Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (01-20-09 06:18 AM)

The Daily Magic Formula Stock for 01/20/2009 is Ceradyne Inc. According to the Magic Formula Investing Web Site, the ebit yield is 40% and the EBIT ROIC is 25-50%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “plan,” “assume” or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained in this report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industries and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date of the filing of this report. New risks and uncertainties arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. We do not undertake and specifically decline any obligation to update any forward-looking statements or to publicly announce the results of any revisions to any statements to reflect new information or future events or developments.

We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in this report in Item 1A under the caption “Risk Factors,” in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Item 7A under the caption “Quantitative and Qualitative Disclosures About Market Risk,” all of which you should review carefully.


ITEM 1. BUSINESS

Introduction

We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications.

In many high performance applications, products made of advanced technical ceramics meet specifications that similar products made of metals, plastics or traditional ceramics cannot achieve. Advanced technical ceramics can withstand extremely high temperatures, combine hardness with light weight, are highly resistant to corrosion and wear, and often have excellent electrical insulation capabilities, special electronic properties and low friction characteristics.

Our products include:

• lightweight ceramic armor for soldiers and other military applications;

• ceramic industrial components for erosion and corrosion resistant applications;
• ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, and zirconium diboride, which are used in manufacturing armor and a broad range of industrial products; and BORONEIGE ® boron nitride powder for cosmetic products;

• evaporation boats for metallization of materials for food packaging and other products;

• durable, reduced friction, ceramic diesel engine components;

• functional and frictional coatings primarily for automotive applications;

Our customers include the U.S. government, prime government contractors and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

The principal factor contributing to our recent growth in sales is increased demand by the U.S. military for ceramic body armor that protects soldiers. This increased demand has been driven by a growing recognition of the performance and life saving benefits of utilizing advanced technical ceramics in lightweight body armor. In addition, the market for ceramic body armor increased further beginning in 2006 with the introduction of enhanced side ballistic inserts, known as ESBI, which protect the side areas of the soldier’s torso. Recent military conflicts in Iraq and Afghanistan, as well as an increasingly unstable geopolitical climate and the heightened risk of international conflicts, have resulted in increased orders for these products. We believe that our ability to produce and deliver large quantities of ceramic body armor has led to increased orders for our products. However, shipments and orders for the current generation ESAPI (enhanced small arms protective inserts) body armor for the U.S. Army, which represented 40.3% of our total revenues in 2007 and 57.0% of our total body armor shipments in 2007 may end in 2008. We believe we will continue to supply ESAPI body armor to other U.S. military customers besides the U.S. Army throughout 2008. In response to a solicitation notice from the U.S. Army regarding the next ballistic threat generation of body armor, known as XSAPI, we submitted our quotation for this procurement in February 2008. Government contracts for ceramic armor generally are awarded in an open competitive bidding process. Our future level of sales of ceramic body armor will depend on the U.S. military’s continued demand for these products and our ability to successfully compete for and retain this business.

Our sales also increased from 2004 through 2007 because of our acquisition of ESK Ceramics on August 23, 2004, our acquisition of Minco, Inc. on July 10, 2007 and our acquisition of EaglePicher Boron, LLC on August 31, 2007. The operations of ESK Ceramics have been consolidated with ours since September 1, 2004. The operations of Minco, Inc. have been consolidated with ours since July 10, 2007, and the operations of EaglePicher Boron have been consolidated since September 1, 2007.

As a result of the ESK acquisition, we believe that we are the only ceramic body armor manufacturer with a vertically integrated approach of designing much of our key equipment and controlling the manufacturing process from the principal raw material powder to finished product.

Our new Minco operation manufactures fused silica powders for a wide range of industrial applications and is a key supplier of this raw material to our Thermo Materials division. EaglePicher Boron, LLC, which we have renamed Boron Products, LLC, produces the boron isotope 10 B. This isotope is a strong neutron absorber and is used for both nuclear waste containment and nuclear power plant neutron radiation critical control. Our Boron Products subsidiary produces complementary chemical isotopes used in the normal operation and control of nuclear power plants. Boron Products also produces the boron isotope 11 B, which is used in the semiconductor manufacturing process as an additive to semiconductor grade silicon as a “doping” agent and where ultra high purity boron is required. We anticipate that Boron Products will further strengthen our entry, announced during 2006, into the nuclear waste containment and other nuclear power plant related ceramic materials markets.

We believe that numerous applications for ceramic products and technology have the potential to drive long-term growth of our business. Examples of applications for which we have developed or are currently developing products include:


• lightweight ceramic armor for military vehicles, boats and aircraft;

• ceramic components that have the potential to facilitate the extraction of oil from oil sands on a cost-effective basis;

• ceramic materials that have the potential to reduce significantly the cost of producing molten aluminum;

• chemical micro reactors, heat exchangers and hydraulic trim valves produced with our proprietary technology that have the potential to provide an economical substitute for steel in extreme environments;

• high purity fused silica ceramic crucibles used by several photovoltaic cell manufacturers in their silicon melting operation in order to produce polycrystalline silicon storage containers;

• storage containers made with our boron carbide powder that have the potential to be used for long-term containment of nuclear waste from nuclear power plants; and

• small complicated ceramic components made using our injection molding technology that have the potential to be used as medical implants.

To meet increasingly higher performance standards, advanced technical ceramics have stringent technical manufacturing requirements. We have designed and customized our facilities and capital equipment to enhance our advanced technical ceramic manufacturing processes. We have also implemented lean manufacturing initiatives to lower costs and drive further efficiencies in our manufacturing processes, and are expanding our facilities to add manufacturing capacity.

In July 2007, we entered into an agreement with Ideal Innovations, Inc. and Oshkosh Truck Corporation to further develop, produce and market an armored military vehicle we call the Bull tm . The Bull tm armored vehicle is intended to address the increasing need for protection from improvised explosive devices known as IED’s, mine blasts and high-threat, explosively formed projectiles, known as EFP’s, and will be built on a combat-proven Oshkosh Truck chassis. The Bull tm armored solution, conceived by Ideal Innovations in 2005 and developed with Ceradyne in 2006, has been tested by the Army Test Center, Aberdeen, Maryland, and demonstrated to be capable of protecting vehicle occupants against IED, EFP and mine blast threats. It is designed to meet current IED threats, and is intended to withstand the increasingly prevalent and higher EFP threats now faced by the U.S. military. In September 2007, in response to a solicitation notice from the U.S. military regarding Mine Resistant Ambush Protected Vehicles II Enhanced Vehicle Competition, known as MRAP II, we, together with Ideal Innovations and Oshkosh Truck, submitted a quotation and delivered both a 6-person and a 10-person MRAP II vehicle named the Bull tm , to the U.S. Army Aberdeen Test Center for further service evaluation. In December 2007, the U.S. government awarded a delivery order totaling $18.1 million to Ideal Innovations, Ceradyne and Oshkosh Truck for several 6-person versions and targets of the Bull tm armored vehicle to be used for further government testing. Ideal Innovations is the prime contractor and we are a sub contractor to Ideal Innovations. Whether we receive additional orders for the Bull tm armored vehicle will depend upon the success of these tests, the U.S. military’s need and funding for MRAP II armored vehicles, the results of testing of a competitor’s MRAP II armored vehicle, and whether our pricing for the Bull tm armored vehicle is competitive.

Ceradyne’s design and production contribution to the Bull tm armored vehicle program is based on our experience and expertise learned over many years in developing ceramic armor systems for military helicopters, ground-based vehicles and boats. Due to the ballistic threat level that MRAP II armored vehicles are required to meet, the current design of the Bull tm armored vehicle does not include any ceramic armor.

Although we are engaged in development of ceramic armor systems to use on future versions of the Bull tm armored vehicle, we do not know when or if a ceramic armor solution will be available or whether it would be acceptable to the U.S. military.

We conduct our operations through six operating segments: our Advanced Ceramic Operations division, our ESK Ceramics subsidiary, our Semicon Associates division, our Thermo Materials division, our Ceradyne Canada subsidiary and our Boron Products subsidiary.

Advanced Technical Ceramics

Evolving customer requirements in industrial processing, military systems, microwave electronics, automotive/diesel engine products and orthodontics have generated a demand for high performance materials with properties not readily available in metals, plastics or traditional ceramics. The following table compares favorable typical properties of selected advanced technical ceramics with those of other selected materials.


