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Exhibit 13
BRUSH WELLMAN INC.
1997
ANNUAL REPORT
......SUSTAINABLE GROWTH
[PHOTO]
INVESTING FOR ...............
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Cover: Brush Wellman's sales have grown dramatically since 1992. To equip the
Company for Sustainable Growth in the future, Brush Wellman is in the midst of a
major expansion and upgrading of its capabilities, highlighted by an investment
of $117 million in its Elmore, Ohio facility. This new facility will
significantly boost capacity, reduce production costs, improve working capital
utilization and enable the Company to offer improved service to customers. The
new facility should be fully operational by the end of 1998.
METAL SYSTEMS GROUP
(Approximately 70% of Sales)
ALLOY PRODUCTS are tailored metallurgically to specific customer performance
requirements. Copper beryllium 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.
BERYLLIUM is a unique material exhibiting physical and mechanical properties
unmatched by any other metal. It is one of the lightest structural materials
known, yet 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.
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.
MICROELECTRONICS GROUP
(Approximately 30% of Sales)
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.
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.
CIRCUITS PROCESSING TECHNOLOGY INC.
produces thick-film substrates for use in
high-frequency wireless telecommunications
applications, both ground and satellite based.
FINANCIAL HIGHLIGHTS
(Dollars in millions except per share amounts) 1997 1996 % Change
------- ------- --------
Sales ................................................. $ 433.8 $ 376.3 +15%
Net Income ............................................ 25.6 24.5 +5%
Net Income per share (diluted) ........................ 1.56 1.53 +2%
Dividends per share ................................... 0.46 0.42 +10%
Shareholders' equity per share (diluted) .............. 14.41 13.72 +5%
93 94 95 96 97
-- -- -- -- --
NET SALES
(in millions) $295.5 $345.9 $369.6 $376.3 $433.8
NET INCOME
(in millions) $ 6.5 $ 18.9 $ 20.7 $ 24.5 $ 25.6
NET INCOME PER SHARE
(diluted) $ 0.40 $ 1.15 $ 1.27 $ 1.53 $ 1.56
RETURN ON
SHAREHOLDERS' EQUITY 3.8% 9.9% 10.3% 11.2% 10.8%
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BRUSH WELLMAN INC.
is a leading international supplier of high performance engineered materials. It
is the only fully-integrated producer of beryllium, beryllium-containing alloys
and beryllia ceramic in the world. Brush Wellman also produces engineered
material systems through Technical Materials, Inc. and precious metal products
through Williams Advanced Materials Inc., both wholly-owned subsidiaries.
Brush Wellman materials continue to find new applications in a widening
array of markets. Manufacturers of electronic equipment and computers,
telecommunications systems, automobiles, aerospace products and systems, medical
equipment, home appliances and high performance recreational goods specify the
Company's high-quality materials in applications where superior performance and
reliability are essential.
Brush Wellman has nine production facilities in the United States, and
it markets its products through Company-owned Technical Service and Distribution
Centers in Japan, Germany, the United Kingdom and the United States, a
joint-venture service center in Singapore, and through a network of independent
distributors throughout the world. The Company is headquartered in Cleveland,
Ohio, the city in which the Company was founded in 1931. Brush Wellman stock is
traded of the New York Stock Exchange, identified with the symbol, "BW".
TO OUR SHAREHOLDERS
On behalf of all employees of Brush Wellman, I am pleased and encouraged to
report the achievement of another all-time sales and production record in 1997.
The fact that Brush Wellman sales grew by 15% despite the strong dollar and
capacity constraints in our Alloy Products business is a credit to the hard work
and innovation of our employees and provides evidence of the growing acceptance
of our engineered materials in high-reliability applications throughout the
world. Sales have now increased for five consecutive years and have established
new record levels in each of the last four years. Clearly, we are succeeding in
developing new applications for our products and are effectively delivering
high-quality products, on time, to our customers. In the 1996 Annual Report,
Brush Wellman's strategy for the future was articulated as focusing on three
major strategic thrusts: improve our base business, expand alloy and build a
microelectronics business. During 1997, we made progress on each of these
issues. Improvements were made in yield, productivity and operating performance
in Ceramic Products and Beryllium Products, and we continue to identify areas
for additional improvement. Alloy Products' performance was strong, both in
North America and overseas, despite the translation effects of the strong
dollar. We are proceeding on schedule with our Alloy Strip expansion project and
the Brush Engineered Bronze facility opened in the fourth quarter. In addition,
we achieved strong sales increases in microelectronics applications at Williams
Advanced Materials Inc. and Ceramic Products. Our 1997 Annual Report details our
progress in 1997 and provides an outline of our strategy for sustainable growth
in the years ahead.
1997 FINANCIAL RESULTS
For the year 1997, Brush Wellman Inc. reported diluted earnings per share of
$1.56, basic earnings per share of $1.58 and net income of $25.6 million. This
compares with 1996 diluted earnings of $1.53 per share, basic earnings per share
of $1.55 and net income of $24.5 million. Sales during 1997 totaled a record
$434 million, a 15% increase over 1996 sales of $376 million, which had
represented the previous record. Brush Wellman's sales have now increased for
five consecutive years, and have established new sales records in each of the
past four years. During 1997 the Company achieved sales increases in all major
product lines.
Throughout the year, Brush Wellman's earnings were adversely affected by
currency exchange rates. The stronger dollar reduced earnings by 24 cents per
share for the full year 1997, compared with 1996. A strong dollar, relative to
comparative periods, tends to reduce sales and income from the Company's
overseas operations due to currency translation effects. Actual production
volumes are generally unaffected by changes in currency exchange rates because
overseas sales are typically priced in local currencies. In addition, earnings
were pressured by business and product mix shifts, a higher tax rate, costs
associated with the company owned life insurance program and start-up costs
associated with Brush Engineered Bronze. Despite these unusual factors, Brush
Wellman's earnings increased in 1997.
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Brush Wellman's capital expenditures increased in 1997, reflecting
investments in Alloy Strip, Brush Engineered Bronze and Mine Development.
Capital expenditures are expected to remain high in 1998. In addition, Brush
Wellman is financing a considerable amount of the Alloy Strip expansion via a
combination of operating and synthetic lease arrangements.
Our balance sheet remains strong. Long-term debt as a percent of total
capital was 7% at the end of 1997. This ratio will grow in 1998, however, with
our major expansion and upgrading of our Alloy Strip capability. The leasing
obligations mentioned above will be in addition to long-term debt reflected on
the balance sheet. Management remains committed to maintaining the Company's
strong financial condition. Our debt and leasing arrangements are detailed in
Notes E and F, pages 13 and 14.
PRODUCT AND MARKET SUMMARY
We look at our various products in two major groups:
the Metal Systems Group and the Microelectronics Group.
METAL SYSTEMS GROUP
The Metal Systems Group represents approximately 70% of sales, and includes
Alloy Products, Engineered Material Systems (produced by the Company's
subsidiary, Technical Materials, Inc.), and Beryllium Products. Alloy Products'
sales grew in 1997 relative to 1996, both domestically and overseas. This
continuing strength reflects high levels of demand for these materials in
electronics applications and our continuing success in developing new
applications in automotive electronics, telecommunications, appliances,
commercial aircraft and plastic mold materials markets. In addition, Alloy Strip
production continues at full capacity, creating strains on the manufacturing
system, cost pressures and limiting our short-term growth. These strains should
begin to be relieved as the new Alloy Strip capacity becomes operational. Start
up on the new casting facility occurred on schedule during the fourth quarter
1997. The new rolling equipment should be operational in the second half 1998.
The Company's new Brush Engineered Bronze facility began operating in the fourth
quarter and is now shipping high quality specialty alloys to customers.
Technical Materials, Inc. (TMI) also had a very strong year, posting significant
increases in sales and profit. Over the past five years TMI has consistently
contributed to Brush Wellman's growth and profitability. Sales of Beryllium
Products also grew in 1997. The Company is encouraged by the success in
developing new applications for AlBeMet(R), in aerospace, commercial satellites,
industrial and high-performance automotive applications. Beryllium Products
operated at a loss for the whole of 1997 but was profitable for the second half
of the year. The Company's international sales grew by 31% in 1997, despite the
translation effects from a stronger dollar.
MICROELECTRONICS GROUP
Our Microelectronics Group includes Precious Metal Products (produced by
Williams Advanced Materials Inc., a Brush Wellman subsidiary), Ceramic Products
and Circuits Processing Technology. The Microelectronics Group represents
slightly less than 30% of Brush Wellman sales.
Sales of the Company's Williams Advanced Materials Inc. (WAM) subsidiary
increased dramatically in 1997 and established an all-time record. The
profitability of precious metal products continued to increase in 1997. Sales of
vapor deposition products were particularly strong. This performance was the
result of the team at WAM's success in developing new markets and adapting to
rapidly changing customer requirements. However, WAM sales, though profitable,
tend to contribute lower margins because of their high precious metal content.
In addition, volatility in the worldwide platinum and palladium markets during
the second and third quarters of 1997 caused WAM's profitability to be less than
it otherwise would have been. Despite this external pressure, WAM's contribution
to sales and earnings was considerably higher than in 1996.
Ceramic Products' sales grew in 1997, particularly in wireless
telecommunications applications. Sales of CuPack, our family of high performance
direct bond copper packages also grew significantly in 1997. Brush Wellman
Ceramic Products offer thermal management solutions for electronics applications
in wireless telecommunications, automotive, computer and satellite markets.
Circuits Processing Technology (CPT) also made a positive contribution.
