
However, we were encouraged by the strengthening of demand from international
markets during the fourth quarter.
Technical Materials, Inc. (TMI) sales of Engineered Material Systems, also
increased, reflecting continued success in marketing and production of this
unique line of specialty materials. Over the past four years TMI has
consistently contributed to Brush Wellman's growth and profitability.
Beryllium Products sales declined compared with last year due to continuing
weakness in aerospace and defense applications. In addition, particularly over
the past two years, Beryllium Products sales have been adversely affected by
imports of beryllium from Kazakstan at prices which we believe to be far below
fair market value. In March 1996, the Company filed a petition with the United
States International Trade Commission seeking government intervention in this
matter. In February 1997, the International Trade Commission ruled that the
Company was not sufficiently damaged by these imports to warrant the imposition
of sanctions, and Brush Wellman's petition on this case was denied. Despite the
fact that Beryllium Products represent less than 10% of the Company's total
sales, they remain an important part of Brush Wellman's business. Moreover,
these products are critical to many defense, aerospace and commercial
applications. While the decision from the ITC is disappointing to us, it does
not diminish our strategy to develop new markets and new applications for
Beryllium, AlBeMet(R) and E-Materials.
Ceramic Products sales also declined in 1996 due to reduced demand from the
telecommunications market and product mix shifts. We are, however, encouraged by
recent progress in the development of direct bond copper products.
Williams Advanced Materials Inc. (WAM) sales declined in 1996. However, all
of the sales decline occurred during the first half of the year, compared with a
very strong
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performance in the first half 1995. The decline was caused by the redesign of a
major microprocessor application, which had been anticipated by management.
Williams Advanced Materials sales increased in the second half 1996, led by
sales of new products, including vapor deposition products and fine wire. As
well, due to effective planning and hard work by the team at WAM, the
profitability of this business unit increased in 1996, despite lower sales for
the year.
Additional details of sales and financial performance during 1996 are
contained in Management's Discussion and Analysis, beginning on page 19.
STRATEGIC REVIEW
By 1996, Brush Wellman had successfully completed a major transition which began
in the early 1990's. At the beginning of the decade, defense, aerospace and
mainframe computer applications represented nearly 70% of the Company's sales.
The end of the Cold War and the major structural changes in mainframe computer
design resulted in dramatic reductions in demand for our materials. By adopting
new strategies, Brush Wellman successfully met the challenge created by these
changes in the marketplace.
Over the past five years our sales have grown by 42%, after declining from
1988 through 1992. This growth has been achieved fundamentally by developing new
applications in new markets, worldwide, as our traditional markets --
defense/aerospace and mainframe computers -- declined precipitously. Target
markets, such as automotive electronics, personal computers, appliances,
telecommunications, commercial aerospace, plastic molds and high performance
sporting goods have all contributed to the Company's growth. Most of the growth
the Company has achieved in recent years has been in new or improved products.
As a world leader in the production of high-performance engineered materials, we
realize that our success in the future depends on our ability to remain a
technology leader, and to develop a continuing stream of ever improving products
and processes to meet the changing needs of a dynamic marketplace.
International marketing has been another major strategic effort, and overseas
sales have contributed greatly to the Company's growth. The largest overseas
customer concentrations are in Germany, Japan, the United Kingdom, Switzerland
and Singapore. After attaining an all-time high in 1995, Brush Wellman sales
outside the United States declined in 1996, due to softer market conditions and
the translation effects of a stronger dollar. Despite this decline overseas,
total Company sales increased for the fourth year in a row.
THE FUTURE: BRUSH WELLMAN'S BLUEPRINT FOR GROWTH
Brush Wellman is the world's leading producer of beryllium materials. Any
strategy for the future must recognize and build upon this unique core
competency. Our materials can simultaneously provide light weight and strength,
or thermal conductivity and electrical insulating properties. They can withstand
high temperatures, readily conduct electricity and resist stress and fatigue.
Because of their unique combinations of properties, materials produced by Brush
Wellman can enable our customers to produce safer, smaller, more reliable and
more efficient products, improve productivity, and reduce costs, over the life
of their products. Given the continuing trends toward miniaturization, weight
reduction, increased electronic content, and the heightened awareness of the
costs of component failure and repair-related downtime, we are convinced that
our materials have the potential to capture a far greater portion of the
worldwide specialty materials market.
Brush Wellman's performance has been strong in recent years, but our returns
to shareholders have not yet reflected the improved results. To increase returns
to our shareholders, we believe that we must build on our successes, and grow
the business faster and
[GRAPH]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Long-Term Debt
% of Capital at Year-End
EBITDA
(Earnings Before Interest,
Taxes, Depreciationa and
Amortization - in millions)
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more consistently in the future. To do this, we will be focusing efforts on
three major Strategic Thrusts:
- - -- First, improve the base business,
- - -- Second, expand alloy capabilities, and
- - -- Third, build a microelectronics business.
Despite our increased sales and higher earnings, significant opportunities
still exist to IMPROVE THE BASE BUSINESS. Each business team has identified
places for improving profitability. Yield, productivity and working capital
management are all targets for improvement through our BrushBREAKTHRU program
and other efforts. In particular, many opportunities for improvement have been
identified at our Elmore operation, and focused improvement efforts are
underway.
We are also addressing attention to two underperforming units, Ceramic and
Beryllium Products. Ceramic profitability improvement efforts will be focused on
cost reduction through yield improvement, and the pursuit of new opportunities
for growth. Direct Bond Copper and copper tungsten are two technologies which
offer interesting potential for growth. Beryllium Products profitability should
be enhanced through a combination of cost reduction efforts, product and process
improvements, and growth in sales of AlBeMet(R).
Our second strategic thrust involves EXPANDING OUR ALLOY CAPABILITIES, with
a goal to become the global leader in non-ferrous specialty alloys. Brush
Wellman's Alloy Products have enjoyed good growth over the past five years. As
this has happened, our patented Alloy 174 has become a more significant part of
the Alloy Product mix, in terms of dollar sales, and an even larger portion of
alloy production in terms of pounds. Traditional alloy strip, while at a lesser
rate, has also continued to grow. The Alloy business serves markets around the
world, in a wide variety of end-use applications, yet copper beryllium
represents a small proportion of the worldwide non-ferrous alloy sales. We are
convinced that our products have the potential to capture a larger share of this
market, if we make some fundamental changes. Specifically, the keys to
positioning Alloy to become a world leader in specialty/high performance
non-ferrous alloys are to: expand capacity, introduce new alloys, broaden
international marketing capabilities, reduce costs and cycle time and add
non-beryllium-containing alloys to our product line.
In May 1996, the Board of Directors approved a plan for a major expansion and
upgrading of our alloy strip capabilities, involving the investment of $110
million at our Elmore, Ohio facility. The goals of this investment are to
increase strip production capacity, reduce production costs, improve quality,
reduce delivery lead-times, and optimize working capital utilization. In
addition, the new capacity will incorporate the best available environmental,
health and safety technology, so as to be the safest possible work place, and
have minimal impact on the external environment.
The expansion involves three major phases. Phase one is a
new cast shop. The new cast shop is intended to increase capacity, improve
quality and reduce the cost of all our alloy products. The cast shop involves
$35 million of capital expense. Phase two and three are heavy gauge and
finishing equipment for alloy strip. These two phases involve $75 million of
capital.
This project is not simply an expansion of existing capabilities. Rather, it
is designed to allow Brush Wellman to reposition itself in the materials
marketplace, and thereby create major opportunities for growth. Brush Wellman
has historically done an outstanding job as a supplier of premium alloys. We are
recognized as the industry leader in terms of quality and technical support.
But, our cost structure and capacity have limited us to the highest end, premium
niche of the materials market. By
===========================================
1. improve the base business,
2. expand alloy capabilities, and
3. build a microelectronics business.
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reducing our costs and allowing us to produce strip in much larger coils, the
new capacity should enable Brush Wellman to compete for many applications which
were not accessible to us before. The combination of our quality, technical
abilities and the properties of our materials with world class production
facilities, a lower cost structure and greater casting and rolling capacity
should position Brush Wellman to be a formidable competitor in the worldwide
copper based specialty alloys market as we approach the 21st century.
Ground was officially broken on the expansion in June 1996. The new capacity
should be fully operational in 1998. It is being financed by a combination of
operating leases, and traditional debt and cash flow (See Notes E and F on pages
10 and 11). Our long-term debt at the end of 1996 was less than 8% of capital.
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In financing the expansion, we are confident that the project will not result in
over leveraging the Company's balance sheet. Over the long run, the expansion
should significantly enhance the Company's ability to provide a superior return
on investment, and thus improve shareholder value.
The expansion is obviously a major and necessary step, but to maximize growth
potential in the non-ferrous alloys market, we are also introducing new alloys.
Our new product development process focuses on target markets, listening to the
voice of the customer to develop products representing value innovation. Through
a combination of product development and capacity expansion, we are taking steps
to offer products with significant competitive advantages for the larger,
"specialty" segment of the market. We are now introducing a new alloy family,
Alloy 171, directed at large volume users in the automotive, and appliance
markets. Thus far, the interest in this new alloy system among potential users
is very strong.
We also continue to broaden international marketing capabilities. We have
been successful in Europe and Japan in recent years. Our work in these markets
will intensify as we move forward. In addition, we are broadening our efforts in
the ASEAN region and South America.
Our efforts to reduce costs and cycle time are continuous, and should be
significantly enhanced by our strip expansion and capabilities upgrade.
We intend to exploit opportunities in non-beryllium-containing alloys. In
August, the Board of Directors approved a plan for the Company to produce Brush
Engineered Bronze, a family of specialty alloys in rod, bar and tube form. This
new endeavor will involve the investment of over $10 million for a new plant,
equipment and working capital. The new plant will be a 50,000 square foot
facility located in Lorain, Ohio. Construction of the new facility commenced
during the fourth quarter 1996, with a target completion date in 1997. The
addition of Brush
"OUR GOAL IS TO BECOME THE WORLD'S LEADING SUPPLIER OF HIGH QUALITY, SPECIALTY
NON-FERROUS ALLOYS."
