Brush Engineered Materials Inc. 2007 Annual Report Ready for what’s next ABOUT THECompany Brush Engineered Materials Inc. around the world, a broad range of high • The Beryllium and Beryllium Composites is among the world’s premier advanced performance products and a customer- segment consisting of beryllium and materials and services companies. We are driven focus that is global in scope. beryllia ceramic products committed to developing, manufacturing Founded in 1931 in Cleveland, Ohio, • The Engineered Material Systems and marketing highly engineered advanced the Company today serves customers in segment comprised of Technical enabling materials to global customers more than 50 countries. Materials, Inc., which manufactures across a wide range of markets including We have four reporting segments: specialty strip metal products telecommunications and computer, data • The Advanced Material Technologies We have operating, service center storage, aerospace and defense, auto- and Services segment consisting of and major office locations throughout motive electronics, industrial components, Williams Advanced Materials Inc., which North America, Europe and Asia, and appliance and medical. Our service offering manufactures precious, non-precious, employ approximately 2,200 people provides further competitive advantage specialty metal and inorganic materials worldwide. Our common stock (ticker and a value package that answers the • The Specialty Engineered Alloys symbol: BW) is listed on the New York needs of the customer. segment consisting of Alloy Products, Stock Exchange. We differentiate ourselves in these which includes bulk and strip form markets with a strong base of manufac- products and beryllium hydroxide turing operations and service capabilities Contents Financial Highlights . 1 Letter to Shareholders . 2 Ready for What’s Next . 5 Financial Summary and Shareholder Returns . 18 2007 Form 10-K . 19 Directors, Officers, Facilities and Subsidiaries . 116 Corporate Data . 117 FINANCIAL Highlights (Dollars in millions except per share amounts) 2007 2006 2005 Sales . $ 955.7 $ 763.1 $ 541.3 Net income . 53.3 49.6 17.8 Net income per share (diluted) . 2.59 2.45 0.92 Revenue by Segment Revenue by Market Revenue by Region 57% 54% 40% Domestic Advanced Material 23% Telecommunications Technologies and Data Storage and Computer Services 6% 3% Other Other 30% Specialty 5% 7% 6% Engineered Medical Aerospace 43% Beryllium and Alloys and Defense International Beryllium 7% 5% Engineered 7% Composites Appliance 7% Material Automotive Industrial Systems Components 1 TO OUR Shareholders Richard J. Hipple Chairman, President and CEO For Brush Engineered Materials Inc., Summary of 2007 Financial Results margin improvement was driven by the 2007 will be remembered as another year Our financial performance in the year leverage from the Company’s sales growth of outstanding achievements. The Company was strong. At year end, we completed 20 as well as the ongoing initiatives to lower set sales and operating profit records, and consecutive quarters where sales were costs and increase operating efficiencies. reached a number of other milestones. higher than the comparable quarter of the These included: prior year and nine consecutive quarters Revenue Growth Strong demand from our traditional • Strong sales growth – sales increased of double-digit sales growth. For the year, end-use markets, as well as continued 25% from 2006 and 77% from 2005, sales were a record $955.7 million, up headway with new products and market • Significant global expansion – inter- $192.6 million, or 25%, compared to the initiatives, enabled us to deliver organic national sales accounted for 43% of prior year. Sales growth, net of metal price growth of 20% over 2006, after adjusting revenues, up from 35% in 2006, inflation, was approximately 20% in 2007, for the impact of metal prices. • Broadened market base and additional following growth of 28% in 2006. We have positioned the Company to growth opportunities with new products, Net income for the year was $53.3 take advantage of growth opportunities • Increased profitability and higher profit million, or $2.59 per share, diluted, com- with innovative materials and services margins – income before income taxes pared to net income of $49.6 million, or that truly differentiate us and allow our increased by $43 million and was more $2.45 per share, diluted, for 2006. Excluding customers to change the rules with their than double the 2006 level, the reversal of a deferred tax valuation own technologies. Nowhere is this more • Continued strengthening of our balance allowance, the Company earned $1.38 evident than with our Williams Advanced sheet - adding significant liquidity and per share in 2006. Earnings in 2007 were Material Inc.’s (WAM) ruthenium-based flexibility. affected by a favorable litigation settle- ment, lower of cost or market charges, a sputtering materials to support the rapid Even with the tremendous progress, loss on the sale of a small