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Additional details of sales and financial performance during 1996 are
contained in Management's Discussion and Analysis, beginning on page 22.
STRATEGIC REVIEW
The decade of the 1990's has been one of transition and growth for Brush
Wellman. Sales have grown steadily over the past five years, from a low of $265
million in 1992, to a record $434 million in 1997. This is an average annual
growth rate of over 10%, a rate considerably more robust than the United States
economy over the same period. This performance is especially gratifying
considering the structural changes that occurred in the Company's market base.
At the beginning of the decade, defense and mainframe computer applications
represented nearly 70% of the Company's sales. The end of the Cold War and the
major changes in mainframe computer design resulted in dramatic reductions in
demand for our materials. By 1997, these two markets represented less than 10%
of the Company's sales.
Data processing/electronics, including personal computers, data storage
devices and related connectors, switches relays and microelectronic components
accounted for more than 30% of sales in 1997. Telecommunications, automotive
electronics, appliances, plastic molds, commercial aviation and consumer
products are now important markets for our products. This transition in Brush
Wellman's business was the result of the successful implementation of a
strategic, targeted marketing and product development plan. Most of the growth
the Company has achieved in recent years has been in new or improved products.
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. International sales represented 32% of the Company's total in
1997, and achieved an all-time record despite the translation effects of the
strong dollar.
THE FUTURE: BRUSH WELLMAN'S STRATEGY FOR SUSTAINABLE 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 sales and earnings have grown consistently throughout the past
five years. During 1997, this improved
"Our investments . . . are designed to allow Brush Wellman to reposition itself
in the materials marketplace, thereby creating opportunities for growth."
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performance began to be reflected in our returns to shareholders, as the price
of Brush Wellman stock increased by 50% from the beginning through the end of
the year. Improving shareholder value will continue to be an important priority
in 1998. To do that, we realize that we must achieve earnings growth, and
improve our asset utilization. We also realize that we must continue to
demonstrate the success of our Alloy Products' growth strategy, including a
successful start-up of our Alloy Strip expansion.
For the longer term, we remain focused on three major Strategic Thrusts:
o First, improve the base business,
o Second, become the worldwide leader in specialty nonferrous alloys, and
o Third, build a microelectronics business.
Improve the Base.....
Despite the progress made in 1997, there remain opportunities to improve the
base business. In particular, many opportunities for improvement have been
identified in Ceramic Products, Beryllium Products, our Elmore operation, and
business systems.
Ceramic Products' profitability improvement efforts are concentrated on cost
reduction, focusing on yield improvements, and the pursuit of Direct Bond Copper
and Copper Tungsten as major new opportunities for growth. We achieved a major
turnaround in Ceramic profitability in 1997, but this product area continued to
operate at a loss throughout the year. Thus, Ceramic remains an area for profit
improvement focus.
Beryllium Products' profitability is being enhanced through
a combination of cost reduction efforts, product and process improvements, and
growth in sales of AlBeMet(R). Beryllium Products lost money for 1997 overall,
but was profitable during the second half and is expected to continue improving
this year.
We are determined to improve the efficiency of our Elmore, Ohio operation,
which is by far the largest in the Company. The Alloy expansion will help
considerably, but it will only get us part of the way to being a truly world
class operation. In 1998 we are challenging ourselves to make demonstrable
progress in cost, quality and worker safety at our Elmore operation.
In addition, during 1998 we are continuing our program to convert all
business systems for the year 2000. Details of our year 2000 compliance program
can be found in Management's Discussion and Analysis, page 25.
... Become the Global Leader in Non-Ferrous
Specialty Alloys ...
Our second strategic thrust involves expanding our alloy capabilities, with the
goal to become the global leader in non-ferrous specialty alloys. Alloy has
enjoyed good growth over the past five years, led by Alloy 174 strip. This
lower-priced, patented copper beryllium alloy has become a major part of the
product mix in terms of dollar sales and an even larger portion of Alloy
production in terms of pounds. Traditional alloy strip has also continued to
grow over the past few years. However, despite our sales gains, copper beryllium
represents a small proportion of non-ferrous alloys. We are convinced that our
products have the potential to capture a much larger share of this market, if we
make some fundamental changes. Specifically, the keys to positioning Alloy to be
the world's leader in specialty, high-performance non-ferrous alloys are: expand
capacity, introduce new alloys, broaden international marketing capabilities,
fully utilize organizational strengths and expand the range of alloy product
offerings by adding specialty, 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 $117
million. The goals of this investment are to increase capacity, reduce costs,
improve service and optimize working capital utilization. In addition, the new
capacity will incorporate advanced environmental, health and safety technology,
so as to be the safest work place reasonably
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achievable, and have minimal impact on the external environment.
The expansion involves the installation of a new cast shop,
hot and cold rolling mills, annealing, pickling and finishing equipment. The new
cast shop will increase the capacity, improve the quality and reduce the cost of
all our alloy products.
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. By reducing our
costs and allowing us to produce strip in much larger coils, the new capacity
will 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. Casting began in
November 1997. Remaining construction is proceeding on schedule, and the new
capacity should be fully operational by the fourth quarter.
The project is being financed primarily off-balance sheet, through a
combination of:
o an Operating Lease arrangement with the Toledo Port Authority
for the building, amounting to just under $19 million,
o a Synthetic Lease on equipment, involving the participation of
several banks, which could total $62 million, and
o the balance, or about $36 million, will be financed through a combination of
cash outlays and debt.
This financing arrangement not only enhances the project from a balance sheet
and cash flow standpoint, but it also involves a very attractive total financing
cost over the life of the project. 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 must also introduce new alloys.
Traditionally, our alloy products have been confined to the highest end,
"premium" niche of the market. Today, 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, telecommunications, computer and appliance
markets. Thus far, the interest in this new alloy system among potential users
is very strong. Alloy 171 has been approved for design in major connector
applications in the United States and internationally. We also continue to
broaden international marketing capabilities. We have been very 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 scope to the ASIAN region
through our joint venture Distribution Center in Singapore, which opened in
1997.
Over the years, we have built a strong Alloy Marketing organization. Moving
forward, we are identifying ways to utilize this organizational strength to do a
more effective job of target market and account development, particularly in
international markets.
We intend to exploit opportunities in non-beryllium alloys. The new Brush
Engineered Bronze, a family of specialty alloys in rod, bar and tube form, is
currently being introduced, supported by a $12 million, 50,000 square foot
greenfield expansion in Lorain, Ohio. This facility began casting specialty
non-ferrous alloys during the fourth quarter 1997. The addition of Brush
Engineered Bronze to our product line further strengthens our position in the
specialty alloys business. It represents another step toward our goal to be the
world's leading producer of high-quality, specialty non-ferrous alloys..
...BUILD A MICROELECTRONICS BUSINESS
Our third strategic thrust involves building a microelectronics business. The
Microelectronics Group competes for a multi-billion dollar worldwide market, and
currently represents approximately 30% of Brush Wellman's sales. We have an
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established marketing and sales presence in this business with a range of
products which meet the high performance requirements of the microelectronics
industry. We believe that by executing a strategy based on internal growth and
acquisition, we will be able to significantly expand our presence in these
attractive, fast growing worldwide markets.
Our strategic vision for microelectronics involves exploiting growth
opportunities for materials and value-added package components. Williams
Advanced Materials has been very successful in expanding its markets over the
past few years. WAM is positioned to continue developing new markets and
applications for precious metal materials both in North America and Asia,
through its facility in Singapore. Beryllium Oxide Ceramic materials grew in
1997 in wireless telecommunications applications. This material provides
solutions to thermal management problems which are presented by high-frequency
or high-power microelectronics, particularly in small spaces. We are also
exploring certain metal matrix composites and powder metal materials. Our
value-added components include CuPack and other direct bond copper components as
well as the thick-film substrate package components produced by Circuits
Processing Technology Inc. These value-added components offer alternative
thermal management solutions, focusing on high-performance, wireless
telecommunications. Our growth plans for the future involve internal development
by maximizing our organizational and technical strengths, interunit synergy and
targeted acquisitions.
DIVIDEND INCREASE
In August, the Board of Directors approved a 9% increase in the quarterly cash
dividend to a rate of 12 cents per share. This raised the annualized dividend
rate to 48 cents per share from the previous rate of 44 cents.
SHARE REPURCHASE
In May, the Board of Directors granted the authority for share repurchases, in
the open market, of a maximum of one million shares over the next four years.
The plan is intended to offset dilution due to issuance of stock through the
incentive compensation plans, and to provide the Company the option of acquiring
shares of Brush Wellman when such investment appears especially attractive.
During 1997, Brush Wellman repurchased 205,600 shares.
ORGANIZATION
In May, the Board of Directors elected Mr. Brian J. Derry Vice President
Operations. In this position, Mr. Derry is responsible for all of the Company's
Alloy and Beryllium manufacturing operations in Delta, Utah, Elmore, Ohio and
Reading, Pennsylvania.
Mr. Derry joins Brush Wellman with over twenty-five years of operations
management experience, most recently for the Ethyl Corporation, a $1.5 billion
manufacturer of fuel additives in Richmond, Virginia, and also for General
Electric Company's Plastics Group and Allied Chemical Company. We are very
pleased that Brian has joined Brush Wellman. He has quickly become an important
contributor to the accomplishment of our objectives.
In August, Mr. James P. Mooney resigned from the Board of Directors. Mr.