COMMON STOCK PRICE
[GRAPH]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Engineered Bronze to our product line further strengthens our position in the
specialty alloys business. It represents another step toward our goal to become
the world's leading producer of high quality, specialty non-ferrous alloys.
Our Third Strategic Thrust involves BUILDING A MICROELECTRONICS BUSINESS.
Microelectronics is currently a multi-billion dollar market, worldwide. Alloy,
Precious Metals, Specialty Metal Strip, Ceramic and even Beryllium Products all
offer properties which are attractive to designers of sophisticated
semiconductor packages, lead frames, connectors and other microelectronic
components. Today, nearly one fifth of Brush Wellman's sales are to
microelectronics applications. We have an established marketing/sales presence
in this business, and believe by executing a more coordinated strategy, we will
be able to significantly expand our presence in these attractive, fast growing
worldwide markets.
As part of our strategy to expand the range of products serving the
microelectronics market, during the fourth quarter 1996 Brush Wellman acquired
Circuits Processing Technology Incorporated (CPT), in exchange for common stock.
CPT is a San Diego based producer of thick film circuits. CPT primarily serves
the commercial and satellite telecommunications markets and also supplies parts
to military, aerospace, and medical markets. CPT has been supplying the
microelectronics industry with high quality precious metal thick film circuits
for the past 14 years.
The addition of CPT augments Brush Wellman's position as a supplier of
value-added microelectronic materials, circuits, and sub-assemblies. At the same
time, CPT's ability to continue its rapid growth and extend their unique
technology into new markets should be enhanced by Brush Wellman's sales and
marketing resources. CPT contributed to sales and profitability in the fourth
quarter 1996.
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SHARE REPURCHASE
In December 1995, The Board of Directors authorized a program to repurchase up
to one million shares of the Company's common stock. The Company repurchased
over 500,000 shares under this program through April 1996. In May, the Board of
Directors suspended the repurchase authority until the financing needs for the
alloy strip expansion project were determined, and the financing package was put
in place.
DIVIDEND INCREASE
In August, the Board of Directors approved a 10% increase in the quarterly
cash dividend to a rate of 11 cents per share. This raised the annualized
dividend rate to 44 cents per share from the previous rate of 40 cents.
ORGANIZATION
In October, Brush Wellman announced the appointment of Mr. James P. Mooney
to its Board of Directors. Mr. Mooney is currently Chairman and Chief Executive
Officer of OM Group, Inc. He has been a member of the OM Group Board of
Directors since 1991. He joins the Brush Wellman Board of Directors as part of a
class of Directors whose term ends in 1998.
In December, we were saddened to learn of the passing of Nathan Winthrop
(Nate) Bass, at the age of 79. Mr. Bass was one of the pioneers of the beryllium
industry, who, from 1945 until he retired in 1985, played a major role in the
development of the Brush Beryllium Company, and eventually Brush Wellman Inc.
Mr. Robert H. Rozek, Senior Vice President International will retire at the
end of March 1997, following a long and distinguished career with Brush Wellman.
In over 38 years with the Company, Mr. Rozek was involved, at a senior level, in
nearly all aspects of the business. Under his leadership, our international
subsidiaries were established, thus positioning the Company to be an effective
worldwide competitor in Alloy Products.
ENVIRONMENTAL, HEALTH AND SAFETY ISSUES
For nearly fifty years, it has been known that inhalation of very fine
airborne particles of beryllium may cause a lung disorder, known as chronic
beryllium disease. Chronic beryllium disease is a lung condition that occurs in
that minority of persons whose immune systems react to beryllium in the lungs.
The large majority of people do not have an adverse reaction to beryllium
exposure. In solid form, beryllium and beryllium alloys pose no special health
risk. Thus, the risk of CBD is generally confined to workplaces in which
operations are performed that generate beryllium-containing dust or fumes. As
the world's leading producer of beryllium we are committed to remain the leader
in knowledge about the health effects of beryllium exposure, and are determined
to work to develop more effective prevention methods and treatments. We are also
committed to openly communicate our knowledge about the issue, so that all
parties are properly informed and so as to encourage a continuing, open dialogue
on scientific and medical knowledge. In 1996 we completed surveillance blood
testing of employees in Ohio and presented results of this work and a related
Epidemiological Study to all employees. In addition, we expanded the blood
testing program to our Utah facilities. We also continue to support the work of
the Beryllium Industry Science Advisory Committee.
Unfortunately, our efforts to learn more may also have led
to an increase in litigation, as well as some negative publicity during 1996. We
will continue to vigorously defend Brush Wellman against these lawsuits, while
we proceed in our efforts to protect workers from the risk of adverse health
effects, and work to increase medical knowledge regarding chronic beryllium
disease.
OUTLOOK
Looking forward, for 1997, our goal is to produce improved returns to our
shareholders. We will strive for continued growth in earnings, and increases in
our sales penetration in the worldwide specialty materials market. Recognizing
that this is a year of investment for the future, it is not realistic to expect
significant growth in 1997, but we remain determined to do all in our power to
continue improving sales and earnings this year.
For the longer term, we recognize that, fundamentally, sales growth remains
the key to our success. We are committed to a major expansion of our alloy strip
capability. This investment is designed to enable the Company to significantly
expand sales, reduce production costs, improve working capital management and
offer better quality and service to our customers of alloy strip products. By
implementing this capabilities expansion and upgrade, and by executing the other
aspects of our strategic plan, Brush Wellman will be equipped to show
consistent, strong growth in sales and earnings, and produce superior returns
for our shareholders.
/s/ Gordon D. Harnett
Gordon D. Harnett
Chairman of the Board
President and Chief Executive Officer
March 1997
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Consolidated Statements of Income
Brush Wellman Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands except per share amounts)
1996 1995 1994
Net Sales .......................................... $ 376,279 $ 369,618 $ 345,878
Cost of sales ................................... 267,713 268,732 253,938
------------ ------------ ------------
Gross Margin ....................................... 108,566 100,886 91,940
Selling, administrative and general expenses .... 64,991 62,736 55,502
Research and development expenses ............... 8,309 7,814 8,754
Other-- net ..................................... 961 1,250 2,586
------------ ------------ ------------
Operating Profit ................................... 34,305 29,086 25,098
Interest expense ................................ 1,128 1,653 2,071
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 33,177 27,433 23,027
Income taxes:
Currently payable ............................... 9,825 9,547 6,270
Deferred ........................................ (1,139) (2,803) (1,793)
------------ ------------ ------------
8,686 6,744 4,477
------------ ------------ ------------
NET INCOME . $ 24,491 $ 20,689 $ 18,550
============ ============ ============
Net Income Per Share of Common Stock ............ $ 1.52 $ 1.26 $ 1.14
============ ============ ============
Average number of shares of Common Stock outstanding 16,148,231 16,408,553 16,243,333
See notes to consolidated financial statements
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9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Brush Wellman Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
---- ---- ----
Cash Flows from Operating Activities:
Net Income ....................................................................... $ 24,491 $ 20,689 $ 18,550
Adjustments to Reconcile Net Income to Net Cash
Provided from Operating Activities:
Depreciation, depletion and amortization ....................................... 18,537 18,042 17,588
Amortization of mine development ............................................... 4,417 2,869 2,031
Decrease (Increase) in accounts receivable ..................................... (557) (308) (4,610)
Decrease (Increase) in inventory ............................................... (2,946) 874 (7,058)
Decrease (Increase) in prepaid and other current assets ........................ (460) (1,951) 565
Increase (Decrease) in accounts payable and accrued expenses ................... 1,158 (1,856) 8,389
Increase (Decrease) in interest and taxes payable .............................. (1,327) 1,050 809
Increase (Decrease) in deferred income tax ..................................... (1,189) (1,284) (1,879)
Increase (Decrease) in other long-term liabilities ............................. 1,954 2,061 704
Other-- net .................................................................... 966 (589) 80
------ ------- ------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 45,044 39,597 35,169
Cash Flows from Investing Activities:
Payments for purchase of property, plant and equipment ........................... (26,825) (24,244) (17,214)
Payments for mine development .................................................... (3,663) (787) (543)
Payments for acquisition of business ............................................. -- -- (720)
Other investments-- net .......................................................... (4,909) 718 (24)
------ ------- ------
NET CASH USED IN INVESTING ACTIVITIES (35,397) (24,313) (18,501)
Cash Flows from Financing Activities:
Proceeds from issuance of short-term debt ........................................ 552 5,845 --
Proceeds from issuance of long-term debt ......................................... 8,305 -- --
Repayment of long-term debt ...................................................... (813) (758) (704)
Repayment of short-term debt ..................................................... (2,149) (5,000) (1,962)
Purchase of treasury stock ....................................................... (6,656) (2,826) --
Issuance of Common Stock under stock option plans ................................ 1,460 1,141 502
Payments of dividends ............................................................ (6,489) (5,489) (3,702)
------ ------- ------
NET CASH USED IN FINANCING ACTIVITIES (5,790) (7,087) (5,866)
Effects of Exchange Rate Changes on Cash & Cash Equivalents ......................... (1,661) 915 1,949
------ ------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,196 9,112 12,751
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,553 20,441 7,690
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,749 $ 29,553 $ 20,441
======== ======== ========
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
Brush Wellman Inc. and Subsidiaries
December 31, 1996 and 1995
(Dollars in thousands)
1996 1995
Assets
Current Assets
Cash and cash equivalents .................................................... $ 31,749 $ 29,553
Accounts receivable (less allowance of $954 for 1996 and $1,015 for 1995) .... 52,211 52,532
Inventories .................................................................. 96,324 92,727
Prepaid expenses and deferred income taxes ................................... 16,949 16,935
--------- ---------
TOTAL CURRENT ASSETS . 197,233 191,747
Other Assets .................................................................... 28,326 18,912
Property, Plant and Equipment
Land ......................................................................... 5,186 4,399
Buildings .................................................................... 80,057 76,258
Machinery and equipment ...................................................... 274,903 258,265
Construction in progress ..................................................... 19,405 14,564
Allowances for depreciation .................................................. (256,690) (240,449)
122,861 113,037
Mineral resources ............................................................ 5,693 5,661
Mine development ............................................................. 18,883 15,220
Allowances for amortization and depletion .................................... (17,217) (12,724)
--------- ---------
7,359 8,157
--------- ---------
PROPERTY, PLANT AND EQUIPMENT-- NET 130,220 121,194
--------- ---------
