Ceramic Industry

Ceradyne Reports Results for Third Quarter, Nine Months (posted 10/29/08)

October 29, 2008

Ceradyne, Inc. recently reported its financial results for the third quarter and nine months ended September 30, 2008. Sales for the third quarter of 2008 were $167.7 million, compared with $191.6 million in third-quarter 2007. Net income for third-quarter 2008 decreased by $13.3 million or 40.6% to $19.4 million, or $0.73 per fully diluted share, compared to $32.7 million, or $1.16 per fully diluted share, in the third quarter of 2007.

Net income for the third quarter 2008 includes a previously announced non-recurring pre-tax acquisition-related compensation charge of $9.8 million associated with a pre-closing commitment related to SemEquip, Inc., which Ceradyne acquired in August 2008, to pay incentive compensation to certain employees and advisors, and a pre-tax charge of $3.0 million from an other-than-temporary reduction in the value of investments in auction rate securities. The non-recurring after-tax acquisition-related charge 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 investments in auction rate securities charge was $1.9 million, or approximately $0.07 per fully diluted share. These two charges had a combined negative impact on net income of approximately $0.31 per fully diluted share in the third quarter of 2008.

Gross profit margin was 39.7% of net sales in third-quarter 2008 compared to 39.6% in the same period in 2007. The provision for income taxes was 36.1% in third-quarter 2008, compared to 39.6% in the same period in 2007. Fully diluted average shares outstanding were 26.6 million for the third quarter of 2008, compared to 28.1 million for the third quarter of 2007. The lower average shares outstanding in the current quarter is due primarily to the repurchase of 1.1 million shares under the company’s stock repurchase program announced on March 4, 2008.

Sales for the nine months ended September 30, 2008, were $541.3 million, compared with $565.4 million in the same period last year. Net income for the first nine months of 2008 was $85.5 million, or $3.18 per fully diluted share, on 26.9 million shares, compared to $109.0 million, or $3.93 per fully diluted share, on 27.7 million shares, for the same period in 2007. Net income for the first nine months of 2008 includes a non-recurring pre-tax acquisition-related compensation charge of $9.8 million related to a pre-closing commitment by SemEquip, Inc., to pay incentive compensation to certain employees and advisors, and a pre-tax charge of $3.5 million from an other-than-temporary reduction in the value of investments in auction rate securities. The non-recurring after-tax acquisition-related charge amounted to $6.2 million, or approximately $0.23 per fully diluted share, and the after-tax other-than-temporary reduction in the value of investments in auction rate securities charge was $2.3 million, or approximately $0.09 per fully diluted share. These two charges had a combined negative impact on net income of approximately $0.32 per fully diluted share for the first nine months of 2008.

Gross profit margin was 39.5% of net sales in the nine months ended September 30, 2008, compared to 40.7% in the same period in 2007. The provision for income taxes was 36.3% in the first nine months of 2008, compared to 37.1% in the same period in 2007.

New bookings for the third quarter of 2008 were $119.4 million, compared to $163.6 million for the same period last year. For the first nine months of 2008, new bookings were $476.6 million, compared to $395.3 million for the comparable period last year. Total backlog as of September 30, 2008, was $174.9 million, compared to total backlog at September 30, 2007, of $173.1 million.

“I think it would be helpful to our shareholders if I explained certain activities which Ceradyne management is focusing on for the future,” said Joel P. Moskowitz, president and chief executive officer. “Additionally, because of the state of the capital markets, I will discuss the company’s strong balance sheet as well as review the balance of 2008 and provide our initial guidance for 2009.

“With the additional visibility we have for Q4 2008, we now provide revised guidance for all of 2008 as follows: sales range from $695 million to $700 million and earnings range from $4.00 to $4.15 per fully diluted share. The foregoing includes the negative impact of the above discussed $0.32 per fully diluted share, which is made up of the non-recurring pre-tax charges of $9.8 million related to the SemEquip acquisition and the $3.5 million pre-tax other-than-temporary reduction in the value of our investments in auction rate securities.

“We believe our shipments of XSAPI body armor in the fourth quarter will be modest and will consist primarily of the first article test parts.

“In October 2008, we received the largest contract ever awarded to Ceradyne for the next generation of ceramic body armor plates, XSAPI, as well as for the current ESAPI plates, from the U.S. Army REDCOM, Aberdeen Proving Grounds, Md. Of this $2.37 billion ID/IQ (indefinite delivery/indefinite quantity) five-year contract, we have now received approximately $73 million in initial orders consisting of first article test parts, as well as production components. On Monday, October 27, 2008, the Department of the Army issued a 120-day “Stop Work Order” on the initial production delivery order 0002 for $72 million, but not on the initial first article test order 0001 on this ID/IQ contract. We believe that this Stop Work Order is attributable to a protest filed by BAE Systems. We anticipate the protest will be resolved in a short period of time.

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

“Although we believe that the government may increase its requirements for XSAPI to a “pure fleet” (i.e., full deployment of XSAPI) strategy, we cannot project that decision at this time. Assuming our normal order flow of SAPI, ESAPI sustainment, non-pure-fleet XSAPI, and Special Forces armor, we expect our body armor shipments will be approximately $125 million less in 2009 than in 2008. This reduction in shipments will be partially offset by increased sales of our ceramic crucibles for solar cell applications, which we anticipate will double to about $80 million in 2009, and increased sales in other non-defense areas, such as by our ESK Ceramics subsidiary in Kempten, Germany. Assuming no pure fleet increase in Army-related XSAPI, our initial guidance for 2009 is as follows: sales range from $640 million to $650 million and earnings range from $3.00 to $3.25 per fully diluted share. This assumes an annual tax rate of 36% with fully diluted average shares of 26.5 million.

“As of September 30, 2008, our cash, cash equivalents, restricted cash and short-term investments totaled approximately $215 million. In addition, we have approximately $29 million in auction rate securities, which are classified as long-term investments due to their illiquid status.

“Ceradyne management will continue to focus on the areas we have repeatedly discussed. These include acquisitions; defense products, including armor for military vehicles; solar energy; and ceramics for the smelting of aluminum. Also, it is interesting to note that with the projected decline of body armor shipments, our 2009 guidance includes revenues from body armor equal to only about 40% of total net sales, down from over 80% less than two years ago. The company anticipates further growth in non-defense products and will continue to generate strong monthly cash flow in 2009.

“We plan to expand all areas of our operations, particularly industrial and solar related. We are evaluating new operations in China and Singapore and anticipate expansion of our operations in Germany and Atlanta, Ga.”

Additional information, including an archive of a recent conference call discussing these results, is available at www.ceradyne.com.

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