SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from
to
Commission
file number 000-13059
(Exact
name of registrant as specified in its charter)
Delaware
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33-0055414
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(State
or other jurisdiction of Incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3169
Red Hill Avenue, Costa Mesa, California
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92626
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(Address
of principal executive offices)
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(Zip
Code)
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(714)
549-0421
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class:
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Name
of Each Exchange on Which Registered:
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Common
Stock, par value $0.01 per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act of
1933. YES
¨
NO
x
Indicate
by check mark whether the registrant is not required to file reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934. YES
¨
NO
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES
x
NO
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
¨
|
Accelerated
filer
x
|
Non-accelerated
filer
¨
|
Smaller
reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
The
aggregate market value of registrant’s common stock held by non-affiliates as of
June 30, 2009 (the last business day of registrant’s most recently
completed second fiscal quarter) was approximately $430.1 million.
As of
February 19, 2010, there were 25,406,190 shares of registrant’s Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant’s definitive proxy statement for its annual
meeting of stockholders to be held on June 8, 2010 are incorporated by
reference into Part III of this Form 10-K.
TABLE
OF CONTENTS
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Page
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PART
I
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3
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ITEM 1.
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Business
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3
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ITEM 1A.
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Risk
Factors
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26
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ITEM 1B.
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Unresolved
Staff Comments
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34
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ITEM
2.
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Properties
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35
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ITEM
3.
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Legal
Proceedings
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35
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ITEM
4.
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Submission
of Matters to a Vote of Security Holders
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35
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PART
II
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36
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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36
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ITEM
6.
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Selected
Financial Data
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37
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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38
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ITEM 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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59
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ITEM
8.
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Financial
Statements and Supplementary Data
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60
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ITEM
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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60
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ITEM 9A.
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Controls
and Procedures
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60
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ITEM 9B.
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Other
information
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60
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PART
III
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61
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance
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61
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ITEM
11.
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Executive
Compensation
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62
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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62
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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62
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ITEM
14.
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Principal
Accountant Fees and Services
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62
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PART
IV
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63
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ITEM
15.
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Exhibits
and Financial Statement Schedules
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63
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FINANCIALS
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F-1
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PART
I
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 capabilities, special
electronic properties and low friction characteristics.
Our
products include:
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•
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lightweight
ceramic armor and enhanced combat helmets for soldiers and other military
applications;
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•
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ceramic
industrial components for erosion and corrosion resistant
applications;
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•
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ceramic
powders, including boron carbide, boron nitride, titanium diboride,
calcium hexaboride, zirconium diboride and fused silica, which are used in
manufacturing armor and a broad range of industrial products
and consumer products;
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•
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evaporation
boats for metallization of materials for food packaging and other
products;
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•
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durable,
reduced friction, ceramic diesel engine
components;
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•
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functional
and frictional coatings primarily for automotive
applications;
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•
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translucent
ceramic orthodontic brackets;
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•
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ceramic-impregnated
dispenser cathodes for microwave tubes, lasers and cathode ray
tubes;
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•
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ceramic
crucibles for melting silicon in the photovoltaic solar cell manufacturing
process;
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•
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ceramic
missile radomes (nose cones) for the defense
industry;
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•
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fused
silica powders for precision investment casting
(PIC);
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•
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neutron
absorbing materials, structural and non-structural, in combination with
aluminum metal matrix composite 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;
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•
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nuclear
chemistry products for use in pressurized water reactors and boiling water
reactors;
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•
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boron
dopant chemicals for semiconductor silicon manufacturing and for ion
implanting of silicon wafers; and
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•
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ceramic
bearings and bushings for oil drilling and fluid handling
pumps.
|
Our
customers include the U.S. government, prime government contractors and
industrial, automotive, diesel and commercial manufacturers in both domestic and
international markets.
The
principal factor contributing to our growth in sales from 2002 through 2007 was
demand by the U.S. military for ceramic body armor that protects soldiers, which
was primarily the result of military conflicts such as those in Iraq and
Afghanistan. This demand was driven by recognition of the performance and life
saving benefits of utilizing advanced technical ceramics in lightweight body
armor. Our sales also increased from 2004 through 2007 because of our
acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in
July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we
renamed Boron Products, LLC, and the recent expansion of our operations into
China. Our sales declined in 2008 primarily because of reduction in shipments of
body armor. Our sales declined in 2009 primarily because of a continued
reduction in shipments of body armor and also due to a reduction in shipments of
our industrial products because of the severe economic recession.
Shipments
of lightweight ceramic body armor represented $170.0 million or 42.4% of our
total revenues in 2009, $385.0 million or 56.6% of our total revenues in 2008,
and $535.3 million or 70.7% of our total revenues in 2007. Of these amounts,
ESAPI (enhanced small arms protective inserts) body armor represented 26.4% of
our total body armor shipments in 2009, 50.2% of our total body armor shipments
in 2008, and 57.0% of our total body armor shipments in 2007.
Shipments
of XSAPI, the newest ballistic threat generation of ceramic body armor plates,
represented $48.2 million, or 12.0% of our total revenues and 28.4% of our total
body armor shipments in 2009. These shipments were made against an Indefinite
Delivery/Indefinite Quantity contract awarded to us in October 2008. This
five-year contract has a maximum value of $2.3 billion and allows the U.S.
government to order either XSAPI or ESAPI body armor from us. To date, we have
received one delivery order under this contract in March 2009 for $76.8 million
of XSAPI body armor. We anticipate shipping the remaining balance of this order,
$28.6 million, during the first quarter of 2010. Since it is our policy to
include in backlog only delivery orders with firm delivery dates, our backlog at
December 31, 2009 does not include any amounts under this ID/IQ contract except
for the balance of the initial delivery order.
Based on
informal discussions with U.S. Army personnel, we believe the U.S. Army has
decided that the current XSAPI weight from all suppliers, although in compliance
with the weight limitations specified in the ID/IQ contract, is too heavy for
use in the current military campaign in Afghanistan. Consequently, unless the
U.S. Army changes its position regarding weight or the ballistic threat that the
XSAPI plate defeats becomes more prevalent, we do not expect any additional
orders for the current version of XSAPI ceramic body armor plates.
We are
developing ESAPI and XSAPI designs that weigh 10% to 15% less than the current
designs and will offer these to the U.S. Army and other Department of Defense
users once these designs meet the current ballistic requirements. There is no
assurance that we will be successful with these lighter weight
designs.
We do
have qualified lightweight body armor inserts that are viable for the
Afghanistan campaign and these designs have been offered to the Army and the
Marines. These designs offer significant weight savings at a reduced level of
protection from the currently fielded ESAPI design. The Army and the Marines
have shown interest in these designs and we continue to pursue these
opportunities, but there is no assurance that we will be
successful.
We
believe there will continue to be a viable replacement business for body armor
inserts that is procured through the Defense Supply Center Philadelphia (DSCP),
and we expect continued procurements for replacement inserts during
2010. We will also continue to bid on Foreign Military Sales (FMS) for the first
generation of inserts called Small Arms Protective Inserts (SAPI) through our
existing ID/IQ contract with Aberdeen Proving Grounds.
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 and may be cancelled by the
U.S. government at any time without penalty. 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.
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 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. Our Boron Products operation 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. Boron
Products also produces complementary chemical isotopes used in the normal
operation and control of nuclear power plants, and 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.
In June
2008, we purchased certain assets and technology related to proprietary
technical ceramic bearings used for “down hole” oil drilling and for coal bed
methane pumps and steam assisted oil extraction pumps. These assets and the
intellectual property were acquired from a privately-owned business located in
Greenwich, Rhode Island. This operation, which we now call Ceradyne Bearing
Technology, has been relocated to our Lexington, Kentucky, facility. These
bearings and pumps incorporate ceramic parts supplied by our ESK Ceramics
subsidiary.
In August
2008, we acquired SemEquip, Inc., a late-stage startup technology company
located in Billerica, Massachusetts. SemEquip develops and markets “cluster
molecules” such as B
18
H
22
for use
in the ion implantation of boron (B) in the manufacture of semiconductors.
SemEquip owns a portfolio of approximately 107 issued patents and pending patent
applications.
In June
2009, we acquired substantially all of the business and assets and all
technology and intellectual property related to ballistic combat and non-combat
helmets of Diaphorm Technologies, LLC, based in Salem, New Hampshire. In
connection with this acquisition, we submitted a proposal to the U.S. Marine
Corps Systems Command in June 2009 in response to a solicitation for the
procurement of Enhanced Combat Helmets (ECH), which are intended to provide
substantially increased levels of protection compared to combat helmets now in
use. In late July 2009, in response to our proposal, the U.S. Marine Corps
System Command awarded us a contract for development test helmets valued at
approximately $1.2 million. We delivered all of these test helmets in the
quarter ended September 30, 2009. Subsequent to our delivery of the Enhanced
Combat Helmets development test helmets in the quarter ended September 30, 2009,
we were notified that the initial helmets from all potential suppliers did not
meet all of the legacy ballistic and non-ballistic test protocols. Therefore,
the U.S. Marine Corps System Command delayed the program to allow a full review
of the test protocols and in this light have recently issued a revised product
description. On February 1, 2010, the Marines issued a modification to the
contract requesting us and our competitors to submit additional development test
helmets for testing early in the second quarter 2010. These changes have delayed
the original projection for fielding these helmets from late 2010 to the first
quarter of 2011. The U.S. Marine Corps and the U.S. Army have the option under
this contract to procure up to a maximum of 246,840 helmets. We expect 2010
revenues from our police protection helmet business and this contract for
additional test helmets to be approximately $7.0 to $9.0 million. Our strategy
regarding this acquisition is to combine our successful track record in body
armor programs with the proprietary helmet-forming technologies acquired from
Diaphorm to create a world class manufacturer of Enhanced Combat
Helmets.
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:
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•
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lightweight
ceramic armor for military helmets, vehicles, boats and
aircraft;
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•
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ceramic
components that have the potential to facilitate the extraction of oil
from oil sands on a cost-effective
basis;
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ceramic
materials that have the potential to reduce significantly the cost of
producing molten aluminum;
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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;
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high
purity fused silica ceramic crucibles used by several photovoltaic cell
manufacturers in their silicon melting operation in order to produce
polycrystalline silicon;
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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;
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small
complicated ceramic components made using our injection molding technology
that have the potential to be used as medical
implants;
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ceramic
bearing and bushing assemblies designed for longer life due to their
rugged construction and the erosion, corrosion and lubricity
characteristics of the ceramic bearing surface;
and
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•
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cluster
chemicals such as B
18
H
22
and
cluster ion implantation hardware required to facilitate the manufacture
of advanced semiconductor chips.
|
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 in China to add manufacturing capacity for the
production of ceramic crucibles.
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 segment, which is comprised of our Boron Products and SemEquip
subsidiaries.
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.
Materials
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Melting
Point
(Degrees
Fahrenheit)
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Hardness
(Vickers
Scale)
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Chemical
Resistance
to
Acids
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Electrical
Properties
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Density
(Grams
per
Cubic
Centimeter)
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Advanced technical ceramics
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2,500 to 6,900
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Up to 3,200
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Excellent
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From excellent insulators to conductors
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2.5 to 4.5
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High
strength alloy steel
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2,500
to 2,700
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Up
to 900
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Fair
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Conductors
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7.0
to 9.0
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High
performance plastics
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275
to 750
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Up
to 10
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Good to Excellent
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Good
to excellent insulators
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1.0
to 2.0
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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
Solution
We
develop, manufacture and market advanced technical ceramic products, ceramic
powders and components for defense, industrial, automotive/diesel and commercial
applications. The table on the following pages illustrates some of the solutions
we have designed to meet market opportunities and demands.
Market
Opportunity
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Demands
of the Market
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Our
Solution
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Defense
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Lightweight
ceramic body armor and boron carbide powders
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Due
to the proliferation of automatic weapons in tactical operations and
terrorist conflicts, it has become necessary for vests or other armor to
stop machine gun bullets while being light enough in weight to allow
freedom of movement without undue fatigue.
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We
have developed lightweight bullet resistant ceramic body armor solutions,
including SAPI (small arms protective inserts), ESAPI (enhanced small arms
protective inserts), ESBI (enhanced side ballistic inserts) and other
systems. These products generally consist of hot pressed Ceralloy
®
546 (boron carbide) or hot pressed Ceralloy
®
146 (silicon carbide) and other ceramic coupled with backings such as
Dyneema
®
,
Spectra Shield
®
or Kevlar
®
purchased from third parties. Our subsidiary, ESK Ceramics, is a
major manufacturer of boron carbide powders, which are used by us and our
competitors to manufacture lightweight ceramic body
armor.
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Lightweight
ceramic armor for military ground-based vehicles, boats and
aircraft
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Military
ground-based vehicles, boats and aircraft require protection against
automatic weapons. Weight, cost and vehicle compatibility are critical
technical parameters.
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We
have developed a series of lightweight, cost effective ceramic armor
systems and attachment mechanisms that have multi-hit protection at
various threat levels and can be added to an existing vehicle or designed
into new vehicles, boats and
aircraft.
|
Market
Opportunity
|
|
Demands
of the Market
|
|
Our
Solution
|
Missile
radomes (nose cones)
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|
Defensive
tactical missile systems such as the PAC-3 (Patriot Advanced Capability)
are designed to fly at extremely high velocities, survive tight turning
radii and operate in severe weather conditions. These operating conditions
preclude the use of conventional polymer materials for
radomes.
|
|
We
have developed advanced technical ceramic radomes made of fused silica
ceramics which meet certain specifications of these tactical defensive
missile systems, and have developed a modified silicon nitride radomes for
more demanding requirements. We have also established a precision diamond
grinding capability to finish these radomes.
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Lightweight
ballistic rated helmets that provide increased protection for our
troops.
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|
In
order to meet survivability goals without affecting the soldier’s
functionality, improvements in head gear are needed for soldiers.
Unfortunately, combat helmets have only seen small incremental
improvements during the last twenty years.
The
ballistic material, generally thermo-set Aramid based, used in these
legacy helmets have remained very similar and have reached their maximum
performance.
|
|
We
are manufacturing and demonstrating the new ECH (Enhanced Combat Helmet)
that offers over a 35% improvement against fragmentation threats for the
U.S. Marines and Army.
This
is accomplished by utilizing new thermoplastic UHMWPE (Ultra High Molecule
Weight Poly Ethylene) materials recently developed by both Dyneema and
Honeywell which offer improved ballistic performance at lighter weights
vs. thermo-set Aramids.
Our
proprietary Seamless Ballistic
TM
processing technique enhances the performance of the ballistic material
while cost effectively manufacturing it to the required protective
helmet shape and meeting other legacy specifications of the U.S. military
for head gear protection.
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Industrial
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Advanced
ceramic structural parts
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Applications
such as high performance pump seals, blast nozzles, chemical processing,
and pulp and paper manufacturing, require components with corrosion and
wear resistant properties, mechanical strength, hardness, favorable
friction properties and the ability to withstand extreme temperature
fluctuations.
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We
have developed products for each of these applications which have
excellent wear resistant properties, lightness, hardness and the ability
to withstand extremely high temperatures. We manufacture these products
using primarily our Ekasic
®
silicon carbide, silicon nitride and boron carbide
ceramic.
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Boron
compounds and metallurgy
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Increasing
productivity requirements in primary industries are met with boron nitride
powders, which are used as high temperature lubricants and release agents.
As filler material in polymers and silicones, boron nitride is used for
heat conducting and insulating films in the electronic industry. Aluminum
and steel foundries increasingly require consumables with longer lifetimes
to improve their overall efficiencies.
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In
the aluminum extrusion industry, boron nitride powder, spray or suspension
is used as a release agent to keep the hot metal away from the extrusion
die. In furnace and high temperature applications it is used as an
insulation sleeve or support for graphite heaters. Boron nitride’s largely
inert behavior towards molten metals makes it an ideal material for
applications in direct contact with such materials. We supply break rings
for horizontal continuous casting and side-dams for thin strip casting. We
also supply high density and high purity silicon nitride products for
aluminum-foundries worldwide.
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Market
Opportunity
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|
Demands
of the Market
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Our
Solution
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Evaporation
boats
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Packaging
materials used for snack and other food products are often lined with an
aluminum coating to preserve shelf life. The coating, or metallization,
process requires a tool, called an evaporation boat, which can withstand
the high temperature and corrosiveness of melted aluminum.
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We
have developed evaporation boats, typically made using boron
nitride/titanium diboride, that can withstand direct contact with highly
corrosive liquids, such as melted aluminum. These evaporation boats are
used in the metallization of various surfaces, including paper, plastic
and glass.
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Industrial
equipment requiring critical protection against severe wear or
corrosion
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Failure
of industrial equipment is often caused by premature wearing out of
surfaces due to abrasive action. An example is paper making equipment
where the pulp slurry runs at 5,000 feet per minute.
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Sintered
reaction bonded silicon nitride (SRBSN) industrial wear parts are designed
to replace hard metal or oxide ceramic wear surfaces, resulting in greater
productivity, quality and longer uptime.
Our
proprietary advanced technical ceramic side dams are used
in the production of steel in the continuous casting
process.
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Photovoltaic
(solar cell) manufacturing requiring crucibles for melting
silicon
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|
In
order to produce cost effective solar cell components, it is necessary to
melt silicon in a crucible or vessel that will be able to contain the
molten silicon yet not allow unwanted chemicals to contaminate the
melt.
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We
have developed a high purity fused silica ceramic crucible (receptacle)
which is being used by several photovoltaic cell manufacturers in their
silicon melting operation in order to produce polycrystalline silicon. We
also manufacture the fused silica powders that are a key material for the
production of our ceramic
crucibles.
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Market
Opportunity
|
|
Demands
of the Market
|
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Our
Solution
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Radioactive
waste management and nuclear chemistry products
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|
Increasing
stockpiles of radioactive nuclear waste require materials that can be used
to safely transport and store items such as spent nuclear fuel rods. New
and existing nuclear power plants also require materials capable of
containing neutron radiation during day-to-day operations.
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The
boron atom in boron carbide powder is able to capture neutrons, thus
reducing the radioactive risk associated with transportation and storage
of nuclear waste. Our Boral
®
product line, which consists of a hot-rolled sheet containing a core of
uniformly distributed boron carbide and aluminum particles that is
enclosed within layers of pure aluminum, forms a solid and effective
barrier for the storage of nuclear waste.
We
also manufacture the boron isotope
10
B
in its pure form. This isotope is a strong neutron absorber and is used
for both nuclear waste containment and nuclear power plant neutron
radiation critical control. We also produce complementary chemical
isotopes used in the normal operation and control of nuclear power
plants.
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Semiconductor
silicon wafer manufacturing requiring
11
B
isotopes
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Silicon
based semiconductor devices require ‘p’ dopants to move the electrons
through the electronic materials.
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We
produce the boron isotope
11
B
which is used in the semiconductor wafer manufacturing processes as an
additive to semiconductor grade silicon as a “doping” agent and where
ultra high purity boron is required.
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Materials
for precision investment casting
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The
market is demanding lower cost, thinner molds and faster mold build
times.
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We
have developed fused silica refractory blends that enable the production
of highly efficient, single-use mold systems for precision investment
casting.
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Ceramic
bearings, bushings and seals for fluid handling
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|
In
order to make an effective transition in fluid handling pumps from the
pump itself to the exterior, it is necessary to have an interface with
excellent friction and erosion and corrosion properties.
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We
have developed a number of primarily silicon carbide compositions and
shapes for a wide variety of precision components for use in contact with
rotational elements in fluid handling pumps. These are produced primarily
by our ESK Ceramics subsidiary in Kempten, Germany.
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Specially
designed heavy duty bearings and bushings
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It
is necessary to maintain the position and integrity of heavy duty
rotational shafts in down hole oil drilling and/or water pumps in severe
environments.
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In
June 2008, we acquired a series of proprietary designs for heavy duty
“stacked bearings” and bushings which utilize our advanced technical
ceramic sliding surface
interface.
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Market
Opportunity
|
|
Demands
of the Market
|
|
Our
Solution
|
In
converting silicon wafers to semiconductors, it is necessary to introduce
atoms of the element boron into the silicon matrix.
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The
market has developed and generally utilizes technology known as ion
implantation. Starting materials used in ion implantation such as BF
3
have
been generally utilized for many years. However, as the requirements for
higher current semiconductor chips increase and the number of chips per
unit area on the silicon wafer increases, there is a need for ion
implantation which improves the manufacturing throughput of high
boron content
in semiconductor chips.
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Our
acquisition of SemEquip, Inc. in August 2008 brought to Ceradyne the
intellectual property for the “cluster” molecule B
18
H
22
as
well as other cluster molecules. These materials are designed to increase
the productivity of the ion implantation technology in part due to the
large numbers of atoms such as boron.
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Automotive/Diesel
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Heavy-duty
diesel truck engines
|
|
In
order to achieve diesel engine life of 500,000 miles or more without major
maintenance, and to meet current environmental requirements, it may be
necessary to replace metal engine components with longer lasting, lighter
weight, lower friction ceramic parts at acceptable unit
costs.
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Our
SRBSN ceramic cam rollers replace conventional steel cam rollers in order
to allow diesel engines to run at higher internal pressures and thus meet
environmental and other requirements.
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Wear-resistant
functional and frictional coatings, surface engineered
components
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Engines
generate extreme vibration during operation that can cause components
joined by nuts and bolts to loosen. Traditionally, locknut washers have
been used for this application.
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Our
wear-resistant functional and frictional coatings utilizing entrapped hard
particles, primarily diamonds, are applied to shims in lieu of using
locknut washers. These coatings increase the static friction coefficient
and minimize the effects of vibration and allow more economic and
efficient designs of engines, particularly in the auto
industry.
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Commercial
|
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Orthodontic
brackets
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Traditional
stainless steel orthodontic brackets are often considered unsightly.
Substitute clear plastic materials can be weak and may stain. Some
orthodontic patients prefer aesthetically pleasing brackets which can be
affixed to each tooth to support the arch wire.
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Our
translucent ceramic orthodontic brackets are inert, reveal the color of
the patient’s teeth, and allow the orthodontist to correct the patient’s
bite. Our marketing partner, 3M Unitek, sells this translucent ceramic
bracket under the brand name Clarity™.
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BORONEIGE
®
boron nitride powder
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The
cosmetic industry utilizes very fine, white, silky, smooth powders as a
base for a wide range of products including lipstick, eye shadow, facial
creams, rouge and other related products. There is an increasing demand
for these base materials which can make up to forty percent of the end
product. Generally, the requirements include white color, controlled
chemistry and surface area.
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Boron
nitride, which is made by our ESK Ceramics subsidiary, is a well
controlled micro structure white powder. The use of our unique boron
nitride called BORONEIGE
®
is anticipated to grow as the availability of the base powders and the use
of various cosmetic products increase.
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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 148 employees with degrees in ceramic
engineering or related sciences, of which 32 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 custom equipment and manufacturing processes allow
us to meet the high volume demands of our customers in the markets that we
serve.
Vertically Integrated
Manufacturer
. We are a vertically integrated manufacturer of
lightweight ceramic body armor and other ceramic products such as crucibles for
photovoltaic solar cell manufacturing. 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 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. Our acquisition of Minco, Inc. in 2007 provided Ceradyne with
its own source of fused silica ceramic powders, which are the primary raw
material in the manufacturing of crucibles (receptacles) used in the
manufacturing of photovoltaic solar cells. The crucibles are used as the
container for melting large (450 kilogram) ingots of silicon. Recently, we
internally developed a proprietary hard ceramic coating designed to act as a
barrier between the molten silicon and the Ceradyne crucible.
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
personnel 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 missile program; 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. Additionally, we believe that
our EKasic® (silicon carbide) product line of industrial pump seals and bearings
allows us to be a leader in fluid handling products.
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 a significant portion 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 and our
President of North American 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, Minco, Inc. in July 2007, EaglePicher Boron, LLC in August 2007,
assets and intellectual property related to heavy duty “stacked bearings” and
bushings in June 2008, SemEquip, Inc. in August 2008, and the assets and
business
of Diaphorm Technologies, LLC in June 2009. 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, such as enhanced combat helmets 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,
called XSAPI, that is capable of withstanding higher ballistic threats than
previous versions with approximately the same product weight.
Continuing to Increase our
Non-Defense Revenue Base
. We plan to continue to grow our
non-defense customer base, primarily through promoting existing products to new
customers and developing new products for new and existing customers. We focus
on educating our current and potential customers on the advantages of our
advanced technical ceramics compared to alternative solutions, and assisting
them in developing advanced technical ceramic components for existing or new
products and applications. Our technical and marketing staff educates our
customers through direct sales visits, by preparing technical papers and product
literature, and by participating in technical conferences, trade shows and
exhibitions. Based on these efforts, we believe there is an opportunity to
further expand the use of advanced technical ceramic products. For example, we
are working with 3M Unitek on developing the next generation of translucent
ceramic orthodontic brackets. We also are working with companies in the aluminum
industry on utilizing ceramic materials in their next generation smelting
production processes that have the potential to reduce the cost of producing
aluminum. We also intend to further increase our customer, product and market
base by converting certain advanced technical ceramics, originally developed for
defense applications, to industrial and commercial applications. In addition to
organically growing our product portfolio and market reach, we plan to continue
to identify strategic acquisition opportunities that broaden our product lines
within industrial and commercial markets. For example, a key strategic reason
for our acquisitions of ESK Ceramics, the Boral® product line, Minco, Inc.,
EaglePicher Boron, LLC., and SemEquip, Inc., as well as the expansion of our
operations into Canada and China, were to further increase our non-defense
revenue base.
Our
acquisition of SemEquip, Inc. in August 2008 is intended to allow us to broaden
our participation and position us to participate in future semiconductor
markets. SemEquip’s development of cluster molecules such as B
18
H
22
may be a
key in the manufacture of next generation high current semiconductor devices.
Our acquisition in June 2008 of certain assets and intellectual property related
to heavy duty “stacked bearings” and bushings provides Ceradyne with a new
product line of relatively large, rugged ceramic bearings and bushings. These
components will be used in severe environments such as “down hole” oil drilling
and submersible fluid handling pumps.
Identifying New Products and
Markets
. We intend to identify new products and markets to meet
evolving customer requirements for high performance materials. Due to the
special properties of the advanced technical ceramics we produce, we believe
there are numerous applications and markets for such materials. Our research and
development efforts have identified several new applications for advanced
technical ceramics in both existing markets, such as the defense industry, and
new markets, including the energy, metals production and chemical industries.
Such new applications include lightweight ceramic armor for military vehicles,
boats and aircraft; ceramic components that have the potential to facilitate
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; 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. We also expect to continue to benefit
from the addition of ESK Ceramics’ expertise in ceramic powders and
products, which has expanded the scope and scale of our product development
efforts.
Investing to Improve our Gross
Margins and Manufacturing Efficiencies
. We focus on cost
containment, productivity enhancements and manufacturing efficiencies as a means
to drive earnings growth. We have implemented lean manufacturing initiatives,
such as Demand Flow
®
Technology and 5-S plus Safety in order to reduce inventories, scrap and queue
times and to increase productivity. Additionally, we continue to evaluate
opportunities to employ automation and
dedicated
work cells to expand our in-line production efficiency. We also continue to seek
ways to reduce our manufacturing costs by evaluating opportunities to relocate
or expand manufacturing operations within the United States as well as
internationally. For example, in 2004, we began expanding our high
energy-utilization manufacturing processes at our new Lexington, Kentucky
facility, where the cost of electricity, which comprises a significant portion
of our cost of product sales, is substantially lower than in California. We plan
to evaluate strategic manufacturing relationships in international markets,
including joint ventures or acquisitions, particularly in low cost manufacturing
areas such as Mexico and China. We completed the construction in June 2007, of a
new approximately 98,000 square foot facility in Tianjin, China for the
manufacture of ceramic crucibles which are used for melting silicon in the
photovoltaic solar cell manufacturing process. We are increasing this capacity
and will start construction during 2010 of an approximately 218,000 square foot
facility in Tianjin, China for the manufacture of ceramic crucibles. We also
plan to develop strategic relationships with other manufacturing companies or
key customers whose expertise or financial resources can assist us in
accomplishing our objectives. We initiated a major improvement to our data and
information technology systems with the implementation of SAP enterprise
software applications. It is our intention to integrate the use of SAP software
throughout our Company with a target completion date of December
2011.
Market
Applications and Products
Our
products are sold into four principal markets: defense, industrial,
automotive/diesel and commercial. The following is a description of our
principal products by market application:
Defense
Lightweight Ceramic
Armor
. We have developed and currently manufacture lightweight
ceramic armor capable of protecting against threats as great as 12.7 millimeter
armor piercing machine gun bullets. Compared to traditional steel armor plates,
our ceramic armor systems offer weight savings as great as 40%. Using hot
pressed Ceralloy
®
ceramic, our armor plates are laminated with either Spectra Shield
®
,
Dyneema
®
,
Kevlar™, fiberglass, custom hybrid laminates or aluminum, and formed into a wide
variety of shapes, structures and components. Initially, our manufactured
ceramic armor was used principally for military helicopter crew seats and
airframe panels. We are now also a major supplier of lightweight ceramic body
armor for the U.S. military, and lightweight ceramic armor for military
helicopters. We are also a supplier of armor systems for military
vehicles.
Boron Carbide
Powders
. We manufacture boron carbide powder, which is the principal
raw material used in the production of our lightweight ceramic body armor. Our
ESK Ceramics subsidiary is one of the world’s leading manufacturers of this
material. ESK Ceramics has been a supplier of boron carbide powder to us
for over 30 years and periodically supplies our ceramic body armor
competitors.
Missile Radomes (Nose
Cones)
. We manufacture conical shaped, precision machined ceramic
radomes which are designed for the front end of defensive missiles. These
radomes are used where missile velocities are high and operating environments
are severe, and the thermal shock and erosion resistance, high strength and
microwave transparency properties of advanced technical ceramics are required.
Our ceramic radomes are used on the PAC-3 (Patriot Advanced Capability) missile
and various future missile system prototypes.
Industrial
Fluid Handling/Wear
Parts
. We supply products made primarily of our EKasic
®
silicon carbide, silicon nitride and boron carbide, which have excellent wear
resistant properties, lightness, hardness, and can withstand extremely high
temperatures. Products furnished are used in high performance pump seals,
bearings for fluid handling, blast nozzles and chemical processing.
Boron Compounds and Metallurgy
Ceramics
. Boron nitride powders have excellent release properties
and are highly resistant to wear and corrosion. These powders are used in the
forming and bending of glass, as an additive in refractory materials, and as a
lubricant for aluminum extrusion. Our silicon nitride products have excellent
thermal shock resistance and temperature stability up to 1,200° Centigrade.
These products are used for transportation of liquid aluminum, for use in low
and high pressure casting and in liquid aluminum processes.
Evaporation Boats
. Our
evaporation boats are used in the metallization of various surfaces such as
plastic, paper or glass. Metallization is a process based on the deposition of a
metallic vapor under vacuum to coat a substrate surface with a thin layer of
aluminum, zinc, copper or silver. The preferred metal for the metallizing
process is aluminum. Evaporation boats have direct contact with highly corrosive
molten metal alloys and are made out of a boron nitride/titanium diboride
composite material. These products provide packaging manufacturers the ability
to apply vaporized aluminum to packaging material that as a finished product
helps to preserve and maintain the shelf life of food products.
Industrial Wear
Components
. Our industrial wear components are made primarily of our
Ceralloy
®
147
sintered reaction bonded silicon nitride (SRBSN). These SRBSN ceramic components
are generally incorporated in high wear areas of industrial machinery where
severe abrasive conditions would otherwise wear out vital components. Our wear
resistant parts are used to replace parts made of materials such as tungsten
carbide or ceramics such as aluminum oxide. Applications include paper making
equipment, abrasive blasting nozzles, metal cutting tool inserts as well as
custom products.
Radioactive Waste
Management
. Boron carbide powder has a high cross-section for
capturing neutrons, making it an ideal material for the management of
radioactive nuclear waste from nuclear power plants. Typical applications
include use in neutron absorbing parts, such as control rods in nuclear power
plants, and nuclear shielding in the storage and transportation of nuclear waste
materials. Our Boral® product line, which consists of a rolled sheet containing
a core of uniformly distributed boron carbide and aluminum particles that is
enclosed within layers of pure aluminum, forms a solid and effective barrier for
the storage of nuclear waste. We also produce 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.
Ceramic-Impregnated Dispenser
Cathodes
. We manufacture ceramic-impregnated dispenser cathodes for
microwave tubes used in radar, satellite communications, electronic
countermeasures and other applications. Dispenser cathodes, when heated, provide
a stream of electrons which are magnetically focused into an electron beam.