Mooney is Chairman and Chief Executive Officer of The OM Group, Inc. He had
joined the Brush Wellman Board of Directors in October 1996, but was unable to
continue on the Board due to scheduling conflicts. He made a positive impact on
Brush Wellman during his short tenure on our Board. We wish him and OM Group
continued success in the future.
Three long-standing members -- Mr. Henry G. Piper, Mr. Gerald C. McDonough
and Mr. Frank B. Carr -- retired from the Board of Directors during 1997. Mr.
Piper originally joined the Company in 1959 and rose through the ranks to
Chairman, President and CEO, before retiring in 1991. He had served on the Board
of Directors since 1967.
Mr. McDonough had been a member of the Board since 1983. During his fourteen
years of service on the Board, he was an immense help to the Company, and a
strong advocate of shareholder interests.
Mr. Carr retired from the Board in December, in accordance with the Company's
mandatory retirement policy for Directors who reach age 70. Brush Wellman is
grateful to Mr. Carr for his twenty-seven years of service as a Director. He
contributed greatly to the Company's success for nearly three decades. All three
of these
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long-standing Board members served with distinction. We wish them well on their
retirement from the Board.
We also welcomed two new Directors in 1997. Mr. Joseph P. Keithley was
appointed to the Board of Directors in June. Mr. Keithley, 49, is the Chairman
of the Board, President and Chief Executive Officer of Keithley Instruments,
Inc. in Cleveland, Ohio.
In December Brush Wellman announced the appointment of Mr. William R.
Robertson to its Board of Directors. Mr. Robertson, 56, is a Managing Partner of
Kirtland Capital. Prior to joining Kirtland, Mr. Robertson was President of
National City Corporation. He is a Director of National City Corporation and
National City Bank.
We are very pleased that Mr. Keithley and Mr. Robertson have joined our Board
of Directors. They bring to the Board a wealth of knowledge and understanding of
high technology industry, finance and capital markets as well as management
expertise.
ENVIRONMENTAL, HEALTH AND SAFETY ISSUES
In solid form, the form in which it is nearly always used, beryllium and
beryllium alloys pose no special health risk. However, 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 (CBD). Chronic
beryllium disease is a lung condition that occurs in that small 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. The risk of CBD
is generally confined to workplaces in which operations are performed that
generate beryllium-containing dust or fumes. At Brush Wellman, efforts in regard
to CBD focus on two fronts: prevention and treatment.
In terms of prevention, we continue to work -- and to invest resources -- to
protect workers from potentially harmful exposures to airborne beryllium. During
1997 we continued to implement changes in work practices in certain operations
to more effectively limit potential for harmful exposure. In addition, in May
1997, the Board of Directors authorized investing an additional $2.5 million for
capital improvements to our Beryllium Products operation in Elmore, Ohio aimed
specifically at further reducing the potential for employee exposure to airborne
beryllium.
Our efforts to develop more effective treatments involve a continuing
commitment to medical research. In 1997 we completed surveillance blood testing
of employees in Utah and presented results of this work and the related
Epidemiological Study to the employees. This work is part of an ongoing effort
to increase the medical understanding of CBD, with a goal of developing more
effective treatments, and hopefully, a cure for the condition. We also continue
to support the work of the Beryllium Industry Science Advisory Committee.
OUTLOOK
Looking forward, demand for our products is at an all time high and continues to
grow. We should begin to see some of the benefits of our capital investment
program in 1998. Brush Engineered Bronze is now operating. In addition,
successful trial heats on the new casting equipment in Elmore were conducted in
the fourth quarter, and material from this new equipment is now beginning to
feed our commercial alloy production stream. The new alloy strip rolling and
finishing equipment in Elmore is scheduled to be operational by the fourth
quarter of 1998. However we are currently operating at capacity in this, our
largest product line, and will likely remain capacity constrained until the new
equipment is in operation. In addition, our profits will continue to suffer from
currency pressures if the dollar remains at its current high levels or
strengthens further.
For the longer term, Brush Wellman remains committed to its strategic plan to
increase shareholder value through a combination of actions focused on improving
our base, becoming the worldwide leader in specialty, non-ferrous alloys, and
building a microelectronics business. Our plans are ambitious, but I am
convinced that we have a unique combination of products, processes, technology,
facilities, a global distribution system, financial resources and, most
importantly, competent and dedicated people. The employees of Brush Wellman can
be proud that we have met the challenges of the past decade, and I look forward
with enthusiasm to achieving our goals of significant and sustainable growth in
sales, earnings and shareholder returns in the years ahead.
/s/ Gordon D. Harnett
Gordon D. Harnett
Chairman of the Board
President and Chief Executive Officer
March 1998
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Consolidated Statements of Income
Brush Wellman Inc. and Subsidiaries
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands except per share amounts)
1997 1996 1995
---- ---- ----
Net Sales .................................................................... $ 433,801 $ 376,279 $ 369,618
Cost of sales.............................................................. 320,792 267,713 268,732
--------- ------------ ------------
Gross Margin.................................................................. 113,009 108,566 100,886
Selling, administrative and general expenses............................... 68,953 64,991 62,736
Research and development expenses ......................................... 7,707 8,309 7,814
Other-- net ............................................................... 325 961 1,250
--------- ------------ ------------
Operating Profit.............................................................. 36,024 34,305 29,086
Interest expense .......................................................... 553 1,128 1,653
--------- ------------ ------------
INCOME BEFORE INCOME TAXES ............... 35,471 33,177 27,433
--------- ------------ ------------
Income taxes:
Currently payable ......................................................... 8,506 9,825 9,547
Deferred .................................................................. 1,368 (1,139) (2,803)
--------- ------------ -----------
9,874 8,686 6,744
--------- ------------ -----------
NET INCOME ............... $ 25,597 $ 24,491 $ 20,689
========== ============ ============
Net income per share of Common Stock--basic............................... $ 1.58 $ 1.55 $ 1.28
========== ============ ============
Average number of shares of Common Stock outstanding-basic.................... 16,214,718 15,846,358 16,159,508
Net income per share of Common Stock--diluted.............................. $ 1.56 $ 1.53 $ 1.27
=========== ============ ============
Average number of shares of Common Stock outstanding--diluted................. 16,429,468 15,980,481 16,289,795
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
Brush Wellman Inc. and Subsidiaries
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities:
Net Income ....................................................................... $ 25,597 $ 24,491 $ 20,689
Adjustments to Reconcile Net Income to Net Cash
Provided from Operating Activities:
Depreciation, depletion and amortization ....................................... 18,695 18,537 18,042
Amortization of mine development ............................................... 634 4,417 2,869
Decrease (Increase) in accounts receivable ..................................... (12,652) (557) (308)
Decrease (Increase) in inventory ............................................... 3,653 (2,946) 874
Decrease (Increase) in prepaid and other current assets ........................ (4,001) (460) (1,951)
Increase (Decrease) in accounts payable and accrued expenses ................... 10,126 1,158 (1,856)
Increase (Decrease) in interest and taxes payable (2,536) (1,327) 1,050
Increase (Decrease) in deferred income tax ..................................... 1,466 (1,189) (1,284)
Increase (Decrease) in other long-term liabilities ............................. 962 1,954 2,061
Other--net .................................................................... (1,550) 966 (589)
-------- -------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 40,394 45,044 39,597
Cash Flows from Investing Activities:
Payments for purchase of property, plant and equipment ........................... (53,155) (26,825) (24,244)
Payments for mine development .................................................... (9,526) (3,663) (787)
Other investments--net .......................................................... (1,686) (4,909) 718
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (64,367) (35,397) (24,313)
Cash Flows from Financing Activities:
Proceeds from issuance of short-term debt ........................................ 6,997 552 5,845
Proceeds from issuance of long-term debt ......................................... -- 8,305 --
Repayment of long-term debt ...................................................... (960) (813) (758)
Repayment of short-term debt ..................................................... (93) (2,149) (5,000)
Purchase of treasury stock ....................................................... (4,927) (6,656) (2,826)
Issuance of Common Stock under stock option plans ................................ 5,872 1,460 1,141
Payments of dividends ............................................................ (7,285) (6,489) (5,489)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (396) (5,790) (7,087)
Effects of Exchange Rate Changes on Cash & Cash Equivalents ......................... (210) (1,661) 915
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (24,579) 2,196 9,112
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,749 29,553 20,441
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,170 $ 31,749 $ 29,553
======== ======== ========
See notes to consolidated financial statements
9
12
Consolidated Balance Sheets
Brush Wellman Inc. and Subsidiaries
December 31, 1997 and 1996
(Dollars in thousands)
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................................................... $ 7,170 $31,749
Accounts receivable (less allowance of $1,059 for 1997 and $954 for 1996)...................... 62,812 52,211
Inventories.................................................................................... 90,714 96,324
Prepaid expenses and deferred income taxes..................................................... 18,215 16,949
-------- --------
TOTAL CURRENT ASSETS 178,911 197,233
OTHER ASSETS...................................................................................... 31,319 28,326
Property, Plant and Equipment
Land........................................................................................... 5,043 5,186
Buildings...................................................................................... 85,721 80,057
Machinery and equipment........................................................................ 312,088 274,903
Construction in progress....................................................................... 26,735 19,405
Allowances for depreciation.................................................................... (272,192) (256,690)
--------- ---------
157,395 122,861
Mineral resources.............................................................................. .5,693 5,693
Mine development............................................................................... 28,409 18,883
Allowances for amortization and depletion...................................................... (17,875) (17,217)
--------- ---------
16,227 7,359
--------- ---------
PROPERTY, PLANT AND EQUIPMENT-- NET 173,622 130,220
--------- ---------
$ 383,852 $ 355,779
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt................................................................................$ 28,877 $ 25,670
Accounts payable............................................................................... 13,519 7,713
Salaries and wages............................................................................. 12,341 9,672
Taxes other than income taxes.................................................................. 2,611 2,212
Other liabilities and accrued items............................................................ 13,628 13,810
Dividends payable.............................................................................. 1,967 1,789
Income taxes................................................................................... 5,369 8,195
--------- ---------
TOTAL CURRENT LIABILITIES 78,312 69,061
OTHER LONG-TERM LIABILITIES 8,200 6,906
RETIREMENT AND POST-EMPLOYMENT BENEFITS 39,825 40,365
LONG-TERM DEBT 17,905 18,860
DEFERRED INCOME TAXES 2,797 1,330
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 22,227,006 shares (21,908,885 for 1996)................. 22,227 21,909
Additional paid-in capital..................................................................... 59,583 53,650
Retained income................................................................................ 254,174 236,043
--------- ---------
335,984 311,602
Less: Common Stock in treasury, 5,843,561 shares in 1997 (5,618,377 in 1996)................... 96,639 91,357
Other Equity transactions.................................................................... 2,532 988
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 236,813 219,257
--------- ---------
$ 383,852 $ 355,779
========= =========
See notes to consolidated financial statements
10
13
Consolidated Statements of Shareholders' Equity
Brush Wellman Inc and Subsidiaries
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands except per share amounts)
Additional Common
Common Paid-In Retained Stock In
Stock Capital Income Treasury Other
--------------------------------------------------------------------
BALANCES AT JANUARY 1, 1995 $ 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)
Net income............................................. 25,597
Declared dividends $.46 per share...................... (7,463)
Proceeds from sale of 309,196 shares under option plans 309 4,821
Income tax benefit from employees' stock options....... 742
Other equity transactions.............................. 9 370 (3) (1,544)
Forfeiture of restricted stock......................... (355)
Purchase of shares for treasury........................ (4,927)
--------- --------- --------- --------- ---------
BALANCES AT DECEMBER 31, 1997 $ 22,227 $ 59,583 $ 254,174 $ (96,639) $ (2,532)
========= ========= ========= ========= =========
See notes to consolidated financial statements
11
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brush Wellman Inc. and Subsidiaries
December 31, 1997
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 are beryllium
alloys, beryllium, engineered material systems, precious metals, ceramics and
thick film circuits. The Company is vertically integrated and distributes its
products through a combination of Company-owned facilities and outside
distributors and agents.