business and adoption of perpendicular magnetic there were several opportunities offering gains on the sale of low cost ruthenium recording (PMR) technology in the data greater success that were not fully realized. purchased in 2006. The combined effect of storage market. Our ruthenium-based A slower-than-expected penetration of the these items was approximately $0.80 per products generated the largest portion of hard disk drive media market and margins share. Excluding these items, the operating our sales growth in the past year. However, that fell short of expectations were two run rate was $1.79 per share in 2007, an during the ramp-up process, certain quality factors that prevented us from reaching increase of 30% compared to the prior year. issues and specification changes caused our full potential in 2007. Operating profit margins continued to shipment delays to this market in 2007. As we proceed through early 2008, improve in 2007, reaching 8.8% of sales for These issues have since been resolved we’re watchful of the prevailing macro- the year. Excluding the net benefit of the and we are now well positioned to take economic situation, yet we’re also confident items noted above and metal price inflation, advantage of ruthenium-based demand that our deliberate and tested strategy will operating profit was 6.4% of sales in 2007 in 2008. Looking forward, we expect to continue to strengthen our ability to grow compared to 5.7% in 2006. The operating qualify and participate in both the oxide sales and profits. 2 Total Sales (in millions) $401.0 $496.3 $541.3 $763.1 $955.7 $1,000 and soft underlayer coatings of the hard solar and other technology-based growth disk drive media market in 2008. Both markets in Europe. Additionally, we’re $800 layers offer exciting, incremental growth nearing completion of another center in $600 opportunities. Suzhou, China to provide target and evap- $400 Other areas of strong revenue oration materials manufacturing, target growth include our new clad material for bonding services, inorganic materials and $200 disk drive arms that enable the new distribution for our WAM customers. These $0 03 04 05 06 07 generation of compact high density hard facilities will provide excellent bases of disk drives to perform under difficult customer support for our PVD target International Sales conditions. ToughMet®, our copper-nickel- business in these regions. We anticipate (in millions) $124.4 $164.1 $179.1 $263.4 $413.0 tin alloy, continued to grow at a 30% an additional location in Asia in the next $500 compound annual growth rate and is few years. $400 finding new applications in aerospace, oil Our international depth is illustrated and gas, and heavy equipment markets. by the numbers. International sales were $300 Meanwhile, we remain very successful 43% of total sales in 2007, with approxi- $200 at meeting demand for defense optical mately 75% of international sales coming $100 systems with our beryllium products. We from Asia. Our Asian sales have more $0 are actively working to augment our than doubled during the last two years. 03 04 05 06 07 defense application base with commercial I am very proud of our Asian team for the opportunities that we expect will translate tremendous job they are doing to position Average Sales per Employee into new sales in 2008. Finally, our thin film us for future growth in the region. (in thousands) $218.8 $259.6 $274.8 $349.2 $434.2 coatings business, Thin Film Technology, $500 Inc., acquired in 2005, has increased its Acquisitions $400 revenue with growth in medical and After our top priority of organic defense applications. growth, strategic acquisitions will continue $300 to play a critical role in our growth strategy. We intend to leverage our extensive $200 materials engineering and product expertise In February 2008, we completed the $100 to help our customers meet new and previously announced acquisition of the assets of Techni-Met, Inc. Value-added $0 emerging demands created by the 03 04 05 06 07 advances in solar energy technologies, films manufactured at Techni-Met’s hard disk drive media, high brightness Windsor, Connecticut facilities supply a Total Debt light-emitting diodes (HB-LEDs) and wide range of high-end applications in (in millions) $99.2 $72.5 $57.2 $49.0 $35.5 continued breakthroughs in the medical advanced technology industries, including $100 products markets. Continued innovations in supporting downstream customers in the automotive market, deep sea drilling, developing more accurate diagnostic $75 consumer electronics, commercial aero- devices for diabetes management. Like $50 space and heavy equipment markets our other recent acquisitions, we expect it should also result in additional sales of to be accretive in the first year. Techni-Met $25 our materials. meets our key acquisition goals of having a high level of intellectual property and a $0 03 04 05 06 07 Global Strength – Local Presence strong market position with promising Our strategy to leverage market growth prospects.