Microwave dispenser cathodes are primarily composed of a porous tungsten matrix
impregnated with ceramic oxide compounds. The use of ceramic-impregnated
cathodes reduces the amount of energy necessary to create a high level of
electron emissions. Our ceramic-impregnated cathodes are also used in ion lasers
and cathode ray tubes.
Tempered Glass Furnace Components
and Metallurgical and Industrial Tooling
. Fused silica ceramic does
not, to any material extent, expand when heated or contract when cooled. This
material is therefore used for industrial tooling components and molds where
complicated shapes and dimensions are maintained over a wide range of
temperatures. Such applications include forming and shaping titanium metal used
in aircraft manufacture. Other applications take advantage of fused silica’s
excellent thermal shock resistance and inertness when in contact with glass. We
have the capability to make fused silica ceramic rollers up to 14 feet in length
used in glass tempering furnaces.
Fused Silica Ceramic
Crucibles
. We manufacture fused silica ceramic crucibles, or
receptacles, which are used in the fabrication of polycrystalline silicon for
photovoltaic solar cells that convert sunlight into electricity. These crucibles
are designed to withstand high temperatures and thermal shock when in contact
with molten silicon, without contaminating the melt. In 2008, we introduced a
proprietary hard ceramic coating to line the crucible’s interior.
Precision Ceramics
. We
manufacture a variety of hot pressed Ceralloy
®
ceramic compositions that are precision diamond ground to exacting tolerances,
primarily for microwave tube applications. The interior cavities of microwave
tubes often require microwave absorbing ceramic components capable of operating
at elevated temperatures and in high vacuums.
Samarium Cobalt Permanent
Magnets
. We manufacture and market our samarium cobalt magnets as
components primarily for microwave tube applications. Electron beams in
microwave tubes generated by the dispenser cathodes described above can be
controlled by the magnetic force provided by these powerful permanent magnets.
The magnets are generally small sub-components of microwave traveling wave
tubes.
Boron Isotopes and Molecules for the
Nuclear Industry.
We enrich and manufacture the boron isotope
10
B
which is a material that is used by the nuclear power industry. The
10
B
isotope is critical to the safe operations of the U.S. nuclear power industry,
waste storage, and the stability and safe-keeping of nuclear
weapons.
Boron Isotopes for
Semiconductors
. We produce 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. With our acquisition of SemEquip, Inc. in August 2008, we now
produce the cluster boron molecule B
18
H
22
for next
generation semiconductor devices.
Precision Investment Casting
Products.
We manufacture fused silica grains and powder products
that are used in precision investment casting (PIC), a highly sophisticated
manufacturing process used to make a wide range of precision dimensioned
castings for a broad base of different industries. The process requires low
expansion materials for one time use in the casting process. Our products
include proprietary blends that reduce our customers’ cast and cycle
time.
Heavy Duty Bearings.
In June
2008, we acquired the proprietary rights for a series of heavy duty rugged
ceramic bearing components for down hole oil drilling and various water pump
applications. The unique designs are intended to extend the life of drilling
equipment by reducing premature failures during operations.
Automotive/Diesel
Wear-Resistant Functional and
Frictional Coatings
. We manufacture our EKagrip
®
Foils
for wear-resistant functional and frictional coatings for fastener applications
utilizing entrapped hard particles, primarily diamonds. This product line
increases the static friction coefficient, minimizes the effects of vibration
and allows more economic and efficient designs of engines, particularly in the
auto industry.
Diesel Engine
Components
. We have been manufacturing ceramic cam rollers for
heavy-duty diesel engines since 1999, and now have production contracts to
supply cam rollers to several major engine companies. However, an original
equipment manufacturer that had been using our ceramic cam rollers, developed a
new diesel truck engine that was introduced in 2007 to meet new environmental
regulations. This new engine is designed to use steel cam rollers rather than
our more expensive ceramic cam rollers. Consequently, sales of our cam rollers
to this manufacturer declined beginning in 2007 and we expect further declines
through 2010. We also supply a fuel systems manufacturer with components for a
diesel fuel pump. In addition, we are engaged in development projects with a
number of other diesel engine and fuel pump systems manufacturers worldwide for
various ceramic components.
Commercial
Ceramic Orthodontic
Brackets
. In orthodontics, to correct a patient’s tooth alignment,
usually a small stainless steel bracket is attached to each tooth. These
brackets provide a guide to the archwire, which is the wire that sets into each
bracket. The cosmetic appearance of this metal is often considered unattractive.
Together with 3M Unitek, we have developed a ceramic bracket which 3M Unitek
markets to orthodontists under the brand name Clarity™. The translucency of this
ceramic bracket, together with the classic ceramic properties of hardness,
chemical inertness and imperviousness, result in a cosmetic substitute for
traditional stainless steel brackets. These brackets reveal the natural color of
the patient’s teeth while performing the structural functions of traditional
stainless steel brackets. We have recently developed and manufacture a next
generation ceramic orthodontic bracket which 3M Unitek sells under the brand
name Clarity SL™.
BORONEIGE
®
Boron Nitride
Powder
. We manufacture and market to the cosmetic industry a very
fine, white, silky, smooth powder called
BORONEIGE
®
,
which is used as a base for
a wide range of products including lipstick, eye shadow, facial creams, rouge
and other related products.
Operating
Segments and Facilities
We serve
our markets through six segments with manufacturing facilities in several
locations across the United States, one in Canada, one in China, one in Europe,
and one in India. The following table includes a summary of our facilities and
products comprising our six operating segments.
Operating
Segment and Facility Location
|
|
Products
|
Ceradyne
Advanced Ceramic Operations
Costa
Mesa and Irvine, California
(1)
Approximately
216,000 square feet
Lexington,
Kentucky
(2)
Approximately
115,000 square feet
Wixom,
Michigan
(3)
Approximately
29,000 square feet
Salem,
New Hampshire
(4)
Approximately
16,000 square feet
Mountain
Green, Utah
(5)
Approximately
18,000 square feet
Bangalore,
India
(6)
Approximately
21,000 square feet
|
|
Defense
Applications:
• Lightweight ceramic armor
• Enhanced combat helmets
Industrial
Applications:
• Ceralloy
®
147 SRBSN wear parts
• Precision ceramics
• Ceramic bearings and bushings
Automotive/Diesel
Applications:
• Ceralloy
®
147 SRBSN automotive/diesel engine parts
Commercial
Applications:
• Ceramic orthodontic brackets
• Components for medical
devices
|
|
|
|
ESK Ceramics
Kempten,
Germany
(7)
Approximately
599,000 square feet
Bazet,
France
(8)
Approximately 88,000 square feet (anticipated to be sold
during the first quarter of 2010)
|
|
Defense
Applications:
• Boron carbide powders for body
armor
Industrial
Applications:
• Ceramic powders: boron carbide, boron nitride,
titanium diboride,
calcium hexaboride and zirconium diboride
• Silicon carbide parts
• Evaporation boats for the packaging
industry
• High performance fluid handling pump
seals
Automotive/Diesel
Applications:
• EKagrip
®
functional and frictional coatings
Commercial
Applications:
• BORONEIGE
®
boron nitride powder for cosmetics
|
|
|
|
Ceradyne
Semicon Associates
Lexington,
Kentucky
(9)
Approximately
35,000 square feet
|
|
Industrial
Applications:
• Ceramic-impregnated dispenser cathodes for
microwave tubes, lasers and
cathode ray tubes
• Samarium cobalt magnets
|
|
|
|
Ceradyne
Thermo Materials
Scottdale
and Clarkston, Georgia
(10)
Approximately
225,000 square feet
Tianjin,
China
(11)
Approximately
98,000 square feet
Midway,
Tennessee
(12)
Approximately
105,000 square feet
|
|
Defense
Applications:
• Missile radomes (nose cones)
• High purity fused silica used to manufacture
missile radomes (nose cones)
Industrial
Applications:
• Glass tempering rolls
• Metallurgical tooling
• Castable and other fused silica
products
• Crucibles for photovoltaic solar cell
applications
• Turbine components used in aerospace
applications
|
|
|
|
|
|
|
Operating
Segment and Facility Location
|
|
Products
|
Ceradyne
Canada
Chicoutimi,
Quebec, Canada
(13)
Approximately
86,000 square feet
|
|
Industrial
Applications:
• Boral
®
structural neutron absorbing materials
• Metal matrix composite structures
|
|
|
|
Boron
Quapaw,
Oklahoma
(14)
Approximately
128,000 square feet
North
Billerica, Massachusetts
(15)
Approximately
19,000 square feet
|
|
Industrial
Applications:
Nuclear
Applications:
• Nuclear
chemistry products for use in pressurized water reactors and boiling
water
reactors
• Radioactive
containment for use in spent fuel transport and storage
• Burnable
poisons for coating of uranium fuel pellets
Semiconductor
Applications:
• Cluster
molecules such as B
18
H
22
for
ion implantation for next generation
P-dopants
• Ionization
chambers for ionizing cluster molecules for ion implantation
• Development
of cluster ion implantation sub-systems
• Advanced
ion source materials for the manufacture of logic and memory
chips
|
(1)
|
We
have leases on our facilities in Costa Mesa, California, aggregating
approximately 99,000 square feet, all of which expire in
October 2010. We own our 40,000 square foot facility in Irvine,
California. In Irvine, California, a 76,000 square foot facility under a
lease that expires in April 2011.
|
(2)
|
We
own our facility in Lexington, Kentucky.
|
(3)
|
We
have a lease on our Wixom, Michigan facility which expires in April
2010.
|
(4)
|
We
have a lease on our Salem, New Hampshire facility which expires in March
2015.
|
(5)
|
We
have a lease on our Mountain Green, Utah facility which expires in March
2012.
|
(6)
|
We
have a lease on our Bangalore, India facility which expires in June
2014.
|
(7)
|
We
own our facility in Kempten, Germany, as well as the 28-acre property on
which our facility is located.
|
(8)
|
We
own our facility in Bazet, France, as well as the four-acre property on
which our facility is located. This property is in escrow to be sold on
February 28, 2010.
|
(9)
|
We
own our facility in Lexington, Kentucky, as well as the five-acre property
on which our facility is located.
|
(10)
|
We
own an 85,000 square foot facility in Scottdale, Georgia, as well as the
five-acre property on which our facility is located. We have a lease on
our 140,000 square foot facility in Clarkson, Georgia which expires in
June 2013.
|
(11)
|
We
own our facility in Tianjin, China, as well as the four-acre property on
which our facility is located.
|
(12)
|
We
own our facility in Midway, Tennessee as well as the 40-acre property on
which our facility is located.
|
(13)
|
We
own our facility in Chicoutimi, Quebec, Canada, as well as the seven-acre
property on which our facility is located.
|
(14)
|
We
own our facility in Quapaw, Oklahoma as well as the 155-acre property on
which our facility is located.
|
(15)
|
We
have a lease on our facility in North Billerica, Massachusetts which
expires in April 2012.
|
Sales,
Marketing and Customers
Each of
our six operating segments maintains a separate sales and marketing force
promoting its individual products. As of December 31, 2009 we
had 80 employees directly involved in sales and marketing, including 48 sales
and marketing personnel located outside the United States. We also have
agreements with manufacturers’ representatives in foreign countries who are
compensated as a percent of sales in their territory. Sales to customers located
outside the United States represented approximately 33.9% of our net sales in
2009, 27.0% in 2008 and 18.0% in 2007.
We
continue to explore various domestic and international relationships to increase
our sales and market penetration. We seek long-term relationships such as
multi-year agreements or exclusive relationships with our customers to achieve a
more consistent and predictable flow of orders and shipments.
We sell
products and components to the U.S. government and government agencies, as well
as to government contractors, original equipment manufacturers and to end users.
The U.S. government and government agencies collectively represented
approximately 40.8% of our net sales in 2009, 54.1% in 2008 and 71.6% in 2007.
As of December 31, 2009 and 2008, there were no other external customers that
accounted for 10% or more of our revenue.
We sell
our translucent ceramic orthodontic brackets, commonly known as braces, only to
3M Unitek. Sales to 3M Unitek represented approximately 2.4% of our net sales in
2009, 1.5% in 2008 and 1.7% in 2007. In December 2005, we entered into a
new supply agreement with 3M Unitek that expires in December 2010, and which may
be extended by 3M Unitek at its option for an additional two years. This new
agreement replaced our original, March 1986 joint development and supply
agreement with 3M Unitek. 3M Unitek is a major manufacturer of stainless steel
orthodontic brackets and, early in our relationship, shared with us the
functional specifications and properties which ceramic brackets would be
required to satisfy. With this information and our experience with translucent
ceramics in defense applications, we developed, and in 1987 began manufacturing,
translucent ceramic brackets. Under the original supply agreement, 3M Unitek was
required to purchase ceramic orthodontic brackets exclusively from Ceradyne
until September 2007. Under the terms of the new agreement, 3M Unitek will
continue to purchase 100% of their Clarity and Transcend brand ceramic
orthodontic product lines exclusively from us for as long as 3M Unitek continues
to sell such products. The new agreement further stipulates that Unitek must
purchase from Ceradyne at least 50% of the ceramic orthodontic brackets 3M
Unitek requires for next generation designs, which it introduced in
2007.
Manufacturing
Processes
We employ
a number of advanced technical ceramic manufacturing processes that enable us to
deliver high quality products designed to meet specific customer requirements.
The processes used to manufacture our principal products are described
below.
Hot Pressing
. Our hot
pressing process is generally used to fabricate ceramic shapes for lightweight
ceramic armor. We have designed and constructed induction heated furnaces
capable of operating at temperatures exceeding 4,000°F in inert atmospheres at
pressures up to 5,000 pounds per square inch. With this equipment, we can
fabricate parts more than 26 inches in diameter, which is considered large for
advanced technical ceramics. Using multiple cavity dies and special tooling, we
can produce a number of parts in one furnace during a single heating and
pressing cycle.
Our raw
materials are fine powders procured from our ESK Ceramics subsidiary, as
well as from several outside suppliers. After we process them, the powders are
either loaded directly into the hot pressing molds or are shaped into pre-forms
prior to loading into the hot pressing molds. The powders are placed in
specially prepared graphite tooling, most of which we machine to shape. Heat and
pressure are gradually applied to the desired level, carefully maintained and
finally reduced. The furnace is then removed from the press and allowed to cool,
permitting the press to be used with another furnace. For most products, this
cycle takes approximately 20 hours. The resultant ceramic product generally has
mechanical, chemical and electrical properties of a quality approaching
theoretical limits. Almost all products, other than armor, are then finished by
diamond grinding to meet precise dimensional specifications.
Ceramic Powders (Boron Carbide
TETRABOR
®
, Boron Nitride, Titanium Diboride,
Calcium Hexaboride, Zirconium Diboride)
. We purchase raw materials
like carbon, boric acid and oxides from outside vendors. These raw materials are
converted into the final formulation in large high temperature processes using
an arc furnace. After the resultant material is cooled, it is broken down into
fine particulates that are then purified through a chemical treatment. The next
process is the production and classification of various grain sizes. The
manufacturing processes result in a very high and consistent quality powder. The
resulting finished ceramic powder products are used in a wide range of
applications, such as ceramics and powders for abrasives, armor, neutron
absorption and refractories.
Sintering and Reaction Bonding of
Silicon Nitride (SRBSN)
. The sintering of reaction bonded silicon
nitride results in our Ceralloy
®
147
SRBSN, which is used in industrial and automotive/diesel applications. This
SRBSN process begins with relatively inexpensive high purity elemental silicon
(Si) powders, which contrasts sharply with some other competitors’ manufacturing
techniques which start with relatively more expensive silicon nitride (Si
3
N
4
)
powders.
After
additives are incorporated by milling and spray drying, the silicon powders are
formed into shapes through conventional ceramic processing such as dry pressing.
These shapes are then fired in a nitrogen atmosphere which converts the silicon
part to a silicon nitride part. At this step (reaction bonding), the silicon
nitride is pressure sintered in an inert atmosphere increasing the strength of
the component threefold. As a result of SRBSN processing, the ceramic crystals
grow in an intertwining “needle-like” fashion which we have named NeedleLok™.
The NeedleLok™ structure results in a strong, tough, high fracture energy part.
This process can be used to produce extremely high production volumes of parts
due to the use of conventional pressing processes.
Manufacture of Translucent Ceramics
(Transtar
®
)
. We produce
translucent aluminum oxide (Transtar
®
)
components primarily for use as orthodontic ceramic brackets. We purchase the
high purity powders from outside vendors and process them using dedicated
conventional ceramic mechanical dry presses. The formed blanks are then fired in
a segregated furnace in a hydrogen atmosphere at over 3,000°F until the ceramics
enter into a mechanically strong, translucent condition. These fired translucent
brackets then have certain critical features diamond ground into them. The next
step is a proprietary treatment of the bonding side in order to permit a sound
mechanical seal when bound to the patient’s teeth. In the final step we furnace
braze a stainless steel channel into each archwire slot which has been
previously diamond ground into the bracket.
Functional Coatings (Surface
Engineered)
. Our functional coatings are formed by the deposition of
hard particles, primarily diamonds, in a nickel layer on steel, aluminum or
titanium. We purchase the hard particles—sized between nanometers and 60µm—from
outside vendors and customize these raw materials through chemical treatment.
Before being coated, the metal parts are chemically cleaned and deburred. The
final product is manufactured by an electroless nickel coating process with
simultaneous embedding of hard particle grains. The final step is the hardening
of the nickel surface by a heat treatment process up to 660°F.
Evaporation Boats
(LaserMet
®
, DiMet
®
, TriMet
®
, FlashMet
®
)
. Evaporation boats are
ceramic sintered parts consisting of titanium diboride/boron nitride and other
nitride compositions for our TriMet
®
product. These components, in the form of ceramic powders, are milled and
conditioned. The key forming process is hot pressing, which results in solid
sintered billets. From these sintered billets, the evaporation boats are
machined with proprietary processes to various types and shapes.
Sintered Parts
. For the
production of sintered parts, we either buy raw materials like silicon carbide
from outside vendors or use our own ceramic powders. With our specific developed
processes, we condition the ceramic powders by incorporating additives, milling,
and spray drying into ready-to-press powders. We then utilize the processing
steps of forming, green machining, sintering and final machining as the
materials are transformed into various shapes. We utilize a broad range of
technological processes and equipment to accomplish this. Examples of these
processes include cold isostatic pressing, axial dry pressing, injection
molding, extrusion molding, pressure sintering, hot pressing, hot isostatic
pressing and pressureless sintering.
Diamond Grinding
. Many
of our advanced technical ceramic products must be finished by diamond grinding
because of their extreme hardness. Our finished components typically are
machined to tolerances of ±.001 inch and occasionally are machined to tolerances
up to ±.0001 inch. To a very limited extent, we also perform diamond grinding
services for customers independent of our other manufacturing processes to
specifications provided by the customer. Our diamond grinding facilities can
perform surface grinding, diameter grinding, ultrasonic diamond grinding,
diamond lapping, diamond slicing and honing. The equipment includes manual,
automatic and computer numerically controlled, or CNC, grinders. We have
specially adapted the CNC grinders for precision grinding of ceramic contours to
exacting tolerances.
Sintering of Fused Silica
Ceramics
. Sintering of fused silica ceramics is the process we use
to fabricate fused silica ceramic shapes for applications in crucibles for use
in the manufacturing of photovoltaic solar cells, metallurgical tooling, missile
radomes (nose cones) and other industrial uses. To fabricate fused silica
ceramic shapes, fused silica powders are made into unfired shapes through slip
casting or other ceramic forming processes. These unfired “green” shapes are
fired at temperatures up to 2,500°F. The final shapes are often marketed in the
“as fired” condition or, in some cases, precision diamond ground to achieve
specific dimensional tolerances or surface finishes required by certain
customers.
Injection
Molding
. Certain markets, like medical device components, require
ceramic shapes that are small, highly configured and held to tight dimensional
tolerances. Many of these can only be produced by the injection molding process.
At the present time these powders tend to be oxide ceramics, primarily zirconia,
alumina and/or blends thereof that we mix in house. The ceramic powder is then
blended with organic ingredients that constitute a proprietary binder system.
The resultant feedstock allows us to process the material through a standard
injection-molding machine into a precision mold designed by us.
Boron Carbide and Aluminum Metal
Matrix Composites
. For the production of metal matrix composite
materials, we hot press relatively large ingots of aluminum and boron carbide.
These ingots are subsequently either extruded or rolled and then cut into the
final configuration. For the production of Boral
®
, we
acquire an extruded aluminum material into which we place a proprietary mixture
of aluminum and boron carbide powder. We roll this material into thin sheets of
shield material, which can then be cut into numerous sizes
.
Boron Isotopes.
We use
gravity to separate natural boron material into the two isotopes of boron,
10
B and
11
B
through the use of a large tower. We then convert these isotopes into specific
molecules requested by our customers, such as boric acid, zirconium diboride,
boron trifluoride or Boron metal. We employ a broad range of technological
equipment and processes to produce the isotopically enriched molecule of
choice.
High Purity Fused
Silica
. To produce our fused silica powder products, we melt washed
quartz sand into large ingots using an electric arc melting process and then
crush the ingots into powder products using various crushing, grinding, milling,
and size separation equipment. The melting process transforms the quartz raw
material into fused silica glass. The phase transformation that occurs
during the melting process results in a finished product whose thermal expansion
is much less than that of the quartz sand raw material.
Raw
Materials
The
starting raw materials for our manufacturing operations are generally fine,
synthetic powders available from several domestic and foreign sources, including
our subsidiary, ESK Ceramics. ESK Ceramics supplied 670 tons of boron
carbide powder and silicon carbide to us in 2009, 923 tons in 2008 and 1,078
tons in 2007. We have owned ESK Ceramics since August 23, 2004. Our
Minco, Inc. subsidiary, which we acquired on July 10, 2007, supplies us with
high purity fused silica powders. Other raw materials, such as the backing
material for ceramic armor, graphite and metal components, are procured from
several commercial sources.
Quality
Control
We make
our products to a number of exacting specifications. In order to meet both
internal quality criteria and customer requirements, we implement a number of
quality assurance programs such as in-process statistical process control (SPC).
We implement these quality programs separately at each of our manufacturing
locations and in different ways depending on the processes. The results of these
well deployed programs assist us in understanding and predicting limited
exposure to non-conforming products.
Our
Advanced Ceramic Operations, ESK Ceramics, Boron Products, Minco and Thermo
Materials facilities have received ISO 9001 Certification. Semicon
Associates and SemEquip, Inc. are ISO 9000 compliant.
Engineering
and Research
Our
engineering and research efforts consist of application engineering in response
to customer requirements, in addition to new materials and product development
aimed at creating demand for new products. Our efforts create new products,
modify existing products to fit specific customer needs and result in developing
enhanced ceramic processes.
We
allocate costs associated with application engineering and research between cost
of product sales and research and development expense. Application engineering
efforts devoted to specific customer orders generally are recognized as cost of
product sales, while the balance of engineering and research costs is included
in research and development and expensed as incurred. Our research and
development expenses were approximately $12.3
million in 2009, $14.8
million in 2008, and $17.6 million in 2007.
Competition
Our
products compete with advanced technical ceramic products and powders from other
companies, as well as with high strength steel alloys and plastic products. When
competing with other advanced technical ceramic products and powders, we believe
the principal competitive factors are manufacturing capacity and the ability to
deliver products, price, product performance, material specifications,
application engineering capabilities, customer support and reputation. Some of
our competitors include ArmorWorks, The Protective Group, Ceramtec, the Armor
Holdings and Cercom subsidiaries of BAE Systems, CoorsTek, Denka, Momentive
Performance Materials, Hitachi, HC Starck, Kyocera’s Industrial Ceramics Group,
Morgan, Saint Gobain, Kennametal, Spectra-Mat, UK Abrasives, Vesuvius, C-E
Minerals, NHTC, Holtec, Nukem and General Electric. Many of our current or
potential competitors have greater financial, marketing and technical resources
than we do. We cannot guarantee that we will be able to compete successfully
against our current or future competitors. If we fail to compete successfully,
there could be material adverse effects on our business, financial condition and
results of operations. In many applications we also compete with manufacturers
of non-ceramic materials. When competing with high strength steel alloys and
plastic products, we may not be able to compete effectively when price is a
primary consideration,
because
our products are typically more expensive as a result of higher manufacturing
costs associated with the production of advanced technical
ceramics.
Backlog
We record
an item as backlog when we receive a contract, purchase order or other
notification indicating the number of units to be purchased, the purchase price,
specifications, delivery requirements and other customary terms and conditions.
Our backlog was approximately $126.4 million as of December 31, 2008 and
approximately $135.5 million as of December 31, 2009. We expect that
substantially all of our backlog as of December 31, 2009 will be shipped
during 2010.
Patents,
Licenses and Trademarks
We rely
primarily on trade secrecy to protect compositions and processes that we believe
are proprietary. In certain cases, the disclosure of information concerning such
compositions or processes in issuing a patent could be competitively
disadvantageous. However, our management believes that patents are important for
technologies where trade secrecy alone is not a reliable source of protection.
Accordingly, we have applied for, or have been granted, several U.S. patents
relating to compositions, products or processes that our management believes are
proprietary, including lightweight ceramic armor.
We have
been issued two U.S. patents relating to translucent ceramics for orthodontic
brackets. The first of these two patents expired in September 2007, and the
second patent expires in October 2013. We co-invented and co-own these patents
with 3M Unitek. Together with 3M Unitek, we have granted licenses to companies
whose ceramic orthodontic brackets infringe our joint patents. These companies
pay both of us royalties based on sales of their orthodontic ceramic brackets
for the remaining life of the patents.
In
addition to the above, we have been issued 38 U.S. patents and have 102 patents
pending and have applied for corresponding foreign patents in various foreign
countries. Of the number of patents indicated above, our ESK Ceramics
subsidiary has been issued 8 U.S. patents, while 8 patents are pending, and our
SemEquip subsidiary has been issued 20 U.S. patents and 87 patents are
pending.
The
proprietary coarse grained silicon carbide materials, including silicon carbide
materials with graphite inclusions, are protected by patents in Europe, the
United States, Canada, Japan and the Czech Republic. These patents expire in
2017. Other patents and one patent pending also relate to sintered silicon
carbide materials, the earliest expiring in 2011. Another patent for
evaporation boats has been issued in Europe, the United States, Canada and
Japan. This patent expires in 2019. Other patents relate to Ekagrip
®
friction enhancing coatings, the earliest expiring in 2019. Other patents relate
to titanium diboride materials, boron nitride materials and coatings and
composite ceramic materials.
The
patents issued to our SemEquip subsidiary relate to its ion source and method of
making semiconductor devices. SemEquip's pending patent applications relate to
its ion source, semiconductor devices and synthesis of the molecular cluster
source feed material, octadecaborane, B
18
H
22
, used in
its ion source.
The
patents we acquired from Diaphorm Technologies, LLC in June 2009 include the
apparatus and methods for producing helmets.
“Ceralloy
®
,” the
name of our technical ceramics, “Ceradyne
®
” and
the Ceradyne logo, comprising the stylized letters “CD
®
,” are
our major trademarks registered in the United States and various foreign
countries. We also have other trademarks, including “Transtar
®
,”
“Semicon
®
,”
“Thermo
®
,”
“Defender
®
,”
“NeedleLok
®
,”
“Thermo-Sil
™
,”
“BORAL
®
,” and
“Ramtech
®
”. The
ESK Ceramics logo, and ESK Ceramics’ major product trademarks,
including “TETRABOR
®
”,
“EKasic
®
”,
“DiMet
®
”,
“TriMet
®
”,
“MYCROSINT
®
”,
“EKagrip
®
”,
“BOROMID
®
”,
“EKamold
®
”,
“LaserMet
®
”,
“EllipsoMet
®
” and
“EKatherm
®
” are
registered in Germany and many countries worldwide. The ESK Ceramics’ product
trademarks “BORONEIGE
®
” and
“EKathemis
®
” are
registered in Germany and registration has been applied for in many countries
worldwide. The Minco logo, consisting of an ingot design featuring the word
“Minco” in the center of the ingot, is registered in the United States.
SEMEQUIP
®
,
CLUSTERION
®
,
CLUSTERCARBON
®
, and
CLUSTERBORON
®
are
registered trademarks in the United States and CLUSTERBORON
®
is
also registered in Japan, South Korea and Taiwan. “Diaphorm
®
” and
“Fiber-Tuned
®
” are
registered trademarks in the United States and “Seamless Ballistic
®
” is
registered in the United States, Madrid and Singapore and pending registration
has been applied for in many countries worldwide. “Max Pro-Armor”, Application
Number 77/306,318 has been allowed.
Employees
As of
December 31, 2009 we had 2,039 employees, including 127 employees with
undergraduate or graduate degrees in ceramic engineering or related sciences. Of
these total employees, 1,629 were in manufacturing, 166 were in engineering and
research, 80 were in sales and marketing, and 164 were in general management,
finance and administration. We also use t
emporary
labor in some of our production operations. We generally consider our
relationship with employees to be excellent. None of our U.S.-based employees
are represented by labor unions. The employees of ESK Ceramics have elected
a work council, an entity which represents employees and is entitled to
information and co-determination rights under German law. We consider our
relationship with the work council to be good.
Availability
of SEC Filings
We file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You can read our SEC filings over
the Internet at the SEC’s website at http://www.sec.gov. We also make our SEC
filings available free of charge through our Internet website as soon as
reasonably practicable after we electronically file them with, or furnish them
to, the SEC. Our website address is www.ceradyne.com. The reference to our
website address does not constitute incorporation by reference into this report
of the information contained at that site.
EXECUTIVE
OFFICERS OF CERADYNE
Our
executive officers and their ages as of February 23, 2010 are as
follows:
Name
|
Age
|
Position
|
Joel
P. Moskowitz
|
70
|
Chairman
of the Board, Chief Executive Officer and President
|
|
|
|
David
P. Reed
|
55
|
Vice
President, and President of North American Operations and Assistant
Corporate Secretary
|
|
|
|
Jerrold
J. Pellizzon
|
56
|
Chief
Financial Officer and Corporate Secretary
|
|
|
|
Michael
A. Kraft
|
47
|
Vice
President of Nuclear and Semiconductor Business Units
|
|
|
|
Thomas
Jüngling
|
46
|
Vice
President, and President of ESK Ceramics
|
|
|
|
Bruce
R. Lockhart
|
47
|
Vice
President, and President of Thermo Materials
|
|
|
|
Jeffrey
J. Waldal
|
45
|
Vice
President, and President of Semicon Associates
|
|
|
|
Thomas
A. Cole
|
63
|
Vice
President, Business Development
|
|
|
|
Joel P. Moskowitz
co-founded
our predecessor company in 1967. He served as our President from 1974 until
January 1987, and has served as our President since September 1987. In addition,
Mr. Moskowitz has served as our Chairman of the Board and Chief Executive
Officer since 1983. Mr. Moskowitz currently serves on the Board of Trustees
of Alfred University. Mr. Moskowitz obtained a B.S. in Ceramic Engineering
from Alfred University in 1961 and an M.B.A. from the University of Southern
California in 1967.
David P. Reed
joined us in
November 1983, and has served as a Vice President since January 1988. In
February 2005, Mr. Reed was appointed to the newly created position of
President of North American Operations, with responsibility for all the
company’s business units located in North America. Mr. Reed’s focus has
been and will continue to be on lightweight ceramic armor systems. Prior to
joining us, Mr. Reed served as Manager, Process Engineering for the
Industrial Ceramic Division of Norton Co. from 1980 to 1983. Mr. Reed
obtained a B.S. in Ceramic Engineering from Alfred University in 1976 and an
M.S. in Ceramic Engineering from the University of Illinois in
1977.
Jerrold J. Pellizzon
joined
us in September 2002 and serves as our Chief Financial Officer and Corporate
Secretary. Prior to joining us, Mr. Pellizzon was Chief Executive Officer
of DrSoy Nutrition, Inc., a developer of soy protein based food products, from
2000 until 2002. From 1994 through 2000, Mr. Pellizzon served as Chief
Operating Officer and Chief Financial Officer of Met-Rx Substrate Technologies.
From 1984 to 1993, Mr. Pellizzon was Chief Financial Officer for Breton
Construction, Inc., and served on their executive committee and board of
directors. Prior to 1984, Mr. Pellizzon held executive and management
positions at Duke Timber Construction/Tobin Steel Company and was employed as a
C.P.A. in public accounting. Mr. Pellizzon obtained his B.S. in Economics
from UCLA in 1975.
Michael A. Kraft
joined us in
February 2005 and served as Vice President of Sales, Marketing and Business
Development until June 2007, when he was appointed Vice President of Nuclear and
Semiconductor Business Units. Prior to joining us, Mr. Kraft was Managing
Director of BVI Capital Partners, an investment bank that provides restructuring
services, from 2003 through 2005, and President and Founder of KAM Solutions,
LLC, an engineering and materials testing services firm, in 2003. From 2000
through 2002, Mr. Kraft was President, USA, for Rational AG and from 1993
through 2000, he held various management and marketing positions with
Kulicke & Soffa Industries, Inc. Prior to 1993, Mr. Kraft held
various management and marketing positions with General Electric Company. He
holds degrees with honors from Michigan State University in electrical
engineering and an M.B.A. degree from Pennsylvania State
University.