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.
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 are marked-to-market
using the applicable rates and any unrealized losses are taken to income.
Realized gains and losses on forward contracts and commodity 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.
REVENUE RECOGNITION: The Company recognizes revenue when goods are shipped and
title passes to the customer.
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 1997 consolidated financial statement presentation.
NET INCOME PER SHARE: The Company adopted SFAS No. 128, "Earnings per Share" in
1997 as prescribed, replacing the presentation of primary and fully diluted
earnings per share (EPS) with a presentation of basic and diluted EPS. Basic EPS
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the assumed conversion of all dilutive common stock equivalents as appropriate
under the treasury stock method. The EPS for all periods reported herein have
been restated to comply with SFAS No. 128, including the quarterly results for
1996 and 1997.
ENVIRONMENTAL REMEDIATION: The Company adopted the Statement of Position ("SOP")
96-1, "Environmental Remediation Liabilities" in the first quarter of 1997. The
adoption did not have a material impact on its financial position or results of
operations. Contingencies, including environmental remediation liabilities, are
further outlined in Note M to the Consolidated Financial Statements.
12
15
NEW PRONOUNCEMENTS: In 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." These pronouncements
set forth certain public reporting requirements and standards, but do not
necessitate any changes in accounting practices nor will they affect reported
earnings. The Company is studying the impact of these new requirements on its
reporting and will adopt them as prescribed in 1998.
NOTE B - ACQUISITIONS
In October 1996, the Company acquired the Common Stock of Circuits Processing
Technology, Inc. for Company Common Stock. This transaction was accounted for as
a purchase and did not have a material impact on operations.
NOTE C - INVENTORIES
Inventories in the consolidated balance sheets are summarized as follows:
DECEMBER 31
(Dollars in thousands) 1997 1996
Principally average cost: -------- --------
Raw materials and supplies.............................. $17,331 $20,210
In process.............................................. 58,666 55,242
Finished................................................ 37,008 42,536
-------- --------
113,005 117,988
Excess of average cost over LIFO
inventory value......................................... 22,291 21,664
-------- --------
$90,714 $96,324
======== ========
Inventories aggregating $66,221,000 and $67,730,000 are stated at LIFO at
December 31, 1997 and 1996, 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 $2,560,000, $2,168,000 and $2,284,000 in 1997,
1996 and 1995, respectively. Interest costs capitalized and the amounts
amortized are as follows:
(Dollars in thousands) 1997 1996 1995
------ ------ ------
Interest incurred........................... $2,371 $2,103 $2,099
Less capitalized interest................... 1,818 975 446
------ ----- -------
$ 553 $1,128 $1,653
====== ======= =======
Amortization, included principally
in cost of sales......................... $ 600 $ 573 $ 578
====== ======= =======
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 $1,075,000, ($190,000) and $954,000 in 1997, 1996 and
1995, respectively. The related interest expense was $3,081,000, $5,115,000 and
$4,788,000, respectively.
NOTE E - DEBT
A summary of long-term debt follows:
DECEMBER 31
(Dollars in thousands) 1997 1996
---- ----
9.60% - 9.68% medium-term notes, $5 million
payable in each of 1997 and 2000..................... $ 5,000 $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 through 2000............ 2,400 3,200
Variable rate industrial development
revenue bonds payable in 2016......................... 8,305 8,305
Variable rate note payable in equal installments
through 1999 (paid off in 1997)....................... 0 253
------- -------
4.90% note payable in yen in equal installments
through 1997 (converted to short-term debt)........... 0 706
------- -------
18,705 25,464
Current portion of long-term debt........................ (800) (6,604)
------- -------
$17,905 $18,860
======= =======
Maturities on long-term debt instruments as of December 31, 1997, are as
follows:
1998............................................................ $ 800
1999............................................................ 800
2000............................................................ 5,800
2001............................................................ 0
2002............................................................ 0
Thereafter...................................................... 11,305
--------
$ 18,705
========
The Company has a revolving credit agreement with five banks which provides a
maximum availability of $55,000,000 through April 30, 2000. At December 31,
1997, there were no borrowings outstanding against this agreement.
The Company established a $10,000,000 multi-currency line of credit during
1997. At December 31, 1997 a short-term loan of 513,600,000 yen ($3,948,000) was
outstanding.
Included in short-term debt is $28,077,000 ($19,066,000 at December 31, 1996)
outstanding under lines of credit totaling $82,894,000 ($114,612,000 at December
31, 1996). The $82,894,000 lines of credit consist of $40,000,000, $35,519,000
and $7,375,000 of domestic, foreign and precious metal (primarily gold)
denominated debt respectively. The domestic lines of $40,000,000 are
uncommitted, unsecured and renewed annually. The foreign lines are uncommitted,
unsecured and renewed annually. The precious metal facility is secured and
renewed annually. Of the amount outstanding, $20,702,000 is payable in foreign
currencies and $7,375,000 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. The average rate on short-term debt was
3.0% and 3.5% as of December 31, 1997 and 1996, respectively.
13
16
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
The Company has a private placement agreement whereby the Company can issue
up to an aggregate of $75,000,000 of medium-term notes ($5,000,000 outstanding
at December 31, 1997). 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.
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 variable rate ranged from 3.32% to 4.79% during
1997.
During 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.
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 25 years.
Rent expense amounted to $4.3 million, $4.7 million and $ 4.1 million during
1997, 1996, and 1995, respectively. The future estimated minimum lease payments
under non-cancelable operating leases with initial lease terms in excess of one
year at December 31, 1997, are as follows: 1998 - $3.6 million; 1999 - $ 7.6
million; 2000 - $ 7.4 million; 2001 - $7.1 million; 2002 - $ 3.1 million; and
thereafter - $22.3 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 $81.1 million. Start-up of this facility, which will be phased
in over time, began in the fourth quarter of 1997. Lease payments for the
facility 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 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.
All hedge contracts mature in two years or less. 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, 1997
and December 31, 1996 were as follows:
(DOLLARS IN THOUSANDS) 1997 1996
Currency: ---------- --------
Deutschemark............................................... $ 10,650 $ 9,300
Yen........................................................ 10,950 7,400
Sterling.................................................... 4,328 8,293
--------- ---------
Total....................................................... $ 25,928 $ 24,993
========= =========
CASH AND CASH EQUIVALENTS
Included in cash equivalents at December 31, 1996 were $12.4 million 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. There were no investments of this type
at December 31, 1997.
LONG- AND SHORT-TERM DEBT
The fair value of the Company's debt (which had a carrying value of $46,782,000)
at December 31, 1997 was estimated at $48,289,000 using a discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. At December 31, 1996, the fair value of the
Company's $44,530,000 of debt was estimated at $45,915,000 using the same
procedure.
OTHER SWAP ARRANGEMENTS
The Company has commodity swap agreements to hedge a portion of anticipated
copper purchases through 1999. Under these agreements, the Company receives or
makes payments based on the difference between a specified price and the market
price of copper. The fair value of these contracts at December 31, 1997 was
$11.9 million (notional amount $12.9 million).