Ceramics such as earthenware, glass, brick and tile have been made for centuries and are still in common use today. The inertness and lasting qualities of ceramics are illustrated by artifacts uncovered intact in modern times. Almost all traditional ceramics, including those of ancient times, were based on clay. In the last fifty years, significant advances have been made in ceramic technology by applying specialized manufacturing processes to produce synthetic ceramic powders. Developments in aluminum oxide and other oxides resulted in ceramics that were excellent electrical insulators and were capable of withstanding high temperatures. In addition, industry advancements in ceramic material science have led to the development of a class of ceramics that are generally non-oxides, such as carbides, borides and nitrides. These non-oxide ceramics generally have mechanical properties that exceed those of oxide ceramics developed in prior periods. Collectively, these developments resulted in the ability to manufacture ceramics with great strength at elevated temperatures and reduced fragility, historically a primary limitation of ceramics. The products that have emerged from these advances are known as advanced technical (or structural) ceramics.

The properties of advanced technical ceramics present a compelling case for their use in a wide array of modern applications. However, to meet increasingly higher performance standards, advanced technical ceramics have stringent technical manufacturing requirements. First, manufacturers must start with fine synthetic ceramic powders of very high and consistent quality that are produced using a highly technical and specialized manufacturing process. Few suppliers of these high quality starting powders exist today and not all of these suppliers can consistently produce starting powders of the necessary quality and consistency in the volumes required by ceramic manufacturers. Second, the specialized equipment required to manufacture advanced technical ceramics must often be custom designed and is not readily available, requiring a significant investment in capital equipment and facilities to allow volume production. Manufacturing costs associated with the production of these ceramics are higher than those of the materials they replace. A portion of these costs is related to the need for diamond grinding finished components to exacting tolerances. To accelerate the use of advanced technical ceramics as a direct replacement for metals, plastics or traditional ceramics, these manufacturing costs need to be reduced. Cost reduction efforts include the production of blanks or feed stock to “near net shape” configurations in order to reduce the amount of diamond grinding needed. Manufacturers are also seeking to reduce costs through the use of high volume automated processing and finishing equipment and techniques, and to achieve economies of scale in areas such as powder processing, blank fabrication, firing, finishing and inspection.

Our Competitive Strengths

We believe that several aspects of our company provide us a competitive advantage in the markets we serve, including the following:

Broad Technical Expertise in Ceramic Material Science. Since the founding of our company in 1967, our core business has been researching, developing, designing, manufacturing and marketing advanced technical ceramic products. Specifically, our expertise is in a class of ceramics known as non-oxide structural ceramics. Many of our staff are technically trained, including 121 employees with degrees in ceramic engineering or related sciences, of which 24 have Ph.D. degrees. We have continuously sought to develop and manufacture innovative ceramic products not only for the markets that we currently serve but to identify and apply our experience and capabilities to emerging markets and applications. For example, our expertise allows us to develop ceramic armor products expeditiously and manufacture them on a significant scale.

Proprietary Equipment and Manufacturing Processes. The specialized equipment required to manufacture ceramic powders and advanced technical ceramics must often be custom designed and is not readily available. Over the past several decades, we have designed and constructed a substantial array of highly specialized and customized equipment and manufacturing processes, including our hot press lines and furnaces. We believe our proprietary equipment and manufacturing processes allow us to meet the high volume demands of our customers in the markets that we serve.

Vertically Integrated Body Armor Manufacturer. We are a vertically integrated manufacturer of lightweight ceramic body armor. Our ESK Ceramics subsidiary manufactures boron carbide powder — the key raw material used in the production of our body armor. ESK Ceramics has been a supplier of boron carbide powder to us for over 30 years. We form the boron carbide powder into ceramic armor plates using our own furnaces and hot presses. We then apply backing materials purchased from third parties to the plates to complete a ceramic body armor system ready to ship to our customers. Owning a source of our principal raw material, together with the recent expansion of our manufacturing capacity at our Lexington, Kentucky plant, should allow us to fulfill current and anticipated demand for our ceramic body armor, while enabling us to manage our costs, product yields and high quality standards.

Strong Position in Multiple Markets. We maintain a strong position in many of the markets that we serve. We believe that we are the leading supplier of lightweight ceramic armor products to the U.S. government based on the history of orders that the U.S. government has issued. We further believe that we supply a significant portion of products in many of the markets we serve including: boron carbide powders; translucent ceramic orthodontic brackets; ceramic missile radomes, commonly known as nose cones, for the PAC-3 and Arrow missile programs; sintered reaction bonded silicon nitride, which we call SRBSN, for industrial and automotive applications; evaporation boats used to apply the metallic coating to packaging materials; and wear resistant functional and frictional coatings for the automotive industry. We believe that our leadership position in ceramic body armor and in many of the other markets that we serve provides us with a key advantage in securing new and continuing business.

Key Customer Relationships. We have longstanding relationships with many of our significant customers in the defense, industrial, automotive/diesel and commercial markets that we serve, which have enhanced our ability to obtain business over time. For example, for more than 20 years we have sold our advanced technical ceramic products to various agencies of the U.S. government. Since 2003, we have derived the majority of our revenues from the Army, Marines, Air Force and other branches of the U.S. military. We possess significant knowledge of the applicable purchasing requirements and product specifications within each of the branches of the U.S. military that we serve, and we believe that we have established an excellent reputation with key individuals within each branch.

Experienced Management Team and Entrepreneurial Culture. Our success is attributable in large part to the extensive knowledge and experience of our management team and key personnel. Our executive management team has substantial experience in advanced technical ceramic materials science and our Chief Executive Officer, our President of North American Operations and our Vice President of Operations each has more than 25 years of experience in the ceramics industry. Our management team has demonstrated its ability to identify, execute and integrate strategic acquisitions into our business through our acquisitions of ESK Ceramics in August 2004, Quest Technology in May 2004, a boron carbide/aluminum cladding product line known as Boral ® in June 2006, and Minco, Inc. and EaglePicher Boron, LLC in 2007. Moreover, we believe that the entrepreneurial culture that has been fostered at Ceradyne since 1967 enhances our ability to develop innovative products for the markets that we serve.

Our Business Strategy

Our goal is to create value for our stockholders by profitably developing, manufacturing and selling advanced technical ceramic components to customers in existing and new markets where there is a need for new materials that will increase the efficiency, productivity and life of our customers’ end products. Key elements of our strategy for achieving this goal include:

Capitalizing on Opportunities in the Defense Market. The current geopolitical climate, terrorist threats and heightened international conflicts such as those in Iraq and Afghanistan, have been the primary factors driving demand for our defense products. Our defense marketing and sales efforts emphasize sales of ceramic body armor for military personnel to the U.S. government and, with the authorization of the U.S. government, to foreign allies of the United States. We also intend to expand our lightweight ceramic armor products to address additional body armor applications as well as new defense applications in vehicles, boats and aircraft. In response to a solicitation notice from the U.S. military, we have developed a new generation of body armor that is capable of withstanding higher ballistic threats than current versions with approximately the same product weight. We submitted our quotation for this procurement in February 2008.

Recently, we have applied our armor systems experience and expertise, learned over many years in developing and manufacturing ceramic armor for military helicopters, ground-based vehicles and boats, to develop, together with Ideal Innovations, Inc., a ground-based armored vehicle we call the Bull tm . The Bull tm armored vehicle is designed to address the increasing need, particularly in Iraq, for protection from improvised explosive devices, known as IED’s, mine blasts and high-threat, explosively formed projectiles, known as EFP’s. To address the potentially large demand for these armored military vehicles, we have entered into a teaming agreement with Ideal Innovations and Oshkosh Truck Corporation to further develop, produce and market the Bull tm armored vehicle, which will be built on a combat-proven Oshkosh Truck chassis.

In September 2007, in response to a solicitation notice from the U.S. military regarding Mine Resistant Ambush Protected Vehicles II Enhanced Vehicle Competitive, known as MRAP II, we, together with Ideal Innovations and Oshkosh Truck, submitted a quotation and delivered both a 6-person and a 10-person version of the Bull tm armored vehicle to the U.S. Army Aberdeen Test Center for further service evaluation. In December 2007, the U.S. military awarded a delivery order totaling $18.1 million to Ideal Innovations, Ceradyne and Oshkosh Truck for several 6-person versions and targets of the Bull tm armored vehicle to be used for further government testing. Whether we receive additional orders for the Bull tm armored vehicle will depend upon the success of these tests, the U.S. military’s need and funding for MRAP II armored vehicles, the results of testing of a competitor’s MRAP II armored vehicle, and whether our pricing for the Bull tm armored vehicle is competitive.