$ 355,779 $ 331,853
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt .............................................................. $ 25,670 $ 22,757
Accounts payable ............................................................. 7,713 8,772
Salaries and wages ........................................................... 9,672 10,030
Taxes other than income taxes ................................................ 2,212 1,981
Other liabilities and accrued items .......................................... 13,810 11,723
Dividends payable ............................................................ 1,789 1,621
Income taxes ................................................................. 8,195 9,707
--------- ---------
TOTAL CURRENT LIABILITIES . 69,061 66,591
Other Long-Term Liabilities ..................................................... 6,906 4,148
Retirement and Post-Employment Benefits ......................................... 40,365 41,297
Long-Term Debt .................................................................. 18,860 16,996
Deferred Income Taxes ........................................................... 1,330 2,519
Shareholders' Equity
Serial Preferred Stock, no par value; 5,000,000 shares
authorized, none issued -- --
Common Stock, $1 par value
Authorized 45,000,000 shares; issued 21,908,885 shares
(21,330,401 in 1995)....................................................... 21,909 21,330
Additional paid-in capital ................................................... 53,650 45,658
Retained income .............................................................. 236,043 218,209
--------- ---------
311,602 285,197
Less: Common Stock in treasury, 5,618,377 shares in 1996 (5,259,177 in 1995) . 91,357 84,701
Other Equity transactions .................................................. 988 194
--------- ---------
TOTAL SHAREHOLDERS' EQUITY . 219,257 200,302
--------- ---------
$ 355,779 $ 331,853
========= =========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Brush Wellman Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands except per share amounts)
ADDITIONAL COMMON
COMMON PAID-IN RETAINED STOCK IN
STOCK CAPITAL INCOME TREASURY OTHER
------------------------------------------------------------
BALANCES AT JANUARY 1, 1994 $ 21,181 $ 43,790 $ 188,978 $ (81,874)
Net income ......................................................... 18,550
Declared dividends $.26 per share .................................. (4,187)
Proceeds from sale of 34,500 shares under option plans ............. 34 427
Income tax benefit from employees' stock options ................... 41
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 1994 21,215 44,258 203,341 (81,874)
Net income ......................................................... 20,689
Declared dividends $.36 per share .................................. (5,821)
Proceeds from sale of 71,270 shares under option plans ............. 71 910
Income tax benefit from employees' stock options ................... 160
Other equity transactions .......................................... 44 330 (1) $ (194)
Purchase of shares for treasury .................................... (2,826)
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 1995 21,330 45,658 218,209 (84,701) (194)
Net income ......................................................... 24,491
Declared dividends $.42 per share .................................. (6,657)
Proceeds from sale of 93,710 shares under option plans ............. 94 1,211
Income tax benefit from employees' stock options ................... 155
Purchase of business ............................................... 368 5,296
Other equity transactions .......................................... 117 1,330 (794)
Purchase of shares for treasury .................................... (6,656)
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 1996 $ 21,909 $ 53,650 $ 236,043 $ (91,357) $ (988)
========= ========= ========= ========= =========
See notes to consolidated financial statements.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Wellman Inc. and Subsidiaries
December 31, 1996
NOTE A - ACCOUNTING POLICIES
ORGANIZATION: The Company is a manufacturer of engineered materials used in the
computer and related electronics, telecommunications and automotive electronic
markets. The Company also sells into the aerospace/defense and
appliance/consumer markets. The majority of sales are to customers in North
America, Western Europe and the Pacific rim. Major products sold include
beryllium, beryllium alloys, beryllia ceramic, precious metal products and
specialty metal systems. The majority of products are manufactured and/or
distributed through shared Company facilities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles 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 Wellman Inc. and its subsidiaries, all of which are wholly owned. All
signficant intercompany accounts and transactions are eliminated in
consolidation.
CASH EQUIVALENTS: All highly liquid investments with a put option or maturity of
three months or less when purchased are considered to be cash equivalents.
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
may be 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
MINERAL RESOURCES AND MINE DEVELOPMENT: Property acquisition costs and mining
costs associated with waste rock removal are recorded at cost and are depleted
or amortized by the units of production method based on recoverable proven
beryllium reserves. Exploration and pre-production mine development expenses are
charged to operations in the period in which they are incurred.
INTANGIBLE ASSETS: The cost of intangible assets is amortized by the
straight-line method over the periods estimated to be benefited, which is
generally twenty 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 would be performed. If an evaluation is required,
the estimated future cash flow associated with the asset would be compared to
the asset's carrying amount to determine if a write-down may be required.
DERIVATIVES: Forward foreign exchange currency contracts and commodity swaps are
marked-to-market using the applicable rates and any unrealized losses are taken
to income. Realized gains and losses on forward contracts and swaps and realized
gains on foreign currency options are taken to income when the financial
instrument matures. Option premiums are classified as prepaid expenses and
amortized over the term of the option.
ADVERTISING COSTS: The Company expenses all advertising costs as incurred.
Advertising costs were immaterial for the years presented in the consolidated
financial statements.
INCOME TAXES: The Company uses the liability method as required by Statement of
Financial Accounting Standards (SFAS) No. 109 in measuring the provision for
income taxes and recognizing deferred tax assets and liabilities on the balance
sheet. This statement requires that deferred income taxes reflect the tax
consequences of currently enacted rates for differences between the tax bases of
assets and liabilities and their financial reporting amounts.
RECLASSIFICATION: Certain amounts in prior years have been reclassified to
conform with the 1996 consolidated financial statement presentation.
NET INCOME PER SHARE: Net income per share is based on the weighted average
number of outstanding shares of Common Stock including common stock equivalents
(stock options) as appropriate under the treasury stock method.
ENVIRONMENTAL REMEDIATION: In October 1996, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities". The
SOP is effective for fiscal years beginning after December 15, 1996. The SOP
does not make changes to existing accounting rules, but it clarifies how
existing authoritative guidance on loss contingencies should be applied in
determining environmental liabilities. The Company does not believe the adoption
of the SOP will have a material impact on its financial position or results of
operations. The Company will adopt SOP 96-1 in the first quarter of 1997.
Contingencies, including environmental remediation liabilities, are further
outlined in Note L to the Consolidated Financial Statements.
NOTE B - ACQUISITIONS
In October 1996, the Company acquired the Common Stock of Circuits Processing
Technology, Inc. for Company Common Stock. In October 1994, the Company acquired
the assets, including net working capital, of Hydrostatics Inc. for cash. These
transactions were accounted for as purchases and did not have a material impact
on operations.
10
13
NOTE C - INVENTORIES
Inventories in the consolidated balance sheets are summarized as follows:
December 31
(Dollars in thousands) 1996 1995
---------------------
Principally average cost:
Raw materials and supplies............................... $20,210 $19,719
In process............................................... 55,242 57,013
Finished................................................. 42,536 42,222
------- -------
117,988 118,954
Excess of average cost over LIFO
inventory value......................................... 21,664 26,227
------- -------
$96,324 $92,727
======= =======
Inventories aggregating $67,730,000 and $62,675,000 are stated at LIFO at
December 31, 1996 and 1995, respectively.
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. Interest paid was $2,168,000, $2,284,000 and $2,518,000 in 1996,
1995 and 1994, respectively. Interest costs capitalized and the amounts
amortized are as follows:
(Dollars in thousands) 1996 1995 1994
- - ---------------------- ---- ---- ----
Interest incurred ............................... $2,103 $2,099 $2,407
Less capitalized interest ....................... 975 446 336
$1,128 $1,653 $2,071
------ ------ ------
Amortization, included principally
in cost of sales ............................. $ 573 $ 578 $ 525
====== ====== ======
In 1986, the Company purchased company-owned life insurance policies insuring
the lives of certain United States employees. The contracts are recorded at cash
surrender value, net of policy loans, in other assets. The net contract (income)
expense, including interest expense recorded in Selling, Administrative and
General expenses, was ($190,000), $954,000 and $598,000 in 1996, 1995 and 1994,
respectively. The related interest expense was $5,115,000, $4,788,000 and
$4,091,000, respectively.
NOTE E - DEBT
A summary of long-term debt follows:
December 31
(Dollars in thousands) 1996 1995
---- -----
9.60% - 9.68% medium-term notes, $5,000,000
payable in each of 1997 and 2000 ..................... $ 10,000 $ 10,000
Variable rate industrial development revenue bonds
payable in installments beginning in 2005 ............ 3,000 3,000
5.45% - 6.45% industrial development revenue bonds
payable in equal installments in 1996 through 2000 ..... 3,200 4,000
Variable rate industrial development
revenue bonds payable in 2016 ........................ 8,305 0
Variable rate note payable in installments through 1999 253 0
4.90% note payable in yen in equal
installments through 1997 ............................ 706 1,495
-------- --------
25,464 18,495
Current portion of long-term debt ...................... (6,604) (1,499)
-------- --------
$ 18,860 $ 16,996
======== ========
Maturities on long-term debt instruments as of December 31, 1996, are as
follows:
1997...................................... $ 6,604
1998...................................... 877
1999...................................... 878
2000...................................... 5,800
Thereafter................................ 11,305
-------
$25,464
=======
The Company has a revolving credit agreement with four banks which provides a
maximum availability of $50,000,000 through April 30, 1998. At December 31,
1996, there were no borrowings outstanding against this agreement.
The Company has a private placement agreement whereby the Company can issue
up to an aggregate of $75,000,000 of medium-term notes ($10,000,000 outstanding
at December 31, 1996). The notes bear a fixed interest rate and may have
maturities from nine months to thirty years from date of issue as agreed upon in
each case by the purchaser and the Company.
Included in short-term debt is $19,066,000 ($21,258,000 at December 31,
1995) outstanding under lines of credit totaling $89,612,000. The $89,612,000
lines of credit consist of $50,400,000, $29,341,000 and $9,871,000 of domestic,
foreign and precious metal (primarily gold) denominated debt respectively. The
domestic and foreign lines are uncommitted, unsecured and renewed annually. The
precious metal facility is committed, secured and renewed annually. Of the
amount outstanding, $9,642,000 is payable in foreign currencies and $9,424,000
is denominated in precious metal, primarily gold. Also included in short-term
debt is $800,000 representing the current maturity of an industrial development
revenue bond, $5,000,000 representing the current maturity of a medium-term
note, $98,000 representing the current maturity of a note payable and $706,000
representing the current portion of the yen note payable. The average rate on
short-term debt was 3.5% and 3.6% as of December 31, 1996 and 1995,
respectively.