INTEREST RATE SWAP AGREEMENTS
In December, 1996, the Company entered into an interest rate swap agreement to
hedge the variable rate payments to be made during the initial
14
17
term of an equipment lease (see Note F to the Consolidated Financial
Statements). The Company has accounted for the swap as a hedge effectively
fixing the estimated lease payments through the initial lease term. The fair
value of this contract was a negative $1.2 million at December 31, 1997. The
fair value approximated the notional value at December 31, 1996.
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 at December 31, 1997 and December
31, 1996 approximated its notional value.
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 27, 1998, the Company's Board of Directors adopted a new share
purchase rights plan and declared a dividend distribution of one right for each
share of Common Stock outstanding as of the close of business on February 9,
1998. The plan allows for new shares issued after February 9, 1998 to receive
one right subject to certain limitations and exceptions. Each right entitles the
shareholder to buy one one-hundredth of a share of Serial Preferred Stock,
Series A, at an initial exercise price of $110. 450,000 unissued shares of
Serial Preferred Stock will be designated as Series A Preferred Stock. Each
share of Series A Preferred Stock will be entitled to participate in dividends
on an equivalent basis with one hundred shares of Common Stock. Each share of
Series A Preferred Stock will be entitled to one vote. The rights will not be
exercisable and will not be evidenced by separate right certificates until a
specified time after any person or group acquires beneficial ownership of 20% or
more (or announces a tender offer for 20% or more) of Brush Wellman Common
Stock. The rights expire on January 27, 2008, and can be redeemed for 1 cent per
right under certain circumstances.
In May 1997, the Company's Board of Directors authorized the repurchase of up
to 1,000,000 shares of its Common Stock (not to exceed 250,000 shares per year)
over a four year period. Through December 31, 1997, the Company repurchased
205,600 shares at a total cost of $4.9 million.
In December 1995, the Company's Board of Directors authorized a repurchase of
up to 1,000,000 shares of its Common Stock. Through December 31, 1996, the
Company repurchased 524,400 shares at a total cost of $9,481,000 under this
program. In May 1996, the Company's Board of Directors withdrew the authority
for additional share re-purchases.
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 1997, a total of 9,000 special
restricted shares (1,200 were subsequently forfeited) were granted to certain
employees. In 1996, a total of 116,653 performance restricted shares and 118,127
performance shares 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. Deferred
compensation is amortized over the vesting period and amounted to $270,000 and
$188,000 in 1997 and 1996, 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. In 1995, the Company's right to grant options on a total of 228,565
shares (under the Company's 1979, 1984 and 1989 stock option plans) were
terminated upon shareholder approval of the 1995 Stock Incentive Plan. No
further stock awards will be made under the Company's 1979, 1984 and 1989 stock
option plans except to the extent that shares become available for grant under
these plans by reason of termination of options previously granted.
The 1990 Stock Option Plan for Non-Employee Directors 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 interpretation in accounting for its stock incentive plan. If the
Company had elected to recognize compensation expense for its stock incentive
plan awards based on the estimated fair value of the awards on the grant dates,
consistent with the method prescribed by SFAS No. 123 by amortizing the expense
over the options' vesting periods, the pro forma net income and earnings per
share (E.P.S.) would have been as noted below:
(IN THOUSANDS OF DOLLARS) 1997 1996 1995
Net income As reported $25,597 $24,491 $20,689
Pro forma $25,263 $24,255 $20,662
Basic E.P.S. As reported $ 1.58 $ 1.55 $ 1.28
Pro forma $ 1.56 $ 1.53 $ 1.28
Diluted E.P.S. As reported $ 1.56 $ 1.53 $ 1.27
Pro forma $ 1.54 $ 1.52 $ 1.27
Note: The pro forma disclosures shown are not representative of the effects on
net income and earnings per share in future years.
The weighted average fair value of the Company's stock options used to
compute the pro forma net income and earnings per share disclosures is $4.99,
$5.96 and $5.48 for 1997, 1996 and 1995, respectively. The fair
15
18
Notes to Consolidated Statements continued
value is the estimated present value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for the
various grants in 1997, 1996 and 1995:
1997 1996 1995
------- -------- --------
Risk-free interest rate..................... 6.15% 6.88% 7.75%
Dividend yield.............................. 2.00% 2.03% 1.54%
Volatility of stock......................... 29.90% 29.35% 30.90%
Expected life of option..................... 4 years 10 years 4 years
A summary of option activity during the years 1997, 1996 and 1995 follows:
Range of Weighted Avg.
Shares Option Prices Exercise Price
------ ------------- --------------
Outstanding at December 31, 1994........ 1,578,300 $11.81 to $38.94 $18.58
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 $18.32
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 $18.12
Granted................................. 212,550 $18.13 to $21.81 $18.26
Exercised............................... (309,696) $12.00 to $22.06 $16.65
Canceled................................ (107,040) $13.56 to $38.94 $28.79
---------
Outstanding at December 31, 1997........ 1,340,384 $11.81 to $29.94 $17.62
=========
At December 31, 1997, options for 1,141,774 shares (1,375,730 shares at December
31, 1996) were exercisable with a weighted average remaining life of 5.5 years
and 4.9 years for 1997 and 1996, respectively, and a weighted average exercise
price of $17.58 and $18.28 for 1997 and 1996, respectively. The outstanding
options as of December 31, 1997, may be divided into the following ranges:
Range of Average
Option Prices Outstanding Exercisable Remaining Life
$11.81 to $17.69 789,334 724,274 5.06
$18.63 to $25.50 544,050 410,500 6.16
$28.38 to $29.94 7,000 7,000 0.79
--------- ----------
Total 1,340,384 1,141,774
As of December 31, 1997, there were 194,757 shares (334,112 at December 31,
1996) available for future grants.
NOTE I - INCOME TAXES
Income before income taxes and income taxes are comprised of the following
components, respectively:
(DOLLARS IN THOUSANDS) 1997 1996 1995
Income before income taxes: -------- ------ -------
Domestic................................ $30,993 $28,750 $20,480
Foreign................................. 4,478 4,427 6,953
------- ------- -------
Total before income taxes.............. $35,471 $33,177 $27,433
======= ======= =======
Income taxes:
Current income taxes:
Domestic................................ $ 5,982 $ 7,736 $6,779
Foreign................................. 2,524 2,089 2,768
------- ------- --------
Total current......................... 8,506 9,825 9,547
Deferred income taxes:
Principally domestic.................... 1,368 (1,139) (2,803)
------- ------- --------
Total income taxes.................... $ 9,874 $ 8,686 $ 6,744
======= ======= ========
A reconciliation of the federal statutory and effective income tax rates
follows:
1997 1996 1995
---- ---- ----
Federal statutory rate ...................... 35.0% 35.0% 35.0%
State and local income taxes, net
of federal tax effect...................... 1.7 1.1 2.1
Effect of excess of percentage
depletion over cost depletion.............. (5.5) (4.9) (5.5)
Company-owned life insurance................. (1.5) (3.6) (4.9)
Difference due to book and tax basis
of assets of acquired businesses........... 0.4 1.1 0.4
Taxes on foreign income - net................ (1.2) (1.2) (2.2)
Other items.................................. (1.1) (1.3) (0.3)
---- ---- ----
Effective tax rate....................... 27.8% 26.2% 24.6%
==== ==== ====
Included in income taxes currently payable, as shown in the Consolidated
Statements of Income, are $935,000, $585,000 and $904,000 of state and local
income taxes in 1997, 1996 and 1995, respectively.
The Company made domestic and foreign income tax payments, net of
refunds, of $10,507,000, $11,144,000 and $8,087,000 in 1997, 1996 and 1995,
respectively.
16
19
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) 1997 1996
------- -------
Postretirement benefits other than pensions $12,455 $12,391
Alternative minimum tax credit.......................... 5,582 5,155
Other reserves.......................................... 7,095 6,592
Environmental reserves.................................. 1,666 1,236
Inventory .............................................. -- 380
Miscellaneous........................................... 652 744
------- --------
Total deferred tax assets............................... 27,450 26,498
Depreciation............................................ (9,765) (9,693)
Pensions................................................ (3,946) (3,851)
Mine development........................................ (4,139) (2,005)
Capitalized interest expense............................ (1,179) (1,358)
Inventory .............................................. (198) --
------- --------
Total deferred tax liabilities.......................... (19,227) (16,907)
-------- --------
Net deferred tax asset ................................. $ 8,223 $ 9,591
======== ========
NOTE J - EARNINGS PER SHARE
Years ended December 31, 1997, 1996, and 1995.
The following table sets forth the computation of basic and diluted earnings per
share (E.P.S.):
1997 1996 1995
----------- --------- ----------
Numerator for basic and diluted E.P.S.:
Net income............................ $25,597,000 $24,491,000 $ 20,689,000
Denominator:
Denominator for basic E.P.S.
Weighted-average shares
outstanding....................... 16,214,718 15,846,358 16,159,508
Effect of diluted securities:
Employee stock options.............. 194,189 112,440 129,859
Performance restricted stock ....... 18,680 12,857 428
Special restricted stock............ 1,881 8,826 --
----------- --------- ----------
Diluted potential common shares..... 214,750 134,123 130,287
Denominator for diluted E.P.S.
Adjusted weighted-average shares
outstanding....................... 16,429,468 15,980,481 16,289,795
=========== ========== ==========
Basic E.P.S............................. $1.58 $1.55 $1.28
=========== ========= ==========
Diluted E.P.S........................... $1.56 $1.53 $1.27
=========== ========= ==========
NOTE K - 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 1997, 1996 or 1995.