CEO BACKGROUND

Year First
Name Age Present Position with the Company Elected Director


Joel P. Moskowitz
68 Chairman of the Board, President and Chief Executive Officer 1967

Richard A. Alliegro
78 Director 1992

Frank Edelstein
82 Director 1984

Richard A. Kertson
68 Director 2004

William C. LaCourse
64 Director 2006

Milton L. Lohr
83 Director 1986

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Consolidated Financial Data,” and our consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. We base these statements on assumptions that we consider reasonable. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors discussed in “Note Regarding Forward-Looking Statements,” “Item 1A — Risk Factors,” and elsewhere in this report.

Overview

We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications. Our products include:


• lightweight ceramic armor for soldiers and other military applications;

• ceramic industrial components for erosion and corrosion resistant applications;

• ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, and zirconium diboride, which are used in manufacturing armor and a broad range of industrial products; and BORONEIGE ® boron nitride powder for cosmetic products;

• evaporation boats for metallization of materials for food packaging and other products;

• durable, reduced friction, ceramic diesel engine components;

• functional and frictional coatings primarily for automotive applications;

• translucent ceramic orthodontic brackets;

• ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;

• ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;

• ceramic missile radomes (nose cones) for the defense industry;

• fused silica powders for industrial applications and ceramic crucibles;

• neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composites that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;

• nuclear chemistry products for use in pressurized water reactors and boiling water reactors; and

• boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers.

Our customers include the U.S. government, prime government contractors and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

We conduct our operations primarily through six operating segments. The following table includes a summary of our products by applications for our six segments.

The principal factors contributing to our recent growth in sales are increased demand by the U.S. military for ceramic body armor that protects soldiers and our acquisition of ESK Ceramics in August 2004. The operations of ESK Ceramics have been consolidated with ours since September 1, 2004. In addition, the market for ceramic body armor increased further in 2006 with the introduction of enhanced side ballistic inserts, known as ESBI, which protect the side of the soldier’s torso.

Military conflicts in Iraq and Afghanistan, as well as an increasingly unstable geopolitical climate and the heightened risk of international conflicts, have resulted in increased orders for our ceramic body armor in each year since 2001. We were awarded an Indefinite Delivery/Indefinite Quantity contract by the U.S. Army in August 2004 with an adjusted maximum value of $747.5 million from an original estimated contract value of $461.0 million. Through February 2008, we received sixteen delivery orders equaling the contract amount. We expect to complete the delivery of this adjusted contract amount during 2008. We have also received a number of other orders for ceramic body armor, not covered by the Indefinite Delivery/Indefinite Quantity contract, from the Army and other branches of the U.S. military. In January 2006, we received our first production order for ESBI, or side plates, which are designed to protect the side areas of a soldier’s torso when used in conjunction with our ESAPI ceramic body armor plates. This delivery order, which totaled $70.0 million, was issued to us by the U.S. Army. In June 2006, we were awarded an Indefinite Delivery/Indefinite Quantity contract by the U.S. Army with a maximum value of $611.7 million for ESBI plates. Through February 2008, 6 delivery orders totaling approximately $310.8 million have been issued to us under this contract. Based on our current backlog for ceramic body armor, we expect our shipments of ceramic body armor to be lower in fiscal year 2008 than in 2007. Moreover, government contracts typically may be cancelled by the government at any time without penalty. For the next several quarters, and perhaps longer, demand for ceramic body armor is likely to be the most significant factor affecting our sales.

In response to a solicitation notice from the U.S. Army regarding the next ballistic threat generation of body armor, we submitted our quotation for this procurement in February 2008. This procurement, like most government procurements for ceramic body armor, will be awarded in an open competitive bidding process. We cannot be certain when the military will make awards under this procurement, or whether or to what extent we will be one of the successful bidders.

Although we believe that demand for ceramic body armor will continue for many years, the quantity and timing of government orders depends on a number of factors outside of our control, such as the amount of U.S. defense budget appropriations and the level of international conflicts. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process. Therefore, our future level of sales of ceramic body armor will depend on the U.S. military’s continued demand for these products and our ability to successfully compete for and retain this business.

In July 2007 we entered into an agreement with Ideal Innovations, Inc. and Oshkosh Truck Corporation to further develop, produce and market an armored military vehicle we call the Bull tm . The Bull tm armored vehicle is intended to address the increasing need for protection from improvised explosive devices, known as IEDs, mine blasts and high-threat, explosively formed projectiles, known as EFPs, and will be built on a combat-proven Oshkosh Truck chassis. The Bull tm armored solution, conceived by Ideal Innovations in 2005 and developed with Ceradyne in 2006, has been tested by the Army Test Center, Aberdeen, Maryland, and demonstrated to be capable of protecting vehicle occupants against IED, EFP and mine blast threats. It is designed to meet current IED threats, and is intended to withstand the increasingly prevalent and higher EFP threats now faced by the U.S. military. In September 2007, in response to a solicitation notice from the U.S. military regarding Mine Resistant Ambush Protected Vehicles II Enhanced Vehicle Competitive, known as MRAP II, we, together with Ideal Innovations and Oshkosh Truck, submitted a quotation and delivered both a 6-person and a 10-person MRAP II vehicle named the Bull tm , to the U.S. Army Aberdeen Test Center for further service evaluation. In December 2007, the U.S. government awarded a delivery order totaling $18.1 million to Ideal Innovations, Ceradyne and Oshkosh Truck for several 6-person versions and targets of the Bull tm armored vehicle to be used for further government testing. Ideal Innovations is the prime contractor and we are a sub-contractor to Ideal Innovations. Whether we receive additional orders for the Bull tm armored vehicle will depend upon the success of these tests, the U.S. military’s need and funding for MRAP II armored vehicles, the results of testing of a competitor’s MRAP II armored vehicle, and whether our pricing for the Bull tm armored vehicle is competitive.

Ceradyne’s design and production contribution to the Bull tm armored vehicle program is based on our experience and expertise learned over many years in developing ceramic armor systems for military helicopters, ground-based vehicles and boats. Due to the ballistic threat level that MRAP II armored vehicles are required to meet, the current design of the Bull tm armored vehicle does not include any ceramic armor. Although we are engaged in development of ceramic armor systems to use on future versions of the Bull tm armored vehicle, we do not know when or if a ceramic armor solution will be available or whether it would be acceptable to the U.S. military.

Our ESK Ceramics subsidiary produces boron carbide powder, which serves as a starter ceramic powder in the manufacture of our lightweight ceramic body armor. Owning this source of our principal raw material, together with the recent expansion of our manufacturing capacity for ceramic armor at our new Lexington, Kentucky plant and in our Irvine, California facility, should allow us to fulfill current and anticipated demand for our ceramic body armor.

Our order backlog was $238.9 million as of December 31, 2007 and $344.3 million as of December 31, 2006. Orders for ceramic armor represented approximately $179.5 million, or 75.1% of the total backlog as of December 31, 2007 and $285.5 million, or 82.9% of the total backlog as of December 31, 2006. We expect that substantially all of our order backlog as of December 31, 2007 will be shipped during 2008.

Our sales to customers located outside of the United States have varied in recent years, representing $136.2 million, or 18.0% of net sales in 2007, $105.7 million, or 15.9% during 2006 and $96.1 million, or 26.1% in 2005. We currently have sales offices in Germany, China, England and Canada as well as commissioned independent sales representatives in other parts of Europe and Asia. Of our sales to customers located outside the United States, 31.2% were denominated in U.S. dollars during 2007.

Net Sales. Our net sales consist primarily of revenues from the sale of products, which we recognize when an agreement of sale exists, product delivery and acceptance has occurred, and collection is reasonably assured.

Cost of Product Sales. Our cost of product sales includes the cost of materials, direct labor expenses and manufacturing overhead expenses. Our business requires us to maintain a relatively high fixed manufacturing overhead. As a result, our gross profit, in absolute dollars and as a percentage of net sales, is greatly impacted by our sales volume and the corresponding absorption of fixed manufacturing overhead expenses. Additionally, because many of our products are customized, we are frequently required to devote resources to sustaining engineering expenses, which we also include in cost of product sales.

The cost of electricity comprises a significant portion of our cost of product sales. In 2004, we began expanding our high-energy utilization silicon nitride manufacturing operations at our new facility in Lexington, Kentucky, where costs, particularly for electricity and occupancy, are lower than in California. We have increased our manufacturing capacity for the production of body armor plates by adding three hot press lines at this new facility. We chose this facility for the location of the hot press expansion for the same reasons: lower cost of electricity and occupancy. The cost of electricity for our manufacturing operations in the United States and Europe was approximately $13.5 million, or 3.0% as a percentage of cost of product sales in 2007, approximately $11.1 million, or 2.8% as a percentage of cost of product sales in 2006, and approximately $8.4 million, or 3.0% as a percentage of cost of product sales in 2005.