Thomas Jüngling
joined us in
July 2005 as Director of Business Development and Technology Integration and has
served as Chief Technology Officer since January 2006. In September 2007, Mr.
Jüngling was promoted to President of our ESK Ceramics subsidiary, and he was
appointed a Vice President of Ceradyne in December 2007. Prior to joining us,
Mr. Juengling was Business Unit Manager at Inovan GmbH & Co. KG, Germany.
From 1996 to 2004, Mr. Jüngling held various positions at Elektroschmelzwerk,
Kempten GmbH (ESK Ceramics) and Wacker-Chemie GmbH, Germany. Mr. Jüngling
obtained his Diploma in Mechanical Engineering in 1988 and his PhD in
Engineering (Material Science) in 1992, both from the University of Karlsruhe,
Germany.
Bruce R. Lockhart
joined our
Thermo Materials division as its President in September of 2001, and was
appointed a Vice President of Ceradyne in February 2003. Prior to joining us,
Mr. Lockhart had 16 years of varied experience in the
ceramic
industry, the majority of which was with Thermal Ceramics Inc., a provider of
products for engineered heat management solutions. Mr. Lockhart received a
B.S. in Ceramic Engineering from Clemson University in 1985 and an M.B.A. from
Clemson University in 1990.
Jeffrey J. Waldal
joined our
Semicon Associates division in 1995 as a quality manager, and was promoted to
manufacturing manager in 1997 and to President of Semicon in 1999.
Mr. Waldal was elected as a Vice President in February 2003. He is
currently responsible for the operations, finances and marketing at Semicon
Associates. Mr. Waldal began his career as senior materials technician at
United Technologies—Pratt & Whitney Aircraft. He was employed for eight
years at Ladish Company, Inc. as quality supervisor and quality manager.
Mr. Waldal currently serves on the board of directors as Chairman for
Kentucky Manufacturing Assistance Center and is a member of the University of
Kentucky College of Engineering Dean’s Advisory Council. Mr. Waldal
obtained a degree in Non-Destructive Testing from Hutchinson Technology
Institute in 1984, a B.A. in Business Management from the University of Kentucky
in 1995, and an M.B.A. from Eastern Kentucky University in 1998.
Thomas A. Cole
joined
Ceradyne when we acquired Minco, Inc. in July 2007. He had been serving as
Minco's President and Chief Executive Officer since 2000. He was appointed
Ceradyne's Vice President of Business Development in March 2008. Mr. Cole's
early career was with Corning Inc. for 17 years in various manufacturing and
operating roles mostly in technical ceramics and advanced refractories. He
left Corning in 1987 when he participated in a buyout of Corning’s Corhart
Refractories Division and since then was engaged in fixing troubled businesses
and selling them. He successfully completed the cycle with seven companies
over the last twenty years before joining Ceradyne. Mr. Cole received a B.S.
from the College of Ceramics at Alfred University in 1969 and an M.B.A. from the
University of Buffalo in 1971.
Our
officers are appointed by and serve at the discretion of our Board of
Directors.
ITEM 1A.
RISK FACTORS
This
Annual Report on Form 10-K contains forward-looking statements, as described at
page 3 of this report under the caption “Note Regarding Forward-Looking
Statements.” We believe that the risks described below are the most important
factors which may cause our actual future results of operations to differ
materially from the results projected in the forward-looking
statements.
Risks
Related to Our Business
A
substantial portion of our revenues is derived from the sale of defense related
products, primarily ceramic body armor. If demand for ceramic body armor
declines, if federal budget appropriations involving our products are reduced,
if we fail to obtain new government contracts or delivery orders under existing
contracts, or if existing government contracts or orders are cancelled, our
revenues, profit and cash flow will be materially and adversely
affected.
In recent
years, a substantial portion of our revenues has been derived from the sale of
defense related products, particularly ceramic body armor, either directly or
indirectly to the U.S. government. The sale of defense related products
represented 49.6% of our revenues in 2009, 61.8% in 2008 and 74.0% in 2007. We
anticipate that a substantial portion of our revenues for the foreseeable future
will continue to come from sales of defense related products; however, we expect
that sales of defense related products will be lower in 2010 than they were in
2009. Our dependence on defense related business, and on sales of ceramic armor
in particular, entails several risks, including those described
below.
Our
defense related business is highly sensitive to changes in national and
international defense and budget priorities. For example, in the years 2003
through 2007, our revenues from the sale of ceramic body armor increased
significantly due to the U.S. military’s acceleration of its program to equip
its soldiers with ceramic body armor systems, in part, because of the war in
Iraq. In 2008, however, demand for ceramic body armor began to decline due in
part to the reduction in hostilities in Iraq and because most combat troops were
already equipped with the current generation of ceramic body armor, known as
ESAPI. The outlook for ceramic body armor in 2010 and beyond is uncertain for
several reasons, including President Obama’s announced priority of withdrawing
troops from Iraq by mid 2010, and the rate at which the U.S. military will
proceed with implementing the next ballistic threat generation of ceramic body
armor plates, known as XSAPI (discussed further below). Demand for ceramic body
armor could decline further from 2009 levels for a variety of reasons, including
a lessening of conflicts in the Middle East and other high risk areas, or a
reduction in U.S. defense budget appropriations. If that were to occur, our
revenues from the sale of defense related products would be reduced and our
profit and cash flow could be materially and adversely affected.
Many
defense contracts are awarded in an open competitive bidding process, and our
past success in winning government contracts does not guarantee that we will win
any new contracts in the future. Our success depends upon our ability to
successfully compete for and retain such government contracts. If we, or if
prime contractors for which we are a subcontractor, fail to win any future bids,
or if we are unable to replace business lost upon cancellation, expiration or
completion of a contract, our revenues, profit and cash flow from the sale of
defense related products would be reduced.
Moreover,
government contracts typically may be cancelled by the government at any time
without penalty, other than our right to be reimbursed for certain expenses and
inventory. If the U.S. government were to cancel any of our government
contracts, our revenues, profit and cash flow would be reduced.
As of
December 31, 2008, all orders under the $747.5 million adjusted maximum value
Indefinite Delivery/Indefinite Quantity (ID/IQ) contract for ceramic body armor
awarded to us in August 2004 had been released and the corresponding shipments
were completed in 2008. In October 2008, we were awarded an ID/IQ contract by
the U.S. Army for the next ballistic threat generation of ceramic body armor
plates, known as XSAPI, as well as for the current generation of ESAPI plates.
This five-year contract has a maximum value of $2.3 billion. However, we
anticipate that the government will order either XSAPI or ESAPI, but not both.
Therefore, the total amount of this ID/IQ award likely will not exceed $1.1
billion over the life of the contract. One of our competitors was awarded a
similar ID/IQ contract. We expect that government orders under these
contracts will be split among ourselves and our competitor, so our sales
under our contract will likely be less than the $1.1 billion possible total
amount.
We
believe we will not receive any further delivery orders for XSAPI as the U.S.
military with the recent growth of military operations in Afghanistan, has shown
more interest in procuring body armor that weighs less than the current ESAPI
and XSAPI body armor inserts while being able to defeat similar ballistic
threats. We are currently developing ESAPI and XSAPI designs that weigh 10% to
15% less than the current designs and will offer these to the U.S. Army and
other Department of Defense users once these designs meet the current
requirements. There is no assurance that we will be successful with these
lighter weight designs.
We do
have qualified lightweight body armor inserts that are viable for the
Afghanistan campaign and these designs have been offered to the Army and the
Marines. These designs offer significant weight savings at a reduced level of
protection from the currently fielded ESAPI design. The Army and the Marines
have shown interest in these designs and we continue to pursue these
opportunities but there is no assurance that we will be successful.
Based on
our current backlog and anticipated orders for ceramic body armor and the level
of sales to date in 2010, we expect our shipments of ceramic body armor to be
lower in fiscal year 2010 than in fiscal year 2009. 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,
positions and strategies of the current U.S. government, the level of
international conflicts and the deployment of armed forces. Our future level of
sales of ceramic body armor will depend on our ability to successfully compete
for and retain this business.
If we are
not successful in obtaining and retaining sufficient new body armor business to
keep our manufacturing capacity utilized, we may be required to record
impairment charges for the reduction in value of our fixed assets devoted to
manufacturing body armor. If this were to occur, our earnings would be reduced
in the period we incur the impairment charge.
If
the performance requirements for ceramic body armor are modified by the U.S.
military, we may incur delays or additional costs to change the design of our
product, or we may not be able to satisfy the new requirements with our existing
ceramic materials and processes. If this were to occur, our costs could increase
and our revenues, profit and cash flow would decline.
The
ceramic body armor we manufacture must comply with stringent performance
specifications established by the U.S. military, such as weight and the level of
ballistic protection it must provide, and these specifications may be modified
by the military in new procurements, as well as under existing contracts. For
example, during the quarter ended March 31, 2005, the U.S. military
directed us to modify the specifications of the lightweight ceramic body armor
that we had been manufacturing, from the version commonly referred to as SAPI
(small arms protective insert), to a revised requirement commonly referred to as
ESAPI (enhanced small arms protective insert). The revised requirement is more
difficult to manufacture than the SAPI version. The change to this new design
resulted in production delays and increased costs to us during the first quarter
of 2005 as we developed new designs to meet the revised requirement and
experienced manufacturing inefficiencies. In the future, the U.S. military may
make additional changes to the performance requirements for body armor, and we
may experience delays or additional costs to satisfy the new requirements, or we
may be unable to meet the new requirements at all with our existing ceramic
materials and processes. If this were to occur, our revenues from ceramic body
armor would decline and our profitability would suffer.
We
rely on two critical materials to make ceramic body armor. A delay or inability
to obtain sufficient quantities of these materials could limit the amount of
body armor we can manufacture and therefore result in reduced revenues, profit
and cash flow.
The
critical materials required to manufacture our ceramic body armor are boron
carbide powder, which is the principal raw material used in the production of
the ceramic armor plates, and an ultra-high molecular weight polyethylene
textile material, which we laminate to the surface of the ceramic armor
plates.
We obtain
substantially all of our boron carbide powder from ESK Ceramics, which has
been a supplier of boron carbide powder to us for over 30 years. We acquired
ESK Ceramics in August 2004, and it is now our subsidiary. If our
ESK Ceramics subsidiary experiences production problems, supplies of boron
carbide powder may be insufficient from other sources to meet our requirements
for ceramic body armor.
The
ultra-high molecular weight polyethylene textile material is available in the
United States only from Honeywell International, Inc., under the brand name
Spectra Shield
®
, and
from Royal DSM N.V., under the brand name Dyneema
®
. Although
we believe that sufficient quantities of these materials will be available to
fulfill our projected needs, a delay or interruption in the supply of either of
these materials could adversely affect our ability to fulfill our current orders
for ceramic body armor.
If a
delay or reduction in supplies of boron carbide powder or either Spectra Shield
or Dyneema occurs, we may not be able to ship all of our orders for ceramic body
armor, which could result in reduced revenues, profit and cash
flow.
If
demand for our products declines, we may have inefficient or under-utilized
capacity, and our gross margins, profit and cash flow may
suffer.
In
response to the increased demand for ceramic body armor for military personnel
and cam rollers for diesel engines, as well as our other products, we have added
significant manufacturing capacity since early 2002.
Demand
for our products, particularly ceramic armor and cam rollers, may not remain at
levels sufficient to utilize all of the manufacturing capacity that we have
added since early 2002. Much of our manufacturing facilities and production
equipment, such as our furnaces and hot presses, are special purpose in nature
and cannot be adapted easily to make other products. Also, a substantial amount
of the boron carbide powder produced by ESK Ceramics is currently used by
us and our competitors to make ceramic body armor. If the demand for ceramic
body armor declines substantially from current levels, ESK Ceramics may
have significant under-utilized capacity for boron carbide powder. Therefore, a
substantial decline in demand for our ceramic body armor or cam rollers could
result in significant excess manufacturing capacity, which would result in under
absorption of overhead expense and reduced profit, and we may be required to
record impairment charges for the reduction in value of our fixed assets devoted
to manufacturing these products. If this were to occur, our earnings would be
reduced in the period we incur the impairment charge.
An
original equipment manufacturer that had been using our ceramic cam rollers
developed a new diesel truck engine that was introduced in 2007 to meet new
environmental regulations. This new engine is designed to use steel cam rollers
rather than our more expensive ceramic cam rollers. Consequently, sales of our
cam rollers to this customer declined beginning in 2007 and we expect further
declines through 2010. Unless we can replace this lost business with sales of
our ceramic cam rollers to new customers, our revenues, profits and cash flow
from this product line will decline further in 2010.
If
we fail to increase our non-defense revenue, and if the demand for ceramic body
armor decreases, our revenues, profit and cash flow will be materially and
adversely affected.
In 2009,
49.6% of our revenues and 64.3% of our gross profits were from sales of
defense-related products. Because our dependence on defense-related products
exposes us to significant risks, part of our business strategy is to continue to
increase our non-defense revenue base by identifying new products and markets
for our advanced technical ceramics, and by increasing sales to our existing
non-defense customers. Our ability to execute this strategy successfully
depends, in part, on our ability to increase market acceptance of our advanced
technical ceramics as a replacement for materials such as metals, plastics and
traditional ceramics. While advanced technical ceramics have certain advantages
over other materials, such as the ability to withstand extremely high
temperatures and combining hardness with light weight, they are more expensive
to produce. As a result, the market for advanced technical ceramic products may
be limited to high-end applications where price is not a critical competitive
factor, where the characteristics of advanced technical ceramics may justify the
higher costs compared to other materials or where other materials are not
suitable. Due to these limitations on the market for advanced technical
ceramics, the market for our products may not grow as we anticipate and we may
not be able to increase our non-defense revenue base. If we are unable to
execute this strategy, and if the demand for ceramic body armor decreases, our
revenues, profit and cash flow will be materially and adversely
affected.
Growth
in our operations may strain our resources, and if we fail to successfully
manage potential future growth, we could incur higher operating costs and delays
in the production of our products, which could result in reduced revenues,
profit and cash flow.
The
volume of orders for ceramic body armor for military personnel, as well as the
introduction of new products and recent acquisitions of other businesses, are
placing, and will continue to place, a significant strain on our operational,
financial and managerial resources and personnel. To effectively manage
potential future growth, we must continue to:
|
•
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add
manufacturing capacity and
personnel;
|
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•
|
implement
and improve our operational, financial and management information
systems;
|
|
•
|
develop
the management skills of our managers and
supervisors;
|
|
•
|
add
new management personnel; and
|
|
•
|
train,
motivate and manage our employees.
|
Any
failure to effectively manage growth could result in increased operating costs
and delays in the development and production of our products. If this occurs,
our revenues, profit and cash flow could decline.
We
may generate less profit than expected or even lose money on our fixed price
government contracts.
Most of
our government contracts provide for a predetermined, fixed price for the
products we sell regardless of the costs we incur. When making proposals for
fixed-price contracts, we must rely on our ability to accurately estimate our
costs and ability to manufacture and deliver the products on time and at a
reasonable profit. Our actual production costs may, however, exceed forecasts
due to unanticipated delays or increased cost of materials, components, labor,
capital equipment or
other
factors. As a result, we may incur losses on fixed price contracts that we had
expected to be profitable, or such contracts may be less profitable than we
expected, which could have a material adverse effect on our business, financial
condition and results of operations.
Our
business is subject to various laws and regulations favoring the U.S.
government’s contractual position, and our failure to comply with such laws and
regulations could harm our operating results and prospects.
As a
contractor to the U.S. government, we must comply with laws and regulations
relating to the formation, administration and performance of federal government
contracts that affect how we do business with our customers and may impose added
costs on our business. These rules generally favor the U.S. government’s
contractual position. For example, these regulations and laws include provisions
that allow unsuccessful bidders to protest or challenge contracts we have been
awarded, and allow the government to unilaterally terminate, reduce or modify
our government contracts.
The
accuracy and appropriateness of certain costs and expenses used to substantiate
our direct and indirect costs for the U.S. government under fixed-price
contracts are subject to extensive regulation and audit by the Defense Contract
Audit Agency, an agency of the U.S. Department of Defense. Responding to
governmental audits, inquiries or investigations may involve significant expense
and divert management’s attention. Our failure to comply with these or other
laws and regulations could result in contract termination, suspension or
debarment from contracting with the federal government, civil fines and damages
and criminal prosecution and penalties. Any of these consequences could have a
material adverse effect on our business, financial condition, results of
operations and liquidity.
We
currently depend entirely on 3M Unitek for sales of our ceramic orthodontic
brackets. If we are unable to maintain our existing level of business with 3M
Unitek our revenues, profit and cash flow from this product line will
decline.
We sell
our ceramic orthodontic brackets exclusively to 3M Unitek under a five year
supply agreement that we entered into with 3M Unitek in December 2005. This
supply agreement replaces our original agreement with 3M Unitek that would have
expired in September 2007, under which 3M Unitek was required to purchase all
ceramic orthodontic brackets exclusively from us, and we were permitted to sell
ceramic orthodontic brackets only to 3M Unitek. Under the terms of the new
agreement, 3M Unitek will continue to purchase their Clarity and Transcend brand
ceramic orthodontic product lines exclusively from us for as long as 3M Unitek
continues to sell those products. The new agreement further stipulates that
Unitek must purchase from Ceradyne at least 50% of the ceramic orthodontic
brackets 3M Unitek requires for next generation designs, which it introduced in
2007. Except under limited circumstances, Ceradyne is not permitted to sell
ceramic orthodontic brackets to any other customers under the new agreement. As
a result of our agreement with 3M Unitek, our revenue from ceramic orthodontic
brackets is dependent entirely upon 3M Unitek. 3M Unitek also offers traditional
stainless steel orthodontic brackets. We cannot guarantee that 3M Unitek will
devote substantial marketing efforts to the sale of our ceramic orthodontic
brackets, or that 3M Unitek will not reassess its commitment to our product. If
3M Unitek fails to actively market our ceramic orthodontic brackets or decides
to promote a competing product over ours, this could cause the sales of our
ceramic orthodontic brackets to decline.
Moreover,
the first of our two patents for our ceramic orthodontic brackets, which we
jointly own with 3M Unitek, expired in September 2007. Consequently, we may not
be able to prevent third parties from manufacturing and selling competitive
ceramic orthodontic brackets. Ceramic orthodontic brackets manufactured and sold
by third parties may be less expensive than ours and may cause sales of our
ceramic orthodontic brackets to decline either as a result of pricing pressure
or loss of market share.
In
addition, the future success of our ceramic orthodontic brackets depends on our
ability to maintain and increase market acceptance for our product compared to
other competitive solutions, including traditional stainless steel brackets and
newer products such as transparent plastic orthodontic aligners, synthetic
sapphire brackets and other ceramic brackets. If 3M Unitek reduces its purchases
of ceramic orthodontic brackets from us or if competitive products gain market
share, the sales of our ceramic orthodontic brackets may decline, resulting in a
decrease in our revenues, profit and cash flow.
Our
business is subject to risks associated with doing business outside the United
States.
Shipments
to customers outside of the United States accounted for approximately 33.9% of
our sales in 2009, 27.0% of our sales in 2008 and 18.0% of our sales in 2007.
Our ESK Ceramics subsidiary is located in Germany. Its sales to customers
located outside of the United States represented approximately 74.7% of its
total sales during 2009, approximately 70.7% of its total sales during 2008, and
approximately 65.9% of its total sales during 2007. The increase in foreign
sales in 2009 compared to 2008 was due primarily to increased sales of our
products in the Asian market as a result of the opening, in June 2007, of our
98,000 square foot facility in Tianjin, China, where we manufacture ceramic
crucibles, primarily for the Chinese
market.
We will commence construction during 2010 of an additional 218,000 square foot
facility in Tianjin, China to expand production capacity for ceramic crucibles,
which we believe will lead to further growth in sales in the Asian
market.
We
anticipate that international shipments will account for a significant portion
of our sales for the foreseeable future. Therefore, the following risks
associated with international business activities could have material adverse
effects on our performance:
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•
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burdens
to comply with multiple and potentially conflicting foreign laws and
regulations, including export requirements, tariffs and other barriers,
health and safety requirements, and unexpected changes in any of these
factors;
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•
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difficulty
in staffing and managing international
operations;
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•
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differences
in intellectual property
protections;
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•
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difficulty
in obtaining export licenses from the U.S. government for sales of our
defense-related products;
|
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•
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potentially
adverse tax consequences due to overlapping or differing tax
structures;
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•
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fluctuations
in currency exchange rates; and
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•
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risks
associated with operating a business in a potentially unstable political
climate.
|
We have
traditionally invoiced our sales from the United States to customers in foreign
countries in U.S. dollars. Consequently, if the U.S. dollar becomes more
expensive relative to the currencies of our foreign customers, the price of our
products that we export from the United States to those countries will rise and
our sales into those countries may fall. In addition, in the future, we may be
required to denominate foreign sales in the local currencies of our customers.
In that case, if the U.S. dollar were to become more expensive relative to the
currencies of our foreign customers, we would receive fewer U.S. dollars for
each unit of foreign currency that we receive when our customers pay us.
Therefore, a more expensive U.S. dollar would cause us to incur losses upon the
conversion of accounts receivable denominated in foreign currencies. Such losses
could harm our results of operations.
Our
ESK Ceramics subsidiary, located in Kempten, Germany invoices approximately
72.0% of its sales in Euros. ESK Ceramics’ sales to customers located in
the United States are invoiced in U.S. dollars. If the Euro becomes more
expensive relative to the currencies of ESK Ceramics’ customers located
outside the European Union, the price of its products sold to customers in those
countries will rise and its sales into those countries may fall.
We
may make future acquisitions which may be difficult to integrate, divert
management resources, result in unanticipated costs, or dilute our
stockholders.
Part of
our continuing business strategy is to make acquisitions of, or investments in,
companies, products or technologies that complement our current products,
enhance our market coverage, technical capabilities or production capacity, or
offer growth opportunities. Future acquisitions could pose numerous risks to our
operations, including:
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•
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we
may have difficulty integrating the purchased operations, technologies or
products;
|
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•
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we
may incur substantial unanticipated integration
costs;
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•
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assimilating
the acquired businesses may divert significant management attention and
financial resources from our other operations and could disrupt our
ongoing business;
|
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acquisitions
could result in the loss of key employees, particularly those of the
acquired operations;
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we
may have difficulty retaining or developing the acquired businesses’
customers;
|
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•
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acquisitions
could adversely affect our existing business relationships with suppliers
and customers;
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we
may fail to realize the potential cost savings or other financial benefits
and/or the strategic benefits of the acquisitions;
and
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•
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we
may incur liabilities from the acquired businesses for infringement of
intellectual property rights or other claims, and we may not be successful
in seeking indemnification for such liabilities or
claims.
|
In
connection with these acquisitions or investments, we could incur debt,
amortization expenses related to intangible assets, large and immediate
write-offs, assume liabilities, or issue stock that would dilute our current
stockholders’ percentage of ownership. We may not be able to complete
acquisitions or integrate the operations, products or personnel gained through
any such acquisition without a material adverse effect on our business,
financial condition and results of operations.
The
cost of electricity is a significant portion of our cost of product sales. An
increase in the cost of electricity may cause our profit margins to
decline.
Electricity
is essential for the production of our products and comprises a significant
portion of our cost of product sales. The cost of electricity for our
manufacturing operations in the United States, Europe and China was
approximately $12.7 million during 2009, approximately $13.2 million during
2008, and approximately $13.5 million during 2007. Over the last several years,
the cost of electricity from utility companies has increased, particularly in
California where a significant portion of our manufacturing facilities are
located. Management utilizes utility industry specialists and consultants to
help manage and implement strategies to minimize annual price increases at its
Advanced Ceramic Operations’ facilities located in California. For other
locations in the United States and Germany, management’s strategy is to enter
into long term contracts to obtain fixed price increases in order to increase
its ability to accurately forecast future energy costs and ensure a stable cost
structure. Fluctuations in the cost of electricity affect our ability to
accurately forecast future energy costs and consequently our profitability. If
the cost of electricity were to increase substantially, our gross profit margins
may decline.
We
may not be able to adequately safeguard our intellectual property rights and
trade secrets from unauthorized use, and we may become subject to claims that we
infringe on others’ intellectual property rights.
We rely
on a combination of patents, trade secrets, trademarks, and other intellectual
property laws, nondisclosure agreements with employees and customers and other
protective measures to preserve our proprietary rights to our products and
production processes. These measures afford only limited protection and may not
preclude competitors from developing products or processes similar or superior
to ours. Moreover, the laws of certain foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States.
Although
we implement protective measures and intend to defend our proprietary rights,
these efforts may not be successful. From time to time, we may litigate within
the United States or abroad to enforce our issued or licensed patents, to
protect our trade secrets and know-how or to determine the enforceability, scope
and validity of our proprietary rights and the proprietary rights of others. For
example, we are currently involved in two lawsuits in Germany that we initiated
to enforce our proprietary rights. Enforcing or defending our proprietary rights
could be expensive, requires management’s attention and might not bring us
timely or effective relief.
Furthermore,
third parties may assert that our products or processes infringe their patent
rights. Our patents may be challenged, invalidated or circumvented. Although
there are no pending or threatened intellectual property lawsuits against us, we
may face litigation or infringement claims in the future. Infringement claims
could result in substantial costs and diversion of our resources even if we
ultimately prevail. A third party claiming infringement may also obtain an
injunction or other equitable relief, which could effectively block the
distribution or sale of allegedly infringing products. Although we may seek
licenses from third parties covering intellectual property that we are allegedly
infringing, we may not be able to obtain any such licenses on acceptable terms,
if at all.
Our
ability to operate effectively could be impaired if we were to lose the services
of our key personnel, or if we are unable to recruit qualified managers and key
personnel in the future.
Our
success depends on the continued service of our management team and key
personnel, including Joel P. Moskowitz, our Chairman and Chief Executive Officer
and President; David P. Reed, our Vice President, and President of North
American Operations; Jerrold J. Pellizzon, our Chief Financial Officer and
Corporate Secretary; and Thomas Jüngling, the President of our ESK Ceramics
subsidiary. Mr. Moskowitz was diagnosed with non-Hodgkin’s lymphoma in
October 2004. He completed chemotherapy treatments in January 2005, and his
current diagnosis indicates that the non-Hodgkin’s lymphoma is in
remission.
If
Mr. Moskowitz becomes unable to continue working due to health reasons, or
if one or more of these individuals were to resign or otherwise terminate their
employment with us, we could experience a loss of sales, delays in new product
development and diversion of management resources, and we may have difficulty
replacing any of these individuals. We do not have employment agreements or key
person insurance on any of our executive employees.
Competition
for qualified managers and key personnel is intense and we may not be able to
recruit and retain such personnel. If we are unable to retain our existing
managers and employees or hire and integrate new personnel, we may experience
operating inefficiencies, production delays and reduced
profitability.
Our
manufacturing facilities are subject to a number of operational risks, including
hazards associated with ceramic manufacturing and natural disasters, any of
which could have a material adverse impact on our productivity and results of
operations.
Due to
the nature of our business, we are exposed to hazards associated with ceramic
manufacturing, such as:
|
•
|
accidents
or mechanical failure;
|
|
•
|
fires
or explosions of furnaces; and
|
|
•
|
employee
exposure to extreme temperatures or hazardous
substances.
|
In
addition, the location of our facilities exposes us to potential earthquakes and
other natural disasters. These hazards may cause personal injury, loss of life
and damage to property, which could lead to a substantial interruption or
suspension of operations, potential loss of customers and sales, government
fines and lawsuits by injured persons. Any such consequences could have an
adverse effect on the productivity and profitability of a particular
manufacturing facility or on us as a whole.
Defects
in our products could harm our reputation for quality products, increase our
operating expenses, reduce sales of our products and impact cash
flow.
Our
products have in the past contained, and may in the future contain, errors or
defects that may be detected at any point in the life of the products. Such
errors could result in delays in shipping and sales during the period required
for their correction and additional expense associated with their reworking or
replacement. Real or perceived defects in our products may result in product
returns, loss of sales, delays in market acceptance, injury to our reputation
and increased warranty costs, which could reduce our sales and profit. For
example, in March 2002, the U.S. government notified us that several lots
of our SAPI lightweight ceramic body armor failed to pass ballistics
reverification tests. As a result, we stopped production of our SAPI product,
modified the design of our product and resumed shipping approximately four
months later. In addition, we agreed to correct or replace at our expense all
supplies of our SAPI product sales that did not meet the original contractual
requirements.
If
we are unable to compete successfully against current and future competitors,
our revenues could decline.
Our
products compete with advanced technical ceramic products from other companies,
as well as with high strength steel alloys and plastic products.
When
competing with other advanced technical ceramic products, we believe the
principal competitive factors are:
|
•
|
manufacturing
capacity and the ability to deliver
products;
|
|
•
|
material
specifications;
|
|
•
|
application
engineering capabilities;
|
When
competing with high strength steel alloys and plastic products, we may not be
able to compete effectively when price is a primary consideration, because our
products are typically more expensive as a result of higher manufacturing costs
associated with the production of advanced technical ceramics.
Some of
our competitors include Armor Works, The Protective Group, Ceramtec, the Armor
Holdings and Cercom subsidiaries of BAE Systems, CoorsTek, Denka, Momentive
Performance Materials, Hitachi, HC Starck, Kyocera’s Industrial Ceramics Group,
Morgan, Saint Gobain, Kennametal, Spectra-Mat, UK Abrasives, Vesuvius, C-E
Minerals, NHTC, Holtec, Nukem and General Electric. Many of our current or
potential competitors have greater financial, marketing and technical resources
than we do. If we fail to compete successfully against our current or future
competitors, our revenues, profit and cash flow could decline.
Uninsured
losses arising from third party claims brought against us could result in
payment of substantial damages, which would decrease our cash reserves and could
harm our profit and cash flow.
Our
products are used in applications where the failure to use our products properly
or their malfunction could result in serious bodily injury or death. We may not
have adequate insurance to cover the payment of any potential claim related to
such injuries or deaths. Insurance coverage may not continue to be available to
us or, if available, may be at a significantly higher cost.
We
are subject to extensive government regulation, and our failure or inability to
comply with these regulations could subject us to penalties and result in a loss
of our government contracts, which could reduce our revenues, profit and cash
flow.
We must
comply with and are affected by various government regulations that impact our
operating costs, profit margins and our internal organization and operation of
our business. Furthermore, we have production contracts with governmental
entities and are subject to additional rules, regulations and approvals
applicable to government contractors. We are also subject to routine audits to
assure our compliance with these requirements. Our failure to comply with these
regulations, rules and approvals could result in the imposition of penalties and
the loss of our government contracts and disqualification as a U.S. government
contractor. As a result, our revenues, profit and cash flow could be
reduced.
In
addition, a number of our employees involved with defense related business are
required to obtain security clearances from the U.S. government. Our business
may suffer if we or our employees are unable to obtain the security clearances
that are required.
Like
other companies operating internationally, we are subject to the Foreign Corrupt
Practices Act and other laws which prohibit improper payments to foreign
governments and their officials by U.S. and other business entities. Violations
of the Foreign Corrupt Practices Act may result in severe criminal penalties,
which could have a material adverse effect on our business, financial condition,
results of operations and liquidity.
If
we fail to comply with environmental laws and regulations, we could incur an
increase in our operating costs and a decrease in our profit and cash
flow.
We are
subject to a variety of environmental regulations relating to the use, storage,
discharge and disposal of hazardous materials used to manufacture our products.
Authorities could impose fines, suspend production, alter our manufacturing
processes, or stop our operations if we do not comply with these
regulations.
Until
1997, we produced certain products using beryllium oxide, which is highly toxic
in powder form. This powder, if inhaled, can cause chronic beryllium disease in
a small percentage of the population. We have been sued in the past by former
employees and by employees of one of our customers and by their family members
alleging that they had contracted chronic beryllium disease as a result of
exposure to beryllium oxide powders used in our products. The last of these
claims was settled in 2002, and all of these claims have been dismissed without
our incurring material liability. We may not, however, be able to avoid future
liability to persons who may allege that they contracted chronic beryllium
disease as a result of exposure to the beryllium oxide we used in prior
years.
Any
failure to comply with current or subsequently enacted environmental statutes
and regulations could subject us to liabilities, fines or the suspension of
production. Furthermore, any claims asserted against us in the future related to
exposure to beryllium oxide powder may not be covered by insurance. Even if
covered, the amount of insurance may be inadequate to cover any adverse
judgment.
