Advanced Ceramics Experiences Severe Downturn; Recovery Expected in Late 2002 or 2003
AVX Corp., one of the largest U.S. manufacturers of ceramic capacitors, saw a 58% decline in sales for fiscal 2002. (The company’s fiscal year ends in March, along with the majority of Japanese firms.) The company said that its sales unit volumes increased slightly in the fourth quarter, but that selling prices continued to be under heavy pressure because the capacity in the industry still exceeded near-term demand. Kyocera, AVX’s parent company, said that overall sales for FY2002 dropped by 19.5% due to the rapid global downturn in the markets related to information technology, such as personal computers, mobile phone handsets and optical communication devices.
KEMET Corp., a U.S.-based manufacturer of solid tantalum and multi-layered ceramic capacitors, reported a 64% drop in FY2002 sales (also ending in March). Murata Manufacturing Co., one of the largest Japanese manufacturers of ceramic capacitors, piezoelectric components, microwave devices and other high-tech ceramic products, saw a decrease of more than 32% in FY2002 sales. And Compagnie de Saint-Gobain, whose High-Performance Materials and Plastics division generated 13% of the company’s total $27 billion 2001 sales figure, saw revenues drop by over 20% in this sector compared to the previous year’s levels due to the downturn in the global electronics market.
A severe downturn in the semiconductor capital equipment industry also negatively affected the advanced ceramics industry. CoorsTek, Inc., a leading designer and manufacturer of critical components and integrated assemblies for the semiconductor capital equipment industry and other high-tech applications, said that profound weakness in its key markets led to a 26% decline in its total 2001 revenues. And American Technical Ceramics Corp., another supplier to this industry segment, saw net sales for the nine months ending March 31, 2002, decline by 43%. (The company’s fiscal year ends in June.) According to Victor Insetta, president and CEO of American Technical Ceramics, this downturn “…has been more severe than we have seen in many years.”
According to Dr. Thomas Abraham, vice president of Business Communications Co. (BCC), a market research and analysis firm that has tracked the advanced ceramics market for the last 20 years, overall sales in the high-tech ceramics industry dropped by 10% between 2000 and 2001 due to the continuing economic slump that began in the last quarter of 2000 and was fueled by the September 11 terrorist attacks.
Companies Cut Jobs, Investments to Protect ProfitabilityAs revenues began to drop in late 2000, profits also started to tumble. American Technical Ceramics, for example, reported a net loss of almost $2 million for the nine months ending on March 31, 2002, compared to a net income of almost $8 million in the same period the year before. Murata’s operating income dropped by over 70% to an estimated $385 million compared to nearly $1.4 billion in FY2001, and KEMET reported a net loss of $27.3 million compared to net earnings of $352.3 million in FY2001. Other advanced ceramic companies reported similar drops in earnings.
As a result, many companies in this sector were forced to cut costs and take other measures to protect their financial positions. Thousands of jobs were slashed and some facilities were closed in an effort to reduce overhead. KEMET reported that it had reduced its number of employees to approximately 6800 by March 2002—a 58% drop from its peak of approximately 16,000 employees in the summer of 2000. By the third quarter of 2001, CoorsTek had reduced its workforce by approximately 30% and announced that it would sell its Chattanooga, Tenn., manufacturing facility. (The facility was sold to Ixion Technologies, headquartered in New Bedford, Mass., in the fourth quarter.) AVX Corp. consolidated its Vancouver, Wash., ceramic component manufacturing facility into other AVX facilities, a move that affected approximately 340 employees. And American Technical Ceramics also announced that it had scaled back its production, workforce and investments in an effort to reduce costs and conserve cash. Many companies also took steps to lower their inventory levels and reduce debt in an effort to improve cash flow.
In addition to cutting costs, companies also sought to improve their profit margins by developing new products and expanding market share for existing products. AVX, for instance, introduced a new series of zinc oxide-based ceramic semiconductor varistors, called the CANBus Series, that provide greater current and energy handling capabilities compared to conventional capacitors.
During the fourth quarter of 2001, CoorsTek added eight new assembly programs in the semiconductor segment and four non-semiconductor programs in industries such as security, printing and aerospace. And despite significant cost reductions, American Technical Ceramics said that it remained focused on long-term objectives and planned to continue investing in R&D and new product initiatives.
By early 2002, these profit-boosting strategies had begun to pay off, with many companies reporting higher first quarter earnings compared to the fourth quarter of 2001.
Defense and Oil Industries Boost Sales for SomeNot all advanced ceramics manufacturers reported losses in 2001. Carbo Ceramics Inc., a manufacturer of ceramic proppants for use in the hydraulic fracturing of natural gas and oil wells, said that revenues increased 47% due to increases in sales volume and the average selling price. The company’s gross profit margins also increased by 42%, despite increased manufacturing costs due to higher natural gas costs in the first half of the year. While a slowdown in natural gas drilling and fracturing activity in the U.S. led to a 14% decline in revenues in first quarter 2002 compared to the same period in 2001, the company remains optimistic about near-term performance. “While we are operating in a more difficult environment in the early part of this year, demand has been strong in several key markets where we have been able to demonstrate to operators the value created through the use of our high conductivity proppants,” said C. Mark Pearson, president and CEO.
The company is constructing a new manufacturing facility in China that is expected to be complete and operational by the end of 2002 and has begun a $17 million project to optimize throughput at its manufacturing facility in McIntyre, Ga. It is also increasing research and development activities targeted at new product development in both oilfield and industrial applications.
Ceradyne, Inc., a manufacturer of advanced technical ceramics for industrial, electronic, defense and consumer applications, also had a good year. Sales remained relatively flat in 2001 but rose 23% in the first quarter of 2002 to a record $14.7 million compared to $11.9 million in the first quarter of 2001. The company expects overall shipments in 2002 to increase by as much as 30-40% compared to last year due to increasing strength in the company’s three primary markets: lightweight ceramic armor for military applications, particularly body armor for protecting individual soldiers; ceramic orthodontic brackets; and ceramic valve train components for diesel engines. The company invested over $6 million in capital equipment in 2001, expanded facilities in its Advanced Ceramic Operations located in Costa Mesa, Calif., leased an additional 40,000 square feet of manufacturing space in nearby Irvine, Calif., and increased its workforce to meet increasing levels of demand.
A number of other, smaller companies also managed to maintain or increase sales levels in 2001 despite the difficult market conditions, with many firms citing diversification in products and/or markets as the key to their success.
Outlook Uncertain but BrighterAccording to Abraham of BCC, the advanced ceramics market is likely to pick up by the end of 2002. In addition to the increased activities in the defense sector, electronic applications are also starting to rebound. Within the next five years, electronic ceramics are forecast to grow by 11.1%, structural ceramics by 10.9%, advanced coatings by 9.2% and ceramics for chemical processing and environmental applications by 7.5% (see Table 1).
Manufacturers are also optimistic, though many remain cautious. According to Insetta of American Technical Ceramics, customers appear to be depleting inventory overstock and are beginning to place orders to meet current production needs. By the third quarter ending March 31, 2002, increases were being seen in wireless, medical and military industries. However, the fiber optic and semiconductor equipment industries remained depressed. “The outlook is still very uncertain, and our customers are still working from very short-term horizons,” he said.
Despite the uncertainties, many companies are projecting revenue growth for 2002 as excess inventories continue to be consumed and market demand for electronic products begins to improve.