Selling Expenses. Our selling expenses consist primarily of salaries and benefits for direct sales and marketing employees, commissions for direct sales employees and for independent sales representatives, trade show expenses, rent for our sales offices, product literature, and travel and entertainment expenses.

General and Administrative Expenses. Our general and administrative expenses consist primarily of employee salaries and benefits, employee bonuses, which are computed quarterly and accrued in the quarter earned, professional service fees, rent for facilities and expenses for information technology.

Research and Development Expenses. Our research and development expenses consist primarily of employee salaries and benefits, materials and supplies related to ongoing application engineering in response to customer requirements, and the research and development of new materials technology and products. These costs are expensed as incurred.

Review of Historical Stock Option Grant Procedures

In July 2006, the Company voluntarily initiated a review of its historical stock option grant practices and related accounting treatment. The review was conducted by a Special Committee comprised of three independent members of the Company’s Board of Directors, with the assistance of independent legal counsel and forensic accounting experts. The scope of the Special Committee’s review included all stock options granted by the Company from January 1997 through September 2003. The Special Committee has completed its review.

Until September 2003, stock option grants generally were approved by unanimous written consents signed by the members of the Stock Option Committee of the Board of Directors. Throughout this period, the Stock Option Committee consisted of the CEO and one other non-management Director. The date specified as the grant date in each unanimous written consent was used (i) to determine the exercise price of the options and (ii) as the accounting measurement date.

The review found that from January 1997 through September 2003, the date selected by management as the grant date and accounting measurement date was the date specified in the unanimous written consent, but that, in all but one case, the unanimous written consents were not prepared, approved or executed by the Company’s Stock Option Committee until a later date. There were a total of 23 grant dates from January 1997 through September 2003. The Company’s CEO was responsible for selecting the grant dates and followed a consistent practice of seeking low grant prices and he was unaware of the accounting implications of the method he used. Therefore, the use of the date specified in the unanimous written consent as the accounting measurement date was incorrect in all but one case. The proper accounting measurement date was the date the unanimous written consent was signed by the members of the Stock Option Committee.

Based upon information gathered during the review by independent legal counsel, the Special Committee and the Board of Directors have concluded that, while the Company applied an option price date selection practice that resulted in the use of incorrect accounting measurement dates for options granted between January 1997 and September 2003, the accounting errors resulting from the use of incorrect measurement dates were not the product of any deliberate or intentional misconduct by the Company or its executives, staff or Board of Directors. However, as a result of using revised measurement dates for options granted from January 1997 through September 2003, the Company recorded a charge in the second quarter ended June 30, 2006 of $3.4 million ($2.3 million after income taxes) pertaining to the years ended December 31, 1997 to 2005 and the six months ended June 30, 2006 (the “Stock-Based Charge”). The Stock-Based Charge was included as a component of general and administrative expenses in the consolidated statements of income as this is where the affected individual’s normal compensation costs are recorded. The Stock-Based Charge includes non-cash compensation expense of $2.2 million ($1.4 million after income taxes) primarily related to stock option grants made during the period from January 1997 through September 2003 that should have been measured as compensation cost at the actual stock option grant dates, and subsequently amortized to expense over the vesting period for each stock option grant. The Stock-Based Charge also includes $1.2 million ($0.9 million after income taxes) of estimated additional employment and other taxes that are expected to become payable.

From September 2003 to February 2005, all stock option grants were approved at meetings held by the Stock Option Committee, and, since February 2005, all stock option grants have been approved at meetings held by the Compensation Committee of the Board of Directors. The dates of these meetings have been used correctly as the accounting measurement date for all stock options granted since September 2003.

Had this estimated Stock-Based Charge been reflected, as and when incurred, in the Company’s results of operations for prior years, the impact on net income for Ceradyne’s fiscal years ended December 31 would have been a reduction of $21,000 in 1997, a reduction of $45,000 in 1998, a reduction of $47,000 in 1999, a reduction of $104,000 in 2000, a reduction of $269,000 in 2001, a reduction of $74,000 in 2002, a reduction of $347,000 in 2003, a reduction of $611,000 in 2004, and a reduction of $324,000 in 2005. As of December 31, 2006, the total remaining incremental stock-based compensation charge related to these stock option grants that are expected to vest in future periods with a revised accounting measurement date is immaterial. There was no impact on revenue or net cash provided by operating activities as a result of the estimated compensation charge.

The Company does not believe that a restatement of its prior-period financial statements is required for the Stock-Based Charge. Based on the materiality guidelines contained in SEC Staff Accounting Bulletin No. 99, Materiality (SAB 99), the Company believes that the Stock-Based Charge is not material to any of the individual prior periods affected and the aggregate Stock-Based Charge is not material to the results for the year ended December 31, 2006.

Prior to December 31, 2006, the current members of Ceradyne’s Board of Directors, all current executive officers and all other employees of the Company amended all unexercised stock options they held which had an exercise price that is less than the price of the Company’s common stock on the actual date of grant, by increasing the exercise price to an amount equal to the closing price of the common stock as of the actual grant date. The Company has and will continue to reimburse all non-executive officer employees for the increase in the exercise price for the modified options as they vest. Such reimbursement has and will not be material.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. One generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof, or variations thereon, or similar terminology. Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. Reference is made to the risks and uncertainties which are described in this report in Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Part II, Item 1A under the caption “Risk Factors.” Reference is also made to the risks and uncertainties described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the Securities and Exchange Commission, in Item 1A under the caption “Risk Factors,” and in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, automotive/diesel and commercial applications. Our products include:

• lightweight ceramic armor for soldiers and other military applications;

• ceramic industrial components for erosion and corrosion resistant applications;

• ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, and zirconium diboride, which are used in manufacturing armor and a broad range of industrial products; and BORONEIGE ® boron nitride powder for cosmetic products;

• evaporation boats for metallization of materials for food packaging and other products;

• durable, reduced friction, ceramic diesel engine components;

• functional and frictional coatings primarily for automotive applications;

• translucent ceramic orthodontic brackets;

• ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;

• ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;

• ceramic missile radomes (nose cones) for the defense industry;
• fused silica powders for industrial applications and ceramic crucibles;

• neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composites that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;

• nuclear chemistry products for use in pressurized water reactors and boiling water reactors;

• boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers;

• technical ceramic bearings for “down hole” oil drilling and for coal bed methane pumps and steam assisted oil extraction pumps; and

• cluster ion implantation sub-systems and advanced ion source materials for the manufacture of logic and memory chips.
Our customers include the U.S. government, prime government contractors and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