Fines and
other punishments imposed on us for environmental violations and expenses we
incur to remedy or comply with environmental regulations and future liability
for incidences of chronic beryllium disease contracted by employees or employees
of customers would decrease our cash reserves and could harm our
profitability.
Our long term investments are subject
to risks which may cause losses and affect the liquidity of these
investments
.
Our long term investments at December 31, 2009 included $20.0
million of auction rate
securities which is net of the cumulative to date pre-tax impairment and pre-tax
other than temporary impairment charges. Cumulatively to date, we have incurred
$2.5 million in pre-tax impairment charges against other comprehensive income,
$10.9 million in pre-tax other than temporary impairment charges and a realized
loss of $2.3 million related to these securities. We received $5.3 million of
proceeds in connection with the sale of the securities that resulted in the
realized loss of $2.3 million. For the year ended December 31, 2009, we
recognized a pre-tax credit of $6.1 million in other comprehensive income
associated with the temporary increase in market value of auction rate
securities, a $2.9 million in pre-tax other than temporary impairment charges
and a realized loss of $2.3 million which totaled $5.2 million of charges
against current earnings. The Company’s investments in auction rate securities
represent interests in collateralized debt obligations supported by pools of
residential and commercial mortgages or credit cards, insurance securitizations
and other structured credits, including corporate bonds. These auction rate
securities are intended to provide liquidity via an auction process that resets
the applicable interest rate at predetermined calendar intervals, allowing
investors to either roll over their holdings or gain immediate liquidity by
selling such interests at par. During the second half of the year 2007, the
auctions for these securities failed and in 2008 there was no liquid market for
these securities. As a result of current negative conditions in the global
credit markets, auctions for our investment in these securities are
inactive. Consequently, the investments
are not currently liquid through the
normal auction process. If they remain illiquid and a buyer is not found outside
the auction process, the value of these securities may decline
further.
We review impairments associated with our auction rate securities each reporting
period to determine the classification of the impairment as “temporary” or
“other-than-temporary.” A temporary impairment charge results in an unrealized
loss being recorded in the other comprehensive income component of stockholders’
equity. Such an unrealized loss does not reduce net income for the applicable
accounting period because the loss is not viewed as other-than-temporary. We
believe that a portion of the impairment of our auction rate securities
investments is temporary and a portion is other-than-temporary.
Risks
Related to our Common Stock
Our
stock price has been volatile, and the value of an investment in our common
stock may decline.
The
market price and trading volume of our common stock has been subject to
significant volatility, and this trend may continue. The value of our common
stock may decline regardless of our operating performance or prospects. Factors
affecting our market price include:
|
•
|
initiation
of coverage by securities analysts, securities analysts’ buy/sell
recommendations and any expressed beliefs of securities analysts regarding
our business prospects or estimated trading
multiples;
|
|
•
|
our
perceived prospects;
|
|
•
|
variations
in our operating results and whether we have achieved our key business
targets;
|
|
•
|
the
limited number of shares of our common stock available for purchase or
sale in the public markets;
|
|
•
|
sales
or purchases of large blocks of our
stock;
|
|
•
|
changes
in, or our failure to meet, our earnings
estimates;
|
|
•
|
differences
between our reported results and those expected by investors and
securities analysts;
|
|
•
|
decreases
in our trading multiples on an absolute basis or relative to comparable
companies;
|
|
•
|
announcements
of new contracts by us or our
competitors;
|
|
•
|
market
reaction to any future acquisitions, joint ventures or strategic
investments announced by us or our
competitors;
|
|
•
|
developments
in the financial markets;
|
|
•
|
market
reaction to any adverse publicity or news stories;
and
|
|
•
|
general
economic, political or stock market
conditions.
|
Recent
events have caused stock prices for many companies, including ours, to fluctuate
in ways unrelated or disproportionate to their operating performance. The
general economic, political and stock market conditions that may affect the
market price of our common stock are beyond our control. The market price of our
common stock at any particular time may not remain the market price in the
future. In the past, securities class action litigation has been instituted
against companies following periods of volatility in the market price of their
securities. Any such litigation, if instituted against us, could result in
substantial costs and a diversion of management’s attention and
resources.
Delaware
law may delay or prevent a change in control, and may discourage bids for our
common stock at a premium over its market price.
We are
subject to the provisions of section 203 of the Delaware General Corporation
Law. These provisions prohibit large stockholders, in particular a stockholder
owning 15% or more of the outstanding voting stock, from consummating a merger
or combination with a corporation unless this stockholder receives board
approval for the transaction or 66
2
/
3
% of the shares of voting stock
not owned by the stockholder approve the merger or transaction. These provisions
of Delaware law may have the effect of delaying, deferring or preventing a
change in control, and may discourage bids for our common stock at a premium
over its market price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2.
PROPERTIES
We serve
our markets through six operating segments with manufacturing facilities in
several locations across the United States, one in Canada, one in China, one in
Europe and one in India. Please see the table under the caption “Operating
Segments and Facilities” in Item 1 of this report for a summary of our
facilities and products comprising our six operating segments.
ITEM 3.
LEGAL PROCEEDINGS
Daniel
Vargas, Jr. v. Ceradyne, Inc., Orange County Superior Court, Civil Action No.
07CC01232
:
A class
action lawsuit was filed on March 23, 2007, in the California Superior
Court for Orange County, in which it was asserted that the
representative plaintiff, a former Ceradyne employee, and the putative
class members, were not paid overtime at an appropriate overtime rate. The
complaint alleged that the purportedly affected employees should have had their
regular rate of pay for purposes of calculating overtime adjusted to reflect the
payment of a bonus to them for the four years preceding the filing of the
complaint, up to the present time. The complaint further alleged that a waiting
time penalty should be assessed for the failure to timely pay the correct
overtime payment. Ceradyne filed an answer denying the material allegations
of the complaint. The motion for class certification was heard on November 13,
2008 and class certification was granted. On January 6, 2009, the court entered
an order certifying the class. Ceradyne contends that the lawsuit is
without merit on the basis that the bonuses that have been paid are
discretionary and not of the type that are subject to inclusion in the regular
hourly rate for purposes of calculating overtime. After a request for review by
the Court of Appeal of the decision to grant class certification, a day-long
mediation before a third-party neutral mediator, and an evaluation of the cost
of litigation and the financial exposure in the case, Ceradyne agreed to provide
a settlement fund of $1.25 million to resolve all issues in the litigation. The
settlement specifically states that neither party is admitting to liability or
lack thereof. Ceradyne believed that based upon the cost of further defense and
the exposure in the case, it was best to settle the matter. On January 8, 2010,
the Court has granted final approval of the settlement. The settlement funds
will be paid to a third party administrator on or before March 18,
2010.
On
October 21, 2009, Ceradyne made a settlement offer in relation to a claim
pertaining to ballistic tests of armored wing assemblies. Ceradyne established a
reserve of $1.0 million for this matter as of September 30, 2009.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of
security holders during the fourth quarter of 2009.
PART
II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the Nasdaq Stock Market under the symbol “CRDN.” The
following table shows the high and low closing sale prices for our common stock
as reported by the Nasdaq Stock Market during the calendar quarters
indicated:
|
|
High
|
|
|
Low
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
50.15
|
|
|
$
|
27.92
|
|
Second
Quarter
|
|
$
|
43.13
|
|
|
$
|
32.27
|
|
Third
Quarter
|
|
$
|
49.70
|
|
|
$
|
32.19
|
|
Fourth
Quarter
|
|
$
|
36.06
|
|
|
$
|
18.15
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
24.84
|
|
|
$
|
14.36
|
|
Second
Quarter
|
|
$
|
23.44
|
|
|
$
|
17.24
|
|
Third
Quarter
|
|
$
|
20.25
|
|
|
$
|
16.04
|
|
Fourth
Quarter
|
|
$
|
19.60
|
|
|
$
|
15.95
|
|
As of
February 19, 2010, there were 366 holders of record of our common
stock.
We have
never declared or paid cash dividends on our common stock and do not plan to pay
any cash dividends in the near future. Our current policy is to retain all funds
and earnings for use in the operation and expansion of our
business.
We did
not sell any equity securities during the year ended December 31, 2009 that
were not registered under the Securities Act of 1933.
The
following table sets forth information regarding shares of our common stock that
we repurchased during the fourth quarter ended December 31, 2009.
Issuer
Purchases of Equity Securities
Period
|
|
(a)
Total
Number of Shares
Purchased
|
|
|
(b)
Average
Price Paid
per Share
|
|
|
(c)
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
(d)
Maximum
Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased
Under the Plans or
Programs
|
|
Month
No. 1 (October 1 to October 31, 2009)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,860,237
|
|
|
$
|
50,196,703
|
|
Month
No. 2 (November 1 to November 30, 2009)
|
|
|
260,000
|
|
|
$
|
16.18
|
|
|
|
2,120,237
|
|
|
$
|
45,990,609
|
|
Month
No. 3 (December 1 to December 31, 2009)
|
|
|
25,000
|
|
|
$
|
17.95
|
|
|
|
2,145,237
|
|
|
$
|
45,541,877
|
|
Total
|
|
|
285,000
|
|
|
$
|
16.33
|
|
|
|
2,145,237
|
|
|
$
|
45,541,877
|
|
(1)
|
On
March 4, 2008, we announced that our board had authorized the repurchase
of up to $100.0 million of our common stock in open market transactions,
including block purchases, or in privately negotiated transactions. We did
not set a time limit for completion of this repurchase program, and we may
suspend or terminate it at any
time.
|
ITEM 6.
SELECTED FINANCIAL DATA
|
The
following selected consolidated financial data as of December 31, 2005,
2006 and 2007 and for the years ended December 31, 2005 and 2006 are
derived from our audited consolidated financial statements for those periods,
which are not included in this report. The selected consolidated financial data
as of December 31, 2008 and 2009 and for the years ended December 31,
2007, 2008 and 2009 are derived from our audited consolidated financial
statements which are included in this report beginning on page F-1. The
following data is qualified in its entirety by and should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and our consolidated financial statements and the related notes
included elsewhere in this report.
|
|
Year
Ended December 31,
|
|
|
|
2009
(1)
|
|
|
2008
(2)
|
|
|
2007
(3)
|
|
|
2006
|
|
|
2005
|
|
|
|
(amounts
in thousands, except per share data)
|
|
Statement
of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
400,575
|
|
|
$
|
680,197
|
|
|
$
|
756,835
|
|
|
$
|
662,888
|
|
|
$
|
368,253
|
|
Cost
of product sales
|
|
|
298,956
|
|
|
|
414,885
|
|
|
|
450,787
|
|
|
|
401,991
|
|
|
|
237,115
|
|
Gross
profit
|
|
|
101,619
|
|
|
|
265,312
|
|
|
|
306,048
|
|
|
|
260,897
|
|
|
|
131,138
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
27,151
|
|
|
|
31,231
|
|
|
|
26,917
|
|
|
|
22,919
|
|
|
|
20,694
|
|
General
and administrative
|
|
|
38,492
|
|
|
|
43,889
|
|
|
|
40,801
|
|
|
|
35,293
|
|
|
|
21,014
|
|
Acquisition
related charges
|
|
|
(768
|
)
|
|
|
9,824
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research
and development
|
|
|
12,258
|
|
|
|
14,782
|
|
|
|
17,552
|
|
|
|
9,909
|
|
|
|
7,802
|
|
Restructuring
- plant closure and severance
|
|
|
12,924
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill
impairment
|
|
|
3,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
93,889
|
|
|
|
99,726
|
|
|
|
85,270
|
|
|
|
68,121
|
|
|
|
49,510
|
|
Income
from operations
|
|
|
7,730
|
|
|
|
165,586
|
|
|
|
220,778
|
|
|
|
192,776
|
|
|
|
81,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,091
|
|
|
|
7,553
|
|
|
|
12,394
|
|
|
|
6,687
|
|
|
|
434
|
|
Interest
expense
|
|
|
(7,119
|
)
|
|
|
(7,876
|
)
|
|
|
(7,618
|
)
|
|
|
(7,236
|
)
|
|
|
(9,330
|
)
|
Gain
on early extinguishment of debt
|
|
|
1,881
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on auction rate securities
|
|
|
(5,187
|
)
|
|
|
(5,870
|
)
|
|
|
(2,114
|
)
|
|
|
-
|
|
|
|
-
|
|
Miscellaneous,
net
|
|
|
(979
|
)
|
|
|
1,511
|
|
|
|
(311
|
)
|
|
|
(799
|
)
|
|
|
420
|
|
Total
other income (expense)
|
|
|
(7,313
|
)
|
|
|
(4,682
|
)
|
|
|
2,351
|
|
|
|
(1,348
|
)
|
|
|
(8,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
417
|
|
|
|
160,904
|
|
|
|
223,129
|
|
|
|
191,428
|
|
|
|
73,152
|
|
Provision
for income taxes
|
|
|
(8,098
|
)
|
|
|
56,424
|
|
|
|
80,946
|
|
|
|
64,934
|
|
|
|
26,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,515
|
|
|
$
|
104,480
|
|
|
$
|
142,183
|
|
|
$
|
126,494
|
|
|
$
|
46,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.33
|
|
|
$
|
3.95
|
|
|
$
|
5.22
|
|
|
$
|
4.70
|
|
|
$
|
1.90
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
3.91
|
|
|
$
|
5.13
|
|
|
$
|
4.62
|
|
|
$
|
1.86
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,684
|
|
|
|
26,446
|
|
|
|
27,252
|
|
|
|
26,924
|
|
|
|
24,635
|
|
Diluted
|
|
|
25,802
|
|
|
|
26,689
|
|
|
|
27,732
|
|
|
|
27,352
|
|
|
|
25,107
|
|
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(amounts
in thousands)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
122,154
|
|
|
$
|
215,282
|
|
|
$
|
155,103
|
|
|
$
|
13,547
|
|
|
$
|
91,542
|
|
Short
term investments
|
|
|
117,666
|
|
|
|
6,140
|
|
|
|
29,582
|
|
|
|
190,565
|
|
|
|
7,839
|
|
Working
capital
|
|
|
406,207
|
|
|
|
400,835
|
|
|
|
353,923
|
|
|
|
332,063
|
|
|
|
212,309
|
|
Total
assets
|
|
|
849,704
|
|
|
|
854,527
|
|
|
|
782,654
|
|
|
|
613,001
|
|
|
|
429,184
|
|
Total
long-term debt
|
|
|
82,163
|
|
|
|
102,631
|
|
|
|
98,748
|
|
|
|
95,153
|
|
|
|
91,827
|
|
Stockholders’
equity
|
|
|
649,717
|
|
|
|
638,994
|
|
|
|
591,817
|
|
|
|
421,881
|
|
|
|
267,700
|
|
(1)
|
The
operations of Diaphorm have been consolidated with ours since June 1,
2009.
|
(2)
|
The
operations of SemEquip, Inc. have been consolidated with ours since August
11, 2008.
|
(3)
|
The
operations of Minco, Inc. have been consolidated with ours since July 10,
2007. The operations of Ceradyne Boron Products have been consolidated
with ours since September 1, 2007.
|
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 and enhanced combat helmets 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, zirconium diboride and fused silica, which are used in
manufacturing armor and a broad range of industrial products and consumer
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 precision investment casting
(PIC);
|
|
•
|
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; and
|
|
•
|
ceramic
bearings and bushings for oil drilling and fluid handling
pumps.
|
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.
Operating
Segment and Facility Location
|
|
Products
|
Ceradyne
Advanced Ceramic Operations
Costa Mesa and Irvine, California
Approximately
216,000 square feet
Lexington, Kentucky
Approximately
115,000 square feet
Wixom, Michigan
Approximately
29,000 square feet
Salem, New Hampshire
Approximately
16,000 square feet
Mountain
Green, Utah
Approximately
18,000 square feet
Bangalore,
India
Approximately
21,000 square feet
|
|
Defense
Applications:
• Lightweight
ceramic armor
• Enhanced
combat helmets
Industrial
Applications:
• Ceralloy
®
147 SRBSN wear parts
• Precision
ceramics
• Ceramic
bearings and bushings
Automotive/Diesel
Applications:
• Ceralloy
®
147 SRBSN automotive/diesel engine parts
Commercial
Applications:
• Ceramic
orthodontic brackets
• Components
for medical devices
|
|
|
|
ESK Ceramics
Kempten, Germany
Approximately
599,000 square feet
|
|
Defense
Applications:
• Boron
carbide powders for body armor
Industrial
Applications:
• Ceramic
powders: boron carbide, boron nitride, titanium diboride, calcium
hexaboride
and zirconium diboride
•
Silicon carbide parts
•
Evaporation boats for the packaging industry
•
High performance fluid handling pump seals
Automotive/Diesel
Applications:
•
EKagrip
®
functional and frictional coatings
Commercial
Applications:
•
BORONEIGE
®
boron nitride powder for cosmetics
|
|
|
|
Ceradyne
Semicon Associates
Lexington, Kentucky
Approximately
35,000 square feet
|
|
Industrial
Applications:
•
Ceramic-impregnated dispenser cathodes for microwave tubes, lasers and
cathode ray tubes
•
Samarium cobalt magnets
|
|
|
|
Ceradyne
Thermo Materials
Scottdale and Clarkston, Georgia
Approximately
225,000 square feet
Tianjin,
China
Approximately
98,000 square feet
Midway, Tennessee
Approximately
105,000 square feet
|
|
Defense
Applications:
•
Missile radomes (nose cones)
•
High purity fused silica used to manufacture missile radomes (nose
cones)
Industrial
Applications:
•
Glass tempering rolls
•
Metallurgical tooling
•
Castable and other fused silica products
•
Crucibles for photovoltaic solar cell applications
•
Turbine components used in aerospace applications
|
|
|
|
Ceradyne
Canada
Chicoutimi, Quebec, Canada
Approximately 86,000 square feet
|
|
Industrial
Applications:
•
Boral
®
structural neutron absorbing materials
•
Metal matrix composite structures
|
|
|
|
Boron
Quapaw, Oklahoma
Approximately
128,000 square feet
North
Billerica, Massachusetts
Approximately
19,000 square feet
|
|
Industrial
Applications:
Nuclear
Applications:
• Nuclear chemistry products for use in pressurized
water reactors and boiling water
reactors
• Radioactive containment for use in spent fuel
transport and storage
• Burnable poisons for coating of uranium fuel
pellets
Semiconductor Applications:
• Cluster molecules such as B
18
H
22
for
ion implantation for next generation P-dopants
• Ionization chambers for ionizing cluster molecules for
ion implantation
• Development of cluster ion implantation
sub-systems
• Advanced ion source materials for the manufacture of
logic and memory chips
|
The
tables below show, for each of our six segments, revenues and income before
provision for income taxes in the periods indicated.
Segment
revenues (in millions):
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Advanced
Ceramic Operations
|
|
$
|
214.1
|
|
|
$
|
450.5
|
|
|
$
|
587.3
|
|
ESK Ceramics
|
|
|
105.1
|
|
|
|
152.2
|
|
|
|
160.6
|
|
Semicon
Associates
|
|
|
7.7
|
|
|
|
8.6
|
|
|
|
8.0
|
|
Thermo
Materials
|
|
|
66.1
|
|
|
|
80.2
|
|
|
|
32.0
|
|
Ceradyne
Canada
|
|
|
1.7
|
|
|
|
5.2
|
|
|
|
3.9
|
|
Boron
|
|
|
27.3
|
|
|
|
19.0
|
|
|
|
7.7
|
|
Inter-segment
elimination
|
|
|
(21.4
|
)
|
|
|
(35.5
|
)
|
|
|
(42.7
|
)
|
Total
revenue from external customers
|
|
$
|
400.6
|
|
|
$
|
680.2
|
|
|
$
|
756.8
|
|
Segment
income before provision for taxes (in millions):
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Advanced
Ceramic Operations
|
|
$
|
22.8
|
|
|
$
|
145.4
|
|
|
$
|
209.2
|
|
ESK Ceramics
|
|
|
(24.9
|
)
|
|
|
4.2
|
|
|
|
13.4
|
|
Semicon
Associates
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
1.1
|
|
Thermo
Materials
|
|
|
12.8
|
|
|
|
23.7
|
|
|
|
2.3
|
|
Ceradyne
Canada
|
|
|
(6.9
|
)
|
|
|
(0.1
|
)
|
|
|
(3.0
|
)
|
Boron
|
|
|
(4.1
|
)
|
|
|
(15.5
|
)
|
|
|
0.7
|
|
Inter-segment
elimination
|
|
|
-
|
|
|
|
1.8
|
|
|
|
(0.6
|
)
|
Total
segment income before provision for taxes
|
|
$
|
0.4
|
|
|
$
|
160.9
|
|
|
$
|
223.1
|
|
We
categorize our products into four market applications. The table below shows the
percentage contribution of our total sales to external customers of each market
application in the different time periods.
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Defense
|
|
|
49.6
|
%
|
|
|
61.8
|
%
|
|
|
74.0
|
%
|
Industrial
|
|
|
41.2
|
|
|
|
30.6
|
|
|
|
20.1
|
|
Automotive/Diesel
|
|
|
6.3
|
|
|
|
5.8
|
|
|
|
4.2
|
|
Commercial
|
|
|
2.9
|
|
|
|
1.8
|
|
|
|
1.7
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The
principal factor contributing to our growth in sales from 2002 through 2007 was
demand by the U.S. military for ceramic body armor that protects soldiers, which
was primarily the result of military conflicts such as those in Iraq and
Afghanistan. This demand was driven by recognition of the performance and life
saving benefits of utilizing advanced technical ceramics in lightweight body
armor. Our sales also increased from 2004 through 2007 because of our
acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in
July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we
renamed Boron Products, LLC, and the recent expansion of our operations into
China. Our sales declined in 2008 primarily because of reduction in shipments of
body armor. Our sales declined in 2009 primarily because of a continued
reduction in shipments of body armor and also due to a reduction in shipments of
our industrial products because of the severe economic recession.
Shipments
of lightweight ceramic body armor represented $170.0 million or 42.4% of our
total revenues in 2009, $385.0 million or 56.6% of our total revenues in 2008,
and $535.3 million or 70.7% of our total revenues in 2007. Of these amounts,
ESAPI (enhanced small arms protective inserts) body armor represented 26.4% of
our total body armor shipments in 2009, 50.2% of our total body armor shipments
in 2008, and 57.0% of our total body armor shipments in 2007.
Shipments
of XSAPI, the newest ballistic threat generation of ceramic body armor plates,
represented $48.2 million, or 12.0% of our total revenues and 28.4% of our total
body armor shipments in 2009. These shipments were made against an Indefinite
Delivery/Indefinite Quantity contract awarded to us in October 2008. This
five-year contract has a maximum value of $2.3 billion and allows the U.S.
government to order either XSAPI or ESAPI body armor from us. To date, we have
received one delivery order under this contract in March 2009 for $76.8 million
of XSAPI body armor. We anticipate shipping the remaining balance of this order,
$28.6 million, during the first quarter of 2010. Since it is our policy to
include in backlog only delivery orders with firm delivery dates, our backlog at
December 31, 2009 does not include any amounts under this ID/IQ contract except
for the balance of the initial delivery order.
Based on
informal discussions with U.S. Army personnel, we believe the U.S. Army has
decided that the current XSAPI weight from all suppliers, although in compliance
with the weight limitations specified in the ID/IQ contract, is too heavy for
use in the current military campaign in Afghanistan. Consequently, unless the
U.S. Army changes its position regarding weight or the ballistic threat that the
XSAPI plate defeats becomes more prevalent, we do not expect any additional
orders for the current version of XSAPI ceramic body armor plates.
We are
developing ESAPI and XSAPI designs that weigh 10% to 15% less than the current
designs and will offer these to the U.S. Army and other Department of Defense
users once these designs meet the current ballistic requirements. There is no
assurance that we will be successful with these lighter weight
designs.
We do
have qualified lightweight body armor inserts that are viable for the
Afghanistan campaign and these designs have been offered to the Army and the
Marines. These designs offer significant weight saving at a reduced level of
protection from the currently fielded ESAPI design. The Army and the Marines
have shown interest in these designs and we continue to pursue these
opportunities, but there is no assurance that we will be
successful.
We
believe there will continue to be a viable replacement business for body armor
inserts that is procured through the Defense Supply Center Philadelphia (DSCP),
and Ceradyne expects continued procurements for replacement inserts during 2010.
We will also continue to bid on Foreign Military Sales (FMS) for the first
generation of inserts called Small Arms Protective Inserts (SAPI) through our
existing ID/IQ contract with Aberdeen Proving Grounds.
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 and may be cancelled by the
U.S. government at any time without penalty. 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.
Our order
backlog was $135.5 million as of December 31, 2009 and $126.4 million as of
December 31, 2008. Orders for ceramic armor represented approximately $70.9
million, or 52.3% of the total backlog as of December 31, 2009 and $65.5
million, or 51.8% of the total backlog as of December 31, 2008. We expect that
substantially all of our order backlog as of December 31, 2009 will be shipped
during 2010.
Based on
our current backlog for ceramic body armor and on the other factors discussed
above, we expect our shipments of ceramic body armor to be lower in fiscal year
2010 than in 2009.
Our sales
to customers located outside of the United States have varied in recent years,
representing $135.8 million, or 33.9% of net sales in 2009, $184.0 million, or
27.0% of net sales in 2008, and $136.2 million, or 18.0% of net sales in 2007.
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, 38.2% were
denominated in U.S. dollars during 2009.
Net Sales
. Our net sales
consist primarily of revenues from the sale of products, which we recognize when
an agreement of sale exists, the product has been delivered according to the
terms of the sales order and collection is reasonably assured. We may reduce
revenue with reserves for sales returns. Allowances for sales returns, which are
recorded at the time revenue is recognized, are based upon historical sales
returns. We did not include a sales return provision at December 31, 2009 or
2008 because our historical experience with sales returns leads us to conclude
that no allowance for sales returns is necessary.
We do not
record a warranty reserve on the sale of our products. For our largest product
line, body armor, all of which is sold to the U.S. government, each lot of body
armor is tested at an independent laboratory and the lot cannot be released for
shipment to the U.S. government until positive test results are received by both
the U.S. government and us. For our non-body armor sales, we have experienced
minimal claims from these types of sales. Additionally, due to the inherent
nature, strength, durability and structural properties of ceramics, as well as a
rigid quality control program that includes, for some of our customers, having
the customer accept quality test results prior to shipment, we do not believe a
warranty reserve is necessary.
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 associated with production efforts, which we also include
in cost of product sales.
The cost
of electricity comprises a significant portion of our cost of product sales. Our
high electricity utilization is a direct result of the use of high temperature
furnaces to hot press ceramic body armor inserts and to sinter silicon nitride
(“Si3N4”) for industrial products. Several years ago, we recognized the need to
mitigate the cost of electricity and in 2003 we embarked on a plan to move
production from California to Lexington, Kentucky. To date, we have moved all of
our Si3N4 furnaces to Kentucky and have established three new hot press lines in
Kentucky. No large scale furnaces have been added to the California facility in
the past two years. The electricity cost in Kentucky is more stable than
California because of the presence of coal fired power plants. Ceradyne may
continue the shift of more production to Kentucky by moving further hot press
production from California to Kentucky in the future. The price of electricity
in Kentucky has been stable for the past three years and is projected by our
supplier to continue to be stable over the next few years. We have a policy of
locating new production facilities that require high levels of electricity in
regions of the world that have either available hydroelectric or coal fired
power plants.
The cost
of electricity for our manufacturing operations in the United States and Europe
was approximately $12.7 million, or 4.2% as a percentage of cost of product
sales in 2009, $13.2 million, or 3.2% as a percentage of cost of product sales
in 2008, and approximately $13.5 million, or 3.0% as a percentage of cost of
product sales in 2007. Over the last several years, the cost of electricity from
utility companies has increased, particularly in California where a significant
portion of our manufacturing facilities are located. Management utilizes utility
industry specialists and consultants to help manage and implement strategies to
minimize annual energy price increases at our Advanced Ceramic Operations’
California facilities. For other locations in the United States and Germany,
management’s strategy is to enter into long term contracts to obtain fixed price
increases in order to increase its ability to accurately forecast future energy
costs and ensure a stable cost structure. Fluctuations in the cost of
electricity affect our ability to accurately forecast future energy costs and
consequently our profitability. If the cost of electricity were to increase
substantially, our gross profit margins may decline.
With
regard to significant costs for raw materials that impact our gross margins, we
rely on two critical materials to make ceramic body armor: boron carbide powder,
which is the principal raw material used in the production of ceramic armor
plates, and an ultra-high molecular weight polyethylene textile material, which
we laminate to the surface of the ceramic armor plates. We obtain substantially
all of our boron carbide powder from our subsidiary, ESK Ceramics, which has
been a supplier of boron carbide powder to us for over 30 years. Boron carbide
is made from borax and boric acid through a complicated furnace process.
Historically, these raw material products have not experienced significant price
and supply instability and consequently we have been able to obtain sufficient
quantities of boron carbide material from ESK Ceramics.
We have
further identified a second source of boron carbide from a supplier that
utilizes crude boron carbide from China and does the finishing in the United
States. The crude boron carbide from China is inexpensive and offers a method to
mitigate any internal cost increases at ESK Ceramics through the use of lower
cost China material as part of the ESK Ceramics’ raw material mix.
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 for future
products, and the research and development of new materials technology and
products. These costs are expensed as incurred.
Change
in Accounting for Convertible Debt
In May
2008, the FASB Staff issued new accounting guidance for convertible debt
instruments that may be settled in cash upon conversion (including partial
settlement) which specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the issuer’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. The Company adopted this new guidance as of January 1,
2009, and the adoption impacted the historical accounting for our 2.875% senior
subordinated convertible notes due December 15, 2035 (the “Notes”). The
implementation of this new accounting guidance for convertible debt resulted in
the following retrospective changes in long-term debt, debt issuance costs
(included in other noncurrent assets), deferred tax liability, additional paid
in capital and retained earnings (in thousands):
|
|
Net
Increase (Decrease)
|
|
|
|
Long-Term
Debt
|
|
|
Debt
Issuance
Costs
|
|
|
Deferred
Tax
Liability
|
|
|
Additional
Paid
In
Capital
|
|
|
Retained
Earnings
|
|
Allocation
of long term debt proceeds and issuance costs
To
equity component on issuance date
|
|
$
|
(29,261
|
)
|
|
$
|
(1,018
|
)
|
|
$
|
11,015
|
|
|
$
|
17,228
|
|
|
$
|
-
|
|
Cumulative
retrospective impact from amortization of
discount
on liability component and debt issuance costs
|
|
|
3,414
|
|
|
|
204
|
|
|
|
(1,252
|
)
|
|
|
-
|
|
|
|
(1,958
|
)
|
Cumulative
retrospective impact at January 1, 2007
|
|
|
(25,847
|
)
|
|
|
(814
|
)
|
|
|
9,763
|
|
|
|
17,228
|
|
|
|
(1,958
|
)
|
Retrospective
impact from amortization of discount on
liability
component and debt issuance costs during the year
|
|
|
3,595
|
|
|
|
182
|
|
|
|
(1,331
|
)
|
|
|
-
|
|
|
|
(2,082
|
)
|
Cumulative
retrospective impact at December 31, 2007
|
|
|
(22,252
|
)
|
|
|
(632
|
)
|
|
|
8,432
|
|
|
|
17,228
|
|
|
|
(4,040
|
)
|
Retrospective
impact from amortization of discount on
liability
component and debt issuance costs during the year
|
|
|
3,883
|
|
|
|
163
|
|
|
|
(1,450
|
)
|
|
|
-
|
|
|
|
(2,270
|
)
|
Cumulative
retrospective impact at December 31, 2008
|
|
$
|
(18,369
|
)
|
|
$
|
(469
|
)
|
|
$
|
6,982
|
|
|
$
|
17,228
|
|
|
$
|
(6,310
|
)
|
The adoption of the new accounting guidance also resulted in increased interest
expense of approximately $3.7 million in 2008 and $3.4 million in 2007, and
decreased net income by $2.3 million in 2008 and $2.1 million in 2007. The
retrospective impact to earnings per share was a decrease of $0.09 in 2008 and
$0.08 in 2007. As a result of the adoption of the accounting guidance for
convertible debt, interest expense for the year ended December 31, 2009 includes
non-cash interest expense from amortization of the discount on the liability
component of $3.6 million and amortization of debt issuance costs of $399,000
which reduced net income by $4.0 million and earnings per share by
$0.10.