During November 1996, the Company entered into an agreement with the Lorain
Port Authority, Ohio to issue $8,305,000 in variable rate industrial revenue
bonds, maturing in 2016. The outstanding cash is shown as cash and cash
equivalents on the balance sheet, but is restricted for use in constructing a
new facility in Lorain, Ohio, subject to the terms agreed upon with the Lorain
Port Authority, Ohio pursuant to the issuance of the bonds.
During 1994, the Company re-funded its $3,000,000 industrial development
revenue bonds. The 7.25% bonds were re-funded into variable rate demand bonds.
The variable rate ranged from 2.55% to 4.30% during 1996 and 3.00% to 5.70%
during 1995.
In December 1995, the Company entered into an interest rate swap agreement
to manage its interest rate exposure on the $3,000,000 variable rate industrial
development revenue bond. The Company converted the variable rate to a fixed
rate of 6.03% under the interest rate swap agreement that matures in 2002.
11
14
Notes to Consolidated Statements (Continued)
The loan agreements include certain restrictive covenants covering the
incurrence of additional debt, interest coverage, and maintenance of working
capital, tangible net worth (as defined) and debt to earnings ratio.
NOTE F - LEASING ARRANGEMENTS
The Company leases warehouse and manufacturing space, and manufacturing and
computer equipment under operating leases with terms ranging up to 15 years.
Rent expense amounted to $4.7 million, $4.1 million and $ 4.8 million during
1996, 1995, and 1994, respectively. The future estimated minimum lease payments
under non-cancelable operating leases with initial lease terms in excess of one
year at December 31, 1996, are as follows: 1997 - $0.1 million; 1998 - $ 1.8
million; 1999 - $ 5.7 million; 2000 - $5.7; 2001 - $ 5.7 million; and thereafter
- - - $19.3 million.
The Company has agreements for the construction and operating leases of a
production facility and certain equipment to be located in that facility. The
new facility and related equipment will be owned by third parties and have an
estimated cost of $78.5 million. Start-up of this facility is anticipated to be
phased in over time, commencing in the fourth quarter of 1997. Lease payments
for the facility will commence in 1997 and continue through 2011 with options
for renewal. Lease payments of the related equipment commence in 1999 and
continue through the initial lease term expiring in 2001. The Company has
options to renew the lease of the equipment for seven one-year periods and to
purchase the equipment for its estimated fair value at the end of each term. The
lease provides for a substantial residual value guarantee by the Company at the
termination of the lease.
The Company has guaranteed performance under the construction contracts for
the building and equipment. The estimated minimum payments under these leases
are included in the preceding paragraph.
The lease agreements include restrictive covenants covering certain
liquidity ratios, maintenance of tangible net worth (as defined) and maximum
rental expenses.
NOTE G - DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE INFORMATION
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has a program in place to manage foreign currency risk. As part of
that program, the Company has entered into forward contracts and purchased
foreign currency options 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
value of the foreign currency transactions will be partially offset by the gains
on the hedge contracts and options.
All hedge contracts mature in two years or less. The options were generally
several percent out-of-the-money at the time of purchase and all options matured
prior to December 31, 1996. At year end, the Company was in a net unrealized
gain position on its forward contracts that was not material to the Company.
Therefore, the fair market value of the forward contracts approximates their
nominal value as of the balance sheet date. The contracted amounts of the
Company's outstanding forward contracts as of December 31, 1996 were as follows:
Forward
(Dollars in thousands) Contracts
- - ---------------------- ---------
Currency:
Deutschemark......................................... $ 9,300
Yen.................................................. 7,400
Sterling............................................. 8,293
Total................................................ $ 24,993
CASH AND CASH EQUIVALENTS
Included in cash equivalents are $12.4 million ($21.4 million in 1995) in
variable rate demand notes which are investments in debt securities that are
revalued every seven days and puttable to the remarketing agent with seven days'
notice. The notes are guaranteed by letters of credit from highly rated
financial institutions. The carrying amounts reported in the balance sheet for
cash and cash equivalents approximate fair value.
LONG-AND SHORT-TERM DEBT
The fair value of the Company's debt (which had a carrying value of $44,530,000)
at December 31, 1996 was estimated at $ 45,915,000 using a discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
In December 1995, the Company entered into an interest rate swap, converting
to a fixed rate from a variable rate on a $3,000,000 industrial revenue
development bond. The fair value of this swap approximates its carrying value.
OTHER SWAP ARRANGEMENTS
The Company has entered into a commodity swap agreement to hedge a portion of
anticipated copper purchases during 1997. Under the agreement, the Company
receives or makes payments based on the difference between a specified price and
the market price of copper. The fair value of this contract at December 31, 1996
is $2.3 million (notional amount $2.1 million). This commitment expires in
December 1997.
INTEREST RATE SWAP AGREEMENT
In December, 1996, the Company has entered into an interest rate swap agreement
to hedge the variable rate payments to be made during the initial term of an
equipment lease (see Note F). The Company has accounted for the swap as a hedge
effectively fixing the estimated lease payments at a total of $13.1 million
through the initial lease term. The notional value of the swap approximates its
fair value at December 31, 1996.
NOTE H - CAPITAL STOCK
The Company has 5,000,000 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 26, 1988, the Company's Board of Directors declared a dividend of
one preferred stock purchase right for each outstanding share of
12
15
Common Stock. 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 $100.
450,000 unissued shares of Serial Preferred Stock have been 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 Brush
Wellman Common Stock. Each share of Series A Preferred Stock will be entitled to
one vote. The rights are not 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 Brush Wellman Common Stock. The rights expire on January 26, 1998, and
can be redeemed for 3 cents per right under certain circumstances.
In December 1995, the Company's Board of Directors authorized a program to
repurchase up to 1,000,000 shares of its Common Stock. In May 1996, the
Company's Board of Directors withdrew the authority for additional share
repurchases. The Company repurchased 524,400 shares at a total cost of
$9,482,000 under this program.
The 1995 Stock Incentive Plan authorizes the granting of five categories of
incentive awards: performance restricted shares, performance shares, performance
units, restricted shares and option rights. In 1996, a total of 116,653
performance restricted shares and 118,127 performance shares were granted to
certain employees. In 1995, a total of 43,921 performance restricted shares and
21,961 performance shares (682 and 341 were subsequently forfeited,
respectively) were granted to certain employees. The market value of the
performance restricted shares and the performance shares adjusted for
management's expectation of reaching the Management Objectives as outlined in
the plan agreement, and the related dividends on the performance restricted
shares have been recorded as deferred compensation-restricted stock and are a
component of other equity transactions of shareholders' equity. At December 31,
1996, no amount for the performance shares has been recorded as deferred
compensation restricted stock. Deferred compensation on the performance
restricted shares is amortized over the vesting period and amounted to $188,000
and $366,000 in 1996 and 1995, respectively. 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 1995 Stock Incentive Plan
and previous plans generally become exercisable over a four-year period and
expire ten years from the date of the grant.
The 1990 Stock Option Plan for Non-Employee Directors provides for a
one-time grant of 5,000 options to each non-employee director 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 ten years after the date they were granted.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation", but applies APB Opinion No. 25 and
related Interpretations in accounting for its stock incentive plans. The
compensation expense determined in applying SFAS No. 123 was immaterial for 1996
and 1995.
A summary of option activity during the years 1996, 1995 and 1994 follows:
Range of Weighted Avg.
Shares Option Prices Exercise Price
Outstanding at January 1, 1994 1,744,090 $11.81 to $38.94
Granted................................. 215,700 $15.19 to $15.75
Exercised............................... (34,500) $12.00 to $15.31
Canceled................................ (346,990) $12.00 to $38.94
---------
Outstanding at December 31, 1994 1,578,300 $11.81 to $38.94
Granted................................. 210,400 $17.69 to $19.81 $17.74
Exercised............................... (71,270) $12.00 to $17.25 $13.77
Canceled................................ (55,690) $12.00 to $38.94 $29.34
---------
Outstanding at December 31,1995 1,661,740 $11.81 to $38.94
Granted................................. 35,000 $18.63 to $19.06 $18.69
Exercised............................... (93,710) $12.00 to $15.75 $13.93
Canceled................................ (58,460) $12.00 to $38.94 $30.98
---------
Outstanding at December 31, 1996 ....... 1,544,570 $11.81 to $38.94
=========
At December 31, 1996, options for 1,375,730 shares (1,313,560 shares at December
31, 1995) were exercisable with a weighted average remaining contractual life of
4.9 years and 5.9 years for 1996 and 1995, respectively. The outstanding options
as of December 31, 1996, may be divided into the following ranges:
Range of Average
Option Prices Outstanding Exercisable Remaining Life
------------- ----------- ----------- --------------
$11.81 to $17.69 1,008,570 874,730 6.82
$18.63 to $25.50 484,000 449,000 3.20
$28.38 to $38.94 52,000 52,000 0.43
Total 1,544,570 1,375,730
As of December 31, 1996, there were 334,112 shares (545,432 at December 31,
1995) available for future grants.