The principal factors contributing to our growth in sales from 2001 through 2007 were increased demand by the U.S. military for ceramic body armor that protects soldiers and our acquisitions of ESK Ceramics in August 2004, Minco, Inc. in July 2007 and Eagle Picher Boron, LLC in August 2007, which was renamed Ceradyne Boron Products. However, year-over-year sales of body armor declined in each of the first three quarters of 2008, and are expected to remain below the prior year level in the fourth quarter of 2008. Our sales of body armor, as well as other armor components for defense applications, declined by $93.2 million in the first nine months of 2008 compared to the same period of 2007. This decline in defense product revenues was significantly offset, however, by revenues contributed by our two acquisitions completed in the third quarter of 2007 and by internal growth in sales of ceramic crucibles used for melting silicon in the manufacture of photovoltaic solar cells. The combined sales contributed by Minco and Boron Products in the first nine months of 2008 were $36.4 million, and sales of ceramic crucibles, including crucibles manufactured in our new factory in Tianjin, China, increased by $23.4 million in the first nine months of 2008 compared to 2007. The operating expenses associated with these acquired businesses are higher than those attributable to body armor. The results of the first nine months of 2008 reflect our strategy of expanding our business through internal growth and strategic acquisitions with an emphasis on increasing our non-defense business.
Military conflicts in Iraq and Afghanistan, as well as an increasingly unstable geopolitical climate and the heightened risk of international conflicts, have resulted in increased shipments of our ceramic body armor in each of the years from 2001 through 2007. We were awarded an Indefinite Delivery/Indefinite Quantity (“ID/IQ”) contract by the U.S. Army in August 2004 with an adjusted maximum value of $747.5 million from an original estimated contract value of $461.0 million. Through June 2008, we received sixteen delivery orders equaling the contract amount. We completed the delivery of this adjusted contract amount in September 2008. We have also received a number of other orders for ceramic body armor, not covered by the ID/IQ contract, from the Army and other branches of the U.S. military. In January 2006, we received our first production order for Enhanced Side Ballistic Inserts (“ESBI”), or side plates, which are designed to protect the side areas of a soldier’s torso when used in conjunction with our Enhanced Small Arms Protective Inserts (“ESAPI”), or ceramic body armor plates. This delivery order, which totaled $70.0 million, was issued to us by the U.S. Army. In June 2006, we were awarded an ID/IQ contract by the U.S. Army with a maximum value of $611.7 million for ESBI plates. Through September 2008, ten delivery orders totaling approximately $447.1 million have been issued to us under this contract.
In October 2008, we received an ID/IQ contract for the next ballistic threat generation of ceramic body armor plates, called XSAPI, as well as for the current generation ESAPI plates from the U.S. Army RDECOM, Aberdeen Proving Grounds, Maryland. The total amount of this contract is $2.37 billion and covers a period of approximately five years. The U.S. Army can order one or both types of plates over the five year life of the contract. At the same time this ID/IQ contract was awarded to us, we also received an initial delivery order for “first article testing” for both XSAPI and ESAPI armor plates valued at approximately $0.9 million. We expect, however, that future orders issued under this ID/IQ contract will be primarily for XSAPI armor plates, which likely would result in total orders under this five-year procurement being less than the full $2.37 billion contract amount. The contract provides for a minimum of 500 sets (including front and back plates) per year to a maximum of 240,000 sets per year. Shortly after receiving the ID/IQ contract and delivery order for “first article testing” plates, we received the first production delivery order under this ID/IQ contract for $72.2 million to be delivered from February 2009 to February 2010, with early delivery allowed. However, on October 27, 2008, the U.S. Army issued a “stop work order” instructing us to stop all work on the $72.2 million production delivery order for a period of 120 days, but not on the delivery order for “first article testing” plates. We believe that the stop work order is attributable to a protest filed by a competitor after the Army issued the first production delivery order. We anticipate that this protest will be resolved before the end of the 120-day stop work period.
Based on our current backlog and anticipated orders for ceramic body armor and the level of sales to date in 2008, we expect our shipments of ceramic body armor to be lower in fiscal year 2008 than in 2007. We also expect shipments of ceramic body armor to be lower in fiscal year 2009 than in 2008. Moreover, government contracts typically may be cancelled by the government at any time without penalty. For the next several quarters, and perhaps longer, demand for ceramic body armor is likely to be the most significant factor affecting our sales.

Although we believe that demand for ceramic body armor will continue for many years, the quantity and timing of government orders depends on a number of factors outside of our control, such as the amount of U.S. defense budget appropriations and the level of international conflicts. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process. Therefore, our future level of sales of ceramic body armor will depend on our ability to successfully compete for and retain this business.
Our ESK Ceramics subsidiary produces boron carbide powder, which serves as a starter ceramic powder in the manufacture of our lightweight ceramic body armor. Owning this source of our principal raw material, together with the recent expansion of our manufacturing capacity for ceramic armor at our Lexington, Kentucky plant and in our Irvine, California facility, should allow us to fulfill current and anticipated demand for our ceramic body armor. The lower demand for body armor has negatively impacted inter-segment sales of boron carbide powder by our ESK Ceramics subsidiary to our Advanced Ceramic Operations division in the first nine months of 2008.

Our order backlog was $174.9 million as of September 30, 2008 and $173.1 million as of September 30, 2007. Orders for ceramic body armor represented approximately $136.6 million, or 78.1%, of the total backlog as of September 30, 2008 and $147.9 million, or 85.5%, of the total backlog as of September 30, 2007. We expect that substantially all of our order backlog as of September 30, 2008 will be shipped during 2008. Our order backlog at September 30, 2008 does not include the $72.2 million delivery order mentioned above, which was received in October 2008.
Review of Historical Stock Option Grant Procedures
In July 2006, the Company voluntarily initiated a review of its historical stock option grant practices and related accounting treatment. The review was conducted by a Special Committee comprised of three independent members of the Company’s Board of Directors, with the assistance of independent legal counsel and forensic accounting experts. The scope of the Special Committee’s review included all stock options granted by the Company from January 1997 through September 2003. The Special Committee has completed its review.
Until September 2003, stock option grants generally were approved by unanimous written consents signed by the members of the Stock Option Committee of the Board of Directors. Throughout this period, the Stock Option Committee consisted of the CEO and one other non-management Director. The date specified as the grant date in each unanimous written consent was used (i) to determine the exercise price of the options and (ii) as the accounting measurement date.
The review found that from January 1997 through September 2003, the date selected by management as the grant date and accounting measurement date was the date specified in the unanimous written consent, but that, in all but one case, the unanimous written consents were not prepared, approved or executed by the Company’s Stock Option Committee until a later date. There were a total of 23 grant dates from January 1997 through September 2003. The Company’s CEO was responsible for selecting the grant dates and followed a consistent practice of seeking low grant prices and he was unaware of the accounting implications of the method he used. Therefore, the use of the date specified in the unanimous written consent as the accounting measurement date was incorrect in all but one case. The proper accounting measurement date was the date the unanimous written consent was signed by the members of the Stock Option Committee.
Based upon information gathered during the review by independent legal counsel, the Special Committee and the Board of Directors have concluded that, while the Company applied an option price date selection practice that resulted in the use of incorrect accounting measurement dates for options granted between January 1997 and September 2003, the accounting errors resulting from the use of incorrect measurement dates were not the product of any deliberate or intentional misconduct by the Company or its executives, staff or Board of Directors. However, as a result of using revised measurement dates for options granted from January 1997 through September 2003, the Company recorded a charge in the second quarter ended June 30, 2006 of $3.4 million ($2.3 million after income taxes) pertaining to the years ended December 31, 1997 to 2005 and the six months ended June 30, 2006 (the “Stock-Based Charge”). The Stock-Based Charge was included as a component of general and administrative expenses in the consolidated statements of income as this is where the affected individual’s normal compensation costs are recorded. The Stock-Based Charge includes non-cash compensation expense of $2.2 million ($1.4 million after income taxes) primarily related to stock option grants made during the period from January 1997 through September 2003 that should have been measured as compensation cost at the actual stock option grant dates, and subsequently amortized to expense over the vesting period for each stock option grant. The Stock-Based Charge also includes $1.2 million ($0.9 million after income taxes) of estimated additional employment and other taxes that are expected to become payable.
From September 2003 to February 2005, all stock option grants were approved at meetings held by the Stock Option Committee, and, since February 2005, all stock option grants have been approved at meetings held by the Compensation Committee of the Board of Directors. The dates of these meetings have been used correctly as the accounting measurement date for all stock options granted since September 2003.

