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Annual Report 2008 - AMG Advanced Metallurgical Group NV

Annual Report 2008 - AMG Advanced Metallurgical Group NV

70 Financial

70 Financial Review

Year ended December 31 2008 2007 Revenue and expenses Advanced Materials revenue 756,726 688,039 Engineering Systems revenue 435,462 312,147 Timminco revenue 237,824 155,473 Graphit-Kropfmühl revenue 87,932 – Total revenue 1,517,944 1,155,659 Cost of sales 1,219,665 954,229 Gross profit 298,279 201,430 Selling, general and administrative expenses 167,081 123,413 Restructuring and asset impairment expenses 56,904 (241) Environmental expenses 5,233 2,107 Other (income) expense, net (6,158) (8,018) Operating profit 75,219 84,169 Gross profit AMG’s gross profit increased to $298.3 million in the year ended December 31, 2008 from $201.4 million in the year ended December 31, 2007, a 48% increase. Gross profit as a percentage of sales improved to 20% in 2008 as compared to 17% in 2007. All divisions contributed to the increase in gross profit. Advanced Materials improved their gross profit by $19.9 million, or 19% due to improved average selling prices for the year. This increase in gross profit was despite a $20.5 million inventory write-down during the fourth quarter. Engineering Systems capitalized on in-sourcing and economies of scale in making DSS furnaces and increased its gross margin by 44%. Timminco’s expansion into UMSi improved its margins by $33.6 million and the acquisition of Graphit-Kropfmühl contributed $1.9 million to gross profit, despite a one-time charge of $8.2 million related to purchase accounting for inventory. Selling, general and administrative expenses Selling, general and administrative costs increased to $167.1 million in the year ended December 31, 2008 as compared to $123.4 million in the year ended December 31, 2007. As a percentage of sales, SG&A costs remained relatively flat at 11% of sales in 2008 and 2007. The increase in costs is primarily related to corporate development and the larger infrastructure of the Company needed to operate effectively as a public company in the Netherlands. These expenses primarily consist of compensation and benefits, professional fees, travel costs, insurance and other related expenses. Personnel expenses increased from $68.3 million in the year ended December 31, 2007 to $90.8 million in the year ended December 31, 2008. The largest individual element of this increase was stock-based compensation expense, a non-cash expense, recognized for options granted in the amount of $20.1 million, as compared to $4.2 million in 2007. The second largest component of the increase related to the inclusion of GK in the group, which added $6.1 million of additional compensation and benefits. The Company incurs professional fees from global service providers. Professional services were $29.4 million and $18.9 million in the periods ended December 31, 2008 and 2007, respectively. This amount includes audit fees, legal fees, recruiting fees, directors’ fees as well as consultants used in all operations. The significant increase in professional services was due largely to corporate development efforts. Research and development expense increased from $6.2 million in the year ended December 31, 2007 to $8.2 million in the year ended December 31, 2008. The significant investment in R&D was related to the development of a solar silicon ingoting process and thin film coatings to be used in the photovoltaic industry. All other SG&A expenses, such as travel and entertainment, insurance, occupancy, communi cation and bank fees increased to $38.7 million in the year ended Financial Review 71

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