NOTE I - INCOME TAXES
Income before income taxes and income taxes are made up of the following
components, respectively:
(Dollars in thousands) 1996 1995 1994
--------- -------- ---------
Income before income taxes:
Domestic ........................... $ 28,750 $ 20,480 $ 17,570
Foreign ............................ 4,427 6,953 5,457
-------- -------- --------
Total before income taxes ........ $ 33,177 $ 27,433 $ 23,027
======== ======== ========
Income taxes:
Current income taxes:
Domestic ........................... $ 7,736 $ 6,779 $ 5,374
Foreign ............................ 2,089 2,768 1,968
Benefit of foreign loss carryforward -- -- (1,072)
-------- -------- --------
Total current........................ 9,825 9,547 6,270
Deferred income taxes:
Principally domestic ............... (1,139) (2,803) (1,793)
-------- -------- --------
Total income taxes ............... $ 8,686 $ 6,744 $ 4,477
======== ======== ========
13
16
A reconciliation of the federal statutory and effective income tax
rates(benefits) follows:
1996 1995 1994
---- ---- ----
Federal statutory rate ..................... 35.0% 35.0% 34.0%
State and local income taxes, net
of federal tax effect .................... 1.1 2.1 3.2
Effect of excess of percentage
depletion over cost depletion ............ (4.9) (5.5) (6.1)
Company-owned life insurance ............... (3.6) (4.9) (5.1)
Difference due to book and tax basis
of assets of acquired businesses ......... 1.1 0.4 0.4
Taxes on foreign income - net .............. (1.2) (2.2) (3.5)
Reduction of valuation allowance ........... -- -- (4.7)
Other items ................................ (1.3) (0.3) 1.2
---- ---- ----
Effective tax rate ..................... 26.2% 24.6% 19.4%
==== ==== ====
Included in income taxes currently payable, as shown in the Consolidated
Statements of Income, are $585,000, $904,000 and $1,116,000 of state and local
income taxes in 1996, 1995 and 1994, respectively.
The Company made domestic and foreign income tax payments, net of refunds,
of $11,144,000 $8,087,000 and $5,353,000 in 1996, 1995 and 1994, respectively.
Under Statement 109, 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:
(Dollars in thousands) 1996 1995
---- ----
Postretirement benefits other than pensions ........ $ 12,391 $ 12,333
Alternative minimum tax credit ..................... 5,155 5,937
Other reserves ..................................... 6,911 5,339
Restructuring accrual .............................. 1,239 1,981
Inventory .......................................... 380 --
Miscellaneous ...................................... 744 236
-------- --------
Total deferred tax assets .......................... 26,820 25,826
======== ========
Depreciation ....................................... (10,015) (9,836)
Pensions ........................................... (3,851) (3,914)
Mine development ................................... (2,005) (2,070)
Capitalized interest expense ....................... (1,358) (1,340)
Inventory .......................................... -- (214)
-------- --------
Total deferred tax liabilities ..................... (17,229) (17,374)
-------- --------
Net deferred tax asset ............................. $ 9,591 $ 8,452
======== ========
NOTE J - PENSIONS
The Company and its subsidiaries have noncontributory pension plans covering
substantially all U.S. employees. Plans provide benefits based on the
participants' years of service and compensation or stated amounts for each year
of service. The Company's funding policy is to make the minimum actuarially
computed annual contributions required by applicable regulations. No
contributions were made in 1996, 1995 or 1994.
A summary of the components of net periodic pension cost (credits) for
pension plans follows (in thousands):
Defined benefit plans: 1996 1995 1994
---- ---- ----
Service cost-benefits earned
during the period ..................... $ 2,591 $ 1,942 $ 2,125
Interest cost on projected
benefit obligation .................... 4,958 4,512 4,247
Actual return (increase)/decrease
on plan assets ........................ (11,084) (12,684) 897
Net amortization and deferral ........... 3,890 5,759 (7,684)
-------- ------- --------
Total (credit) expense ................ $ 355 $ ( 471) $ (415)
======== ======= ========
The following table sets forth the funded status of the Company's plans and the
amounts recognized in the consolidated balance sheets at December 31 (in
thousands):
PLANS WHOSE ASSETS
EXCEED ACCUMULATED
BENEFITS
1996 1995
---- ----
Actuarial present value of benefit obligations:
Vested benefit obligation .............................. $ 51,898 $ 49,410
======== ========
Accumulated benefit obligation ......................... $ 56,288 $ 53,669
======== ========
Plan assets at fair value .............................. $ 84,819 $ 76,970
======== ========
Projected benefit obligation ........................... (68,264) (65,044)
-------- --------
Plan assets in excess of projected benefit obligation .. 16,555 11,926
Unrecognized net (gain) or loss ........................ (3,577) 1,731
Unrecognized net assets, at date of adopting
FAS 87, net of amortization .......................... (4,015) (4,723)
Unrecognized prior service cost ........................ 2,365 2,577
-------- --------
Net pension asset recognized at December 31 ........... $ 11,328 $ 11,511
======== ========
Assumptions used in accounting for the pension plans were:
1996 1995 1994
---- ---- ----
Weighted-average discount rate.................... 7.50% 7.25% 8.25%
Rate of increase in compensation levels............ 5% 5% 5%
Expected long-term rate of return on assets........ 9% 9% 9%
Plan assets consist primarily of listed common stocks, corporate and government
bonds and short-term investments.
The Company also has accrued unfunded retirement arrangements for certain
U.S. employees and directors. At December 31, 1996, the projected benefit
obligation was $1,910,000 ($1,569,000 in 1995). A corresponding accumulated
benefit obligation of $1,747,000 ($1,421,000 in 1995) has
14
17
been recognized as a liability in the balance sheet and is included in
retirement and post-employment benefits. Certain foreign subsidiaries have
funded and accrued unfunded retirement arrangements which are not material to
the consolidated financial statements.
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 contribution was $1,844,000 in 1996, $1,683,000 in 1995 and $1,596,000
in 1994.
NOTE K - OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's defined benefit pension plans and deferred
contribution plans, the Company currently provides postretirement medical and
death benefits to certain full-time employees and spouses, excluding those of
subsidiaries. The Company also provides medical benefits to certain retired
employees and spouses from an operation that was divested in 1985.
Employees become eligible at age 55 with 10 years of service. Certain
employees, excluding those of subsidiaries, who retired after June 30, 1992
receive credits, based on years of service up to 30, to be used toward the
purchase of medical benefits. Contributions toward the cost of medical benefits
are required from retirees with less than 30 years of service and also for
increases in the cost of medical benefits due to inflation. Employees who
retired prior to July 1, 1992 generally had less stringent eligibility criteria
and contribution rates, and account for the majority of the postretirement
benefit obligation.
The following table presents the plan's funded status and the amounts
recognized in the Company's consolidated balance sheets (in thousands):
December 31,
1996 1995
---- ----
Accumulated postretirement benefit obligation:
Retirees ............................................... $22,477 $23,610
Fully eligible active plan participants .............. 5,371 4,696
Other active plan participants ....................... 3,995 4,636
31,843 32,942
Plan assets ............................................ -- --
Unrecognized net gain .................................. 4,612 2,858
------- -------
Accrued postretirement benefit obligation .............. $36,455 $35,800
======= =======
Net periodic postretirement benefit cost includes
the following components (in thousands):
1996 1995 1994
---- ---- ----
Service cost........................................ $385 $304 $341
Interest cost....................................... 2,277 2,409 2,612
Amortization of (gain)............................ (25) (140) --
Adjustment to benefit obligation -- -- --
------ ------ -------
Net periodic postretirement benefit cost ............ $2,637 $2,573 $2,953
====== ====== ======
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) used in determining the
accumulated postretirement benefit obligation as of December 31, 1996 is 6.50%
for retirees age 65 and over and 8.50% for retirees under age 65 in 1997, and
both are assumed to decrease gradually to 4.75% until 2005 and remain at that
level thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
$1,751,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1996 by $156,000.
This increase would apply only to employees who retired prior to July 1, 1992.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% at December 31, 1996, 7.25% at
December 31, 1995 and 8.25% at December 31, 1994.
NOTE L - CONTINGENCIES
The Company is from time to time involved in various legal and other proceedings
that relate to the ordinary course of operating its business, including, but not
limited to: employment-related actions; product liability claims; and workers'
compensation claims.
While the Company is unable to predict the outcome of current proceedings,
based upon the facts currently known to it, the Company does not believe that
resolution of these proceedings will have a material adverse effect on the
financial condition or operations of the Company.
The Company has an active program for environmental compliance which
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. For projects involving remediation, estimates of the probable
costs are made and the Company established reserves of $4.0 million at December
31, 1996 ($3.3 million at December 31, 1995). These reserves cover existing or
currently foreseen projects. Expenditures are charged to the reserve which is
adjusted from time to time as additional projects are identified and for which
probable costs of remediation can be estimated. The current portion of the
reserve is included in the balance sheet as other liabilities and accrued items
while the long-term portion is included under other long-term liabilities.
As of December 31, 1996, the Company has outstanding commitments of $13
million to purchase capital equipment.
18
Notes to Consolidated Statements (continued)
NOTE M - OPERATIONS BY GEOGRAPHIC AREA
Years ended December 31, 1996, 1995 and
1994 (Dollars in thousands)
1996
------------------------------------------------------
OPERATIONS INTERNATIONAL
IN THE DISTRIBUTION ADJUSTMENTS &
UNITED STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ -------------------------
Sales to unaffiliated customers ........ $ 301,451 $ 74,828 $ 376,279
Transfers between operations ........... 43,190 ($ 43,190)
--------- --------- --------- ---------
Net Sales .......................... $ 344,641 $ 74,828 ($ 43,190) $ 376,279
========= ========= ========= =========
Operating profit (loss) ................ $ 29,591 $ 4,783 ($ 69) $ 34,305
========= ========= ========= =========
Interest expense ....................... (1,128)
---------
Income before income taxes ......... $ 33,177
=========
Identifiable assets at December 31, 1996 $ 298,832 $ 43,812 ($ 5,237) $ 337,407
========= ========= ========= =========
Corporate assets ....................... 18,372
---------
Total assets at December 31, 1996 .. $ 355,779
=========
1995
--------------------------------------------------
Sales to unaffiliated customers ........ $ 278,455 $ 91,163 $ 369,618
Transfers between operations ........... 54,065 ($ 54,065)
--------- --------- --------- ---------
Net Sales .......................... $ 332,520 $ 91,163 ($ 54,065) 369,618
========= ========= ========= =========
Operating profit (loss) ................ $ 24,932 $ 7,378 ($ 3,224) $ 29,086
========= ========= ========= =========
Interest expense ....................... (1,653)
---------
Income before income taxes ......... $ 27,433
=========
Identifiable assets at December 31, 1995 $ 287,977 $ 44,718 ($ 4,835) $ 327,860
========= ========= ========= =========
Corporate assets ....................... 3,993
---------
Total assets at December 31, 1995 .. $ 331,853
=========
1994
------------------------------------------------------
Sales to unaffiliated customers ........ $ 262,358 $ 83,520 $ 345,878
Transfers between operations ........... 47,239 ($ 47,239)
--------- --------- --------- ---------
Net Sales .......................... $ 309,597 $ 83,520 ($ 47,239) $ 345,878
========= ========= ========= =========
Operating profit (loss) ................ $ 21,520 $ 5,841 ($ 2,263) $ 25,098
========= ========= =========
Interest expense ....................... (2,071)
---------
Income before income taxes ......... $ 23,027
=========
Identifiable assets at December 31, 1994 $ 274,376 $ 41,687 ($ 5,538) $ 310,525
========= ========= =========
Corporate assets ....................... 6,608
---------
Total assets at December 31, 1994 .. $ 317,133
=========
Transfers between operations are accounted for in the same manner as sales to
unaffiliated customers. Corporate assets are principally cash and cash
equivalents and investments.