A summary of the components of net periodic pension cost (credits) for
pension plans follows (in thousands):
DEFINED BENEFIT PLANS: 1997 1996 1995
Service cost-benefits earned
during the year........................ $ 2,509 $2,591 $ 1,942
Interest cost on projected
benefit obligation..................... 4,916 4,958 4,512
Actual return (increase)/decrease
on plan assets......................... (15,433) (11,084) (12,684)
Net amortization and deferral............ 7,903 3,890 5,759
------- ------- -------
Total (credit) expense................. $ (105) $ 355 $ (471)
======= ======= =======
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
1997 1996
------- ---------
Actuarial present value of benefit obligations:
Vested benefit obligation.................................. $54,983 $ 51,898
======= =========
Accumulated benefit obligation........................... $58,688 $ 56,288
======= =========
Plan assets at fair value....................................$96,372 $ 84,819
Projected benefit obligation.............................. (70,665) (68,264)
------- ---------
Plan assets in excess of projected benefit obligation.... 25,707 16,555
Unrecognized net (gain) or loss.......................... (13,772) (3,577)
Unrecognized net assets, at date of adopting
SFAS 87, net of amortization............................ (3,308) (4,015)
Unrecognized prior service cost.......................... 2,980 2,365
------- ---------
Net pension asset recognized at December 31.... .......... $11,607 $ 11,328
======= =========
Assumptions used in accounting for the pension plans were:
1997 1996 1995
---- ---- ----
Weighted-average discount rate............................ 7.25% 7.50% 7.25%
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, 1997, the projected
benefit obligation was $2,041,000 ($1,910,000 in 1996). A corresponding
accumulated benefit obligation of $1,835,000 ($1,747,000 in 1996) has
17
20
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
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 $2,207,000 in 1997, $1,844,000 in 1996 and $1,683,000
in 1995.
NOTE L - 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. Employees hired on or after January 3, 1994 are not eligible for
postretirement health benefits. The Company also provides medical benefits to
certain retired employees and spouses from an operation that was divested in
1985.
Covered 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,
1997 1996
---- ----
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees.............................................. $21,505 $22,477
Fully eligible active plan participants............... 5,382 5,371
Other active plan participants........................ 3,888 3,995
------- -------
30,775 31,843
Plan assets............................................... -- --
Unrecognized net gain/(loss).............................. 5,875 4,612
------- -------
Accrued postretirement benefit obligation................. $36,650 $36,455
======= =======
Net periodic postretirement benefit cost includes the following components (in
thousands):
1997 1996 1995
---- ---- ----
Service cost.......................................... $ 312 $ 385 $ 304
Interest cost......................................... 2,174 2,277 2,409
Amortization of (gain)/loss........................... (230) (25) (140)
------ ------ ------
Net periodic postretirement benefit cost .......... $2,256 $2,637 $2,573
====== ====== ======
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, 1997 is 6.25%
for retirees age 65 and over and 8.00% for retirees under age 65 in 1998, 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, 1997 by
$1,773,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1997 by $121,000. 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 7.25% at December 31, 1997, 7.50% at
December 31, 1996 and 7.25% at December 31, 1995.
NOTE M - CONTINGENCIES AND COMMITMENTS
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 undiscounted reserves of $5.1 million at
December 31, 1997 ($4.0 million at December 31, 1996). 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, 1997, the Company has outstanding commitments of $8.2
million to purchase capital equipment.
18
21
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
Note N - OPERATIONS BY GEOGRAPHIC AREA
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1997
--------------------------------------------------------------
OPERATIONS INTERNATIONAL
IN THE DISTRIBUTION ADJUSTMENTS &
UNITED STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ -------------- -------------
Sales to unaffiliated customers.................................... $345,100 $ 88,701 $433,801
Transfers between operations....................................... 62,844 ($62,844)
-------- ------- -------- --------
Net Sales...................................................... $407,944 $88,701 ($62,844) $433,801
======== ======= ======== ========
Operating profit (loss) ........................................... $ 33,438 $ 4,888 ($ 2,302) $ 36,024
======== ======= ========
Interest expense................................................... (553)
--------
Income before income taxes..................................... 35,471
========
Identifiable assets at December 31, 1997........................... $321,760 $45,606 ($ 4,449) $362,917
======== ======= ========
Corporate assets................................................... 20,935
--------
Total assets at December 31, 1997.............................. $383,852
========
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
------------------------------------------------------------
OPERATIONS INTERNATIONAL
IN THE DISTRIBUTION ADJUSTMENTS &
UNITED STATES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- -------------
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
========
Transfers between operations are accounted for in the same manner as sales to
unaffiliated customers. Corporate assets are principally cash and cash
equivalents, property, plant and equipment, and investments.
Total international sales were $142,423,000 in 1997, $108,402,000 in
1996, and $127,289,000 in 1995. 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 $53,722,000 in 1997,
$33,574,000 in 1996, and $36,126,000 in 1995.
19
22
Notes to Consolidated Statements (continued)
NOTE O - QUARTERLY DATA (UNAUDITED)
Years ended December 31, 1997 and 1996
(Dollars in thousands except per share amounts)
1997
------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ---------- ----------- ----------- -----------
Net Sales.............................................. $99,688 $ 113,374 $ 109,073 $ 111,666 $ 433,801
Gross Profit............................................ 25,691 29,786 27,227 30,305 113,009
Percent of Sales ................................... 25.8% 26.3% 25.0% 27.1% 26.1%
Net Income ............................................ 6,490 7,489 3,989 7,629 25,597
Earnings Per Share of Common Stock:
Basic .............................................. 0.40 0.46 0.25 0.47 1.58
Diluted ............................................ 0.40 0.46 0.24 0.46 1.56
Dividends Per Share of Common Stock ................... 0.11 0.11 0.12 0.12 0.46
Stock price range
High............................................... 19.25 22.13 26.81 25.87
Low .................................................. 16.25 17.75 20.94 23.06
1996
--------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- ------- --------
Net Sales............................................. $93,801 $104,349 $88,312 $89,817 $376,279
Gross Profit............................................ 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
Earnings Per Share of Common Stock:
Basic................................................ 0.33 0.52 0.29 0.41 1.55
Diluted.............................................. 0.32 0.51 0.29 0.41 1.53
Dividends Per Share of Common Stock..................... 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
20
23
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 27, 1998
- -------------------------------------------------------------------------------
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
24
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 services, 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
1997 TO 1996 COMPARISON
Sales in 1997 were a record $433.8 million, a 15% improvement over 1996 sales of
$376.3 million. Sales have increased for five consecutive years, establishing
record highs in each of the past four years. Diluted earnings per share grew to
$1.56 in 1997 from $1.53 in 1996.
Metal Systems sales, which are approximately 70% of total sales, increased
in 1997 over 1996. The primary markets for these products are
telecommunications, automotive and electronics. Aerospace, defense and plastic
tooling are smaller, but important markets as well. Major products included in
Metal Systems are beryllium, beryllium alloy strip and bulk and engineered
materials. These products offer a wide variety of performance characteristics
that are ideal in high reliability applications, and enable customers to improve
efficiencies and lower costs. Depending upon their form and application, these
products can provide superior electrical conductivity, formability, wear
resistance and high strength and hardness. Applications for these materials
include connectors, switches, relays, mold tooling, bushings, contacts and
structural components.
Alloy strip sales posted significant gains in 1997 over 1996 in the domestic
and international markets. Pounds shipped increased at a higher rate than the
sale values as a large portion of the additional sales was in relatively lower
priced alloys. The translation rate differences also adversely affected
international sales. Strip production was near capacity for most of the year.
The new casting facility in Elmore, Ohio, part of the three-year $117 million
alloy expansion project, started up on schedule late in the fourth quarter 1997.
In addition to increasing capacity, this equipment is designed to lower costs
and improve quality of beryllium alloy products. The strip mill portion of the
expansion project is scheduled to be completed in the summer of 1998.
Sales of alloy bulk products declined year on year due to lower sales to the
recreation and leisure market. The Company has now developed new alloys and
marketing strategies in attempts to regain its share in this profitable, but
somewhat seasonal and inconsistent, market. Bulk product sales to other markets
increased slightly in 1997 over 1996. To augment the markets served by its
traditional beryllium alloy bulk products, the Company recently completed
construction of a new facility in Lorain, Ohio, to produce a specialty family of
non-beryllium containing alloys in rod, bar and tube form. Production in limited
quantities began in the fourth quarter 1997 and the facility is anticipated to
be fully operational in 1998.
Sales of engineered material systems once again demonstrated strong growth
in the current year continuing a five-year trend of improving revenues and
profits. Engineered material systems include clad inlay or overlay metals,
contour profiling of metals, electron beam welded metal systems, precious and
base metal electroplating and solder-coated metal systems, or any combinations
of these systems. Capital investments to support and expand these product
offerings were made in 1997 and are planned to continue in 1998.
Beryllium sales also grew in 1997 from 1996. AlBeMet(R) sales, while still
relatively small, increased in the current year and the Company is encouraged by
its potential commercial applications. Investment cast products also offer an
opportunity for growth. Beryllium metal sales, primarily for defense
applications, were flat year on year.