As of December 31, 2009 and 2008, the long-term debt and the equity component
(recorded in additional paid in capital, net of income tax benefit), determined
in accordance with the new accounting guidance for convertible debt, comprised
the following (in thousands):
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Long-term
debt
|
|
|
|
|
|
|
Principal
amount
|
|
$
|
93,100
|
|
|
$
|
121,000
|
|
Unamortized
discount
|
|
|
(10,937
|
)
|
|
|
(18,369
|
)
|
Net
carrying amount
|
|
$
|
82,163
|
|
|
$
|
102,631
|
|
Equity
component, net of income tax benefit
|
|
$
|
16,399
|
|
|
$
|
17,228
|
|
The
discount on the liability component of long-term debt is being amortized using
the effective interest method based on an annual effective rate of 7.5%, which
represented the market interest rate for similar debt without a conversion
option on the issuance date, through December 2012, which coincides with the
first date that holders of the Notes can exercise their put option, as discussed
in Note 4 of Notes to Consolidated Financial Statements commencing at page F-6
of this report. The amount of interest expense recognized relating to both the
contractual interest coupon and the amortization of the discount on the
liability component was $6.7 million in 2009, $7.4 million in 2008 and $7.1
million in 2007.
Results
of Operations
The
following table sets forth certain income and expense items from our financial
statements for the years ended December 31, 2009, 2008 and 2007 expressed
as a percentage of net sales.
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of product sales
|
|
|
74.6
|
|
|
|
61.0
|
|
|
|
59.6
|
|
Gross
profit
|
|
|
25.4
|
|
|
|
39.0
|
|
|
|
40.4
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
6.8
|
|
|
|
4.6
|
|
|
|
3.6
|
|
General
and administrative
|
|
|
9.6
|
|
|
|
6.5
|
|
|
|
5.4
|
|
Acquisition
related charges
|
|
|
(0.2
|
)
|
|
|
1.4
|
|
|
|
—
|
|
Research
and development
|
|
|
3.1
|
|
|
|
2.2
|
|
|
|
2.3
|
|
Restructuring
- plant closure and severance
|
|
|
3.2
|
|
|
|
—
|
|
|
|
—
|
|
Goodwill
impairment
|
|
|
1.0
|
|
|
|
—
|
|
|
|
—
|
|
Income
from operations
|
|
|
1.9
|
|
|
|
24.3
|
|
|
|
29.1
|
|
Other
income (expense)
|
|
|
(1.8
|
)
|
|
|
(0.7
|
)
|
|
|
0.3
|
|
Income
before provision for income taxes
|
|
|
0.1
|
|
|
|
23.6
|
|
|
|
29.4
|
|
Net
income
|
|
|
2.1
|
%
|
|
|
15.4
|
%
|
|
|
18.8
|
%
|
Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008
Net Sales.
Our net sales
for the year ended December 31, 2009 were $400.6 million, a decrease of
$279.6 million, or 41.1%, from $680.2 million in the prior year. The main causes
of the decrease were a reduction in body armor shipments and a reduction in
sales at our ESK Ceramics subsidiary due to the recent economic contraction.
Overall, net sales for the year ended December 31, 2009 of our defense
related products were $198.8 million, a decrease of $221.3 million, or 52.7%,
from $420.1 million in the prior year and sales for the year ended
December 31, 2009 of industrial products amounted to $164.9 million, a
decrease of $43.2 million, or 20.8%, from $208.1 million in the prior year.
Sales of automotive/diesel products for the year ended December 31, 2009
were $25.1 million, a decrease of $14.3 million, or 36.2%, from $39.4 million in
the prior year and our net sales of commercial products for the year ended
December 31, 2009 were $11.8 million, a decrease of $0.8 million, or 6.1%, from
$12.6 million in the prior year. The contraction of the global economy was a
major reason for the decline in our sales volume and resulting gross profit in
our industrial, automotive/diesel and commercial business lines. Also,
contributing to the decline was a decrease in per unit sales prices of crucibles
due to increased price competition.
Our Advanced Ceramic Operations
division had net sales for the year ended December 31, 2009 of $214.1
million, a decrease of $236.4 million, or 52.5%, from $450.5 million in the
prior year. The primary reason for this decrease was that shipments of ceramic
body and other armor components for defense customers amounted to $188.6
million, a decrease of $221.1 million, or 54.0%, from $409.7 million of net
sales in the prior year. The primary reason for the decline in shipments was a
reduction in demand for ESAPI body armor sets from us by the U.S. Army because
they achieved their targeted goal of 960,000 total sets of ESAPI received from
all suppliers since 2005. This targeted goal of shipments was met at the end of
September 2008. We received our first and only production order to date for
the newest ballistic threat generation of body armor, XSAPI, plates on March 31,
2009 for $
76.8
million under the ID/IQ contract
discussed above under “Overview,” and commenced shipments during April 2009. Net
sales of XSAPI body armor for the three and twelve month periods ended December
31, 2009 were $
10.1
million and $
48.2
million, respectively. Other decreases
in sales were from reductions in sales of combat vehicle armor of $5.1 million.
Also contributing to the decrease in 2009 sales was a $12.6 million decline in
shipments of automotive/diesel products due primarily to the reduction in
production of the heavy-duty diesel trucks which was negatively affected by
trucking companies’ inability to secure financing to purchase new trucks with
the result that some of our customers initiated reduced work hours to reduce
production because of the decline in sales in the transportation industry as a
result of the severe economic contraction during 2009. In addition, sales of
industrial wear products declined by $1.7 million in 2009, also due to the
severe economic contraction.
Sales to
the automotive/diesel market represented 6.3% of sales for the year ended
December 31, 2009 and 5.8% of sales for the year ended December 31, 2008. The
recent events in the automotive industry have not had a material impact on our
results of operations or liquidity. We have not experienced any modifications to
payment terms due to issues involving customer liquidity in this industry
segment.
Our ESK
Ceramics subsidiary had net sales for the year ended December 31, 2009 of $105.1
million, a decrease of $47.1 million, or 31.0%, from $152.2 million in the prior
year. On a constant currency basis, sales for the year ended December 31, 2009
were $108.7 million, a decrease of $43.5 million from the prior year. We
computed sales on a constant currency basis by calculating 2008 sales in actual
Euros and applying a monthly average foreign exchange rate of the Euro to the
U.S. dollar during 2009, which was then compared to 2009 actual sales in U.S
dollars. Sales of industrial products for the year ended December 31, 2009 were
$64.3 million, a decrease of $32.6 million, or 33.7%, from $96.9 million in the
prior year. Sales of automotive/diesel products for the year ended December 31,
2009 were $20.1 million, a decrease of $1.7 million, or 7.7%, from $21.8 million
in the prior year. The decreases in sales for industrial and automotive/diesel
products were primarily the result of the severe economic contraction during
2009. Sales of defense products for the year ended December 31, 2009 were $18.4
million, a decrease of $12.5 million, or 40.4%, from $30.9 million in the prior
year. Included in sales of defense products for the year ended December 31, 2009
were inter-segment sales of $16.0 million compared to $28.4 million in the prior
year, a decrease of $12.4 million of shipments to our Advanced Ceramic
Operations division. The balance of the decrease was due to a reduction in sales
of boron carbide powder to third parties in the defense industry for the year
ended December 31, 2009, because their sales of ceramic body armor
declined.
Our
Semicon Associates division net sales for the year ended December 31, 2009
were $7.7 million, a decrease of $0.9 million, or 10.2%, from $8.6 million in
the prior year. The decrease reflects lower shipments of microwave
cathodes.
Our
Thermo Materials division had net sales for the year ended December 31,
2009 of $66.1 million, a decrease of $14.1 million, or 17.5%, from $80.2 million
in the prior year. The primary reasons for this decrease were a reduction of
$6.0 million in the sales of precision investment casting products and a $2.4
million reduction in refractory product sales, both due to the severe economic
recession. Revenue from crucibles used in the manufacture of photovoltaic cells
was $35.6 million, a decrease of $4.8 million, or 11.9%, from $40.4 million in
the prior year. This decrease was caused by lower per unit sales prices due to
increased price competition while units sold increased for the year ended
December 31, 2009 compared to the prior year. Sales to the defense industry
during the year ended December 31, 2009 were $8.3 million, an increase of
$1.4 million, or 20.1%, from $6.9 million when compared to the prior
year.
Our
Ceradyne Canada subsidiary had net sales for the year ended December 31, 2009 of
$1.7 million, a decrease of $3.5 million, or 68.1%, from $5.2 million in the
prior year. To lower our costs of production, during the year ended
December 31, 2009, we began to manufacture our Boral® product line
internally. This caused a delay in production, resulting in a decline in
net sales of $3.4 million during the year ended December 31,
2009.
Our Boron
segment, which includes our Ceradyne Boron Products subsidiary, which we
acquired on August 31, 2007, and our SemEquip, Inc. subsidiary, which we
acquired on August 11, 2008 had net sales for the year ended December 31, 2009,
of $27.3 million, an increase of $8.3 million, or 43.6%, from $19.0 million in
the prior year. Sales for the year ended December 31, 2009 from Ceradyne Boron
Products were $25.5 million, an increase of $7.1 million, or 38.9%, from $18.4
million during the prior year. The increased sales by Ceradyne Boron Products
resulted from additional shipments to the nuclear industry of $7.4 million and
were offset by a decline in sales to the semiconductor industry of $245,000.
SemEquip’s sales for the year ended December 31, 2009 were $1.8 million, an
increase of $1.1 million, or 173.0%, from $0.7 million during the prior year.
The increased sales by SemEquip, Inc. were the result of additional shipments of
spare parts and an increase in engineering services, both to the semiconductor
industry. Additionally, 2009 financial results included a full year of
SemEquip’s results compared to less than five months of results in 2008 as
SemEquip was acquired in August 2008.
Gross Profit
. Our gross
profit for the year ended December 31, 2009 was $101.6 million, a decrease
of $163.7 million, or 61.7%, from $265.3 million in the prior year. As a
percentage of net sales, gross profit was 25.4% for the year ended
December 31, 2009, compared to 39.0% for the prior year. This decrease in
gross profit and gross profit as a percentage of net sales in the year ended
December 31, 2009 caused primarily by substantially lower sales of body
armor, particularly of higher margin sales of body armor and reduced
operating leverage resulting in less absorption of manufacturing overhead
expenses in the production of body armor. Our body armor product line was
responsible for $119.9 million of the total decrease in gross profit in 2009
compared to 2008.
Also
contributing to the decline in gross profits were lower sales and production
volumes of most of our industrial product lines caused by reduced demand brought
on by the recent sharp economic contraction, resulting in an increase of
unabsorbed manufacturing overhead expenses. However, we did realize increases in
gross profit of $3.9 million from a growth in sales to the nuclear industry,
$0.7 million from expanding sales of products to the semiconductor industry,
both by
our
Ceradyne Boron Products subsidiary, and $0.7 million from improvement in sales
of ceramic radomes to the defense industry by our Thermo Materials
Division.
Our
Advanced Ceramic Operations division posted gross profit for the year ended
December 31, 2009 of $59.7 million, a decrease of $128.2 million, or 68.2%,
from $187.9 million in the prior year. As a percentage of net sales, gross
profit was 27.9% for the year ended December 31, 2009, compared to 41.7%
for the prior year. The primary reasons for the decrease in gross profit and
gross profit as a percentage of net sales were lower volumes of production of
body armor and industrial products resulting in an increase of unabsorbed
manufacturing overhead expenses, higher scrap rates incurred in the production
of body armor, and poorer sales mix caused by shipments of lower gross margin
SAPI and XSAPI body armor products compared to the prior year.
Our
ESK Ceramics subsidiary had a gross profit for the year ended
December 31, 2009 of $14.5 million, a decrease of $23.7 million, or 62.1%,
from $38.2 million in the prior year. Gross profit as a percentage of net sales
was 13.8% in the year ended December 31, 2009 compared to 25.1% in the
prior year. The decrease in gross profit and gross profit as a percentage of net
sales were the result of an unfavorable sales mix due to lower sales of ceramic
powder for armor applications, an increase in unabsorbed manufacturing overhead
expenses caused by lower production volumes, and lower sales of all product
lines due to reduced demand for our products as a result of the recent economic
contraction. Gross profit was also adversely impacted by the $1.9 million of
charges for accelerated depreciation of fixed assets in connection with the
closing of the facility in Bazet, France. Additional information regarding this
plant closure is provided below under the caption “Restructuring – Plant Closure
and Severance.”
Our
Semicon Associates division had gross profit for the year ended
December 31, 2009 of $1.9 million, a decrease of $0.7 million, or 28.6%,
from $2.6 million in the prior year. As a percentage of net sales, gross profit
was 24.5% for the year ended December 31, 2009 compared to 30.8% for the
prior year. The decrease in gross profit and in gross profit as a percentage of
net sales in the year ended December 31, 2009 was due primarily to
decreased sales of higher margin parts from our microwave cathode product line
compared to the prior year.
Our
Thermo Materials division had gross profit for the year ended December 31,
2009 of $23.1 million, a decrease of $9.8 million, or 29.8%, from $32.9 million
in the prior year. As a percentage of net sales, gross profit was 34.9% for the
year ended December 31, 2009, compared to 41.0% for the prior year. The
primary reason gross profit decreased was due to lower unit sales prices of
crucibles due to increased price competition, while costs did not decline
proportionately. Also contributing to the decrease in gross profit was lower
sales of industrial and refractory products due to the recent world-wide
economic contraction resulting in an increase of unabsorbed manufacturing
overhead expenses compared to the prior year.
Our
Ceradyne Canada subsidiary had negative gross profit for the year ended December
31, 2009 of $1.8 million, a decrease of $3.1 million, from a gross profit of
$1.3 million in the prior year. The negative gross profit resulted primarily
from significantly lower sales of our Boral® product line and metal matrix
composite products to the nuclear industry resulting in under utilized capacity
and an increase of unabsorbed manufacturing overhead expenses compared to the
prior year.
Our
Ceradyne Boron segment, which includes our Ceradyne Boron Products subsidiary,
which we acquired on August 31, 2007, and our SemEquip, Inc. subsidiary, which
we acquired on August 11, 2008, had gross profit of $4.2 million, an increase of
$3.6 million, or 615.8%, from $0.6 million in the prior year. Of this increase
in gross margin, $4.6 million was from additional sales of products to the
nuclear and semiconductor industries and improved absorption of fixed
manufacturing costs. Offsetting this increase at Ceradyne Boron Products was an
increase of $1.0 million in negative gross profit from SemEquip, Inc. to a
negative $2.6 million gross profit in the year ending December 31, 2009 from a
negative $1.6 million in the prior year primarily due to the reporting of a full
year of SemEquip’s results in 2009 compared to less than five months of results
in 2008.
Selling Expenses.
Our
selling expenses for the year ended December 31, 2009 were $27.2 million, a
decrease of $4.0 million, or 13.1%, from $31.2 million in the prior year.
Selling expenses, as a percentage of net sales, increased from 4.6% for the year
ended December 31, 2008 to 6.8% of net sales for the year ended
December 31, 2009. The decrease in selling expenses was due to a reduction
in headcount and related personnel and travel expenses. The increase in selling
expenses as a percentage of net sales was due to a reduction in net sales that
was not fully offset by a proportionate decrease in selling
expenses.
General and Administrative
Expenses.
Our general and administrative expenses for the year ended
December 31, 2009 were $38.5 million, a decrease of $5.4 million, or 12.3%,
from $43.9 million in the year ended December 31, 2008. General and
administrative expenses, as a percentage of net sales, increased from 6.5% for
the year ended December 31, 2008 to 9.6% of net sales for the year ended
December 31, 2009. The decrease in general and administrative expenses was
due to a reduction in headcount and related personnel and travel expenses, and
reduced bonuses due to lower pre-tax income in 2009
as
compared to 2008. The increase in general and administrative expenses as a
percentage of net sales was due to a reduction in net sales that was not fully
offset by a proportionate decrease in general and administrative
expenses.
Restructuring – Plant Closure and
Severance.
We recorded pre-tax restructuring and severance charges of
$12.9 million for the year ended December 31, 2009. Included in this
amount are charges totaling $10.3 million due to the closing of our
manufacturing facility in Bazet, France owned by our ESK Ceramics France
subsidiary and $2.7 million of severance charges consisting of headcount
reductions in the United States of $1.3 million and $1.4 million in Germany
during the year ended December 31, 2009.
In the
second quarter of 2009, we made a strategic decision to close this manufacturing
plant. During the year ended December 31, 2009, we recognized pre-tax charges of
$10.3 million for the closure of the Bazet facility which included severance and
related costs, and contract termination costs of $9.6 million, and legal and
other closure costs of $0.7 million. We also incurred $1.9 million for
accelerated depreciation of fixed assets that is reported in Cost of Goods Sold
for the year ended December 31, 2009. The severance charge was recognized as a
postemployment benefit as the Company’s obligation related to employees' rights
to receive compensation for future absences was attributable to employees'
services already rendered, the obligation relates to rights that legally vest,
payment of the compensation is probable, and the amount could be reasonably
estimated based on local statutory requirements.
We made
this decision as a cost-cutting measure to eliminate losses that were incurred
at this facility due to the recent severe economic contraction. This decision is
consistent with our ongoing objective to lower the costs of our manufacturing
operations. As a result, ESK Ceramics France reduced its workforce by
approximately 97 employees, primarily composed of manufacturing, production and
additional support staff at the plant. Affected employees were eligible for a
severance package that includes severance pay, continuation of benefits and
outplacement services. The plant was completely closed by the end of 2009
calendar year and we anticipate closing the sale of the building during the
first half of 2010.
Goodwill Impairment.
We are
required to test annually whether the estimated fair value of our reporting
units is sufficient to support the goodwill assigned to those reporting units;
we perform the annual test in the fourth quarter. We are also required to test
goodwill for impairment before the annual test if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount, such as a significant adverse change
in the business climate. At December 31, 2009, our market capitalization was
less than our total stockholders' equity. We consider this decline to be
temporary and based on general economic conditions therefore no interim test of
goodwill is required. As of December 31, 2009, none of our reporting units were
at risk of failing step one of the impairment test.
We
incurred a goodwill impairment charge of $3.8 million in the second quarter of
2009 for the goodwill associated with our Ceradyne Canada operating segment. We
determined that the demand for our Boral® product line, which was a large part
of the revenue of the Ceradyne Canada operating and reporting unit, continued to
decline and that this condition required a goodwill impairment test before the
annual test for this reporting unit. To complete the test for impairment, we
utilized discounted cash flow methodology, which requires the forecasting of
cash flows and requires the selection of discount rates. We used available
information to make these fair value estimates, including discount rates,
commensurate with the risks relevant to our business. Based on the goodwill
impairment test performed on the Ceradyne Canada reporting unit, we recorded a
$3.8 million impairment charge, which was recognized in the second quarter of
2009.
During
the second quarter of 2009, we also conducted a test on the forecasted
undiscounted cash flows to determine whether there was impairment on our long
lived assets in our Ceradyne Canada reporting unit. Based on the analysis of the
forecasted undiscounted cash flows for this reporting unit, we determined that
there was no impairment of the long lived assets for the Ceradyne Canada
reporting unit.
The
valuation methodologies and the underlying financial information that are used
to determine fair value require significant judgments to be made by
management. These judgments include, but are not limited to, long-term
projections of future financial performance, terminal growth rate and the
selection of an appropriate discount rate used to calculate the present value of
the estimated future cash flows. The long-term projections used in the valuation
were developed as a part of our annual budgeting and forecasting process. The
discount rate used in the valuation was selected based upon an analysis of
comparable companies and included adjustments made to account for our specific
attributes such as size and industry.
The test
for long-lived asset impairment resulted in no impairment of those assets at
December 31, 2009. Additionally, the test for goodwill impairment resulted in no
impairment of goodwill at December 31, 2009. At the time of the completion of
our annual goodwill impairment test as of December 31, 2009, we believed that
the cash flow projections we used in determining fair value already
appropriately reflected our revised forecast of our financial performance for
2010. While the reduction in sales volume to the U.S. government and the recent
severe economic downturn has impacted all of our reporting units, we believe
that the fundamentals of our businesses remain solid and the long-term outlook
for our industry remains strong. Our valuation models assume the restoration of
long-term market stability after a near term period of no growth. All reporting
units had fair values which exceeded carrying values by at least 23% as of
December 31, 2009. Additionally, a 50
basis
point increase in the discount rate, a critical assumption in which a minor
change can have a significant negative impact on the estimated fair value, would
not have resulted in a goodwill impairment charge.
Acquisition Related Charge.
We incurred an acquisition-related compensation charge of $9.8 million for the
year ended December 31, 2008 associated with a pre-closing commitment by
SemEquip, Inc. for incentive compensation for several of its employees and
advisors. This $9.8 million charge included $1.7 million of cash paid by
Ceradyne at closing, and the balance represents the discounted present value of
the portion of the estimated contingent consideration payable as incentive
compensation to these employees and advisors over 15 years. During the third
quarter of 2009, we revised the estimated future sales and earnings of SemEquip,
which caused a $0.8 million reduction in this acquisition liability and a credit
to pre-tax earnings for the year ended December 31, 2009.
Research and Development
Expenses.
Our research and development expenses for the year ended
December 31, 2009 were $12.3 million, a decrease of $2.5 million, or 17.1%,
from $14.8 million in the prior year. Research and development expenses, as a
percentage of net sales, increased from 2.2% for the year ended
December 31, 2008 to 3.1% of net sales for the year ended December 31,
2009. The primary reasons for the decrease in research and development expenses
were the reduction in headcount and related personnel and travel expenses. The
increase in research and development expenses as a percentage of net sales was
due to a reduction in net sales that was not fully offset by a proportionate
decrease in research and development expenses.
Other Income
(Expense).
Our net other income and expense for the year
ended December 31, 2009 was a net expense of $7.3 million, an
increase of $2.6 million, or 56.3%, from $4.7 million of other net expense in
the prior year. This increase was primarily caused by a reduction of $3.5
million in interest income on our cash balances and short-term marketable
securities because of a substantial decline in interest rates in 2009. This was
offset by a reduction of $0.7 million of losses on auction rate securities
compared to the losses incurred in 2008 and a gain on an early extinguishment of
debt of $1.9 million. Interest expense for the year ended December 31, 2009
was $7.1 million, a decrease of $0.8 million, or 9.6%, from $7.9 million in the
prior year because we bought back $27.9 million of the total $121.0 million
principal of our convertible bond.
Income before Provision (Benefit)
for Income Taxes
. Our income before provision for income taxes for
the year ended December 31, 2009 was $417,000, a decrease of $160.5 million, or
99.7%, from $160.9 million of income before provision for income taxes in the
prior year.
The
primary reasons for the decrease in the income before provision for income taxes
for the year ended December 31, 2009 were large reductions in sales of body
armor due to decreased demand from the U.S. Government, a reduction of sales of
industrial products due to the severe economic contraction, unabsorbed
manufacturing overhead due to lower production volumes, $12.2 million pre-tax
charges for the closure our Bazet, France manufacturing plant, a $3.8 million
pre-tax charge for impairment of goodwill at our Ceradyne Canada segment, $2.6
million of severance costs due to reductions in work force in our North America
operations and at ESK Ceramics, and a reduction in interest income compared to
the prior year because of historically low interest rates. These factors were
partially offset by a $0.8 million reduction in acquisition liabilities and a
credit of $0.6 million to adjust the amortization of intangibles; both were
adjusted based on revised estimates of future sales and earnings at our SemEquip
subsidiary.
Our
Advanced Ceramic Operations division’s income before provision for income taxes
for the year ended December 31, 2009 was $22.9 million, a decrease of
$122.4 million, or 84.3%, from $145.3 million of income before provision for
income taxes in the prior year. The decrease in income before provision for
income taxes for the year ended December 31, 2009 was due primarily to
substantially lower sales of body armor, restructuring and severance expenses of
$1.1 million due to headcount reductions, unabsorbed manufacturing overhead
expenses because of lower volumes of production of body armor and industrial
products, and higher scrap rates incurred in the production of body
armor.
Our
ESK Ceramics subsidiary recorded a loss before provision for income taxes
for the year ended December 31, 2009 of $24.9 million, a decrease of $29.1
million, from income before provision for income taxes of $4.2 million in the
prior year. The primary causes of the decrease in income before provision for
income taxes were substantially reduced industrial sales due to the severe
economic contraction and the resultant lower production volumes that caused
excess capacity and significant unabsorbed manufacturing expenses, a $12.2
million charge for the closure of our Bazet, France, manufacturing plant;
severance expenses in Germany of $1.4 million due to a reduction in work force;
and lower sales of ceramic powder for armor applications because of reduced
demand for body armor by the U.S. military.
Our
Semicon Associates division’s income before provision for income taxes for the
year ended December 31, 2009 was $0.7 million, a decrease of $0.7 million, or
51.1%, from $1.4 million of income before provision for income taxes in the
prior year. The decrease in income before provision for income taxes for the
twelve months ended December 31, 2009 was primarily caused by a reduction in the
sales of microwave cathode products due to the recent economic
contraction.
Our
Thermo Materials division’s income before provision for income taxes for the
year ended December 31, 2009 was $12.8 million, a decrease of $10.9 million, or
45.9%, from $23.7 million of income before provision for income taxes in the
prior year. The decrease in income before provision for income taxes was due to
lower sales of crucibles caused by a reduction in unit selling prices and a
reduction in sales of refractory and industrial products due to the recent
economic contraction, when compared to the prior year.
Our
Ceradyne Canada subsidiary’s loss before provision for income taxes for the year
ended December 31, 2009 amounted to $6.9 million, a decrease of $6.9
million, from a loss before provision for income taxes of $69,000 in the
prior year. The decrease in income before provision for income taxes was due to
a sharp decrease in demand of our Boral
®
product line, metal matrix composite products and unabsorbed
manufacturing expenses, and a goodwill impairment charge of $3.8 million
recorded in the second quarter of 2009.
Our Boron
segment’s loss before provision for income taxes for the year ended December 31,
2009 was $4.1 million, a decrease of $11.4 million, or 73.6%, from a loss before
provision for income taxes of $15.5 million in the prior year. The improvement
in the performance of this segment was attributable to the increase of income
before provision for income taxes at our Ceradyne Boron Products subsidiary of
$3.4 million due to increased sales of nuclear products of $7.4 million and
greater absorption of fixed manufacturing expenses. Also contributing to the
improved performance of this segment was a credit of $0.6 million to adjust the
amortization of intangibles based on revised estimates of sales and earnings.
During the year ended December 31, 2008, SemEquip, Inc. incurred an acquisition
related charge of $9.8 million compared to a credit of $0.8 million in the year
ended December 31, 2009 because of revised estimates.
Income Taxes.
For the
year ended December 31, 2009, we had a tax benefit of $8.1 million, a decrease
of $64.5 million, from $56.4 million of a provision for income taxes in the
prior year. Our effective income tax rate for the year ended December 31,
2008 was 35.1%. The tax benefit in 2009 resulted from a reversal of liability
for uncertain tax positions as well as the tax benefits from the
expenses and losses due to the closure of our Bazet, France manufacturing
facility. We also had part of our pre-tax income originating from our operations
in China where we did not pay income tax. Income taxes also decreased because
pre-tax income was lower in 2009 compared to 2008.
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
Net Sales.
Our net sales
for the year ended December 31, 2008 were $680.2 million, a decrease of
$76.6 million, or 10.1%, from $756.8 million in the prior year.
Our
Advanced Ceramic Operations division had net sales for the year ended
December 31, 2008 of $450.5 million, a decrease of $136.8 million, or
23.3%, from $587.3 million in the prior year. The primary reason for this
decrease was that shipments of ceramic body and other armor
components for defense customers amounted to $409.7 million, a decrease of
$141.6 million, or 25.7%, from $551.3 million of net sales in the prior year due
to reduced demand from the U.S. Department of Defense. The decrease in armor
sales was partially offset by a $6.6 million increase in net sales of our
automotive/diesel component product line, including cam rollers, from $11.0
million in 2007 to $17.6 million in 2008. The primary reason for the increase in
sales of the automotive/diesel component product line was $5.0 million of
shipments of ceramic cam rollers to our North American automotive suppliers
because their customers were making forward purchases of the current engine
which is being replaced by a new, more expensive engine. The remaining increase
of $1.1 million was due to more ceramic cam rollers shipped to European
suppliers for use in off-highway engines.
Our ESK
Ceramics subsidiary had net sales for the year ended December 31, 2008 of $152.2
million, a decrease of $8.4 million, or 5.2%, from $160.6 million in the prior
year. Approximately $11.5 million of the sales in 2008 are attributable to a
higher value of the Euro versus the U.S. dollar in 2008 compared to 2007. Sales
of industrial products for the year ended December 31, 2008 were $96.9 million,
an increase of $4.3 million, or 4.7%, from the $92.6 million in the prior year.
On a constant currency basis, sales of industrial products for the year ended
December 31, 2008 decreased by $3.0 million. Sales of automotive/diesel products
for the year ended December 31, 2008 were $21.8 million, an increase of $1.1
million, or 5.4%, from the $20.7 million in the prior year. On a constant
currency basis, sales of automotive/diesel products for the year ended December
31, 2008 decreased by $0.7 million. The decreases in sales on a constant
currency basis for industrial and automotive/diesel products were primarily the
result of a severe economic contraction in the fourth quarter of 2008. Sales of
defense products for the year ended December 31, 2008 were $30.9 million, a
decrease of $14.3 million, or 31.7% from the $45.2 million in the prior year.
Included in sales of defense products for the year ended December 31, 2008 were
inter-segment sales of $28.4 million compared to $40.7 million in the prior
year, a decrease of $12.3 million of shipments to our Advanced Ceramic
Operations division. The balance of the decrease was due to a reduction in sales
of boron carbide powder to third parties in the defense industry for the year
ended December 31, 2008, because their sales of ceramic body armor declined. On
a constant currency basis, sales of defense products decreased by $16.5 million
for the year ended December 31, 2008.
Our Semicon Associates division had net
sales for the year ended December 31, 2008 of $8.6 million, an increase of
$0.6 million, or 7.3%, from $8.0 million in the prior year. The increase in
sales reflects higher shipments of microwave and laser cathodes of $0.9 million;
this was partially offset by lower shipments of cathode ray tubes and magnets in
2008 when compared to 2007.
Our
Thermo Materials division had net sales for the year ended December 31,
2008 of $80.2 million, an increase of $48.2 million, or 150.3%, from $32.0
million in the prior year. The increase was due in part to the growth of $29.5
million in sales of crucibles used in the manufacture of photovoltaic cells for
the solar energy markets, including $24.4 million by our new operation in China.
Also contributing to the increase in sales during 2008 was $16.1 million in
sales, including inter-company sales, as a result of a full year inclusion of
the financial results of Minco, Inc. which we acquired and initially
consolidated commencing July 10, 2007. Sales to the defense industry were higher
by $2.4 million due to increased demand for ceramic missile
radomes.
Our
Ceradyne Canada subsidiary had net sales for the year ended December 31, 2008 of
$5.2 million, an increase of $1.3 million, or 33.4%, from $3.9 million in the
prior year. The increase in sales reflects higher shipments of our Boral
®
product line to the nuclear industry of $2.5 million. This was partially offset
by a $1.2 million reduction in sales of metal matrix composite
products.
Our Boron
segment which includes our Ceradyne Boron Products subsidiary, which we acquired
on August 31, 2007, and our SemEquip, Inc. subsidiary, which we acquired on
August 11, 2008 had net sales for the year ended December 31, 2008, of $19.0
million, an increase of $11.2 million, or 144.7%, from $7.8 million in the prior
year. The increase in sales was the result of a full year consolidation in 2008
of the Ceradyne Boron Products subsidiary while results in 2007 included net
sales for the period from September 1 to December 31, 2007. Also contributing to
the increase was the consolidation as of August 11, 2008 of the results of
SemEquip,Inc., which had sales of $0.7 million for the period from August 11
through December 31, 2008.
Gross Profit
. Our gross
profit for the year ended December 31, 2008 was $265.3 million, a decrease
of $40.7 million, or 13.3%, from $306.0 million in the prior year. As a
percentage of net sales, gross profit was 39.0% for the year ended
December 31, 2008, compared to 40.4% for the prior year. The decrease in
gross profit as a percentage of net sales in the year ended December 31,
2008 was the result of lower sales, particularly of body armor, resulting in a
poorer sales mix and lower operating leverage resulting in less absorption of
manufacturing overhead expenses. The decrease in gross profit was primarily
caused by the decrease in body armor and other armor component sales; this
resulted in a reduction of $63.4 million of gross profit compared to 2007
results. This decrease was partially offset by gross profit from the increased
sales of ceramic crucibles and the full year consolidation in 2008 of operations
of our Minco, Inc. and Ceradyne Boron Products subsidiaries, both of which were
acquired in 2007.