Total international sales were $108,402,000 in 1996, $127,289,000 in 1995,
and $114,911,000 in 1994. These are comprised of exports from United States
operations and direct sales by international distribution subsidiaries,
primarily in Europe. Most of these sales represent products manufactured in the
United States.
Export sales from United States operations amounted to $33,574,000 in 1996,
$36,126,000 in 1995, and $31,391,000 in 1994.
16
19
NOTE N - QUARTERLY DATA (UNAUDITED)
Years ended December 31, 1996 and 1995
(Dollars in thousands except per share amounts)
1996
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Net Sales .............................. $ 93,801 $ 104,349 $ 88,312 $ 89,817 $ 376,279
Gross Margin ........................... 24,793 31,649 23,728 28,396 108,566
Percent of Sales .................... 26.4% 30.3% 26.9% 31.6% 28.9%
Net Income ............................. 5,155 8,144 4,565 6,627 24,491
Per Share of Common Stock:
Net Income .......................... 0.32 0.51 0.28 0.41 1.52
Dividends ........................... 0.10 0.10 0.11 0.11 0.42
Stock price range
High................................. 19.88 19.38 20.50 19.50
Low ................................. 17.00 17.25 17.88 16.13
1995
----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Net Sales.................................. $98,912 $ 97,283 $ 89,361 $ 84,062 $ 369,618
Gross Margin .............................. 27,372 27,241 22,632 23,641 100,886
Percent of Sales .......................... 27.7% 28.0% 25.3% 28.1% 27.3%
Net Income ................................ 6,789 6,676 3,332 3,892 20,689
Per Share of Common Stock:
Net Income ............................. 0.42 0.40 0.20 0.24 1.26
Dividends............................... 0.08 0.08 0.10 0.10 0.36
Stock price range
High.................................... 18.13 21.88 23.63 18.63
Low .................................... 14.50 17.63 18.38 16.00
17
20
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
[LOGO]
Board of Directors and Shareholders
Brush Wellman Inc.
We have audited the accompanying consolidated balance sheets of Brush Wellman
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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 Wellman
Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 22, 1997
- - --------------------------------------------------------------------------------
Report of Management
The management of Brush Wellman Inc. 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 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/ Carl Cramer
Carl Cramer
Vice President Finance and Chief Financial Officer
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING INFORMATION
Portions of narrative set forth in this Annual Report that are not historical in
nature are forward-looking statements. The Company's actual future performance
may differ from that contemplated by the forward-looking statements as a result
of a variety of factors that include, in addition to those mentioned elsewhere
herein, the condition of the markets which the Company serves, the success of
the Company's strategic plans, the timely and successful completion of pending
capital expansions and the conclusion of pending litigation matters in
accordance with the Company's expectation that there will be no materially
adverse effects.
RESULTS OF OPERATIONS
1996 TO 1995 COMPARISON
Worldwide sales in 1996 were a record $376.3 million surpassing the previous
record of $369.6 million achieved in 1995. The revenue growth came primarily
from domestic beryllium alloy products and specialty metal systems. The
resulting profits grew faster than sales, as earnings per share were $1.52 in
1996, an improvement of 21% over last year.
Worldwide sales of beryllium alloys increased in 1996 over 1995.
Domestically, sales of beryllium copper precision strip, rod and wire were
higher as shipments to the automotive electronics and telecommunications markets
grew. In electronic applications, these alloys frequently offer a superior
combination of reliability, conductivity and formability over competitive
materials. In other applications, depending upon their composition, beryllium
alloys' performance characteristics include good thermal conductivity, strong
wear resistance and high strength and hardness. Sales of bulk products (bar,
tube, plate, custom fabricated parts) also increased in 1996, capitalizing on
these characteristics to further penetrate the aerospace, plastic tooling and
various industrial markets. The recreation and leisure market emerged as a
potentially large application for bulk products; however, with a limited
customer base, sales into this market may be seasonal and inconsistent from year
to year.
International sales of beryllium alloys declined in 1996 compared to 1995 as
a result of softening economic conditions in Germany and other portions of
western Europe. The sales growth in Japan and the Pacific rim slowed down from
recent years, but modest improvements were still recorded. The strong dollar in
1996 also contributed to the reported international sales decline, as foreign
currency sales are translated into fewer dollars compared to 1995. The domestic
beryllium alloy growth more than offset the international decline.
In 1996, the Company embarked upon a $110 million project to modernize and
expand its beryllium alloy production capabilities at its Elmore, Ohio facility.
A three-year project, its objectives are to improve quality and turnaround time,
lower costs, increase capacity and provide an even safer work environment. While
the automotive market potential for the Company's precision strip products is
the main impetus behind the project, virtually all beryllium alloy products and
markets served should benefit upon the project's completion.
Sales of specialty metal systems grew in 1996 over 1995. The gains came
primarily from the telecommunications market, with some additional contribution
from the automotive market as well. Semiconductor shipments were quite strong in
the first part of the year, but a major market slow down, which continued
through year end, adversely affected second half sales.
Precious metal sales were down in 1996 from last year's levels, but sales in
the second half 1996 were higher than in the second half 1995. An anticipated
decline in frame lid assemblies occurred due to a major customer's re-design to
a non-precious metal material in the second quarter 1995. Efforts to broaden the
product offering have been successful through the continued development of
physical/vapor deposition products and services and high temperature braze
alloys. Fine wire sales remained minor. International sales declined in the
current year, reflecting the drop-off in frame lid assembly sales.
Beryllium sales slowed slightly in 1996 as compared to 1995. Defense
applications remain the largest portion of these sales, but at significantly
lower levels resulting from reduced government defense spending in recent years.
Commercial applications, particularly those using AlBeMet(R) (a beryllium
aluminum alloy) are beginning to develop. AlBeMet(R)'s high stiffness and low
density provide excellent properties for a variety of aerospace and
telecommunications applications.
Ceramic sales slipped in 1996 from 1995 levels due to a slowdown in
shipments of base business beryllia ceramic to the telecommunications and
automotive industries. The growth in direct bond copper products was not
sufficient to compensate as these products continue to experience development
delays.
Circuits Processing Technology, Inc. (CPT) was acquired in late October 1996
by the Company and contributed a minor amount to sales and profits. CPT, which
produces thick film circuits using a proprietary etching process, gives the
Company an additional entree into the micro-electronics market.
International operations consist of distribution centers in Germany, England
and Japan, a marketing office in Singapore and a small precious metal finishing
facility in Singapore. Sales by these operations totaled $74.8 million in 1996
compared to $91.2 million in 1995. Sales by the international operations are
predominantly in their respective local currencies with the balance in U.S.
dollars. Direct exports to unaffiliated customers total $33.6 million in 1996
and $36.1 million in 1995. The majority of these sales are to Canada and western
Europe and are
19
22
denominated in U.S. dollars. International markets served are essentially the
same as in the U.S.
As outlined in Note G to the Consolidated Financial Statements, the Company
has a foreign currency hedge program to protect against adverse currency
movements. Should the dollar strengthen significantly, the decrease in value of
foreign currency transactions will be partially offset by gains on the hedge
contracts. As of December 31, 1996, outstanding hedge contracts totaled $25
million, the same as the previous year end.
Cost of sales declined by $1.0 million in 1996 from 1995 on higher sales,
resulting in a $7.7 million improvement in gross profit. Improved operating
efficiencies, including higher yields on certain products, better utilization of
available capacity, effective use of recycled materials and strong cost control
measures, increased the gross margin to 28.9% of sales in 1996 from 27.3% in
1995. Stable prices and product mix helped to offset the negative margin impact
of the stronger dollar. The lower copper cost in 1996, as compared to 1995, is
passed through to the customer and thus had no impact on gross margin.
Selling, administrative and general expenses of $65.0 million represent a 4%
increase over the prior year. Expenses associated with the first phase of
implementing an enterprise-wide information system caused a portion of the
increase. The project will carry over into 1997 and beyond. Additional
administrative and legal expenses were incurred to support and structure the
$110 million modernization and expansion project and the related financial
arrangements. Compensation plans carried higher costs in 1996 and certain sales
volume related expenses increased in 1996 as well.
Research and development (R&D) expenses grew to $8.3 million or 2.2% of
sales in 1996 from $7.8 million or 2.1% of sales in 1995. The increase is
predominantly from efforts to develop a new high quality, low cost precision
beryllium copper strip. The new product will be designed to augment the
Company's current offerings to the electronics markets. The R&D staffing was
also increased. Expenditures on non-beryllium alloy R&D were flat.
Other-net expense was $1.0 million in 1996 and $1.3 million in 1995. Foreign
currency gains, including realized gains on hedge contracts, were $1.2 million
higher in the current year than the last. In 1996, goodwill and other intangible
assets totaling $1.1 million associated with the Fremont, California facility
were written off. While this operation is profitable, its scope of operations,
including product offerings, research capabilities and production capacity, has
been significantly reduced since its acquisition in 1989.
Interest expense fell to $1.1 million in 1996 from $1.7 million in 1995.
These figures are net of capitalized interest associated with long-term capital
projects of $1.0 million in 1996 and $0.4 million in 1995. The weighted average
interest rate was essentially unchanged year on year.
Income before income taxes was $33.2 million in 1996, a 20.9% improvement
from 1995. Slightly higher sales and significantly improved margins were
responsible for the increase.