Had this estimated Stock-Based Charge been reflected, as and when incurred, in the Company’s results of operations for prior years, the impact on net income for Ceradyne’s fiscal years ended December 31 would have been a reduction of $21,000 in 1997, a reduction of $45,000 in 1998, a reduction of $47,000 in 1999, a reduction of $104,000 in 2000, a reduction of $269,000 in 2001, a reduction of $74,000 in 2002, a reduction of $347,000 in 2003, a reduction of $0.6 million in 2004, and a reduction of $324,000 in 2005. As of September 30, 2008, the total remaining incremental stock-based compensation charge related to these stock option grants that are expected to vest in future periods with a revised accounting measurement date is immaterial. There was no impact on revenue or net cash provided by operating activities as a result of the estimated compensation charge.
The Company does not believe that a restatement of its prior-period financial statements is required for the Stock-Based Charge. Based on the materiality guidelines contained in SEC Staff Accounting Bulletin No. 99, Materiality, the Company believes that the Stock-Based Charge is not material to any of the individual prior periods affected and the aggregate Stock-Based Charge is not material to the results for the year ended December 31, 2006.
Prior to December 31, 2006, the current members of Ceradyne’s Board of Directors, all current executive officers and all other employees of the Company amended all unexercised stock options they held which had an exercise price that is less than the price of the Company’s common stock on the actual date of grant, by increasing the exercise price to an amount equal to the closing price of the common stock as of the actual grant date. The Company has reimbursed and will continue to reimburse all non-executive officer employees for the increase in the exercise price for the modified options as they vest. Such reimbursement has not been and will not be material.
Results of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
Net Sales. Our net sales for the three months ended September 30, 2008 were $167.7 million, a decrease of $23.9 million, or 12.5%, from $191.6 million of net sales in the corresponding quarter of the prior year. Net sales for the nine months ended September 30, 2008 were $541.3 million, a decrease of $24.1 million, or 4.3%, from $565.4 million in the corresponding prior year period.
Net sales for our Advanced Ceramic Operations division for the three months ended September 30, 2008 were $110.1 million, a decrease of $35.8 million, or 24.5%, from $145.9 million of net sales in the corresponding quarter of the prior year. The primary reason for the decrease was a decline in shipments of ceramic body armor as well as other armor components for defense contractors. Net sales of ceramic body armor in the third quarter of 2008 were $94.4 million, a decrease of $37.4 million, or 28.4%, from $131.8 million in the third quarter of 2007. In February 2008, the U.S. Army reduced their monthly demand of approximately 22,500 ESAPI body armor sets from us to approximately 12,500 sets per month, as they approached their targeted goal of 960,000 total sets of ESAPI received from all suppliers since 2005. This targeted goal of shipments was met by the end of September 2008. Thereafter, the U.S. Army will request shipments of the next ballistic threat generation of body armor, called XSAPI under the $2.37 billion ID/IQ contract we received in October 2008. In October 2008, we received our first XSAPI production delivery order of $72.2 million. In addition, we received orders for SAPI ceramic body armor plates totaling $39.2 million in September 2008 which are scheduled for shipment late in the fourth quarter of 2008.
Net sales for our automotive/diesel component product line for the three months ended September 30, 2008 were $4.9 million, an increase of $2.1 million, or 75.2%, from $2.8 million in the corresponding quarter of the prior year. The primary reason for this increase was our customers included our automotive/diesel components in their off road vehicles in 2008 compared to 2007 when they were not included in these types of vehicles. Production of heavy-duty diesel truck engines in 2007 was less than usual due to forward buying in 2006 in anticipation of increased emission standards that became effective in 2007. Net sales of our orthodontic brackets product line for the three months ended September 30, 2008 were $2.1 million, a decrease of $398,000, or 15.6%, from $2.5 million in the corresponding quarter of the prior year. The decrease was due to lower demand for Clarity ® orthodontic brackets which we believe was caused by a softening economy.
Net sales for our Advanced Ceramic Operations division for the nine months ended September 30, 2008 were $359.4 million, a decrease of $87.7 million, or 19.6%, from $447.1 million in the corresponding period of the prior year. This decline reflects lower demand, primarily for body armor, as well as other armor components for defense applications. Net sales of ceramic body armor for the nine months ended September 30, 2008 were $308.8 million, a decrease of $100.7 million, or 24.6%, from $409.5 million in the corresponding prior year period. Net sales for our automotive/diesel component product line for the nine months ended September 30, 2008 were $13.4 million, an increase of $6.3 million, or 89.4%, from $7.1 million in the corresponding prior year period. This increase reflects the increased production of heavy-duty diesel truck engines by our customers as described above. Net sales of our orthodontic brackets product line for the nine months ended September 30, 2008 were $8.1 million, an increase of $95,000, or 1.2%, from $8.0 million in the corresponding prior year period. The increase was attributed to sales of $1.2 million of a new version of our orthondontic bracket product line, partially offset by a decline in Clarity ® orthodontic bracket sales.

Our ESK Ceramics subsidiary had net sales for the three months ended September 30, 2008 of $38.0 million, a decrease of $1.0 million, or 2.5%, from $39.0 million in the corresponding quarter of the prior year. Approximately $2.1 million of the net sales of $38.0 million is attributable to the higher value of the Euro versus the U.S. dollar during the three months ended September 30, 2008 as sales denominated in Euros are translated into U.S. dollars for financial reporting purposes. Sales of industrial products for the three months ended September 30, 2008 were $25.5 million, an increase of $2.0 million, or 8.3%, from $23.5 million in the corresponding quarter of the prior year. This increase was the result of a higher demand for fluid handling parts, industrial wear parts and metallurgy parts. Sales of defense products for the three months ended September 30, 2008 were $6.0 million, a decrease of $3.7 million, or 38.2%, from the $9.7 million in the corresponding quarter of the prior year. Included in sales of defense products for the three months ended September 30, 2008 were inter-segment sales of $5.8 million compared to $8.2 million in the prior year. The decrease of $2.4 million in inter-segment sales was due to a reduction in demand for boron carbide powder used in body armor protection by our Advanced Ceramic Operations division. Sales of automotive/diesel products for the three months ended September 30, 2008 were $5.8 million, an increase of $0.6 million, or 10.9%, from $5.2 million in the corresponding quarter of the prior year. Increased demand from automotive original equipment manufacturers accounted for the increased sales. Sales of commercial products, consisting of boron nitride for the cosmetic industry, began in 2007, and for the three months ended September 30, 2008 were $0.8 million, an increase of $0.2 million, or 37.9%, from $0.6 in the corresponding prior year period.
For the nine months ended September 30, 2008, net sales for ESK Ceramics were $123.0 million, an increase of $1.5 million, or 1.2%, from $121.5 million in the corresponding prior year period. Approximately $9.6 million of the net sales of $123.0 million is attributable to the higher value of the Euro versus the U.S. dollar during the nine months ended September 30, 2008 as sales denominated in Euros are translated into U.S. dollars for financial reporting purposes. Additionally, the high value of the Euro versus the U.S. dollar caused our ESK Ceramics products to be less competitive than products denominated in U.S. dollars resulting in a negative impact on ESK Ceramics’ export sales. Sales of industrial products for the nine months ended September 30, 2008 were $78.5 million, an increase of $10.1 million, or 14.7%, from $68.4 million in the corresponding prior year period. This increase was the result of a higher demand for fluid handling, industrial wear parts and metallurgy parts. Sales of defense products for the nine months ended September 30, 2008 were $23.8 million, a decrease of $12.5 million, or 34.6%, from $36.3 million in the prior year. Included in sales of defense products for the nine months ended September 30, 2008 were inter-segment sales of $21.5 million, a decrease of $12.5 million compared to $32.5 million in the prior year. This decrease was due to a reduction in demand of boron carbide at our Advanced Ceramic Operations division. Sales of automotive/diesel products for the nine months ended September 30, 2008 were $18.6 million, an increase of $3.5 million, or 22.7%, from $15.1 million in the prior year period. Increased demand from automotive original equipment manufacturers accounted for the increased sales. Sales of commercial products, consisting of boron nitride for the cosmetic industry, for the nine months ended September 30, 2008 were $2.2 million, an increase of $0.6 million, or 32.5% from $1.6 million in the prior year period.
Our Semicon Associates division had net sales for the three months ended September 30, 2008 of $2.3 million, an increase of $0.7 million, or 38.0%, from $1.6 million in the corresponding quarter of the prior year. For the nine months ended September 30, 2008, net sales for Semicon Associates were $6.6 million, an increase of $0.6 million, or 9.8%, from $6.0 million in the corresponding prior year period. The increases in both periods reflect higher shipments of microwave cathodes.
Our Thermo Materials division had net sales for the three months ended September 30, 2008 of $20.7 million, an increase of $10.4 million, or 110.6%, from $10.3 million in the corresponding quarter of the prior year. The increase was primarily due to higher penetration of the growing solar energy market. Shipments of crucibles used in the manufacture of photovoltaic cells increased to $10.7 million, an increase of $8.5 million, or 387.1%, from $2.2 million in the third quarter a year ago. Of this increased amount, $8.2 million in sales came from shipments from our new manufacturing facility in Tianjin, China. Sales to the defense industry during the three months ended September 30, 2008 were $1.7 million, an increase of $0.6 million, or 46.3%, from $1.1 million when compared to the corresponding prior year period.
For the nine months ended September 30, 2008, net sales for Thermo Materials were $59.7 million, an increase of $41.2 million, or 229.8%, from $18.5 million in the corresponding prior year period. Two factors primarily account for this increase: first, the increased penetration of the growing solar energy market. Shipments of crucibles used in the manufacture of photovoltaic cells increased to $29.3 million, an increase of $23.4 million, or 393.4%, from $5.9 million during the nine months ended September 30, 2008. Of this increased amount, $19.2 million came from our new manufacturing facility in Tianjin, China. Second, Minco, Inc., which we acquired in July 2007, contributed $22.1 million of net sales for the nine months ended September 30, 2008, compared to $5.8 million in the same period last year. Sales to the defense industry during the nine months ended September 30, 2008 were $3.2 million, an increase of $0.8 million, or 34.0%, from $2.4 million when compared to the corresponding prior year period.