Our
Advanced Ceramic Operations division posted gross profit for the year ended
December 31, 2008 of $187.9 million, a decrease of $59.9 million, or 24.2%,
from $247.8 million in the prior year. As a percentage of net sales, gross
profit was 41.7% for the year ended December 31, 2008, compared to 42.2%
for the prior year. The primary reasons for the decrease in gross profit and
gross profit as a percentage of net sales were decreased sales of body armor,
resulting in poorer sales mix and lower operating leverage causing manufacturing
overhead to be under absorbed.
Our
ESK Ceramics subsidiary had a gross profit for the year ended
December 31, 2008 of $38.2 million, a decrease of $10.2 million, or 21.0%,
from $48.4 million for the year ended December 31, 2007. Gross profit as a
percentage of net sales was 25.1% in 2008 compared to 30.1% in 2007. The
decrease in gross profit and in gross profit as a percentage of net sales in the
year ended December 31, 2008 was the result of increased labor and
electricity expenses, continued price reductions in our evaporation boat and our
functional coating businesses due to competitive forces, and a reduction in
higher margin boron carbide powder sales to external customers.
Our
Semicon Associates division had gross profit for the year ended
December 31, 2008 of $2.6 million, an increase of $0.7 million, or 37.6%,
from $1.9 million in the prior year. As a percentage of net sales, gross profit
was 30.8% for the year ended December 31, 2008, compared to 24.0% for the
prior year. The increase in gross profit and in gross profit as a percentage of
net sales in the year ended December 31, 2008 was due primarily to price
increases that were successfully passed on to customers of our microwave and
laser cathodes products.
Our
Thermo Materials division had gross profit for the year ended December 31,
2008 of $32.9 million, an increase of $25.2 million, or 328.9%, from $7.7
million in the prior year. As a percentage of net sales, gross profit was 41.0%
for the year ended December 31, 2008, compared to 24.8% for the prior year.
The improvements in gross profit and gross profit as a percentage of sales were
primarily due to lower sales of fused silica and casting product lines which
have lower gross margins and an increase in the sales of crucibles which have
higher gross margins. Also contributing to the increase in gross profit was the
full year consolidation in 2008 of operations of our Minco, Inc. subsidiary,
which was initially consolidated as of July 10, 2007.
Our
Ceradyne Canada subsidiary had gross profit for the year ended December 31, 2008
of $1.3 million, an increase of $3.2 million, from a negative gross profit of
$1.9 million in the prior year. The increase in gross profit was due to an
improved sales mix caused by increased sales of our Boral
®
product line in 2008 and higher operating leverage.
Our
Ceradyne Boron segment, which includes our Ceradyne Boron Products subsidiary,
which we acquired on August 31, 2007, and our SemEquip, Inc. subsidiary, which
we acquired on August 11, 2008, had gross profit of $0.6 million, a
decrease of $2.3 million, or 79.9%, from $2.9 million in the prior year. The
decrease was primarily caused by a $1.6 million gross loss from the results of
SemEquip, Inc. which were consolidated from August 11, 2008. Our Ceradyne Boron
Products subsidiary had gross profit of $2.2 million for the year ended December
31, 2008, a decrease of $0.7 million, or 24.2%, from $2.9 million in the prior
year. Contributing to the decrease were poor manufacturing yields and a decrease
in sales of higher margin products to the semiconductor industry when compared
to 2007.
Selling Expenses.
Our
selling expenses for the year ended December 31, 2008 were $31.2 million,
an increase of $4.3 million, or 16.0%, from $26.9 million in the prior year.
Selling expenses, as a percentage of net sales, increased from 3.6% for the year
ended December 31, 2007 to 4.6% of net sales for the year ended
December 31, 2008. Selling expenses at our ESK Ceramics subsidiary, which
constitute a relatively large portion of the total, are denominated in Euros and
increase when translated into dollars at lower exchange rates; this caused an
increase of $1.5 million in selling expenses in 2008. Other factors contributing
to the increase were $2.2 million of additional selling expenses due to the full
year consolidation in 2008 of the results of our Ceradyne Boron Products which
was initially consolidated commencing September 1, 2007, $0.5 million of
additional selling expenses due to the full year consolidation in 2008 of our
Minco subsidiary which was initially consolidated commencing July 10, 2007, and
$0.7 million of selling expenses due to the inclusion of the results of our
recently acquired SemEquip, Inc. subsidiary. These increases were partially
offset by a reduction in headcount and related personnel and travel expenses of
$0.6 million at our ACO division. The increase in selling expenses as a
percentage of net sales was due to a reduction in net sales that was not fully
offset by a proportionate decrease in selling expenses.
General and Administrative
Expenses.
Our general and administrative expenses for the year ended
December 31, 2008 were $43.9 million, an increase of $3.1 million, or 7.6%,
from $40.8 million in the year ended December 31, 2007. General and
administrative expenses, as a percentage of net sales, increased from 5.4% for
the year ended December 31, 2007 to 6.5% of net sales for the year ended
December 31, 2008. The consolidation of the operations of our Minco, Inc.
and Ceradyne Boron Products subsidiaries for all of 2008 and the consolidation
of our SemEquip, Inc. subsidiary commencing as of August 11, 2008,
contributed $1.8 million to the increase in general and administrative expenses
for the year ended December 31, 2008. General and administrative expenses also
increased in 2008 due to a $1.5 million increase in professional fees for
auditing, tax and information technology consulting services, and due to $0.5
million of additional expenses in connection with the expansion of our business
in China. These increases were partially offset by a reduction in bonus payments
of $1.5 million as a result of a decrease in pre-tax income in 2008 compared to
2007.
Acquisition Related Charge.
We incurred an acquisition-related compensation charge of $9.8 million for the
year ended December 31, 2008 associated with a pre-closing commitment by
SemEquip, Inc. for incentive compensation for several of its employees and
advisors. This $9.8 million charge includes $1.7 million of cash paid by
Ceradyne at closing, and the balance represents the discounted present value of
the portion of the estimated contingent consideration payable as incentive
compensation to these employees and advisors over 15 years. For additional
information regarding this acquisition, see Note 3 of Notes to Consolidated
Financial Statements commencing at Page F-6 of this report.
Research and Development
Expenses.
Our research and development expenses for the year ended
December 31, 2008 were $14.8 million, a decrease of $2.8 million, or 15.8%,
from $17.6 million in the prior year. Research and development expenses, as a
percentage of net sales, decreased from 2.3% for the year ended
December 31, 2007 to 2.2% of net sales for the year ended December 31,
2008. The primary reasons for these decreases were the reduction in expenses
associated with the development of next generation body armor products and the
development of combat vehicle armor.
Other Income
(Expense).
Our net other income and expense for the year ended
December 31, 2008 was a net expense of $4.7 million, a decrease
of $7.1 million from $2.4 million of net other income in the prior year. There
were two principal reasons for this decrease. We earned $4.8 million less
interest income on our cash balances and short-term marketable securities
because of a substantial decline in interest rates in 2008. We also incurred
charges of $5.9 million for impairment due to other than temporary reductions in
the value of our investments in auction rate securities. Interest expense for
the year ended December 31, 2008 was approximately $7.9 million, an
increase of $258,000, or 3.4%, from $7.6 million in the prior year.
Income before Provision for Income
Taxes.
Our income before provision for income taxes for the year
ended December 31, 2008 was $160.9 million, a decrease of $62.2 million, or
27.9%, from $223.1 million in the prior year.
Our
Advanced Ceramic Operations division’s income before provision for income taxes
for the year ended December 31, 2008 was $145.4 million, a decrease of
$63.8 million, or 30.5%, from $209.2 million in the prior year. The
decrease
in income before provision for income taxes for the year ended December 31,
2008 was a result of lower sales of body armor and a decrease in gross margins
as a result of a poorer sales mix and lower operating leverage.
Our
ESK Ceramics subsidiary’s income before provision for income taxes for the
year ended December 31, 2008 was $4.2 million, a decrease of $9.2 million,
or 68.5%, from $13.4 million in the prior year. The decrease in income before
provision for income taxes for the year ended December 31, 2008 was the
result of increased labor and electricity expenses, continued price reductions
in our evaporation boat and our functional coating businesses due to competitive
forces, a reduction in higher margin boron carbide powder sales to external
customers and the negative impact of the exchange rate of the Euro when compared
to the U.S. dollar.
Our
Semicon Associates division’s income before provision for income taxes for the
year ended December 31, 2008 was $1.4 million, an increase of $246,000, or
21.8%, from $1.1 million in the prior year. The increase in income before
provision for income taxes for the year ended December 31, 2008 was a
result of higher sales of our microwave and laser cathodes products resulting in
improved sales mix and operating leverage.
Our
Thermo Materials division’s income before provision for income taxes for the
year ended December 31, 2008 was $23.7 million, an increase of $21.4
million, or 928.4%, from $2.3 million in the prior year. The increase in income
before provision for income taxes for the year ended December 31, 2008 was due
to a sales mix change from lower sales of fused silica and casting product lines
which have lower gross margins and an increase in the sales of crucibles,
primarily in China, and defense products which have higher gross margins. The
operations of our Minco, Inc. subsidiary, which were consolidated for all of
2008 compared to only part of 2007, contributed $1.5 million to the increase in
income before provision for income taxes for the year ended December 31, 2008
compared to a contribution of $166,000 in the prior year.
Our
Ceradyne Canada subsidiary’s loss before provision for income taxes improved to
$69,000 for the year ended December 31, 2008, from a loss before provision for
taxes of $3.0 million in the prior year. The decrease in the loss before
provision for income taxes for the year ended December 31, 2008 was due to
an improved sales mix caused by increased sales of our Boral
®
product line in 2008 compared to 2007 and higher operating
leverage.
Our Boron
segment’s loss before provision for income taxes for the year ended
December 31, 2008 was $15.5 million, a decrease of $16.2 million from
income before provision of income taxes of $0.7 million in the prior year. The
decrease was primarily caused by a $13.8 million loss before provision for
income taxes incurred by our SemEquip, Inc. subsidiary, which we acquired on
August 11, 2008. Included in the loss was a $9.8 million acquisition-related
compensation charge associated with a pre-closing commitment by SemEquip, Inc.
for incentive compensation for several of its employees and advisors. SemEquip
is a late stage development company that incurred operating losses in connection
with the development and marketing of “cluster molecules” such as B
18
H
22
for use
in the ion implantation of boron (B) in the manufacturing of semiconductors. We
anticipate that SemEquip will continue to incur operating losses for the next
two fiscal years. Additionally, our Boron Products subsidiary incurred a loss
before provision for income taxes for the year ended December 31, 2008 of
$1.7 million due to a reduction of sales of high margin products to the
semiconductor industry as a result of a business contraction in that industry
and poor manufacturing yields.
Income Taxes.
Our
provision for income taxes for the year ended December 31, 2008 was $56.4
million, a decrease of $24.5 million, or 30.3%, from $80.9 million in the prior
year. The effective income tax rate for the year ended December 31, 2008
was 35.1% compared to 36.3% in the prior year. The decrease in the effective tax
rate from the prior year resulted from a higher proportion of our pre-tax income
originating from our operations in China where we did not pay income tax. Income
taxes also decreased because pre-tax income was lower in 2008 compared to
2007.
Liquidity
and Capital Resources
We
generally have met our operating and capital requirements with cash flow from
operating activities and proceeds from the sale of shares of our common
stock.
The
following table presents selected financial information and statistics as of and
for the two years ended December 31, 2009 and 2008 (in
thousands):
|
|
2009
|
|
|
2008
|
|
Cash and cash
equivalents
|
|
$
|
122,154
|
|
|
$
|
215,282
|
|
Short
term investments
|
|
|
117,666
|
|
|
|
6,140
|
|
Accounts
receivable, net
|
|
|
53,269
|
|
|
|
64,631
|
|
Inventories,
net
|
|
|
100,976
|
|
|
|
101,017
|
|
Working
capital
|
|
|
406,207
|
|
|
|
400,835
|
|
Annual
operating cash flow
|
|
|
67,773
|
|
|
|
155,970
|
|
During
the year ended December 31, 2009, we generated $67.8 million of cash from
operations compared to $156.0 million for the year ended December 31, 2008. The
$67.8 million of cash flow from operations during 2009 is primarily comprised of
net income totaling $8.5 million, with $45.8 million of non cash charges
included therein, and a reduction in net operating assets and liabilities, net
of assets acquired, of $13.5 million, mostly due to lower revenues during
the year. We invested $14.4 million to expand manufacturing capacity in selected
product lines and $9.7 million to acquire the assets and business of Diaphorm
Technologies LLC, as explained more fully elsewhere. We also used $9.8 million
to buy back our stock and $23.2 million to acquire a portion of our outstanding
convertible debt, as described more fully below. In an effort to increase yield,
as of December 31, 2009 we had invested a net additional $106.0 million in
marketable securities as compared to the end of 2008. As a result, our net cash
at December 31, 2009 declined by $93.1 million as compared to a $60.2 million
increase during the year ended December 31, 2008.
Investing
activities consumed $130.6 million of cash during the year ended December 31,
2009. This included $9.7 million for the acquisition of substantially all of the
business and assets and all technology and intellectual property related to
ballistic combat and non-combat helmets of Diaphorm Technologies, LLC, based in
Salem, New Hampshire. We invested $179.2 million for the purchase of marketable
securities as we extended the maturities of our investments in an attempt to
increase our return. We also spent $14.5 million for the purchase of property,
plant and equipment. Included in this amount is $6.6 million for improvements in
the production of ceramic crucibles at our China and Atlanta facilities and $2.0
million for the ongoing implementation of our SAP software system. These
expenditures for investing activities were partially offset by $73.2 million of
proceeds from sales and maturities of marketable securities.
Financing
activities during the year ended December 31, 2009 consumed $29.8 million.
During the year ended December 31, 2009, we purchased and retired 567,000 shares
of our common stock at an aggregate cost of $9.8 million under a stock
repurchase program authorized by our Board of Directors. To date, we have
purchased and retired a cumulative total of 2,145,237 at an aggregate cost of
$54.5 million. We are authorized to repurchase and retire an additional $45.5
million for a total of $100.0 million. We also purchased and retired an
aggregate of $27.9 million principal amount of our convertible debt for
$23.2 million reducing the outstanding balance of the Notes to $93.1 million. Of
the $23.2 million expenditure for the retirement of the debt, $21.8 million is
reflected in financing activities and the balance of $1.4 million was
attributable to payments of accreted interest on the debt discount and is
reflected in cash flows from operating activities. We have $26.8 million
remaining of the original $50.0 million authorization by our Board of Directors
to repurchase and retire part of the outstanding Notes. The carrying amount of
the Notes purchased was $24.1 million and the estimated fair value of the
Notes exclusive of the conversion feature was $21.8 million. The difference
between the carrying amount of $24.1 million and the estimated fair value
of $21.8 million was recognized as a gain of $2.3 million upon early
extinguishment of debt, which was partially offset by write off of associated
unamortized debt issuance costs of $392,000, resulting in a net gain of $1.9
million. The difference between the estimated fair value of $21.8 million
and the purchase price of $23.2 million was $1.4 million and was
charged to additional paid-in capital. In May 2008, the FASB Staff issued new
accounting guidance for convertible debt instruments that may be settled in cash
upon conversion (including partial cash settlement) which specifies that issuers
of such instruments should separately account for the liability and equity
components in a manner that will reflect the issuer’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods.
The
negative effect of exchange rates on cash and cash equivalents of $0.5 million
during the year ended December 31, 2009 was due to our investment in our German
subsidiary, ESK Ceramics, and in our Chinese subsidiary, Ceradyne (Tianjin)
Technical Ceramics, Ltd.
Our net
cash position increased by $60.2 million during the year ended December 31,
2008, compared to a $141.6 million increase during the year ended
December 31, 2007. For the year ended December 31, 2008, cash flow
provided by operating activities amounted to $156.0 million. The primary factors
contributing to cash flow from operating activities in the year ended
December 31, 2008, were net income of $106.8 million, and adjustments of
non-cash amounts related to depreciation and amortization of $36.7 million,
stock compensation of $3.1 million, and $5.9 million of unrealized losses on
auction rate securities. Also contributing to the increase in cash flow from
operating activities was a decrease in accounts receivable and other receivables
of $21.2 million due to lower sales compared to the previous year, a decrease in
production tooling of $2.0 million due to lower production volume, an increase
of $9.8 million in other long term liabilities due primarily to the
accrual of the pre-acquisition commitment by SemEquip, Inc. to pay incentive
compensation to several of its employees and advisors, and an increase
of $6.3 million in the accrual for employee benefits at our ESK and
Boron Products subsidiaries due to poor investment results during 2008 at their
respective pension funds. These contributions to our cash
flow from
operating activities were offset in part by deferred income taxes of $1.7
million, increased levels of inventories of $6.6 million, an increase
of $10.8 million in prepaid expenses due to an increase in tax
deposits, and decreases of $13.3 million in accounts payable, $3.3 million in
accrued expenses and income taxes payable. Higher levels of inventories were
largely caused by a $6.9 increase in raw materials and finished goods inventory
in connection with the expansion of our ceramic crucible business in China and
in the United States, an increase of $1.8 million at our Boron segment and an
increase of $4.7 million in inventory at our ESK subsidiary. ESK experienced
rapidly declining sales in the fourth quarter of 2008 and due to long lead times
in their production cycle could not reduce their inventory levels quick enough
to offset the decline in sales during the quarter. These increases in inventory
levels were partially offset by a decrease of $8.9 million in inventories at our
ACO division because of a reduction in sales in 2008. Decreases in accounts
payable and accrued expenses were caused by lower levels of business activity at
our ACO division. Income taxes payable decreased because of lower levels of
pre-tax net income in 2008 compared to 2007.
Investing
activities consumed $49.5 million of our cash for the year ended December 31,
2008. This included $27.2 million for acquisitions, comprising $23.1 million
(net of $2.2 million cash received) for the acquisition of SemEquip, Inc. and
$4.1 million for the acquisition certain assets and developed technology related
to proprietary technical ceramic bearing patents and intellectual property. We
also spent $44.0 million for the purchase of property, plant and equipment.
Included in this amount is $7.2 million for additional capacity for
the production of ceramic crucibles at our China and Atlanta facilities, an
additional $3.6 to support the production of raw materials at our Minco
subsidiary that are consumed in the production of the ceramic crucibles, $9.9
million for the purchase of land and buildings to expand our general production
capacity at our ESK Ceramics subsidiary’s plant in Kempten, Germany, $6.7
million to increase capacity for the fluid handling product line at ESK and $3.0
million for rolling mill equipment to support future growth at our Canada
segment. These expenditures were partially offset by $21.7 million of proceeds
from sales and maturities of marketable securities.
Financing
activities during the year ended December 31, 2008 consumed net cash of
$43.6 million. During the year, we purchased and retired 1,578,237 shares of our
common stock at an aggregate cost of $44.7 million under a stock repurchase
program authorized by our Board of Directors. The negative effect of exchange
rates on cash and cash equivalents of $2.7 million during the year ended
December 31, 2008 was due to our investment in our German subsidiary, ESK
Ceramics, and in our Chinese subsidiary, Ceradyne (Tianjin) Technical Ceramics.,
Ltd.
During
December 2005, we issued $121.0 million principal amount of 2.875% senior
subordinated convertible notes due December 15, 2035. As referenced above,
we purchased and retired an aggregate of $27.9 million principal amount of
our convertible debt for $23.2 million reducing the outstanding balance of the
Notes to $93.1 million. Interest on the notes is payable on December 15 and
June 15 of each year, commencing on June 15, 2006. The notes are
convertible into 17.1032 shares of our common stock for each $1,000 principal
amount of the notes (which represents a conversion price of approximately $58.47
per share), subject to adjustment. The notes are convertible only under certain
circumstances, including if the price of our common stock reaches, or the
trading price of the notes falls below, specified thresholds, if the notes are
called for redemption, if specified corporate transactions or fundamental change
occur, or during the 10 trading days prior to maturity of the notes. We may
redeem the notes at any time after December 20, 2010, for a price equal to
100% of the principal amount plus accrued and unpaid interest, including
contingent interest (as described below), if any, up to but excluding the
redemption date.
With
respect to each $1,000 principal amount of the notes surrendered for conversion,
we will deliver the conversion value to holders as follows: (1) an amount
in cash equal to the lesser of (a) the aggregate conversion value of the
notes to be converted and (b) $1,000, and (2) if the aggregate
conversion value of the notes to be converted is greater than $1,000, an amount
in shares or cash equal to such aggregate conversion value in excess of
$1,000.
The notes
contain put options, which may require us to repurchase in cash all or a portion
of the notes on December 15, 2012, December 15,
2015, December 15, 2020, December 15, 2025, and
December 15, 2030 at a repurchase price equal to 100% of the principal
amount of the notes to be repurchased plus accrued and unpaid interest,
including contingent interest (as described below), if any, to but excluding the
repurchase date.
We are
obligated to pay contingent interest to the holders of the notes during any
six-month period from June 15 to December 14 and from December 15
to June 14, commencing with the six-month period beginning
December 20, 2010 and ending on June 14, 2011, if the average trading
price of the note for the five trading day period ending on the third trading
day immediately preceding the first day of the relevant contingent interest
period equals $1,200 (120% of the principal amount of a note) or more. The
amount of contingent interest payable per note for any relevant contingent
interest period shall equal 0.25% per annum of the average trading price of
a note for the five trading day period ending on the third trading day
immediately preceding the first day of the relevant contingent interest
period.
In December 2005, the Company established an unsecured $10.0 million line of
credit which expires on December 31, 2010. As of December 31, 2009, there were
no outstanding amounts on the line of credit. However, the available line of
credit at
December 31, 2009 has been reduced by outstanding letters of credit in the
aggregate amount of $5.0 million. The interest rate on the credit line is based
on the LIBOR rate for a period of one month, plus a margin of 0.6 percent, which
equaled 0.9% as of December 31, 2009.
Pursuant
to the bank line of credit, the Company is subject to certain covenants, which
include, among other things, the maintenance of specified minimum amounts of net
income, tangible net worth and quick assets to current liabilities ratio. At
December 31, 2009, the Company was not in compliance with the covenant that
required minimum annual net income of $10.0 million. The Company received a
waiver of this covenant during February 2010. The Company was in compliance with
all other covenants at December 31, 2009.
Our cash,
cash equivalents and short-term investments totaled $239.8 million at
December 31, 2009, compared to $221.4 million at December 31, 2008. At
December 31, 2009, we had working capital of $406.2 million, compared to
$400.8 million at December 31, 2008. Our cash position includes amounts
denominated in foreign currencies, and the repatriation of those cash balances
from our ESK Ceramics subsidiary does not result in additional tax costs. We
believe that our current cash and cash equivalents on hand and cash available
from the sale of short-term investments, cash available from borrowings under
our revolving line of credit and cash we expect to generate from operations will
be sufficient to finance our anticipated capital and operating requirements for
at least the next 12 months. Our anticipated capital requirements for 2010
primarily relate to normal replacements of equipment and the planned expansion
of our manufacturing facilities in China that will cost approximately $34.0
million in total of which we expect to spend approximately $29.4 million will be
spent in 2010. To finance the expansion in China, we plan to use cash that we
expect our China operations to generate during 2010, we will use approximately
$10.0 million of our existing cash balances held in our bank accounts in China,
and the balance will be funded from our existing cash balances in the United
States. We also may utilize cash, and, to the extent necessary,
borrowings from time to time to acquire other businesses, technologies or
product lines that complement our current products, enhance our market coverage,
technical capabilities or production capacity, or offer growth opportunities. We
have no present agreements for any material acquisitions.
Our
material contractual obligations and commitments as of December 31, 2009
are as follows (amounts in thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less than
1
Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
After
5
Years
|
|
Debt,
principal amount
|
|
$
|
93,100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,100
|
|
Capital
lease obligations
|
|
|
55
|
|
|
|
26
|
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
Non-cancelable
leases
|
|
|
6,101
|
|
|
|
3,383
|
|
|
|
2,207
|
|
|
|
511
|
|
|
|
—
|
|
Pension
benefits
|
|
|
11,093
|
|
|
|
747
|
|
|
|
1,749
|
|
|
|
2,042
|
|
|
|
6,555
|
|
Information
technology services
|
|
|
1,652
|
|
|
|
788
|
|
|
|
709
|
|
|
|
155
|
|
|
|
—
|
|
Cash
commitments for interest expense
|
|
|
66,689
|
|
|
|
2,677
|
|
|
|
5,236
|
|
|
|
5,236
|
|
|
|
53,540
|
|
Utility
contract
|
|
|
12,857
|
|
|
|
5,140
|
|
|
|
5,205
|
|
|
|
2,512
|
|
|
|
—
|
|
Total
contractual obligations
|
|
$
|
191,547
|
|
|
$
|
12,761
|
|
|
$
|
15,135
|
|
|
$
|
10,456
|
|
|
$
|
153,195
|
|
As of
December 31, 2009, we have $2.2 million of uncertain tax positions. We are
unable to make a reasonable estimate regarding settlement of these uncertain tax
positions, and as a result, they have been excluded from the table.
Off-Balance
Sheet Arrangements
The only
off-balance sheet arrangement is the conversion feature of our 2.875%
convertible senior subordinated notes discussed above.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations, as
well as disclosures included elsewhere in this report are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing these consolidated financial statements requires our management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosure of contingencies.
Management has not determined how reported amounts would differ based on the
application of different accounting policies. Management has also not determined
the likelihood that materially different amounts could be reported under
different conditions or using different assumptions. We believe that the
critical accounting policies that most impact the consolidated financial
statements are as described below. A summary of our significant accounting
policies is included in Note 2 to our consolidated financial statements which
begin on page F-6 of this report.
The
application of accounting policies requires the use of judgment and estimates.
As it relates to the Company, estimates and forecasts are required to determine
sales returns and reserves, rebate reserves, allowances for doubtful accounts,
reserves for excess and obsolete inventory, investments in unconsolidated
affiliates, workers' compensation liabilities, employee benefit related
liabilities, income taxes, any temporary or other than temporary impairment of
assets, forecasted transactions to be hedged, litigation reserves and
contingencies.
These
matters that are subject to judgments and estimation are inherently uncertain,
and different amounts could be reported using different assumptions and
estimates. Management uses its best estimates and judgments in determining the
appropriate amount to reflect in the financial statements, using historical
experience and all available information. The Company also uses the assistance
of outside experts where appropriate. The Company applies estimation
methodologies consistently from year to year.
The
Company believes the following are the critical accounting policies which could
have the most significant effect on the Company's reported results and require
subjective or complex judgments by management.
Sales Recognition
. Sales
are recorded when all of the following have occurred: an agreement of sale
exists, the product has been delivered according to the terms of the sales order
and collection is reasonably assured. Management is required to make judgments
about whether or not collection is reasonably assured. We may reduce revenue
with reserves for sales returns. Allowances, which are recorded at the time
revenue is recognized, are based upon historical sales returns. We did not
include a sales return provision at December 31, 2009 or 2008 because our
historical experience with sales returns leads us to conclude that no allowance
for sales returns is necessary.
We do not
record a warranty reserve on the sale of our products. For our largest product
line, body armor, all of which is sold to the U.S. government, each lot of body
armor is tested at an independent laboratory and the lot cannot be released for
shipment to the U.S. government until positive test results are received by both
the U.S. government and us. For our non-body armor sales, we have experienced
minimal claims from these types of sales. Additionally, due to the inherent
nature, strength, durability and structural properties of ceramics, as well as a
rigid quality control program that includes, for some of our customers, having
the customer accept quality test results prior to shipment, we do not believe a
warranty reserve is necessary.
Accounts Receivable
. We
review our trade accounts receivables and our estimates of the allowance for
doubtful accounts each period. The allowance for doubtful accounts is determined
by analyzing specific customer accounts and assessing the risk of
uncollectibility based on insolvency, disputes or other collection issues. In
addition, we routinely analyze the different aging categories and establish
allowances based on the length of time receivables are past due (based on
contractual terms). A write-off will occur if the settlement of the account
receivable is less than the carrying amount or we ultimately determine the
balance will not be collected. The amounts we will ultimately realize could
differ materially from the amounts assumed in arriving at the allowance for
doubtful accounts in the financial statements included in this report beginning
on page F-1.
Inventories
. Inventories
are valued at the lower of cost (first-in, first-out) or market. The write-down
of inventory for obsolete items is based on our estimate of the amount
considered obsolete based on specific reviews of inventory items. In estimating
the allowance, we rely on our knowledge of the industry as well as our current
inventory levels. The amounts we will ultimately realize could differ from the
estimated amounts. Inventory costs include the cost of material, labor and
manufacturing overhead.
Accounting for Long-Lived
Assets
. Long-lived assets and intangible assets with definite lives
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment
indicators include, among other conditions, cash flow deficits, historic or
anticipated declines in revenue or operating profit and adverse legal or
regulatory developments. If it is determined that such indicators are present
and the review indicates that the assets will not be fully recoverable, based on
undiscounted estimated cash flow over the remaining amortization periods, their
carrying values are reduced to estimated fair market value. Estimated fair
market value is determined primarily using the anticipated cash flow discounted
at a rate commensurate with the risk involved. For the purposes of identifying
and measuring impairment, long-lived assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flow are largely
independent of the cash flow of other assets and liabilities.
Goodwill and
Intangible Assets
. Goodwill is not being amortized, but instead is
subject to an annual assessment of impairment by applying a fair-value based
test. The Company performs an annual impairment test for goodwill as of the
fiscal year end in the fourth quarter of each year. Goodwill is allocated to six
reporting units, which represent the Company’s operating segments. The Company
has defined its reporting units and completed the impairment testing of goodwill
at the operating segment level. The Company’s reporting units are: Advanced
Ceramic Operations, Semicon Associates, Thermo
Materials,
ESK Ceramics, Ceradyne Canada and Boron. The Company compares the fair value of
the goodwill to the carrying amount on an annual basis to determine if there is
potential impairment. If the fair value of goodwill is less than the carrying
value, an impairment loss is recorded to the extent that the fair value of the
goodwill is less than the carrying value. Fair value was determined based on
discounted cash flows and market multiples for each business unit with
significant goodwill. We compared each reporting unit’s fair value to its
carrying value. The use of discounted cash flows requires that we make various
economic, market and business assumptions in developing our internal forecasts,
the useful life over which cash flows will occur, and determination of our
weighted average cost of capital that reflect our best estimates when performing
the annual impairment test. We believe the methods we use to determine these
underlying assumptions and estimates are reasonable. However, our assumptions
and estimates may differ significantly from actual results, or circumstances
could change in the future which may then cause us to later conclude that an
impairment exists, or with hindsight, it may appear that we could have
understated the extent of impairment based on new information that was unknown
at the prior testing date. We may incur a goodwill impairment charge in the
future, if for example, the market price of our stock materially declines, if
the financial results of our operations deteriorate or other circumstances
require an impairment charge. At December 31, 2009, the Company’s market
capitalization was below its net book value. Based on a control factor that was
considered and the discounted cash flows used in management’s assessment, an
impairment to goodwill was not warranted at December 31, 2009. Intangible assets
with definite lives are amortized over their estimated useful lives based on the
economic consumption method.
Pension
. The Company
provides pension benefits to its employees of its subsidiaries of ESK Ceramics
and Ceradyne Boron Products. For the pension plans of both subsidiaries, we make
several assumptions that are used in calculating the expense and liability of
the plans. These key assumptions include the expected long-term rate of return
on plan assets and the discount rate. In selecting the expected long-term rate
of return on assets, we consider the average future rate of earnings expected on
the funds invested or to be invested to provide for the benefits under the
pension plans. This includes considering the plans’ asset allocations and the
expected returns likely to be earned over the life of this plan. A hypothetical
50 basis point change in the expected long-term rate of return on assets would
change pension expense by $174,000. The discount rate reflects the estimated
rate at which an amount that is invested in a portfolio of high-quality debt
instruments would provide the future cash flows necessary to pay benefits when
they come due. A hypothetical 50 basis point change in the discount rate would
change the pension obligation by approximately $1.9 million. The
impact on pension expense from a hypothetical 50 basis point change in the
discount rate would not be material. In addition the expense and liabilities of
the plan were determined using other assumptions for future experience, such as
mortality rates. The actuarial assumptions used by us may differ materially from
actual results due to changing market and economic conditions or longer or
shorter life spans of the participants. Our actual results could differ
materially from those we estimated, which could require us to record a greater
amount of pension expense.
Recent
Accounting Pronouncements
In December
2007, the FASB issued accounting guidance which establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The guidance also provides for
the recognition and measurement of goodwill acquired in a business combination
and determines what information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the business
combination. The Company adopted the new guidance on January 1, 2009, which has
been applied in the accounting for the acquisition of the assets of Diaphorm
Technologies, LLC discussed in Note 3.