An effective tax rate of 26.2% of pre-tax earnings was used in 1996, an
increase from the 24.6% rate in 1995. Increased pre-tax earnings, reduced
foreign tax benefits and a reduction in the allowable tax benefits from the
Company-owned life insurance program as a result of a change in the tax law
caused the higher rates. Adjustments to the statutory tax rate are detailed in
Note I to the Consolidated Financial Statements.
Comparative earnings per share were $1.52 in 1996 and $1.26 in 1995.
1995 TO 1994 COMPARISON
Worldwide sales in 1995 were $369.6 million compared to $345.9 million in 1994.
All product lines, except precious metals, increased over the prior year with
beryllium alloys and specialty metal systems increasing significantly.
Sales of beryllium alloy products increased in both the domestic and
international markets. The focused marketing efforts -- teams dedicated towards
particular markets and/or end use applications -- helped support the domestic
growth. Successful examples of these efforts include the continued penetration
into the automotive electronics market and a significant increase in shipments
of products used in aircraft bearings and bushings. Telecommunications and
computers also remain important markets for beryllium alloys as do appliances,
especially in Europe. Favorable economic conditions in portions of western
Europe, particularly in the first half of the year, helped fuel an addition in
sales there. Sales in Asia grew as a result of increased market share and
development of new applications. The sales trend in general for beryllium alloy
strip products is for customers to move toward the lower price alloys such as
the Company's Alloy 174. The sales increase in 1995 over 1994 was also due, in
part, to favorable foreign currency exchange rates and the pass-through effect
of higher commodity costs, particularly copper.
Beryllium sales increased slightly in 1995 over 1994, but were still
somewhat lower than in the recent years prior to 1994. A large portion of
beryllium sales continues to be for defense/aerospace applications and 1995
sales were enhanced by shipments for defense programs in Europe and growth in
new domestic defense applications in avionics. The two targets for growth are
new defense/aerospace systems, particularly upgrades of current defense systems,
and commercial applications. Research and development, marketing and
manufacturing efforts were re-deployed to concentrate on specific applications
in these and related markets.
Ceramic sales grew in 1995 as compared to 1994. The increase is primarily a
result of the continued development of products utilizing the
20
23
direct bond copper technology. These sales were not profitable due to new
process development and other start-up costs.
Sales of specialty metal systems increased in 1995 over 1994. Most products
experienced gains in 1995 with CERDIP sales increasing significantly. Sales
improved as a result of developing new product applications, increasing market
share and continued expansion into the international markets. Major applications
for these products continue to be automotive electronics and telecommunications.
Precious metal sales declined significantly in 1995 as compared to 1994.
Frame lid assembly sales were reduced due to a customer's re-design of a major
microprocessor application. The re-design had been anticipated by management and
resources have been directed towards developing alternative products and
markets. Sales of physical/vapor deposition products, which service the hybrid
microelectronics, recordable CD, telecommunications and specialty coatings
markets, continue to increase. A small acquisition in late 1994 gave the Company
access to the ultra-fine wire market.
Sales from International operations totaled $91.2 million in 1995 compared
to $83.5 million in 1994. International sales of beryllium alloy increased while
sales of frame lid assemblies from Singapore declined. Direct export sales to
unaffiliated customers totaled $36.1 million in 1995 and $31.4 million in 1994.
The majority of these sales were to Canada and western Europe.
Gross margin was 27.3% in 1995 as compared to 26.6% in 1994. The increase in
international sales, which generally carry higher margins, contributed to this
improvement as did the favorable exchange rates. The direct bond copper start-up
costs and a shift in the remaining frame lid assembly business to smaller and
costlier pieces offset a portion of this increase. Certain manufacturing
expenses, including maintenance at the Elmore, Ohio facility, were higher in
1995 than 1994. Commercial applications of beryllium, particularly those
products containing AlBeMet(R), also have lower margins than traditional defense
applications, although restructuring efforts have reduced certain overhead
costs. The pass-through effect of higher commodity costs in beryllium alloy
sales reduced the margin percent while having no bearing on the actual margin
measured in dollars.
Selling, administrative and general expenses were $62.7 million (17.0% of
sales) in 1995 compared to $55.5 million (16.0% of sales) in 1994. Most expense
categories were higher. Causes of the increases include the alloy products
re-design effort and start-up costs associated with the Singapore subsidiary
established to provide marketing support in South Asia. Distribution and other
sales-related expenses grew due to higher volumes of beryllium alloy products.
The exchange rate effect on the international operations' expenses was also
unfavorable.
Research and development (R&D) expenses were $7.8 million in 1995 compared
to $8.8 million in 1994. The decrease was due to focusing beryllium products'
research efforts on selected key applications. R&D expenses supporting all other
products either increased or were flat with the prior year. The R&D efforts for
new process and product development are coordinated with the Company's overall
marketing strategies and growth plans.
Other-net expense was $1.3 million in 1995 and $2.6 million in 1994. This
category included such expenses as amortization of intangible assets and other
non-operating items. The decrease in net expense was due, in part, to lower
foreign currency exchange losses in 1995.
Interest expense fell to $1.7 million in 1995 from $2.1 million in 1994 due
to a lower average level of debt outstanding and an increase in capitalized
interest associated with active capital expenditure projects.
Income before income taxes rose to $27.4 million in 1995 from $23.0 million
in 1994. Higher sales and the resulting gross margin, along with a favorable
foreign currency effect, combined to improve earnings. This improvement was
partially offset by the increase in selling, general and administrative
expenses.
In 1995, an effective tax rate of 24.6% of pre-tax earnings was employed
compared to 19.4% of pre-tax earnings in 1994. Higher domestic and foreign
pre-tax earnings accounted for the increase.
Comparative earnings per share were $1.26 in 1995 and $1.14 in 1994.
FINANCIAL POSITION
CAPITAL RESOURCES AND LIQUIDITY
Cash flow from operations was $45.0 million in 1996, a $5.4 million improvement
from 1995. Total depreciation, depletion and amortization was $23.0 million in
1996 compared to $20.9 million in 1995. The December 31, 1996 cash balance of
$31.7 million represents a $2.2 million increase from the prior year end while
total debt increased $4.8 million. The accounts receivable balance was flat year
on year; however, with higher sales in the fourth quarter 1996 than fourth
quarter 1995, the average days sales outstanding improved.
The $110 million modernization and expansion project begun in 1996 will be
financed in part by two operating leases totaling approximately $75 million (see
Note F to the Consolidated Financial Statements). While the leases will also
finance the construction phase of the project, lease payments are not scheduled
to begin until the underlying assets are placed in service in 1997 and 1998.
Capital expenditures for property, plant and equipment, excluding items
under lease, were $26.8 million while mine development payments totaled an
additional $3.7 million. Major expenditures included a new plating line at the
Providence, Rhode Island facility and completion of the new rod mill
21
24
at the Elmore, Ohio facility. The Company also began construction of a new
facility in Lorain, Ohio that will produce a specialty family of alloys in rod,
bar and tube form. The facility is scheduled to be operational in mid-1997. To
finance the majority of this project, the Company issued $8.3 million of
tax-advantaged industrial revenue development bonds. Unexpended bond proceeds of
$7.9 million are restricted for use on the Lorain project and are included as
cash and cash equivalents on the consolidated balance sheets as of December 31,
1996.
Short-term debt at December 31, 1996 of $25.7 million includes $6.6 million
of the current portion of long-term debt. The balance is denominated in precious
metals and foreign currencies to provide hedges against current assets so
denominated. Credit lines amounting to $70.5 million are available for
additional borrowing. The domestic and international lines are uncommitted,
unsecured and reviewed annually. The precious metal facility is committed,
secured and renewed annually.
Long-term debt was $18.9 million or 8.6% of total capital at December 31,
1996. Long-term financial resources available to the Company include $60 million
of medium-term notes and $50 million under a revolving credit agreement.
Approximately 359,000 shares of Common Stock at a cost of $6.7 million were
re-purchased in early 1996 under a program initiated during the fourth quarter
1995. The program was suspended in the second quarter 1996. Common Stock was
used to acquire CPT in the fourth quarter 1996. Dividends paid on outstanding
shares totaled $6.5 million, an increase of $1.0 million from last year. The
quarterly dividend per share increased to $0.11 from $0.10 in the third quarter
1996 following a two cents per share increase in the third quarter 1995.
Funds being generated from operations plus the available borrowing capacity
are believed adequate to support operating requirements, capital expenditures,
remediation projects, dividends and small acquisitions. Excess cash, if any, is
invested in money market instruments and other high quality investments.
Cash flow from operating activities in 1995 was $39.6 million. Cash balances
increased $9.1 million during the year while total debt increased less than $1
million. Capital expenditures were $24.2 million in 1995. The Company
re-purchased $2.8 million of Common Stock and paid $5.5 million dividends. As of
December 31, 1995, long-term debt was $17.0 million or 8% of total capital.
ORE RESERVES
The Company's 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 approximates 7%. About 87% of beryllium in ore is recovered in the
extraction process. The Company augments its proven reserves of bertrandite ore
through the purchase of imported beryl ore (approximately 4% beryllium) which is
also processed at the Utah extraction plant.
1996 1995 1994 1993 1992
----- ------ ------ ------ ------
Proven bertrandite
ore reserves at
year end (thousands
of dry tons) ........ 6,763 6,927 6,747 6,786 6,787
Grade % beryllium ..... 0.249% 0.249% 0.251% 0.251% 0.251%
Probable bertrandite
ore reserves at
year-end (thousands
of dry tons) ........ 7,432 7,346 7,559 7,594 7,482
Grade % beryllium ..... 0.217% 0.281% 0.279% 0.279% 0.281%
Bertrandite ore
processed (thousands
of dry tons, diluted) 97 96 79 92 91
Grade % beryllium,
diluted ............. 0.236% 0.232% 0.240% 0.232% 0.234%
INFLATION AND CHANGING PRICES
The prices of certain major raw materials, including copper, nickel and gold
purchased by the Company, decreased during 1996. 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 the Company's ability to offset wage and benefit increases. The
Company employs the last-in, first-out (LIFO) inventory valuation method
domestically to more closely match current costs with revenues.