Sales of Microelectronic Group products, which include precious metals,
ceramics and thick film circuits, increased dramatically in 1997 from 1996 to
account for approximately 30% of the Company's total sales. The majority of the
sales growth was in precious metals, primarily physical vapor deposition targets
used in the optical data storage and hybrid electronic markets. Revenues from
the Company's gold refining operations increased in 1997 as well. Because of the
high precious metal content, the cost of which is passed through to customers,
these sales have a lower margin percent than the average margins earned on the
Company's other products. While profitable, the large increase in precious metal
sales has the effect of lowering the Company's overall gross margin percent.
Ceramic sales were higher in 1997 than 1996 on the strength of additional
base beryllia ceramic sales to the telecommunications market. Direct bond copper
sales increased slightly, but their profitability remained disappointing. Thick
film circuit sales from Circuits Processing Technology, Inc. ("CPT") were a
minor contributor to the increased sales in 1997 from 1996.
International operations consist of distribution centers in Germany, England
and Japan, a marketing office in Singapore and a precious metal finishing
facility in Singapore. In addition, in 1997, the Company entered into a joint
venture in Singapore to provide slitting and distribution facilities for
beryllium alloys. Sales by international operations totaled $88.7 million in
1997 compared to $74.8 million in 1996. Sales by these operations are
predominantly in their respective currencies while the majority of the
underlying cost of sales is incurred in dollars. In 1997, the U.S. dollar on
average strengthened 11% against the yen and 14% against the deutschmark from
1996, thereby reducing the comparative translated value of these sales and
resulting margins. The dollar's value against the yen and the deutschmark was
higher at December 31, 1997 than the average value for 1997. Direct exports to
unaffiliated customers were $53.7 million in 1997 and $33.6 million in 1996. The
majority of these sales are to North America and
22
25
western Europe and are denominated in dollars. International markets 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, 1997, outstanding hedge contracts totaled $25.9
million, compared to $25.0 million at year end 1996.
Gross margin was $113.0 million in 1997, a gain of $4.4 million from 1996.
However, the margin percentage declined to 26.1% of sales from 28.9%. The two
major causes for the decline in the percentage were the effects of the stronger
dollar and the large increase in precious metal products that carry smaller
margins as previously discussed. Capacity constraints at several facilities
created additional cost pressures (increased overtime, limited availability of
the optimal equipment, etc.). Tempering these effects was the increase in
beryllium strip sales earning greater margins. The Utah beryllium extraction
facility operated at very efficient levels in 1997. The cost of copper,
typically passed through to beryllium alloy customers, was essentially flat year
on year. Selling prices in general were fairly stable during 1997.
Selling, administrative and general expenses were $69.0 million or 15.9% of
sales in 1997 compared to $65.0 million or 17.2% of sales in 1996. Costs
associated with the start-up of the new facility in Lorain, Ohio and charges for
the company-owned life insurance program were two main causes for the increase.
The expense portion of the new computer based information system project, begun
in 1996, continued into 1997.
Research and development (R&D) expenses were $7.7 million or 1.8% of sales
in 1997, a decline from $8.3 million or 2.2% of sales in 1996. Expenses were
lower in 1997 in part because of reimbursements for R&D work performed under
government contracts. Additionally, two major initiatives in 1996 achieved their
objectives in early 1997 and, therefore, caused a reduction in expenditures. The
Company is planning on increasing its investment and staffing in R&D in order to
continue developing new products and technologies.
Other-net expense was $0.3 million in 1997 and $1.0 million in 1996. Foreign
currency hedge gains were higher in 1997 than 1996 while goodwill expense was
lower in 1997. Partially offsetting these benefits was an increase in the cost
of financing the consigned platinum and palladium stocks that support a portion
of the precious metal business. Major disruptions to the supply of metal in the
international markets in the summer of 1997 caused the higher rates. By the end
of 1997, financing rates had significantly declined, although they still were
higher than the typically nominal rates of prior years. The Company has taken
additional measures to reduce its exposures.
Interest expense was $0.6 million in 1997 versus $1.1 million in 1996 net of
capitalized interest associated with long-term capital projects of $1.9 million
in 1997 and $1.0 million in 1996. The higher incurred interest expense in 1997
was the result of increased borrowings, as the weighted average interest rate
declined slightly in 1997 from 1996.
Income before income taxes was $35.5 million in 1997, an increase of
$2.3 million from 1996. As explained above, this improvement was due to higher
sales volume generating an increase in margin that was partially offset by an
unfavorable currency effect and higher expenses.
The Company's effective tax rate was 27.8% of pre-tax earnings in 1997
compared to 26.2% in 1996. Higher earnings and a decreased tax benefit from the
company-owned life insurance program caused the increase in the rate.
Adjustments to the statutory tax rate are detailed in Note I to the Consolidated
Financial Statements.
Comparative basic earnings per share were $1.58 in 1997 and $1.55 in 1996.
Diluted earnings per share were $1.56 in 1997 and $1.53 in 1996. All earnings
per share calculations have been restated to comply with SFAS No. 128, which
revised the methodology for determining the weighted average shares outstanding.
(See Note J to the Consolidated Financial Statements for a reconciliation of
basic and diluted earnings per share.)
1996 TO 1995 COMPARISON
Worldwide sales in 1996 were $376.3 million compared to $369.6 million achieved
in 1995. The revenue growth came primarily from domestic beryllium alloy
products and engineered material systems. The resulting profits grew faster than
sales, as diluted earnings per share were $1.53 in 1996, an improvement of 20%
over the prior 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. Sales of bulk products (bar, tube, plate, custom fabricated parts) also
increased in 1996, further penetrating 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 are 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 stronger dollar
in 1996 relative to 1995 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.
Sales of engineered material 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 adversely affected
second half sales.
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Precious metal sales were down in 1996 from 1995'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 1996
from 1995, reflecting the drop-off in frame lid assembly shipments.
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.
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.
Sales from international operations totaled $74.8 million in 1996 compared
to $91.2 million in 1995. Direct exports to unaffiliated customers totaled $33.6
million in 1996 and $36.1 million in 1995.
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, was
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
alloy 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 and in-house investment casting technology. 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 account for the improvement.
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 rate. Adjustments to the statutory tax rate are detailed in
Note I to the Consolidated Financial Statements.
Comparative basic earnings per share were $1.55 in 1996 and $1.28 in 1995
and diluted earnings per share were $1.53 in 1996 and $1.27 in 1995.
FINANCIAL POSITION
CAPITAL RESOURCES AND LIQUIDITY
Cash flow from operations was $40.4 million in 1997 down from $45.0 million in
1996. Accounts receivable increased $12.7 million since the prior year end as a
result of the 24% growth in fourth quarter sales; the collection period remains
essentially unchanged. Inventory declined by $3.7 million in large part as a
result of the strong demand for the Company's products. The cash balance at
December 31, 1997, was $7.2 million compared to $31.7 million at the prior year
end. As discussed below, the increase in capital expenditures is the main cause
for the decline in cash.
The aforementioned $117 million alloy expansion project begun in 1996 is
being financed, in part, by two operating leases totaling approximately $81.1
million (See Note F to the Consolidated Financial Statements). Payments under
the facility lease began in December 1997 and payments under the equipment lease
will begin in 1999. Equipment lease payments are graduated to increase over
time.
Capital expenditures for property, plant and equipment totaled $53.2
million, excluding items under lease. Included in this total is the construction
cost of the new manufacturing facility in Lorain, Ohio, which was financed in
part by tax-advantaged industrial revenue bonds, a portion of the alloy
expansion project in Elmore, Ohio, and new plating lines and related equipment
at the Lincoln, Rhode Island facility. Capital expenditures in 1997 were
significantly higher than in
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recent years and expenditures in 1998 are anticipated to approximate 1997's
level.
New bertrandite mine pits in Utah were developed at a total cost of $13.2
million, including $3.7 million expended in 1996. The pits have an average life
of four to five years.
In 1996, the Company initiated a project to implement a new computer-based
information system replacing the majority of its older systems. The new system
was designed primarily to improve the efficiency of information flow, but it
also mitigates the requirements to make numerous legacy systems year 2000
compliant. The new system is anticipated to be substantially implemented by the
end of 1998 and have a capitalized cost of approximately $15 million. Year 2000
compliant costs for the remaining legacy systems are estimated at approximately
five cents per share in 1998. The Company anticipates that the majority of its
systems will be year 2000 compliant by the end of 1998. The Company does not
believe it is materially dependent upon any vendor or customer who may have a
year 2000 compliance problem.
Short-term debt at year end 1997 was $28.9 million, an increase of $3.2
million from the prior year end. Included in this amount is $0.8 million of the
current portion of long-term debt with the balance denominated in precious
metals and foreign currencies to provide hedges for assets so denominated.
Credit lines amounting to $54.8 million are available for additional borrowing.
The precious metal facility is committed, secured and renewed annually. All
other lines are uncommitted, unsecured and renewed annually.
Long-term debt on the balance sheet was $17.9 million at December 31, 1997,
compared to $18.9 million at December 31, 1996. Long-term available financial
resources include $70 million of medium-term notes and $55 million under a
revolving credit agreement.
The Company repurchased 205,600 shares of Common Stock at a cost of $4.9
million in 1997 under a program authorized by the Board of Directors in the
second quarter 1997. The purpose of the program is to help offset the dilutive
effect of exercisable stock options and other stock-based compensation. Common
stock was used to acquire CPT in the fourth quarter 1996, increasing the number
of outstanding shares. Dividends paid in 1997 were $7.3 million, an increase of
$0.8 million from 1996. The quarterly dividend per share increased to $0.12 from
$0.11 in the third quarter 1997 following a similar increase in the third
quarter 1996.