In December
2007, the FASB issued guidance which introduces significant changes in the
accounting and reporting for business acquisitions and noncontrolling interest
("NCI") in a subsidiary. The new guidance also changes the accounting for and
reporting for the deconsolidation of a subsidiary. Companies are required to
adopt the new guidance for fiscal years beginning after January 1, 2009. The
Company adopted the new guidance on January 1, 2009, which did not have an
impact on its financial position, results of operations or cash flows as the
Company owns 100% of its subsidiaries and there has been no deconsolidation of a
subsidiary after January 1, 2009.
In March
2008, the FASB issued guidance which changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under GAAP, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. The Company adopted this new guidance on January 1, 2009, which did not
have an impact on its financial position, results of operations or cash flows as
there were no derivative instruments or hedging activities after January 1,
2009.
In June 2008,
the FASB issued guidance to determine whether unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. The Company adopted this new guidance on January 1,
2009, which did not have an impact on its financial position, results of
operations or cash flows as the unvested share-based awards do not contain
rights to receive nonforfeitable dividends.
In April
2008, the FASB Staff issued guidance which provides for additional
considerations to be used in determining useful lives of intangible assets and
requires additional disclosure regarding renewals. The Company adopted this new
guidance on January 1, 2009, which did not have a significant impact on its
financial position, results of operations or cash flows.
In April
2009, the FASB Staff issued new accounting guidance which the Company adopted on
April 1, 2009, as follows:
i.) Guidance
for making fair value measurements more consistent with existing GAAP. This new
guidance provides additional authoritative principles in determining whether a
market is active or inactive, and whether a transaction is distressed. This
guidance is applicable to all assets and liabilities (i.e. financial and
nonfinancial) and will require enhanced disclosures. The adoption of this new
guidance did not have a significant impact on the Company’s financial position,
results of operations or cash flows.
ii.) Companies
are required to provide greater clarity about the credit and noncredit component
of an other-than-temporary impairment event and to improve presentation and
disclosure of other than temporary impairments in the financial statements. The
impact of the adoption of this new guidance is discussed in Note 4.
iii.) This
guidance requires new disclosures about fair value of financial instruments in
interim as well as in annual financial statements. The Company has adopted this
new guidance and has provided the additional disclosures required as discussed
in Note 4.
In May 2009,
the FASB issued new guidance which establishes general standards for accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued (“subsequent events”). More
specifically, this new guidance sets forth the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition in the financial
statements, identifies the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that should be made about events or transactions
that occur after the balance sheet date. This new guidance provides largely the
same framework for the evaluation of subsequent events which previously existed
only in auditing literature. The Company has performed an evaluation of
subsequent events through February 23, 2010, which is the day the financial
statements were issued.
In August
2009, the FASB issued revised authoritative guidance regarding the measurement
of liabilities at fair value which provides clarification that in circumstances
where a quoted market price in an active market for an identical liability is
not available, a reporting entity must measure fair value of the liability using
one of the following techniques: 1) the quoted price of the identical liability
when traded as an asset; 2) quoted prices for similar liabilities or similar
liabilities when traded as assets; or 3) another valuation technique, such as a
present value technique or the amount that the reporting entity would pay to
transfer the identical liability or would receive to enter into the identical
liability. This statement becomes effective for the first reporting period
(including interim periods) beginning after issuance, which. The Company adopted
this new guidance on October 1, 2009, which did not have an impact on our
consolidated financial position, results of operations or cash
flows.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
Our
exposure to market rate risk for changes in interest rates relates primarily to
our investment portfolio and our debt. We have not used derivative financial
instruments in our investment portfolio. We place our investments with
high-quality issuers and, by policy, limit the amount of credit exposure to any
one issuer. We protect and preserve our invested funds by limiting default,
market and reinvestment risk. Our investments in marketable securities consist
primarily of high-grade corporate and government securities with maturities of
less than two years. Investments purchased with an original maturity of three
months or less are considered cash equivalents. Our long term investments at
December 31, 2009, included $20.0 million of auction rate securities, net of a
pre-tax temporary impairment charge of $2.5 million against accumulated other
comprehensive income and a pre-tax other than temporary impairment charge of
$10.9 million against earnings and a $2.3 million charge for realized losses.
The
Company’s investments in auction rate securities represent interests in
insurance securitizations collateralized by pools of residential and commercial
mortgages, asset backed securities and other structured credits relating to the
credit risk of various bond guarantors that mature at various dates from June
2021 through July 2052. These auction rate securities were intended to provide
liquidity via an auction process which is scheduled every 28 days, that resets
the applicable interest rate, allowing investors to either roll over their
holdings or gain immediate liquidity by selling such interests at par. Interest
rates are capped at a floating rate of one month LIBOR plus additional spread
ranging from 1.25% to 4.00% depending on prevailing rating. During the second
half of the year 2007, through 2008 and through December 31, 2009, the auctions
for these securities failed. As a result of current negative conditions in the
global credit markets, auctions for our investment in these
securities are inactive. Consequently, the investments are not currently
liquid through the normal auction process and may be liquidated if a buyer is
found outside the auction process. Although the auctions have failed and are
currently inactive, the Company continues to receive underlying cash flows in
the form of interest income from the investments in auction rate securities. As
of December 31, 2009, the fair value of the Company’s investments in auction
rate securities was below cost by approximately $13.4 million. The fair value of
the auction rate securities has been below cost for more than two
years.
With
respect to our investments in auction rate securities as of December 31, 2008
and December 31, 2009, we categorized the investments into three main categories
for analytical purposes which comprised (1) “insurance wrapped” securities, (2)
“put right” securities and (3) “credit derivative product company” securities.
The insurance wrapped category comprised auction rate securities where the
payments are guaranteed by an insurance company, such as a “monoline” financial
guaranty insurance company. The put right category comprised an auction rate
security that was created to provide capital to the issuer in the event that the
issuer exercised the put right. The credit derivative product company category
comprised auction rate securities where the issuer is a financial services
company that offers credit risk protection of structured financial assets in the
form of credit derivatives. The auction rate securities issued by these
financial services companies were created as a way to provide collateral for the
issuers to use for entering into credit default swaps.
For the
year ended December 31, 2009, as part of our evaluation as to whether the
decline in fair value of the auction rate securities was other-than-temporary,
where it was probable that the Company would not collect all contractual cash
flows and the remaining balance was not recoverable, we considered factors which
included, but were not limited to, general market conditions, the length of time
and extent to which the market value has been less than cost, the financial
condition and near-term prospects of the issuer of the securities, and our
intent and ability to hold the investment for a period of time to allow for any
anticipated recovery in market value. If the decline in fair value is judged to
be other than temporary, the cost basis of the individual security is written
down to fair value as a new cost basis and the amount of the write-down is
included in earnings. The new cost basis is not changed for subsequent
recoveries in fair value. Subsequent increases in the fair value of
available-for-sale securities are included in other comprehensive income;
subsequent decreases in fair value, if not an other-than-temporary impairment,
are included in other comprehensive income. Also, due to the illiquid market for
the auction rate securities and limited availability of public information on
these securities, we engaged a third party investment banking firm to assist us
in performing the valuation of the securities. Our valuation analysis used a
trinomial discount model where the compilations of future cash flows were priced
by summing the present values of the future principal and interest payments. We
then forecasted probabilities of default, auction failure, and a successful
auction at par or repurchase at par for each period, as well as forecasted
recovery rates in default for each of the securities. Finally, we discounted the
weighted average cash flow for each period back to present value at the
determined discount rate for each of the securities.
Based on the
information included in prospectuses and other data compiled for each of the
auction rate securities for the year ended December 31, 2009, we determined that
the decline in fair values of the put right securities and credit derivative
product company securities categories were other-than-temporary. This
determination considered the terms of guarantees associated with the securities,
the quality of the underlying collateral, external ratings and other relevant
available
market
information compiled with the assistance of the third party investment banking
firm. Quantitative data reviewed and analyzed by us also indicated that the
cumulative probability of default at some point in the future was 73% for the
put right securities and more than 48% for the credit derivative product company
securities at the high end of the value range as of December 31, 2009. We
believed it was probable that we would collect all contractual cash flows and
the carrying value of the securities in the insurance wrapped category as of
December 31, 2009 was determined to be recoverable based on the valuation of the
securities which considered the terms of certain guarantees, quality of
underlying collateral, external ratings and other relevant market
information.
For the
quarter ended June 30, 2009, we adopted new accounting guidance issued by the
FASB Staff on the effective date of April 1, 2009. In accordance with the new
guidance, when an other-than-temporary impairment has occurred, the amount of
the other-than-temporary impairment recognized in earnings depends on whether an
entity intends to sell the security or more likely than not will be required to
sell the security before recovery of its amortized cost basis less any
current-period credit loss. Based on our evaluation of the auction rate
securities as of December 31, 2009, we determined that it was more likely than
not that we would be required to sell the put right and credit derivative
product company securities before recovery of our amortized cost, accordingly,
we recognized other-than-temporary impairment charges for the decline in fair
value during the year ended December 31, 2009. Quantitative data compiled with
the assistance of our third party investment banking firm also indicated the
cumulative probability of default at some point in the future was 66% for the
put right securities and more than 36% for the credit derivative product company
securities at the high end of the value range as of December 31,
2009.
In
addition to the above, during the year ended December 31, 2009, we also
recognized an other-than-temporary impairment charge for the credit risk
associated with the insurance wrapped securities. In determining whether a
credit loss existed, we used our best estimate of the present value of cash
flows expected to be collected from the debt security. We then discounted the
expected cash flows at the effective interest rate implicit in the security at
the date of acquisition. The difference between the present value of the cash
flows expected to be collected and amortized cost represented the impairment
charge for credit risk. We believe that the carrying value of the securities in
the insurance wrapped category, after the adjustment for credit risk, as of
December 31, 2009 was determined to be recoverable based on the valuation of the
securities which considered the terms of certain guarantees, quality of
underlying collateral, external ratings and other relevant market
information.
We
classify all of our investments as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported in a separate component of stockholders’ equity. Average maturity
of our investment portfolio is 648 days; therefore, the movement of interest
rates should not have a material impact on our balance sheet or income
statement.
At any
time, a significant increase/decrease in interest rates will have an impact on
the fair market value and interest earnings of our investment portfolio. We do
not currently hedge this interest rate exposure. We have performed a sensitivity
analysis as of December 31, 2009 and 2008, using a modeling technique that
measures the change in the fair values arising from a hypothetical 50 basis
points and 100 basis points adverse movement in the levels of interest rates
across the entire yield curve, which are representative of historical movements
in the Federal Funds Rate with all other variables held constant. The analysis
covers our investment and is based on the weighted-average maturity of our
investments as of December 31, 2009 and 2008. The sensitivity analysis
indicated that a hypothetical 50 basis points adverse movement in interest rates
would result in a loss in the fair values of our investment instruments of
approximately $0.6 million at December 31, 2009 and approximately $2,500 at
December 31, 2008. Similarly a hypothetical 100 basis points adverse
movement in interest rates would result in a loss in the fair values of our
investments of approximately $1.2 million at December 31, 2009 and
approximately $5,000 at December 31, 2008.
Actual
maturities may differ from contractual maturities because the issuer of the
securities may have the right to repurchase such securities. We classify
short-term investments in current assets, as all such investments are available
for current operations.
We are
not exposed to market risks related to fluctuations in interest rates on our
debt as it is fixed rate debt. Consequently, we do not utilize interest rate
swaps or other types of derivative financial instruments regarding our
debt.
Foreign
Currency Fluctuations
We enter
into foreign exchange forward contracts to reduce earnings and cash flow
volatility associated with foreign exchange rate changes to allow our management
team to focus its attention on its core business operations. Accordingly, we
enter into contracts which change in value as foreign exchange rates change to
economically offset the effect of changes in value of foreign currency assets
and liabilities, commitments and anticipated foreign currency denominated sales
and operating expenses. We enter into foreign exchange forward contracts in
amounts between minimum and maximum
anticipated
foreign exchange exposures, generally for periods not to exceed one year. These
derivative instruments are not designated as accounting hedges.
We
measure the financial statements of our foreign subsidiaries using the local
currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at the rates of exchange prevailing
during the year. Translation adjustments resulting from this process are
included in stockholders’ equity. Gains and losses from foreign currency
transactions are included in other income miscellaneous.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
Consolidated Financial Statements and Supplementary Data commence at page F-1 of
this report and an index thereto is included in Part IV, Item 15 of this
report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule
15d-15(e) under the Securities Exchange Act of 1934) were
effective.
Changes
in Internal Control over Financial Reporting
Our
management evaluated our internal control over financial reporting and there
have been no changes during the fiscal quarter ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our management assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2009. In making this assessment, it used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control—Integrated Framework. Based on our assessment, we
have concluded that, as of December 31, 2009, our internal control over
financial reporting was effective based on those criteria.
Ceradyne’s
independent registered public accounting firm, PricewaterhouseCoopers LLP,
issued a report on the effectiveness of our internal control over financial
reporting as of December 31, 2009, which appears herein.
ITEM 9B.
OTHER INFORMATION
Not
applicable.
PART
III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
in response to this item (except for certain information concerning executive
officers included in Part I of this report) is incorporated by reference from
the registrant’s definitive proxy statement to be filed with the Commission
within 120 days after the close of registrant’s fiscal year.
ITEM 11.
EXECUTIVE COMPENSATION
Information
in response to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission within 120 days after
the close of registrant’s fiscal year.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information
in response to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission within 120 days after
the close of registrant’s fiscal year.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
in response to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission within 120 days after
the close of registrant’s fiscal year.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information
in response to this item is incorporated by reference from the registrant’s
definitive proxy statement to be filed with the Commission within 120 days after
the close of registrant’s fiscal year.
PART
IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List
of documents filed as part of this report:
Financial
Statements
:
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-1
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
|
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2009, 2008 and
2007
|
|
|
F-3
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31,
2009, 2008 and 2007
|
|
|
F-4
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008
and 2007
|
|
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-6
|
|
(b) List
of Exhibits
Exhibit
Number
|
Description
|
2.1
|
Sale
and Purchase Agreement dated June 26, 2007, among Ceradyne, Inc., Ceradyne
EPB, Inc., EaglePicher Boron, LLC, EaglePicher Technology Holdings, LLC
and EaglePicher Corporation. Incorporated herein by reference to Exhibit
2.1 to the Registrant’s Form 10-Q Report for the quarter ended June 30,
2007.
|
|
|
3.1
|
Restated
Certificate of Incorporation of Ceradyne, Inc., as filed with the
Secretary of State of Delaware on May 25, 1987. Incorporated herein by
reference to Exhibit 3.1 to the Registrant’s Form 10-Q Report for the
quarter ended June 30, 2006.
|
|
|
3.2
|
Certificate
of Amendment of Restated Certificate of Incorporation of Ceradyne, Inc.,
as filed with the Secretary of State of Delaware on June 8, 2006.
Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form
10-Q Report for the quarter ended June 30, 2006.
|
|
|
3.3
|
Bylaws
of Registrant. Incorporated herein by reference to Exhibit 3.3 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007.
|
|
|
3.4
|
Amendment
to Bylaws of Registrant, adopted April 29, 1996. Incorporated herein by
reference to Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2007.
|
|
|
3.5
|
Amendment
to Bylaws of Registrant, adopted December 18, 2007. Incorporated herein by
reference to Exhibit 3.5 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2007.
|
|
|
4.1
|
Indenture
dated December 19, 2005, between Ceradyne, Inc. and Union Bank of
California, N.A., as Trustee. Incorporated herein by reference to Exhibit
4.1 of Registrant’s Form 8-K Current Report dated December 13, 2005, filed
with the Commission on December 19, 2005.
|
|
|
4.2
|
First
Supplemental Indenture dated December 19, 2005, between Ceradyne, Inc. and
Union Bank of California, N.A., as Trustee. Incorporated herein by
reference to Exhibit 4.2 of Registrant’s Form 8-K Current Report dated
December 13, 2005, filed with the Commission on December 19,
2005.
|
|
|
4.3
|
Form
of 2.875% Senior Subordinated Convertible Note due 2035. Incorporated
herein by reference to Exhibit 4.3 of Registrant’s Form 8-K Current Report
dated December 13, 2005, filed with the Commission on December 19,
2005.
|
|
|
10.1
|
Intentionally
omitted.
|
|
|
10.2
|
Lease
covering premises located at 3169-A Red Hill Avenue, Costa Mesa,
California dated October 28, 1985. Incorporated herein by reference to
Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1985.
|
|
|
10.3
|
Lease
dated March 31, 1986 covering premises located at 3163 Red Hill Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.45
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
|
|
|
10.4
|
Lease
dated August 5, 1986 covering premises located at 225 Paularino Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.46
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
|
|
|
10.5
|
Short-form
Memorandum of Lease Assignment dated December 15, 1986, and Lease
dated June 23, 1980, covering premises located at 3449 Church Street,
Scottdale, Georgia. Incorporated herein by reference to Exhibit 10.47 to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1986.
|
|
|
10.6
|
Intentionally
omitted.
|
|
|
10.7*
|
Ceradyne,
Inc. 1994 Stock Incentive Plan. Incorporated herein by reference to
Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
|
|
|
10.8*
|
Amendment
No. 1 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form
S-8 (File No. 33-61675).
|
|
|
10.9
|
Intentionally
omitted.
|
|
|
10.10
|
Intentionally
omitted.
|
|
|
10.11
|
Amendment
No. 2, dated June 5, 1995, to Lease covering premises located at 3169-A
Red Hill Avenue, Costa Mesa, California. Incorporated herein by reference
to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1
(File No. 33-62345).
|
|
|
10.12
|
Amendment
No. 2, dated June 5, 1995, to Lease dated March 31, 1986 covering premises
located at 3163 Red Hill Avenue, Costa Mesa, California. Incorporated
herein by reference to Exhibit 10.34 to the Registrant’s Registration
Statement on Form S-1 (File No. 33-62345).
|
|
|
10.13
|
Amendment
No. 2, dated June 5, 1995, to Lease dated August 5, 1986 covering premises
located at 225 Paularino Avenue, Costa Mesa, California. Incorporated
herein by reference to Exhibit 10.35 to the Registrant’s Registration
Statement on Form S-1 (File No. 33-62345).
|
|
|
10.14*
|
Amendment
No. 2 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
|
|
|
10.15*
|
Amendment
No. 3 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by reference to Exhibit 4.4 to Registrant’s Registration Statement on Form
S-8 (File No. 333-31679).
|
|
|
10.16*
|
Amendment
No. 4 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
|
|
|
10.17*
|
Amendment
No. 5 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2000.
|
|
|
10.18*
|
Amendment
No. 6 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporate herein
by reference to Exhibit 4.7 to the Registrant’s Registration Statement on
Form S-8 (File No. 333-64094).
|
|
|
10.19
|
Intentionally
omitted.
|
|
|
10.20
|
Intentionally
omitted.
|
|
|
10.21*
|
Amendment
No. 7 to the Ceradyne, Inc. 1994 Stock Incentive Plan. Incorporated herein
by referenced to Exhibit 10.34 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2002.
|
|
|
10.22*
|
Ceradyne,
Inc. 2003 Stock Incentive Plan, as Amended and Restated as of April 11,
2005. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Form 8-K Current Report dated May 23, 2005, filed with the Commission on
May 26, 2005.
|
|
|
10.23*
|
Form
of Stock Option Agreement for use under the 2003 Stock Incentive Plan.
Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form
8-K Current Report dated May 23, 2005, filed with the Commission on May
26, 2005.
|
|
|
10.24*
|
Form
of Restricted Stock Unit Award Agreement for use under the 2003 Stock
Incentive Plan. Incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Form 8-K Current Report dated May 23, 2005, filed with
the Commission on May 26, 2005.
|
|
|
10.25
|
Lease
agreement between California State Teachers’ Retirement System, as
Landlord and CERADYNE, INC., as tenant. Incorporated herein by reference
to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2003.
|
|
|
10.26
|
Intentionally
omitted.
|
|
|
10.27
|
Intentionally
omitted .
|
|
|
10.28
|
Intentionally
omitted .
|
|
|
10.29
|
Intentionally
omitted .
|
|
|
10.30
|
Intentionally
omitted.
|
|
|
10.31
|
Intentionally
omitted.
|
|
|
10.32
|
Lease
dated March 11, 1997 covering premises located at 3159-A Red Hill Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.32
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2005.
|
|
|
10.33
|
Extension
No. 2, dated February 2, 2005, to Lease dated March 11, 1997 covering
premises located at 3159-A Red Hill Avenue , Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.33 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.34
|
Lease
dated January 24, 2001 covering premises located at 3161 Red Hill Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.34
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2005.
|
|
|
10.35
|
Extension
No. 1, dated February 2, 2005, to Lease dated January 24, 2001 covering
premises located at 3161 Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.35 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.36
|
Extension
No. 4, dated February 2, 2005, to Lease dated March 31, 1986 covering
premises located at 3163 Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.36 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.37
|
Extension
No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering
premises located at 3169-A Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.37 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.38
|
Lease
dated October 28, 1985 covering premises located at 3169-B Red Hill
Avenue, Costa Mesa, California. Incorporated herein by reference to
Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2005.
|
|
|
10.39
|
Extension
No. 4, dated February 2, 2005, to Lease dated October 28, 1985 covering
premises located at 3169-B Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.39 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.40
|
Extension
No. 4, dated February 4, 2005, to Lease dated August 5, 1986 covering
premises located at 225 Paularino Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.40 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.41
|
Lease
dated February 4, 2005, covering premises located at 201 Paularino Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.41
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2005.
|
|
|
10.42
|
Lease
dated February 4, 2005, covering premises located at 3159-B Red Hill
Avenue, Costa Mesa, California. Incorporated herein by reference to
Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2005.
|
|
|
10.43
|
Extension
No. 1, dated February 7, 2005, to Lease dated March 23, 2004 covering
premises located at 235 Paularino Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.43 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.44
|
Lease
dated August 6, 2001covering premises located at 3165-A Red Hill Avenue,
Costa Mesa, California. Incorporated herein by reference to Exhibit 10.44
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2005.
|
|
|
10.45
|
Extension
No. 1, dated March 9, 2005, to Lease dated August 6, 2001 covering
premises located at 3165-A Red Hill Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.45 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
10.46
|
Lease
dated January 5, 2005 covering premises located at 205 Paularino
Avenue, Costa Mesa, California. Incorporated herein by reference to
Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2005.
|
|
|
10.47
|
Extension
No. 1, dated July 14, 2005, to Lease dated January 5, 2005, covering
premises located at 205 Paularino Avenue, Costa Mesa, California.
Incorporated herein by reference to Exhibit 10.47 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2005.
|
|
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
|
14.1
|
Code
of Business Conduct and Ethics as amended and restated on March 18, 2008.
Incorporated herein by reference to Exhibit 14.1 to the Registrant’s Form
8-K Current Report dated March 18, 2008, filed with the Commission on
March 24, 2008.
|
|
|
21.1
|
Subsidiaries
of the Registrant.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm, PricewaterhouseCoopers
LLP.
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
Each
of these exhibits constitutes a management contract, compensatory plan, or
arrangement.
|
CERADYNE,
INC.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
Board of Directors and Stockholders of Ceradyne,
Inc.
|
In our
opinion, the consolidated financial statements listed in the accompanying index
appearing under Part IV, Item 15(a), present fairly, in all material respects,
the financial position of Ceradyne, Inc. and its subsidiaries at December 31,
2009 and 2008, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in
Internal Control - Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal
Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for
other-than-temporary
impairments in its auction rate securities and the manner in which it accounts
for business combinations in 2009. Also, as discussed in Note
4 to the consolidated financial statements, the Company changed the manner
in which it accounts for
convertible instruments
that may be settled in cash upon conversion in 2009.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
|
/s/
PricewaterhouseCoopers LLP
|
|
Orange
County, California
|
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except for share data)
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
122,154
|
|
|
$
|
215,282
|
|
Short
term investments
|
|
|
117,666
|
|
|
|
6,140
|
|
Restricted
cash
|
|
|
3,130
|
|
|
|
2,702
|
|
Accounts
receivable, net of allowances for doubtful accounts of $851
and $686
in
2009
and 2008, respectively
|
|
|
53,269
|
|
|
|
64,631
|
|
Other
receivables
|
|
|
11,424
|
|
|
|
5,316
|
|
Inventories,
net
|
|
|
100,976
|
|
|
|
101,017
|
|
Production
tooling, net
|
|
|
12,006
|
|
|
|
14,563
|
|
Prepaid
expenses and other
|
|
|
19,932
|
|
|
|
24,170
|
|
Deferred
tax asset
|
|
|
13,796
|
|
|
|
11,967
|
|
Total
current assets
|
|
|
454,353
|
|
|
|
445,788
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
239,322
|
|
|
|
251,928
|
|
Long
term investments
|
|
|
20,019
|
|
|
|
24,434
|
|
Intangible
assets, net
|
|
|
89,409
|
|
|
|
84,384
|
|
Goodwill
|
|
|
43,880
|
|
|
|
45,324
|
|
Other
assets
|
|
|
2,721
|
|
|
|
2,669
|
|
Total
assets
|
|
$
|
849,704
|
|
|
$
|
854,527
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
24,683
|
|
|
$
|
22,954
|
|
Accrued
expenses
|
|
|
23,463
|
|
|
|
21,999
|
|
Total
current liabilities
|
|
|
48,146
|
|
|
|
44,953
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
82,163
|
|
|
|
102,631
|
|
Employee
benefits
|
|
|
21,769
|
|
|
|
19,088
|
|
Other
long term liabilities
|
|
|
39,561
|
|
|
|
41,816
|
|
Deferred
tax liability
|
|
|
8,348
|
|
|
|
7,045
|
|
Total
liabilities
|
|
|
199,987
|
|
|
|
215,533
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value:
100,000,000 authorized; 25,401,005 and
25,830,374
shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
|
|
254
|
|
|
|
259
|
|
Additional
paid in capital
|
|
|
157,679
|
|
|
|
163,291
|
|
Retained
earnings
|
|
|
470,256
|
|
|
|
461,741
|
|
Accumulated
other comprehensive income
|
|
|
21,528
|
|
|
|
13,703
|
|
Total
stockholders’ equity
|
|
|
649,717
|
|
|
|
638,994
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
849,704
|
|
|
$
|
854,527
|
|
The
accompanying notes are an integral part of these consolidated
statements
CERADYNE,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except for per share data)
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
400,575
|
|
|
$
|
680,197
|
|
|
$
|
756,835
|
|
Cost
of product sales
|
|
|
298,956
|
|
|
|
414,885
|
|
|
|
450,787
|
|
Gross
profit
|
|
|
101,619
|
|
|
|
265,312
|
|
|
|
306,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
27,151
|
|
|
|
31,231
|
|
|
|
26,917
|
|
General
and administrative
|
|
|
38,492
|
|
|
|
43,889
|
|
|
|
40,801
|
|
Acquisition
related charge (credit)
|
|
|
(768
|
)
|
|
|
9,824
|
|
|
|
-
|
|
Research
and development
|
|
|
12,258
|
|
|
|
14,782
|
|
|
|
17,552
|
|
Restructuring
– plant closure and severance
|
|
|
12,924
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill
impairment
|
|
|
3,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
93,889
|
|
|
|
99,726
|
|
|
|
85,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
7,730
|
|
|
|
165,586
|
|
|
|
220,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,091
|
|
|
|
7,553
|
|
|
|
12,394
|
|
Interest
expense
|
|
|
(7,119
|
)
|
|
|
(7,876
|
)
|
|
|
(7,618
|
)
|
Gain
on early extinguishment of debt
|
|
|
1,881
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on auction rate securities
|
|
|
(5,187
|
)
|
|
|
(5,870
|
)
|
|
|
(2,114
|
)
|
Miscellaneous,
net
|
|
|
(979
|
)
|
|
|
1,511
|
|
|
|
(311
|
)
|
|
|
|
(7,313
|
)
|
|
|
(4,682
|
)
|
|
|
2,351
|
|
Income
before provision for income taxes
|
|
|
417
|
|
|
|
160,904
|
|
|
|
223,129
|
|
(Benefit)
provision for income taxes
|
|
|
(8,098
|
)
|
|
|
56,424
|
|
|
|
80,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,515
|
|
|
$
|
104,480
|
|
|
$
|
142,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.33
|
|
|
$
|
3.95
|
|
|
$
|
5.22
|
|
Diluted
|
|
$
|
0.33
|
|
|
$
|
3.91
|
|
|
$
|
5.13
|
|
Shares
used in computing per common share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,684
|
|
|
|
26,446
|
|
|
|
27,252
|
|
Diluted
|
|
|
25,802
|
|
|
|
26,689
|
|
|
|
27,732
|
|
The
accompanying notes are an integral part of these consolidated
statements
CERADYNE,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(
In thousands, except for
share data
)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Amount
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
Stockholders’
Equity
|
|
Balance,
December 31, 2006
|
|
|
27,119,012
|
|
|
$
|
195,752
|
|
|
$
|
215,078
|
|
|
$
|
11,051
|
|
|
$
|
421,881
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
142,183
|
|
|
|
—
|
|
|
|
142,183
|
|
Net
unrealized loss on available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(434
|
)
|
|
|
(434
|
)
|
Net
change in pension liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,123
|
|
|
|
1,123
|
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,614
|
|
|
|
19,614
|
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
162,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
19,204
|
|
|
|
401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
401
|
|
Exercise
of stock options
|
|
|
180,314
|
|
|
|
1,297
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,297
|
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
3,301
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,301
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
2,451
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,451
|
|
Balance,
December 31, 2007
|
|
|
27,318,530
|
|
|
$
|
203,202
|
|
|
$
|
357,261
|
|
|
$
|
31,354
|
|
|
$
|
591,817
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
104,480
|
|
|
|
—
|
|
|
|
104,480
|
|
Net
unrealized loss on available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,271
|
)
|
|
|
(5,271
|
)
|
Net
change in pension liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,296
|
)
|
|
|
(3,296
|
)
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,084
|
)
|
|
|
(9,084
|
)
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
86,829
|
|
Issuance
of common stock
|
|
|
55,281
|
|
|
|
809
|
|
|
|
—
|
|
|
|
—
|
|
|
|
809
|
|
Repurchases
of common stock
|
|
|
(1,578,237
|
)
|
|
|
(44,705
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,705
|
)
|
Exercise
of stock options
|
|
|
34,800
|
|
|
|
366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366
|
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
769
|
|
|
|
—
|
|
|
|
—
|
|
|
|
769
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
3,109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,109
|
|
Balance,
December 31,
2008
|
|
|
25,830,374
|
|
|
$
|
163,550
|
|
|
$
|
461,741
|
|
|
$
|
13,703
|
|
|
$
|
638,994
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
—
|
|
|
|
8,515
|
|
|
|
—
|
|
|
|
8,515
|
|
Net
unrealized gain on available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,612
|
|
|
|
3,612
|
|
Net
change in pension liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(936
|
)
|
|
|
(936
|
)
|
Cumulative
translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,149
|
|
|
|
5,149
|
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,340
|
|
Impact
of repurchase of convertible debt
|
|
|
—
|
|
|
|
(829
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(829
|
)
|
Issuance
of common stock
|
|
|
129,131
|
|
|
|
944
|
|
|
|
—
|
|
|
|
—
|
|
|
|
944
|
|
Repurchases
of common stock
|
|
|
(567,000
|
)
|
|
|
(9,753
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,753
|
)
|
Exercise
of stock options
|
|
|
8,500
|
|
|
|
33
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
3,839
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,839
|
|
Balance,
December 31,
2009
|
|
|
25,401,005
|
|
|
$
|
157,933
|
|
|
$
|
470,256
|
|
|
$
|
21,528
|
|
|
$
|
649,717
|
|
The
accompanying notes are an integral part of these consolidated
statements
CERADYNE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years ended
December 31
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,515
|
|
|
$
|
104,480
|
|
|
$
|
142,183
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
35,146
|
|
|
|
36,668
|
|
|
|
26,751
|
|
Non
cash interest expense on convertible debt
|
|
|
3,643
|
|
|
|
3,883
|
|
|
|
3,594
|
|
Gain
on early extinguishment of debt
|
|
|
(1,881
|
)
|
|
|
-
|
|
|
|
-
|
|
Payments
of accreted interest on repurchased convertible debt
|
|
|
(2,957
|
)
|
|
|
-
|
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(1,572
|
)
|
|
|
(3,136
|
)
|
|
|
(3,620
|
)
|
Stock
compensation
|
|
|
3,839
|
|
|
|
3,109
|
|
|
|
2,451
|
|
Losses
on auction rate securities
|
|
|
5,187
|
|
|
|
5,870
|
|
|
|
-
|
|
Goodwill
impairment
|
|
|
3,832
|
|
|
|
-
|
|
|
|
-
|
|
Loss
on equipment disposal
|
|
|
514
|
|
|
|
257
|
|
|
|
908
|
|
Changes
in operating assets and liabilities, net of assets
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
12,170
|
|
|
|
20,830
|
|
|
|
(1,584
|
)
|
Other
receivables
|
|
|
(5,973
|
)
|
|
|
333
|
|
|
|
(2,149
|
)
|
Inventories,
net
|
|
|
2,513
|
|
|
|
(6,623
|
)
|
|
|
(6,270
|
)
|
Production
tooling, net
|
|
|
2,587
|
|
|
|
2,018
|
|
|
|
4,473
|
|
Prepaid
expenses and other
|
|
|
3,731
|
|
|
|
(10,825
|
)
|
|
|
337
|
|
Other
assets
|
|
|
-
|
|
|
|
(427
|
)
|
|
|
(1,154
|
)
|
Accounts
payable and accrued expenses
|
|
|
3,946
|
|
|
|
(16,285
|
)
|
|
|
(4,624
|
)
|
Income
tax payable
|
|
|
(213
|
)
|
|
|
(232
|
)
|
|
|
(12,754
|
)
|
Other
liabilities
|
|
|
-
|
|
|
|
114
|
|
|
|
1,125
|
|
Other
long term liability
|
|
|
(7,357
|
)
|
|
|
9,667
|
|
|
|
4,985
|
|
Employee
benefits
|
|
|
2,103
|
|
|
|
6,269
|
|
|
|
(1,066
|
)
|
Net
cash provided by operating activities
|
|
|
67,773
|
|
|
|
155,970
|
|
|
|
153,586
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(14,534
|
)
|
|
|
(44,047
|
)
|
|
|
(42,245
|
)
|
Changes
in restricted cash
|
|
|
(428
|
)
|
|
|
(42
|
)
|
|
|
(2,660
|
)
|
Purchases
of marketable securities
|
|
|
(179,194
|
)
|
|
|
-
|
|
|
|
(700,443
|
)
|
Proceeds
from sales and maturities of marketable securities
|
|
|
73,170
|
|
|
|
21,738
|
|
|
|
823,499
|
|
Acquisition
of businesses, net of cash acquired
|
|
|
(9,654
|
)
|
|
|
(27,208
|
)
|
|
|
(99,098
|
)
|
Proceeds
from sale of equipment
|
|
|
72
|
|
|
|
84
|
|
|
|
9
|
|
Net
cash (used in) investing activities
|
|
|
(130,568
|
)
|
|
|
(49,475
|
)
|
|
|
(20,938
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock for stock plans
|
|
|
-
|
|
|
|
-
|
|
|
|
401
|
|
Proceeds
from issuance of stock due to exercise of stock options
|
|
|
33
|
|
|
|
366
|
|
|
|
1,297
|
|
Tax
benefit due to exercise of stock options
|
|
|
149
|
|
|
|
769
|
|
|
|
3,531
|
|
Shares
repurchased
|
|
|
(9,753
|
)
|
|
|
(44,705
|
)
|
|
|
-
|
|
Reduction
on long term debt
|
|
|
(20,239
|
)
|
|
|
-
|
|
|
|
-
|
|
Net
cash (used in) provided by financing activities
|
|
|
(29,810
|
)
|
|
|
(43,570
|
)
|
|
|
5,229
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
(523
|
)
|
|
|
(2,746
|
)
|
|
|
3,679
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(93,128
|
)
|
|
|
60,179
|
|
|
|
141,556
|
|
Cash
and cash equivalents, beginning of period
|
|
|
215,282
|
|
|
|
155,103
|
|
|
|
13,547
|
|
Cash
and cash equivalents, end of period
|
|
$
|
122,154
|
|
|
$
|
215,282
|
|
|
$
|
155,103
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
2,952
|
|
|
$
|
3,484
|
|
|
$
|
3,520
|
|
Income
taxes paid
|
|
$
|
733
|
|
|
$
|
63,545
|
|
|
$
|
90,775
|
|
Supplemental
schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fulfillment
of 401(k) obligations through the issuance of stock
|
|
$
|
1,507
|
|
|
$
|
1,291
|
|
|
$
|
1,085
|
|
The
accompanying notes are an integral part of these consolidated
statements
1.