Our Ceradyne Canada subsidiary had net sales for the three months ended September 30, 2008 of $91,000, a decrease of $1.3 million, or 93.4%, from $1.4 million in the corresponding quarter of the prior year, reflecting reduced demand for our Boral ® product line and metal matrix composite products. For the nine months ended September 30, 2008, net sales for Ceradyne Canada were $4.9 million, an increase of $1.7 million, or 54.4%, from $3.2 million for the corresponding prior year period. Overall higher demand for our Boral ® product line by the nuclear power industry in the first half of 2008 contributed to the increase in year to date net sales.
Our Boron business segment comprises SemEquip, Inc., which we acquired on August 11, 2008, and Ceradyne Boron Products, which we acquired on August 31, 2007. Total net sales for this segment were $4.3 million for the three months ended September 30, 2008 and $14.5 million for the nine months ended September 30, 2008. Most of the sales in both the three and nine month periods were from Ceradyne Boron Products which had net sales of $4.1 million, an increase of $2.0 million, or 92.5%, from $2.1 million in the three months ended September 30, 2008 and net sales of $14.3 million, an increase of $12.2 million, or 576.9%, from $2.1 million for the nine months ended September 30, 2008. The increased sales resulted from the inclusion of net sales of Ceradyne Boron Products for the entire three and nine months ended September 30, 2008, which are not comparable to the prior year periods as the acquisition occurred on August 31, 2007. The sales contribution from the SemEquip acquisition is not expected to be significant in 2008.
Gross Profit. Our gross profit for the three months ended September 30, 2008 was $66.7 million, a decrease of $9.1 million, or 12.0%, from $75.8 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 39.7% for the three months ended September 30, 2008 compared to 39.6% for the corresponding prior year quarter. For the nine months ended September 30, 2008, our gross profit was $213.8 million, a decrease of $16.5 million, or 7.2%, from $230.3 million in the prior year. As a percentage of net sales, gross profit was 39.5% for the nine months ended September 30, 2008 compared to 40.7% for the corresponding prior year period. The decrease in gross profit was the result primarily of lower volumes of production of body armor at our Advanced Ceramic Operations division, lower volumes of production of boron carbide powder and continuing pricing pressure for evaporation boats for the packaging industry produced at our ESK subsidiary, lower volumes of production of chemicals and reduced yields at our Ceradyne Boron Products subsidiary and lower volumes of production of Boral ® neutron absorbing materials at our Canadian subsidiary, Ceradyne Canada. Gross profit for the nine months ended September 30, 2008, included $8.7 million of gross profit from the two businesses we acquired in the third quarter of 2007, Ceradyne Boron Products and Minco, Inc.
Our Advanced Ceramic Operations division posted gross profit for the three months ended September 30, 2008 of $47.3 million, a decrease of $13.9 million, or 22.6%, from $61.2 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 43.0% for the three months ended September 30, 2008, from 41.9% for the corresponding prior year quarter. The improvement in gross profit as a percentage of net sales resulted from a reduction in cost of materials and an improvement in manufacturing processes and production rates even as we adjust to the decrease in production volumes from lower body armor demand.
For the nine months ended September 30, 2008, gross profit for the Advanced Ceramic Operations division was $150.7 million, a decrease of $38.7 million, or 20.5%, from $189.4 million in the corresponding prior year period. As a percentage of net sales, gross profit was 41.9% for the nine months ended September 30, 2008 compared to 42.4% for the corresponding prior year period. For the nine months ended September 30, 2008, the primary reason gross profit decreased was lower volumes of production of body armor products compared to the corresponding prior period. Additionally, the nine months ended September 30, 2008 included severance expenses of $386,000 due to the reduction in work force during February and September 2008.
Our ESK Ceramics subsidiary had gross profit for the three months ended September 30, 2008 of $9.4 million, a decrease of $2.2 million, or 18.5%, from $11.6 million in the corresponding prior year quarter. As a percentage of net sales, gross profit was 24.8% for the three months ended September 30, 2008, compared to 29.7% for the three months ended September 30, 2007. The decrease in gross profit as a percentage of net sales for the three months ended September 30, 2008 was the result of an unfavorable sales mix due to lower sales of ceramic powder for armor applications and more competitive pricing for the sales of evaporation boats and surface engineered products.
For the nine months ended September 30, 2008, gross profit for ESK Ceramics was $31.9 million, a decrease of $5.7 million, or 15.1%, from $37.6 million in the prior comparable period. As a percentage of net sales, gross profit was 26.0% for the nine months ended September 30, 2008, compared to 31.0% for the nine months ended September 30, 2007. The decrease in gross profit as a percentage of net sales in the nine month period ended September 30, 2008 was the result of an unfavorable sales mix due to lower sales of ceramic powder for armor applications and more competitive pricing for the sales of evaporation boats.

Our Semicon Associates division had gross profit for the three months ended September 30, 2008 of $0.7 million, an increase of $390,000, or 141.8%, from $275,000 in the corresponding quarter of the prior year. As a percentage of net sales, gross profit was 29.4% for the three months ended September 30, 2008, compared to 16.8% for the corresponding prior year period. For the nine months ended September 30, 2008, gross profit for Semicon Associates was $2.0 million, an increase of $0.8 million, or 67.2%, from $1.2 million in the corresponding prior year period. As a percentage of net sales, gross profit was 30.4% for the nine months ended September 30, 2008 compared to 20.0% for the corresponding prior year period. Increased sales of higher margin parts from our microwave cathode product line, when compared to the corresponding prior year periods, contributed to the increase in gross profit and gross profit as a percentage of net sales for the three and nine months ended September 30, 2008.


CONF CALL

Joel Moskowitz

Thank you, Mindy, and I’m very pleased to have everybody on the line today for the teleconference regarding the reporting of our third quarter and nine-month 2008 financial results.

In addition to the forward-looking statements that Mindy read, I’d also like to remind everyone a recording is being made of this conference call. As our practice has been, before the market opened this morning, we issued a press release outlining our third quarter and nine-month 2008 financial results as well as providing guidance for the balance of 2008 for the entire year, the initial guidance for 2009, as well as some other comments regarding our outlook for your company. Briefly, I’ll review the press release.

We stated that the third quarter, we had sales of $167.7 million, that compared to $191.6 million of sales in the third quarter of last year 2007. Net income for the third quarter 2008 decreased by about $13.3 million or 40.6% to $19.4 million or $0.73 per diluted share. Now, that compared to $32.7 million or $1.16 per fully diluted share last year in the third quarter of ’07.

Now, that net income in the third quarter included the previously announced non-recurring pretax acquisition-related compensation charge of $9.8 million. We had announced that several times as we completed the SemEquip deal and that had to do with pre-closing commitments related to the SemEquip acquisition, which we acquired August of 2008, and that was used to pay certain incentive compensation to certain employees and advisors.

The income number also included a pretax charge of $3 million that came from other than temporary reduction in the value of our investments in auction rate securities. These non-recurring after-tax acquisition-related charges amounted to $6.2 million or approximately $0.24 per fully diluted share, and the after-tax other than temporary reduction in the value of our investments was $1.9 million or $0.07. So, the two charges had a combined negative impact on the third quarter net income of $0.31 per fully diluted share.

Now, the gross margins were 39.7% of net sales in Q3 of ’08, and that compared to 39.6% in the same period last year. The provision for income tax was 36.1% in the Q3 of ’08, and that compared to 39.6% of last year in the same period. The fully diluted average shares outstanding were 26.6 million in Q3, that compared to 28.1 million in the third quarter of 2007. And the lower average shares outstanding in the current quarter was due primarily to the purchase of 1.1 million shares under the company’s stock repurchase program, which we announced in March 4, 2008.

For the nine months, sales were $541.3 million for the period ending September 30, 2008, and that compared to $565.4 million last year in the same period. With net income for the nine months of ’08 being $85.5 million or $3.18 per fully diluted share on 26.9 million, that compared to $109 million or $3.93 per fully diluted share on 27.7 million shares last year for the same nine-month period.

Now, in that $3.18, you also have the same impact that we discussed above, namely, that the net income was reduced with a non-recurring pretax acquisition charge of $9.8 million that related to SemEquip and $3.5 million that related to the other than temporary reduction in the value of our investments in auction rate securities. These amounted to non-recurring after-tax charges of $0.32 per fully diluted share for the first nine months of 2008.