ENVIRONMENTAL MATTERS
As indicated in Note L to the Consolidated Financial Statements, the Company
maintains an active program of environmental compliance. For projects involving
remediation, estimates of the probable costs are made and the Company has
reserved $4.0 million at December 31, 1996 ($3.3 million at December 31, 1995).
This reserve covers existing and currently foreseen projects.
25
SELECTED FINANCIAL DATA
Brush Wellman Inc. and Subsidiaries
(Dollars in thousands except per share amounts)
1996 1995 1994 1993 1992 1986
---- ---- ---- ---- ---- ----
FOR THE YEAR
Net Sales.................................................... $376,279 $369,618 $345,878 $295,478 $265,034 $241,428
Cost of sales................................................ 267,713 268,732 253,938 227,686 192,944 161,392
Gross profit................................................. 108,566 100,886 91,940 67,792 72,090 80,036
Operating profit............................................. 34,305 29,086 25,098 10,658 16,949 42,401
Interest expense............................................. 1,128 1,653 2,071 2,952 3,206 2,148
Income (loss) from continuing operations before income taxes. 33,177 27,433 23,027 7,706 13,743 40,253
Income taxes (benefit)....................................... 8,686 6,744 4,477 1,248 3,243 17,578
Net Income (loss) ........................................... 24,491 20,689 18,550 6,458 10,500 22,675
Per share of Common Stock:
Net income (loss)......................................... 1.52 1.26 1.14 0.40 0.65 1.20
Cash dividends declared................................... 0.42 0.36 0.26 0.20 0.26 0.55
Depreciation and amortization................................ 22,954 20,911 19,619 21,720 20,180 17,903
EBITDA....................................................... 57,259 49,997 44,717 32,378 37,129 60,304
Capital expenditures......................................... 26,825 24,244 17,214 11,901 13,604 25,239
Mine development expenditures................................ 3,663 787 543 814 848 3,451
YEAR-END POSITION
Working Capital.............................................. 128,172 125,156 116,708 105,272 88,616 103,416
Ratio of current assets to current liabilities............... 2.9 to 1 2.9 to 1 2.8 to 1 3.1 to 1 2.5 to 1 2.9 to 1
Property and equipment:
At cost.................................................. 404,127 374,367 350,811 337,342 332,971 254,276
Cost less depreciation and impairment.................... 130,220 121,194 116,763 118,926 127,991 144,107
Total assets................................................ 355,779 331,853 317,133 293,372 310,039 341,210
Other long-term liabilities................................. 47,271 45,445 43,354 40,663 40,332 8,270
Long-term debt.............................................. 18,860 16,996 18,527 24,000 33,808 26,563
Shareholders' equity........................................ 219,257 200,302 186,940 172,075 168,824 234,725
Book value per share........................................ 13.46 12.46 11.59 10.70 10.49 12.48
Number of shares of stock outstanding....................... 16,290,808 16,071,224 16,121,915 16,087,415 16,086,515 18,815,799
Shareholders of record...................................... 2,523 2,351 2,521 2,566 2,762 4,522
Number of employees......................................... 1,926 1,856 1,833 1,803 1,831 2,266
In December 1986, a business acquisition was made; the pro forma effect would
have increased 1986 net sales by $35,000,000.
See Notes to consolidated financial statements.
[GRAPH]
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
CAPITAL EXPENDITURES %
OF SALES
RETURN ON ASSETS
GROSS PROFITS % OF
SALES
26
DIRECTORS
ALBERT C. BERSTICKER (2), (4), (5)
President and Chief Executive Officer,
Ferro Corporation
CHARLES F. BRUSH, III (1),(3), (5)
Personal Investments
DAVID L. BURNER (1), (3)
President and Chief Executive Officer,
BFGoodrich Co.
FRANK B. CARR (1), (2), (4),
Managing Director, Corporate Finance, McDonald & Company
Securities, Inc.
GORDON D. HARNETT (2)
Chairman of the Board
President and Chief Executive Officer
WILLIAM P. MADAR (1), (2), (4), (5)
President and Chief Executive Officer,
Nordson Corporation
GERALD C. MCDONOUGH (3), (4), (5)
Retired Chairman and Chief Executive Officer,
Leaseway Transportation Corp.
ROBERT M. MCINNES (2), (3), (4), (5)
Retired Chairman and Chief Executive Officer,
Pickands Mather & Co.
JAMES P. MOONEY (3)
Chairman and Chief Executive Officer,
OMGroup, Inc.
HENRY G. PIPER
Retired Chairman,
President and Chief Executive Officer
JOHN SHERWIN, JR. (1), (2), (3)
President, Mid-Continent Ventures, Inc.
(1) Audit Committee
(2) Executive Committee
(3) Finance Committee
(4) Nominating Committee
(5) Organization and Compensation Committee
CORPORATE OFFICERS
GORDON D. HARNETT
Chairman of the Board
President and Chief Executive Officer
ROBERT H. ROZEK
Senior Vice President
International
MICHAEL D. ANDERSON
Vice President
Beryllium Products
CARL CRAMER
Vice President Finance
Chief Financial Officer
STEPHEN FREEMAN
Vice President
Alloy Products
CRAIG B. HARLAN
Vice President
International - Europe
JOHN J. PALLAM
Vice President
General Counsel
ANDREW J. SANDOR
Vice President
Alloy Technology
DANIEL A. SKOCH
Vice President
Administration and Human Resources
MICHAEL C. HASYCHAK
Treasurer and Secretary
JAMES P. MARROTTE
Controller
WILLIAM M. CHRISTOFF
Assistant Treasurer - Taxes,
Assistant Secretary
OFFICES AND FACILITIES
MANUFACTURING FACILITIES
Delta, Utah
Elmore, Ohio
Reading, Pennsylvania
Buffalo, New York
Fremont, California
Lincoln, Rhode Island
Newburyport, Massachusetts
San Diego, California
Tucson, Arizona
RESEARCH FACILITIES AND
ADMINISTRATIVE OFFICES
Cleveland, Ohio
SERVICE AND DISTRIBUTION CENTERS
Elmhurst, Illinois
Fairfield, New Jersey
Torrance, California
Warren, Michigan
Stuttgart, Germany
Theale, England
Tokyo/Fukaya, Japan
SUBSIDIARIES
Circuits Processing Technology Inc.
San Diego, California
Technical Materials, Inc.
Lincoln, Rhode Island
Williams Advanced Materials Inc.
Buffalo, New York,
Singapore
Brush Wellman GmbH,
Stuttgart, Germany
Brush Wellman Limited,
Theale, England
Brush Wellman (Japan), Ltd,
Tokyo, Japan
Brush Wellman (Singapore) Pte Ltd,
Singapore
27
CORPORATE DATA
ENVIRONMENTAL POLICY
Brush Wellman Inc. considers Environmental, Health and Safety as integral parts
of our business strategy and necessary for our success. It is the policy of
Brush Wellman to design, manufacture and distribute all products and to manage
and dispose of all materials in a safe, environmentally sound manner. We are
committed to utilizing our resources and technical capabilities to their fullest
extent to protect the health and safety of our employees, our customers, the
general public and the environment.
The health and safety of our employees is of paramount importance. No
operation or task will be conducted unless it can be performed in a safe manner.
Through education and training, we shall promote a culture which establishes
individual ownership of environmental, health, and safety responsibility
throughout the organization and empowers everyone to continuously improve all
working conditions. Each employee will maintain an awareness of safe work
practices and endeavor to prevent conditions which may result in an unsafe
situation or harm the environment. It is the responsibility of each employee to
promptly notify management of any adverse situation.
We shall make every effort to minimize, to the lowest feasible level,
occupational and environmental exposure to all potentially hazardous materials.
We will go beyond regulatory compliance, striving for continuous improvement
in all our environmental, health and safety control efforts.
The Company will provide medical surveillance and preventive health
maintenance programs for the early detection of occupational diseases.
The Management Team at each location will diligently respond to employee
concerns and is directly responsible for developing and implementing programs
for ensuring that their operations comply with this policy. The Environmental,
Health and Safety staff provides support by:
- - - maintaining liaison with appropriate government agencies and
interpreting and communicating regulations;
- - - providing technical guidance and assisting in the development of
policies and performance standards; and
- - - conducting independent review and assessment of all operations to audit
compliance with environmental, safety and health policies.
All employees are expected to follow the intent and spirit of this policy and
incorporate sound health, safety and environmental practices in the conduct of
their jobs.
This policy applies to all Brush Wellman business units worldwide.
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on May 6, 1997
at 11:00 a.m. at The Forum, One Cleveland Center,
1375 East Ninth Street, Cleveland, Ohio
INVESTOR INFORMATION
Brush Wellman maintains an active program of communication
with shareholders, securities analysts and other members of the investment
community. Management makes regular presentations in major financial centers
around the world. To obtain:
- - - additional copies of the Annual Report
- - - SEC Form 10K/10Q
- - - product literature,
please contact:
Timothy Reid
Vice President, Corporate Communications
Corporate Headquarters.
In January 1997, Brush Wellman opened a site on the World Wide Web. The web
site, which can be accessed via the internet at HTTP://WWW.BRUSHWELLMAN.COM is
designed to provide useful, timely information about Brush Wellman to customers,
potential customers, investors, employees and the general public.
DIVIDEND REINVESTMENT PLAN
Brush Wellman has a plan for its shareholders which provides automatic
reinvestment of dividends toward the purchase of additional shares of the
Company's common stock. For a brochure describing the plan please contact the
Vice President, Corporate Communications, at the Corporate Headquarters.
AUDITORS
Ernst & Young LLP
1300 Huntington Building
Cleveland, Ohio 44115
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Operations
P.O.Box 92301
Cleveland, OH 44193-0900
For shareholder inquiries, call: 1-800-622-6757
STOCK LISTING
New York Stock Exchange / Symbol: BW
CORPORATE HEADQUARTERS
Brush Wellman Inc.
17876 St. Clair Ave.
Cleveland, Ohio 44110
(216) 486-4200 o Facsimile: (216) 383-4091
1
28
BRUSH WELLMAN
ENGINEERED MATERIALS
17876 St. Clair Avenue
Cleveland, Ohio 44110
216/486-4200