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 1996 was $45.0 million. Cash balances
increased $2.2 million while total balance sheet debt increased $4.8 million
during 1996. Capital expenditures and mine development expenditures were $30.5
million in 1996. The Company re-purchased $6.7 million of Common Stock and paid
$6.5 million in dividends in 1996.
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.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Proven bertrandite
ore reserves at
year end (thousands
of dry tons) .......................... 6,924 6,763 6,927 6,747 6,786
Grade % beryllium......................... 0.249% 0.249% 0.249% 0.251% 0.251%
Probable bertrandite
ore reserves at
year-end (thousands
of dry tons) ............................ 6,750 7,432 7,346 7,559 7,594
Grade % beryllium.......................... 0.277% 0.281 0.281 0.279 0.279%
Bertrandite ore
processed (thousands
of dry tons, diluted) ................... 110 97 96 79 92
Grade % beryllium,
diluted.................................. 0.229% 0.236% 0.232% 0.240% 0.232%
INFLATION AND CHANGING PRICES
The prices of certain major raw materials, including copper, nickel, gold and
other precious metals purchased by the Company, fluctuate during a given year.
Such changes in costs are generally reflected in selling price adjustments. The
prices of labor and other factors of production generally increase with
inflation. Additions to capacity, while more expensive over time, usually result
in greater productivity or improved yields. However, market factors, alternative
materials and competitive pricing affect 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 M 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 $5.1 million at December 31, 1997 ($4.0 million at December 31, 1996).
This reserve covers existing and currently foreseen projects.
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SELECTED FINANCIAL DATA
Brush Wellman Inc. and Subsidiaries
(Dollars in thousands except per share amounts)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
FOR THE YEAR
Net Sales............................................ $433,801 $376,279 $369,618 $345,878 $295,478
Cost of sales........................................ 320,792 267,713 268,732 253,938 227,686
Gross profit......................................... 113,009 108,566 100,886 91,940 67,792
Operating profit..................................... 36,024 34,305 29,086 25,098 10,658
Interest expense..................................... 553 1,128 1,653 2,071 2,952
Income (loss) from continuing operations
before income taxes................................ 35,471 33,177 27,433 23,027 7,706
Income taxes (benefit)............................... 9,874 8,686 6,744 4,477 1,248
Net Income (loss) ................................... 25,597 24,491 20,689 18,550 6,458
Earnings Per share of Common Stock:
Basic Net Income (loss)........................... 1.58 1.55 1.28 1.15 0.40
Diluted Net Income (loss)......................... 1.56 1.53 1.27 1.15 0.40
Dividends Per share of Common Stock.................. 0.46 0.42 0.36 0.26 0.20
Depreciation and amortization........................ 19,329 22,954 20,911 19,619 21,720
Capital expenditures................................. 53,155 26,825 24,244 17,214 11,901
Mine development expenditures........................ 9,526 3,663 787 543 814
YEAR-END POSITION
Working Capital...................................... 100,599 128,172 125,156 116,708 105,272
Ratio of current assets to current liabilities....... 2 .3 to 1 2.9 to 1 2.9 to 1 2.8 to 1 3.1 to 1
Property and equipment:
At cost........................................... 463,689 404,127 374,367 350,811 337,342
Cost less depreciation and impairment............. 173,622 130,220 121,194 116,763 118,926
Total assets......................................... 383,852 355,779 331,853 317,133 293,372
Other long-term liabilities.......................... 48,025 47,271 45,445 43,354 40,663
Long-term debt....................................... 17,905 18,860 16,996 18,527 24,000
Shareholders' equity................................. 236,813 219,257 200,302 186,940 172,075
Book value per share
Basic............................................. 14.60 13.84 12.40 11.61 10.70
Diluted........................................... 14.41 13.72 12.30 11.57 10.69
Average Number of shares of stock outstanding
Basic............................................. 16,214,718 15,846,358 16,159,508 16,102,350 16,087,250
Diluted........................................... 16,429,468 15,980,481 16,289,795 16,156,159 16,093,696
Shareholders of record............................... 2,329 2,407 2,351 2,521 2,566
Number of employees.................................. 2,160 1,926 1,856 1,833 1,803
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1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ----
FOR THE YEAR
Net Sales............................................ $265,034 $267,473 $297,390 $317,828 $345,838 $307,571
Cost of sales........................................ 192,944 202,080 212,841 233,165 239,554 211,885
Gross profit......................................... 72,090 65,383 84,549 84,663 106,284 95,686
Operating profit..................................... 16,949 (57,354) 28,132 29,195 54,704 48,788
Interest expense..................................... 3,206 3,755 3,359 2,860 2,843 2,965
Income (loss) from continuing operations
before income taxes................................ 13,743 (61,109) 24,773 26,335 51,861 45,823
Income taxes (benefit)............................... 3,243 (17,091) 7,214 7,793 19,344 19,658
Net Income (loss) ................................... 10,500 (44,018) 17,559 18,542 32,517 26,165
Earnings Per share of Common Stock:
Basic Net Income (loss)........................... 0.65 (2.74) 1.09 1.10 1.79 1.39
Diluted Net Income (loss)......................... 0.65 (2.74) 1.09 1.10 1.79 1.39
Dividends Per share of Common Stock.................. 0.26 0.59 0.71 0.67 0.63 0.59
Depreciation and amortization........................ 20,180 22,759 24,070 24,077 23,405 22,098
Capital expenditures................................. 13,604 13,605 16,160 19,946 22,645 18,464
Mine development expenditures........................ 848 6,389 5,699 259 503 581
YEAR-END POSITION
Working Capital...................................... 88,616 80,427 87,570 78,346 92,530 109,063
Ratio of current assets to current liabilities....... 2.5 to 1 2.2 to 1 2.4 to 1 2.1 to 1 2.4 to 1 2.6 to 1
Property and equipment:
At cost........................................... 332,971 321,981 307,088 292,708 279,927 266,543
Cost less depreciation and impairment............. 127,991 132,579 143,635 141,639 143,180 144,829
Total assets......................................... 310,039 307,296 338,982 338,279 357,751 367,473
Other long-term liabilities.......................... 40,332 38,029 9,356 9,087 9,547 10,333
Long-term debt....................................... 33,808 34,946 26,673 21,076 29,908 25,481
Shareholders' equity................................. 168,824 162,264 215,891 211,769 232,840 242,673
Book value per share
Basic............................................. 10.50 10.10 13.40 12.60 12.82 12.90
Diluted........................................... 10.48 10.09 13.40 12.59 12.81 12.88
Average Number of shares of stock outstanding
Basic............................................. 16,080,554 16,069,902 16,108,479 16,805,701 18,159,338 18,815,020
Diluted........................................... 16,111,090 16,080,568 16,116,210 16,820,735 18,173,092 18,840,193
Shareholders of record............................... 2,762 3,116 3,446 3,820 4,014 4,212
Number of employees.................................. 1,831 1,943 2,079 2,160 2,602 2,564
See notes to consolidated financial statements.
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BRUSH WELLMAN INC.
DIRECTORS
Albert C. Bersticker (2),(3),(4)
Chairman and Chief Executive Officer,
Ferro Corporation
Charles F. Brush, III (1), (4)
Personal Investments
David L. Burner (1), (4)
Chairman and Chief Executive Officer,
BF Goodrich Co.
Gordon D. Harnett (2)
Chairman of the Board
President and Chief Executive Officer
Brush Wellman Inc.
Joseph P. Keithley (3), (4)
Chairman, President and CEO
Keithley Instruments, Inc.
William P. Madar (1), (2), (3), (4)
Chairman of the Board,
Nordson Corporation
Robert M. McInnes (2), (3), (4)
Retired President and Chief Executive Officer,
Pickands Mather & Co.
William R. Robertson (1), (4)
Managing Partner
Kirtland Capital Partners
John Sherwin, Jr. (1), (2), (4)
President, Mid-Continent Ventures, Inc.
1 Audit Committee
2 Executive Committee
3 Governance Committee
4 Organization and Compensation Committee
OFFICERS
Gordon D. Harnett (1), (2)
Chairman of the Board
President and Chief Executive Officer
Carl Cramer (1), (2)
Vice President Finance
Chief Financial Officer
Brian J. Derry (1), (2)
Vice President, Operations
Stephen Freeman (1), (2)
Vice President, Alloy Products
Craig B. Harlan (1), (2)
Vice President, International
Andrew J. Sandor (1), (2)
Vice President, Alloy Technology
Daniel A. Skoch (1), (2)
Vice President
Administration and Human Resources
Michael D. Anderson (2)
Vice President, Beryllium Products
Jordan P. Frazier (2)
General Manager, Ceramic Products
Alfonso T. Lubrano (2)
President, Technical Materials, Inc.
John J. Paschall (2)
President, Williams Advanced Materials Inc.
John J. Pallam (1)
Vice President, General Counsel
Michael C. Hasychak (1)
Treasurer and Secretary
James P. Marrotte (1)
Controller
William M. Christoff (1)
Assistant Treasurer - Taxes,
Assistant Secretary
1 Corporate Officers
2 Executive Officers
OFFICES AND FACILITIES
MANUFACTURING FACILITIES
Delta, Utah
Elmore, Ohio
Lorain, 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
Singapore
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
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31
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 5, 1998
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.
Brush Wellman maintains 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 out
transfer agent, National City Bank, at 1-800-622-6757.
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 - Facsimile: (216) 383-4091
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BRUSH WELLMAN
ENGINEERED MATERIALS
17876 St. Clair Avenue
Cleveland, Ohio 44110
216/486-4200