The gross margin for the same nine-month period in ‘08 was 39.5% and that compared to 40.7% with the provision for income taxes of 36.3% in the first nine months of 2008, that compared to 37.1% same period last year.

New bookings for Q3 2008 were $119.4 million and that compared to $163.6 million same period last year. And the nine months – for the total nine months, we booked $476.6 million in 2008 that compared to $395.3 million in the comparable period last year.

The total backlog as of September 30, 2008 was $174.9 million that compares to last year of slightly less $173.1 million.

Now in the press release where, because we’re coming out with our total projections or guidance for ’08 and as well as our initial guidance for ’09, I stated that I thought it might be helpful to our shareholders, if we did give initial guidance for ’09 and as well as discuss some of the areas that your management team continues to focus on. We now have a better visibility for all of ’08, so we've tightened the range a bit to show sales of $695 million to $700 million for all of ’08, and an earnings range of $4 to $4.15 per fully diluted share.

Now, those earnings also include the $0.32 that we discussed in the paragraphs related to the SemEquip acquisition and the expenses related to other than temporary reduction in the value of our investments and auction rate securities. That compares – on September 10, we had provided guidance which these numbers the sales are slightly below the low-end of the guidance and the earnings range adding back to $0.32 would be higher than the lower-end of the guidance that we gave.

And as you may recall, there was some question about XSAPI – how much we could ship in the fourth quarter, if we even had gotten the fourth XSAPI, and we did win that ID/IQ award which we announced, but it came in late enough that actually in Q4 we’ll ship very little of XSAPI. We will ship some of the first article test parts and that’s in the numbers that I just quoted for our guidance for the full year.

Now, in October of 2008, we repeat that we had won the largest contract we ever got at Ceradyne, a five year XSAPI as well as ESAPI plate from the US Army at Aberdeen Proving Grounds for $2.37 billion, which is an indefinite delivery, indefinite quantity generally called ID/IQ five-year contract. And we then received two initial to delivery orders amounting to $73 million which was the first article as well as production.

In this press release, we announced yesterday October 27, the Department of Army issued a 120-day stop work order on the initial delivery order, which was named 0002, that’s $72 million but we were allowed to continue working on the initial first article test order on the ID/IQ contract.

I stated also that we believe that the stop work order is attributable to a protest filed by BAE Systems. We also anticipate that the protest will be resolved in a relatively short period of time. I’m sure in the Q&A that someone will be asking Dave to comment on that.

Although this ID/IQ contract is both for XSAPI and ESAPI, we expect the army will primarily order the XSAPI which would most likely result in total orders under this five- year procurement of less than the full $2.37 billion.

And although we believe that the government may increase its requirements for XSAPI to a Pure Fleet. Pure Fleet is the language that’s used when the government determines that they want every soldier, including National Guard or noncombatants, combatants, full deployment of XSAPI.

Because we cannot project that decision at this time, we’re assuming that our normal flow of XSAPI and ESAPI sustained and non-Pure Fleet XSAPI and Special Forces armor, if we add those numbers up, they come out to about $125 million short of what we shipped in 2008. That is the way we came up with our guidance for 2009. This reduction in shipments will be partially offset by increased sales of our ceramic crucibles, which will double to about $80 million in 2009, and increased sales in other non-defense areas such as our ESK Ceramics subsidiary in Germany.

Now assuming no Pure Fleet increase, which is what we are assuming for the purposes of this initial guidance, our sales for next year would be $640 million to $650 million, with an earnings range of $3.00 to $3.25, and that assumes a tax rate of 36% and fully diluted average shares of $26.5 million.

I went on to point out, because of the capital markets crisis, it is currently evident not only in the United States but worldwide that your company has a very strong balance sheet, particularly we have strong cash, cash equivalents, restricted cash, and short-term investments totaling $215 million. In addition to that, which we usually don't site as cash because it’s classified as a long-term investment are our auction rate securities, which are now in an illiquid status.

The team, most of whom are on the phone right now, except for our operations that are far away, continues to focus on the areas that we have repeatedly discussed. We’re working very hard on acquisitions, particularly defense products, including armor for military vehicles. We have Marc King on the phone. He may give us a little bit of information on that solar energy and – which continues to be a strong suit.

I’d like to mention in solar energy that we have developed a technical improvement to our traditional ceramic crucibles which we have filed a patent for and we expect this to be substantive in the marketplace as it will make a better ingot of silicon and that will release cleanly from the crucible, as well as our ceramics for smelting of aluminum.

It is interesting to know, and for those of you who’ve been following Ceradyne, remember that I’ve been following this since the first day 41 years ago, that we do have a decline in body armor shipments. That’s what we’re projecting for 2009 with our current visibility, assuming no Pure Fleet and it will be about 40% of our shipments.

Now, as we look at it at Ceradyne, we’re moving towards our goal of a diversified company and a lot of that will be based on the sales growth in the future in these non-defense areas. However, even with this decline that we’re projecting next year, even with partially being offset by non-defense, we expect it will continue to generate strong monthly cash flows and that we’re all very excited, actually, about what we see in the marketplace.

We’re planning to expand our solar operations in China, possibly Singapore, for sure Atlanta, Georgia is expanding, and we continue to put in capital expenditures in our non-defense areas in Germany, we are looking for record years out of ESK Ceramics, and a small subsidiary area that they run. But the plans, because of continued increase in the demand for our ceramic silicon carbide products for pump seals and bearings, which is a very important part of ESK’s non-defense programs.

So I think that a more lengthy press release than we normally put out gives you the factual information on Q3, on the balance of ’08, how we see things in ’09, our continued focus in these various areas.

And I’m going to turn this over now as we’ve been doing in recent calls to Jerry Pellizzon, Ceradyne’s Chief Financial Officer, who will give you a little bit of an overview of some of the financial aspects that he wants to highlight. Jerry?

Jerry Pellizzon

Thank you, Joel. A pleasant good morning to everybody wherever you may be. We have a revenue diversification trend that began in Q3 ’07, continued again into this quarter and for the nine months. And it’s interesting to note that the non-armor, non-defense business of Ceradyne had record sales for the year-to-date and record sales for any quarter, and also record earnings contribution. That is driven by our crucible business, not only in China but also in Atlanta, but also other areas of the business, the fluid handling at ESK, our broad metallurgy business at ESK. So we’re seeing some solid growth into that business. The percentage of revenue from our business now is – has declined at 62% from 73% of the revenue compared to the same period in ’07; and so we've really got solid business there.

Non-defense sales year-to-date are $205 million versus $136 million in ’07, so you got a growth rate of 50%. If you net up your contributions of the 2007 acquisitions from the growth rate of 35% and the sales to date are $173 million versus $128 million. So, we’re really pleased about our performance of the non-industrial business and we’re very optimistic about it for the future.

In terms of income from operations, we did declined by $15.1 million before the impact of the charge for the acquisition of the SemEquip, but we did deliver a very healthy 26.2% operating profit margin and our annualized pretax return on capital was 22.3%. So basically, there’s a fact that the selling, general and administrative expenses related to the incremental revenue of our non-defense business are generally higher than those attributable to body armor. So, replacing body armor revenue dollar-for-dollar cannot expect to generate equivalent profit margins but still contribute very, very good incremental profits. So in general, the results of the first nine months of 2008 reflect our strategy of expanding our business through internal growth and strategic acquisitions.

Free cash flow for the nine months ended September 30, 2008 amounted to $91.5 million versus $62.2 million in the comparable period last year. EBITDA was $161 million for the nine months, compared to $188 million during the same period the year before. Our depreciation and amortization is $30 million for the nine months. We were at $18 million last year. Our CapEx was $36 million and compared to $28.3 million last year.

So overall, we’ve seen a healthy growth of our non-industrial, non-defense business. We’re still producing good healthy returns. The balance sheet, as Joel noted, is rock-solid. We continue to produce cash; we’re going to produce cash in 2009 also. So we’re anticipating that we’ll build our cash position. And as we mentioned, we do have a buyback program with about $65 million left on it, so we have ample cash. And in today’s credit constrained era, it's probably one of our most valuable assets that we have on our balance sheet.

Additionally, our DSOs continue to go in the right direction. They’re now a record low 28 days compared to 43 days for the prior year. So I think that the note on the balance sheet is that strong liquidity, strong cash position, and the note on the operating side is that we continue to perform on an excellent basis for manufacturing companies. Joel?

Joel Moskowitz

Thanks a lot, Jerry. I think, Mindy, it would be most productive if we go right into the Q&A period, so we can bring everybody into the act and answer any questions from the people on the line.



SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

9716 Views