Description of Business
Ceradyne,
Inc. (“Ceradyne” or “the Company”) develops, manufactures and markets advanced
technical ceramic products and components for defense, industrial,
automotive/diesel and commercial applications. The Company’s expertise in
ceramic material science as well as a vertically integrated approach of
designing much of its key equipment and controlling the manufacturing process
from raw material powders to finished product allows the Company to design and
manufacture precision, high quality advanced technical ceramic products to meet
demanding customer specifications. The Company markets its products to a broad
range of industries in 63 countries. The Company’s customers include the U.S.
government, prime government contractors and large industrial and commercial
manufacturers.
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.
2.
Summary of Significant Accounting Policies
a.
Principles of Consolidation and Nature of Operations
The
consolidated financial statements include the financial statements of Ceradyne,
Inc. (a Delaware Corporation), and its subsidiaries. Ceradyne, Inc. and its
subsidiaries are collectively referred to herein as the “Company”. All
significant intercompany accounts and transactions have been
eliminated.
b.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an initial maturity of
three months or less when purchased to be cash equivalents.
c.
Investments
The
Company’s short term investments consist of marketable securities, primarily
high-grade corporate and government securities. The Company’s long term
investments consist of auction rate securities (“ARS”). The Company classifies
its investments as available-for-sale based on the Company’s
intent.
At
December 31, 2009, the Company had no derivative financial
instruments.
d.
Foreign Exchange Risk Management
The
Company measures the financial statements of its foreign subsidiaries using the
local currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at the rates of exchange prevailing
during the year. Translation adjustments resulting from this process are
included in stockholders’ equity. Net results from foreign currency transactions
for the years ended December 31, 2009 and 2008 were a $0.5 million loss and a
$1.4 million gain, respectively, and are included in other income,
miscellaneous.
e.
Accounts Receivable, Net
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is determined by analyzing
specific customer accounts and assessing the risk of uncollectibility based on
insolvency, disputes or other collection issues. In addition, the Company
routinely analyzes the different aging categories and establishes allowances
based on the length of time receivables are past due (based on contractual
terms). A write-off will occur if the settlement of the account receivable is
less than the carrying amount or the Company ultimately determines the balance
will not be collected. We do not have any off-balance-sheet credit exposure
related to our customers.
The
following are changes in the allowance for doubtful accounts for the years ended
December 31, 2009, 2008 and 2007 (in thousands):
|
|
Balance at
Beginning
of
Year
|
|
|
Additions
|
|
|
Write-offs
and
Recoveries
|
|
|
Balance at
End
of
Year
|
|
December
31, 2009
|
|
$
|
686
|
|
|
$
|
740
|
|
|
$
|
575
|
|
|
$
|
851
|
|
December
31, 2008
|
|
$
|
792
|
|
|
$
|
955
|
|
|
$
|
1,061
|
|
|
$
|
686
|
|
December
31, 2007
|
|
$
|
1,158
|
|
|
$
|
111
|
|
|
$
|
477
|
|
|
$
|
792
|
|
f.
Inventories
Inventories
are stated at the lower of cost (determined on a standard cost basis which
approximates first-in, first-out (FIFO)) or market. The write-down of inventory
for obsolete items is based on management’s estimate of the amount considered
obsolete based on specific reviews of inventory items. In estimating the
write-down, management relies on its knowledge of the industry as well as its
current inventory levels. The amounts the Company will ultimately realize could
differ from amounts estimated by management. Inventory costs include the cost of
material, labor and manufacturing overhead. The following is a summary of
inventories, net of reserves, by component (in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw
materials
|
|
$
|
12,219
|
|
|
$
|
18,377
|
|
Work-in-process
|
|
|
46,334
|
|
|
|
45,180
|
|
Finished
goods
|
|
|
42,423
|
|
|
|
37,460
|
|
|
|
$
|
100,976
|
|
|
$
|
101,017
|
|
g.
Production Tooling
The
Company’s production tooling primarily consists of graphite tooling used in the
manufacturing and furnace processes. This tooling is being amortized over three
to nine months and is included in the cost of the products produced and expensed
through cost of product sales in the income statement.
h.
Property, Plant and Equipment, Net
Property,
plant and equipment is recorded at cost and consists of the following (in
thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Land
and land improvements
|
|
$
|
19,320
|
|
|
$
|
17,073
|
|
Buildings
and improvements
|
|
|
100,861
|
|
|
|
97,234
|
|
Machinery
and equipment
|
|
|
214,552
|
|
|
|
202,963
|
|
Leasehold
improvements
|
|
|
9,473
|
|
|
|
8,241
|
|
Office
equipment
|
|
|
29,807
|
|
|
|
26,175
|
|
Construction
in progress
|
|
|
6,083
|
|
|
|
13,469
|
|
|
|
|
380,096
|
|
|
|
365,155
|
|
Accumulated
depreciation and amortization
|
|
|
(140,774
|
)
|
|
|
(113,227
|
)
|
|
|
$
|
239,322
|
|
|
$
|
251,928
|
|
Depreciation
and amortization of property, plant and equipment are provided using the
straight-line method over the following estimated useful lives:
Buildings
and improvements
|
30
years
|
Machinery
and equipment
|
3
to 12 years
|
Office
equipment
|
3
to 5 years
|
Leasehold
improvements
|
Shorter
of 10 years or the term of lease
|
Maintenance,
repairs and minor renewals are charged to expense as incurred. Repairs and
maintenance expense approximated $10.9 million, $9.7 million, and $13.2 million
in 2009, 2008, and 2007, respectively. Additions and improvements are
capitalized. When assets are disposed of, the applicable costs and accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is included in the results of operations. Depreciation expense was
approximately $34.6 million, $31.5 million, and $23.7 million in 2009, 2008, and
2007, respectively.
i.
Goodwill and Intangible Assets, Net
Goodwill
is not amortized, but instead goodwill and indefinite lived assets are required
to be tested for impairment annually and under certain circumstances. The
Company performs such testing of goodwill in the fourth quarter of each year at
year end, or as events occur or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying amount. The
Company has defined its reporting units and completed the impairment testing of
goodwill at the operating segment level. The Company’s operating segments are
reporting units that engage in business activities, for which discrete financial
information is available. The Company compares the fair value of the reporting
units to the carrying value of the reporting units for goodwill impairment
testing. Fair value is determined using a discounted cash flow method and/or
prevailing earnings multiples for each reporting unit. The use of discounted
cash flows requires the use of various economic, market and business assumptions
in developing the Company’s internal forecasts, the useful life over which cash
flows will occur, and determination of the Company’s weighted average cost of
capital that reflect the Company’s best estimates when performing the annual
impairment test. However, the Company’s assumptions and estimates may differ
significantly from actual results. The Company may recognize a goodwill
impairment charge in the future, if for example, the market price of Ceradyne’s
stock materially declines, if the financial results of its operations
deteriorate or other circumstances require an impairment charge. At December 31,
2009, the Company’s market capitalization was below its net book value. Based on
a control factor that was considered and the discounted cash flows used in
management’s assessment, an impairment to goodwill was not warranted at December
31, 2009. Additionally, an increase of 50 basis points in the weighted average
cost of capital did not have a significant negative impact on the goodwill
impairment assessment. Intangible assets with definite lives are amortized over
their estimated useful lives based on the economic consumption method.
Goodwill
Impairment
During the
second quarter of 2009, the Company determined that the demand for its
Boral
®
product line, which was a large part of the revenue of the Ceradyne Canada
operating and reporting unit, continued to decline due to competitive market
forces causing a decline in demand for this product line and that this condition
required a goodwill impairment test before the annual test for this reporting
unit. To complete the test for impairment, the Company utilized several
valuation techniques in making the determination, including a discounted cash
flow methodology, which requires the forecasting of cash flows and requires the
selection of discount rates. Management used available information to make these
fair value estimates, including discount rates, commensurate with the risks
relevant to the Company's business. Based on the goodwill impairment test
performed on the Ceradyne Canada reporting unit, the Company recorded a $3.8
million impairment charge, which was recognized during the second quarter of
2009.
During the
second quarter of 2009, the Company also conducted a test on the forecasted
undiscounted cash flows to determine whether there was an impairment of its long
lived assets in the Ceradyne Canada reporting unit. Based on the analysis of the
forecasted undiscounted cash flows for this reporting unit, the Company
determined that there was no impairment of the long lived assets for the
Ceradyne Canada reporting unit.
The
valuation methodologies and the underlying financial information that are used
to determine fair value require significant judgments to be made by
management. These judgments include, but are not limited to, long-term
projections of future financial performance, terminal growth rate and the
selection of an appropriate discount rate used to calculate the present value of
the estimated future cash flows. The long-term projections used in the valuation
were developed as a part of the Company’s annual budgeting and forecasting
process. The discount rate used in the valuation was selected based upon an
analysis of comparable companies and included adjustments made to account for
the Company’s specific attributes such as size and industry. As of December 31,
2009, none of the Company’s reporting units were at risk of failing step one of
the impairment test.
The roll
forward of the goodwill balance by segment for the years ended December 31,
2009 and 2008 is as follows (in thousands):
|
|
ACO
|
|
Semicon
|
|
Thermo
|
|
ESK
|
|
Canada
|
|
Boron
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
2,608
|
|
$
|
603
|
|
$
|
11,378
|
|
$
|
10,176
|
|
$
|
3,832
|
|
$
|
18,251
|
|
$
|
46,848
|
|
Accumulated
impairment losses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Translation
and other
|
|
|
—
|
|
|
—
|
|
|
(1,047
|
)
|
|
(477
|
)
|
|
—
|
|
|
—
|
|
|
(1,524
|
)
|
Balance
at December 31, 2008
|
|
|
2,608
|
|
|
603
|
|
|
10,331
|
|
|
9,699
|
|
|
3,832
|
|
|
18,251
|
|
|
45,324
|
|
Accumulated
impairment losses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition
of Diaphorm Technologies
|
|
|
2,100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,100
|
|
Translation
and other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
288
|
|
|
—
|
|
|
—
|
|
|
288
|
|
Goodwill
impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,832
|
)
|
|
—
|
|
|
(3,832
|
)
|
Balance
at December 31, 2009
|
|
$
|
4,708
|
|
$
|
603
|
|
$
|
10,331
|
|
$
|
9,987
|
|
$
|
—
|
|
$
|
18,251
|
|
$
|
43,880
|
|
The
components of intangibles assets were as follows (in thousands):
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Amount
|
|
Amortizing
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
1,864
|
|
|
$
|
1,864
|
|
|
$
|
—
|
|
|
$
|
1,795
|
|
|
$
|
1,795
|
|
|
$
|
—
|
|
Developed
technology
|
|
|
50,752
|
|
|
|
4,378
|
|
|
|
46,374
|
|
|
|
42,489
|
|
|
|
3,106
|
|
|
|
39,383
|
|
Trade
name
|
|
|
1,110
|
|
|
|
445
|
|
|
|
665
|
|
|
|
1,110
|
|
|
|
302
|
|
|
|
808
|
|
Customer
Relationships
|
|
|
47,604
|
|
|
|
7,671
|
|
|
|
39,933
|
|
|
|
46,604
|
|
|
|
4,465
|
|
|
|
42,139
|
|
Non-compete
agreement
|
|
|
500
|
|
|
|
500
|
|
|
|
—
|
|
|
|
500
|
|
|
|
500
|
|
|
|
—
|
|
Non-amortizing
tradename
|
|
|
2,437
|
|
|
|
—
|
|
|
|
2,437
|
|
|
|
2,054
|
|
|
|
—
|
|
|
|
2,054
|
|
Total
|
|
$
|
104,267
|
|
|
$
|
14,858
|
|
|
$
|
89,409
|
|
|
$
|
94,552
|
|
|
$
|
10,168
|
|
|
$
|
84,384
|
|
Amortization
of definite-lived intangible assets will be approximately $6,996 in 2010, $6,941
in 2011, $7,388 in 2012, $8,342 in 2013 and $9,868 in 2014. Amortization expense
was $4,749 in 2009, $5,176 in 2008 and $3,131 in 2007.
All of
the intangible assets were acquired in the years 2004 through 2009 (see Note
3).
The
estimated useful lives for intangible assets are:
Identified
Intangible Asset
|
|
Estimated
Useful Life in Years or Months
|
Developed
technology
|
|
10
years –12.5 years
|
Tradename
|
|
10
years
|
Customer
relationships
|
|
10
years – 12.5 years
|
Backlog
|
|
1
month – 3 months
|
Non-compete
agreement
|
|
15
months
|
j.
Sales Recognition
Sales are
recorded when all of the following have occurred: an agreement of sale exists,
the price is fixed and determinable, the product has been delivered according to
the terms of the sales order and collection is reasonably assured. Management is
required to make judgments about whether or not collection is reasonably
assured. The Company reduces revenue with allowances for sales
returns. Allowances for sales returns, which are recorded at the time
revenue is recognized, are based upon historical sales returns which are minimal
and immaterial. There were no allowances for sales returns as of December 31,
2009 and 2008 since the Company typically does not experience a material amount
of sales returns from year to year because most of its products are produced and
sold on a made to order basis. Therefore, as of December 31, 2009 and 2008, the
Company did not anticipate any material sales returns for products shipped to
customers.
The
Company does not record a warranty reserve on the sale of its products. For its
largest product line, body armor, all of which is sold to the U.S. Government,
each lot of body armor is tested at an independent laboratory and the lot cannot
be released for shipment to the U.S. Government until positive test results are
received by both the U.S. Government and the Company. For its non-body armor
sales, the Company has experienced minimal claims from these types of
sales.
Additionally,
due to the inherent nature, strength, durability and structural properties of
ceramics, as well as a rigid quality control program that includes, for some of
our customers, having the customer accept quality test results prior to
shipment, management does not believe a warranty reserve is
necessary.
k.
Net Income Per Share
Basic net
income per share is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding. Diluted net income
per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding plus the effect of any
dilutive stock options and restricted stock units using the treasury stock
method and the net share settlement method for the convertible
debt.
The
following is a summary of the number of shares entering into the computation of
net income per common and common equivalent share:
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Weighted
average number of shares outstanding
|
|
|
25,683,963
|
|
|
|
26,445,785
|
|
|
|
27,252,448
|
|
Dilutive
stock options
|
|
|
118,281
|
|
|
|
217,972
|
|
|
|
285,427
|
|
Dilutive
restricted stock units
|
|
|
-
|
|
|
|
25,434
|
|
|
|
39,853
|
|
Dilutive
convertible note shares
|
|
|
-
|
|
|
|
-
|
|
|
|
154,274
|
|
Number
of shares used in dilutive computation
|
|
|
25,802,244
|
|
|
|
26,689,191
|
|
|
|
27,732,002
|
|
Excluded
for the above calculation are 363,924 potential shares from restricted stock
units that are anti-dilutive.
l.
Accounting for Long-Lived Assets
Long-lived
assets and intangible assets with definite lives are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Impairment indicators include, among other
conditions, cash flow deficits, historic or anticipated declines in revenue or
operating profit and adverse legal or regulatory developments. If it is
determined that such indicators are present and the review indicates that the
assets will not be fully recoverable, based on undiscounted estimated cash flows
over the remaining amortization periods, their carrying values are reduced to
estimated fair market value. Estimated fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. For the purposes of identifying and measuring impairment, long-lived
assets are grouped with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities.
m.
Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
n.
Research and Development
Costs
associated with research and development were $12.3 million, $14.8 million and
$17.6 million for years ended December 31, 2009, 2008 and 2007,
respectively. In addition, the Company historically has and continues to engage
in application engineering and internally funded research to improve and reduce
the cost to manufacture existing products, which is reflected in cost of sales,
and to develop new products which is expensed to research and
development.
o.
Income Taxes
The
Company accounts for income taxes using the asset and liability approach. Under
this approach, deferred taxes are determined based on the differences between
the financial statements and the tax bases using rates as enacted in tax laws. A
valuation allowance is established if it is “more likely than not” that all or a
portion of the deferred tax asset will not be realized. The Company also has a
liability for uncertain tax positions which must meet a more likely than not
recognition threshold at the end of each reporting period.
p.
Share-Based Compensation
The
Company recognizes compensation expense for all share-based payment awards made
to employees and directors, including employee stock options, based on estimated
fair values on the grant date, over the requisite vesting period.
The
Company followed the simplified method to establish the beginning balance as of
January 1, 2006 of the additional paid-in capital pool (“APIC pool”) related to
the tax effects of employee share-based compensation, and uses this method to
determine the subsequent impact on the APIC pool and Consolidated Statements of
Cash Flows of the tax effects of employee share-based compensation
awards.
q.
Comprehensive Income
Comprehensive
income encompasses all changes in equity other than those arising from
transactions with stockholders, and consists of net income, currency translation
adjustments, pension liability changes and unrealized net gains and losses on
investments classified as available-for-sale. As of December 31, 2009 and 2008,
accumulated other comprehensive income is as follows (in
thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Unrealized
gain (loss) on available-for-sale-securities, net
|
|
$
|
(1,991
|
)
|
|
$
|
(5,911
|
)
|
Net
change in pension liability
|
|
|
(4,059
|
)
|
|
|
(3,124
|
)
|
Cumulative
translation adjustment
|
|
|
27,578
|
|
|
|
22,738
|
|
|
|
$
|
21,528
|
|
|
$
|
13,703
|
|
r.
Fair Value Measurements
On
January 1, 2008, the Company adopted the new framework for measuring fair
value under GAAP, and expanded its disclosures about fair value measurements as
it relates to recurring and non-recurring financial assets and liabilities. This
new framework addresses how companies should measure fair value when they are
required to use a fair value measure for recognition or disclosure purposes
under GAAP. On January 1, 2009, the Company adopted these new recognition and
disclosure requirements for nonfinancial assets and nonfinancial liabilities
that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis in accordance with GAAP. The adoption in 2009 did not have a
significant impact on the financial statements.
The new
fair value framework requires that assets and liabilities carried at fair value
be classified and disclosed in one of the following three
categories:
Level 1: quoted
market prices in active markets for identical assets and
liabilities
Level 2: observable
market based inputs or unobservable inputs that are corroborated by market
data
Level 3: unobservable
inputs that are not corroborated by market data
The
carrying value of cash and cash equivalents, accounts receivable and trade
payables approximates the fair value due to their short-term
maturities.
For
recognition purposes, on a recurring basis, the Company measures available for
sale short-term and long-term investments at fair value. Short-term investments
had an aggregate fair value of $117.7 million at December 31, 2009 and $6.1
million at
December 31, 2008. The fair value of these investments is determined using
quoted prices in active markets. Long-term investments, comprising auction rate
securities, had an aggregate fair value of $20.0
million at December 31,
2009 and $24.4
million at
December 31, 2008.
On April
1, 2009, the Company adopted new recognition principles for additional guidance
to provide greater clarity about the credit and noncredit component of an
other-than-temporary impairment event. Adoption of the new recognition
principles resulted in a pre-tax other-than-temporary impairment charges
totaling $2.9 million in 2009. This other-than-temporary impairment adjustment
related to the credit risk component of certain auction rate securities which
were previously recognized in other comprehensive income prior to the adoption
of the new recognition principles. During the first quarter of 2009, the Company
recognized pre-tax charges of $104,000 due to other-than-temporary reductions in
the value of its investments in auction rate securities. In the fourth quarter
of 2009, the Company also recorded a realized loss on the sale of auction rate
securities of $2.3 million. Total losses from auction rate securities were $5.2
million in 2009, $5.9 million in 2008 and $2.1 million in 2007. The Company also
recognized a pre-tax temporary gain of $6.1 million in 2009 and pre-tax
temporary charges of $7.8 million in 2008 and $0.8 million in 2007 against
other comprehensive income due to temporary changes in the value of its
investments in auction rate securities.
Cumulatively
to date, the Company has incurred $13.2 million in pre-tax losses from its
investments in auction rate securities and pre-tax temporary impairment charges
against other comprehensive income of $2.5 million. The Company’s
investments in auction rate securities represent interests in insurance
securitizations collateralized by pools of residential and commercial mortgages,
asset backed securities and other structured credits relating to the credit risk
of various bond guarantors that mature at various dates from June 2021 through
July 2052. These auction rate securities were intended to provide liquidity via
an auction process which is scheduled every 28 days, that resets the applicable
interest rate, allowing investors to either roll over their holdings or gain
immediate liquidity by selling such interests at par. Interest rates are capped
at a floating rate of one month LIBOR plus additional spread ranging from 1.25%
to 4.00% depending on prevailing rating. During the second half of the year
2007, through 2009, the auctions for these securities failed. As a result of
current negative conditions in the global credit markets, auctions for the
Company’s investment in these securities failed to settle on their respective
settlement dates. Consequently, the investments are not currently liquid through
the normal auction process and may be liquidated if a buyer is found outside the
auction process. Although the auctions have failed and are currently inactive,
the Company continues to receive underlying cash flows in the form of interest
income from the investments in auction rate securities. As of December 31, 2009,
the fair value of the Company’s investments in auction rate securities was below
cost by approximately $13.4 million. The fair value of the auction rate
securities has been below cost for more than one year.
Prior to
June 30, 2008, the Company was able to determine the fair value of its
investments in auction rate securities using a market approach valuation
technique based on Level 2 inputs that did not require significant
adjustment. Since June 30, 2008, the market demand for auction rate
securities has declined significantly due to the complexity of these
instruments, the difficulty of determining the values of some of the underlying
assets, declines in the issuer’s credit quality and disruptions in the credit
markets. At December 31, 2009, the Company determined that the market for its
investments in auction rate securities and for similar securities was not active
since there were few observable or recent transactions for these securities or
similar securities. The Company’s investments in auction rate securities were
classified within Level 3 of the fair value hierarchy because the Company
determined that significant adjustments using unobservable inputs were required
to determine fair value as of December 31, 2009.
An
auction rate security is a type of structured financial instrument where its
fair value can be estimated based on a valuation technique that includes the
present value of future cash flows (principal and interest payments), review of
the underlying collateral and considers relevant probability weighted and risk
adjusted observable inputs and minimizes the use of unobservable inputs.
Probability weighted inputs included the following:
·
Probability
of earning maximum rate until maturity
·
Probability
of passing auction at some point in the future
·
Probability
of default at some point in the future (with appropriate loss severity
assumptions)
The Company
determined that the appropriate risk-free discount rate (before risk
adjustments) used to discount the contractual cash flows of its auction rate
securities ranged from 0.6% to 5.1%, based on the term structure of the auction
rate security. Liquidity risk premiums are used to adjust the risk-free discount
rate for each auction rate security to reflect uncertainty and observed
volatility of the current market environment. This risk of nonperformance has
been captured within the probability of default and loss severity assumptions
noted above. The risk-adjusted discount rate, which incorporates liquidity risk,
appropriately reflects the Company’s estimate of the assumptions that market
participants would use (including probability weighted inputs noted above) to
estimate the selling price of the asset at the measurement
date.
In
determining whether the decline in value of the ARS investments was
other-than-temporary, the Company considered several factors including, but not
limited to, the following: (1) the reasons for the decline in value (credit
event, interest related or market fluctuations); (2) the Company’s ability
and intent to hold the investments for a sufficient period of time to allow for
recovery of value; (3) whether the decline is substantial; and (4) the
historical and anticipated duration of the events causing the decline in value.
The evaluation for other-than-temporary impairments is a quantitative and
qualitative process, which is subject to various risks and uncertainties. The
risks and uncertainties include changes in the credit quality of the securities,
changes in liquidity as a result of normal market mechanisms or issuer calls of
the securities, and the effects of changes in interest rates.
At December
31, 2009, the Company had no derivative financial
instruments.
Assets
measured at fair value on a recurring basis include the following as of December
31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
at
December 31, 2009
Using
|
|
|
|
|
(In
thousands)
|
|
Quoted
Prices
in
Active Markets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Total
Carrying Value at
December
31, 2009
|
|
Cash
and cash equivalents (including restricted cash)
|
|
$
|
125,284
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
125,284
|
|
Short
term investments
|
|
|
117,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,666
|
|
Long
term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
20,019
|
|
|
|
20,019
|
|
Assets
held by defined benefit pension plans
|
|
|
-
|
|
|
|
6,857
|
|
|
|
-
|
|
|
|
6,857
|
|
Other
long-term financial asset
|
|
$
|
1,962
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
at
December 31, 2008
Using
|
|
|
|
|
(In
thousands)
|
|
Quoted
Prices
in
Active Markets
(Level
1)
|
|
|
Significant
Other
Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Total
Carrying Value at
December
31, 2008
|
|
Cash
and cash equivalents (including restricted cash)
|
|
$
|
217,984
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
217,984
|
|
Short
term investments
|
|
|
6,140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,140
|
|
Long
term investments
|
|
|
-
|
|
|
|
-
|
|
|
|
24,434
|
|
|
|
24,434
|
|
Assets
held by defined benefit pension plans
|
|
|
-
|
|
|
|
6,447
|
|
|
|
-
|
|
|
|
6,447
|
|
Other
long-term financial asset
|
|
$
|
1,355
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,355
|
|
Activity
in long term investments (Level 3) was as follows (in
thousands):
|
|
Year
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of year
|
|
$
|
24,434
|
|
|
$
|
38,089
|
|
Sale
of auction rate securities
|
|
|
(5,320
|
)
|
|
|
-
|
|
Realized
loss included in net earnings
|
|
|
(2,280
|
)
|
|
|
-
|
|
Unrealized
loss included in net earnings
|
|
|
(2,907
|
)
|
|
|
(5,870
|
)
|
Unrealized
gain (loss) included in other comprehensive income
|
|
|
6,092
|
|
|
|
(7,785
|
)
|
Balance
at end of year
|
|
$
|
20,019
|
|
|
$
|
24,434
|
|
Additionally,
on a nonrecurring basis, the Company uses fair value measures when analyzing
asset impairment. Long-lived tangible assets and definite-lived intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If it is
determined such indicators are present and the review indicates that the assets
will not be fully recoverable, based on undiscounted estimated cash flows over
the remaining amortization periods, their carrying values are reduced to
estimated fair value. Estimated fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
During the fourth quarter of each year, the Company evaluates goodwill and
indefinite-lived intangibles for impairment using the income and other valuation
approaches. The income approach is a valuation technique under which estimated
future cash flows are discounted to their present value to calculate fair value.
When analyzing indefinite-lived intangibles for impairment, the Company uses a
relief from royalty method which calculates the cost savings associated with
owning rather than licensing the intangible asset, applying an assumed royalty
rate within the Company’s discounted cash flow calculation.
The Company
is also required to test goodwill for impairment before the annual test if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount, such as a significant
adverse change in the business climate. Goodwill in the Ceradyne Canada
reporting unit segment with a carrying amount of $3.8 million was written down
in full as there was no implied fair value as of June 30, 2009, the effective
date of the impairment test, resulting in an impairment charge of $3.8 million,
which was included in earnings during the second quarter of 2009.
For disclosure purposes, the Company is
required to measure the fair value of outstanding debt on a recurring basis. The
fair value of outstanding debt is determined using quoted prices in active
markets. Long-term debt is reported at amortized cost. The fair value of
long-term debt, based on quoted market prices, was $87.5 million at December 31,
2009 and $83.2 million at December 31, 2008
.
The carrying value of the Company’s
unused line of credit is considered to approximate fair market value, as the
interest rates of these instruments are based predominantly on variable
reference rates.
The
carrying value of accounts receivable and trade payables approximates the fair
value due to their short-term maturities.
s.
Recent Accounting Pronouncements
In
December 2007, the FASB issued accounting guidance which establishes principles
and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The guidance also
provides for the recognition and measurement of goodwill acquired in a business
combination and determines what information to disclose to enable users of the
financial statement to evaluate the nature and financial effects of the business
combination. The Company adopted the new guidance on January 1, 2009, which has
been applied in the accounting for the acquisition of the assets of Diaphorm
Technologies, LLC discussed in Note 3.
In
December 2007, the FASB issued guidance which introduces significant changes in
the accounting and reporting for business acquisitions and noncontrolling
interest ("NCI") in a subsidiary. The new guidance also changes the accounting
for and reporting for the deconsolidation of a subsidiary. Companies are
required to adopt the new guidance for fiscal years beginning after January 1,
2009. The Company adopted the new guidance on January 1, 2009 which did not have
an impact on its financial position, results of operations or cash flows as the
Company owns 100% of its subsidiaries and there has been no deconsolidation of a
subsidiary after January 1, 2009.
In March
2008, the FASB issued guidance which changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under GAAP, and (c) how derivative instruments and related hedged
items affect an entity’s financial position, financial performance, and cash
flows. The Company adopted this new guidance on January 1, 2009, which did not
have an impact on its financial position, results of operations or cash flows as
there were no derivative instruments or hedging activities after January 1,
2009.
In June
2008, the FASB issued guidance to determine whether unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. The Company adopted this new guidance on January 1,
2009, which did not have an impact on its financial position, results of
operations or cash flows as the unvested share-based awards do not contain
rights to receive nonforfeitable dividends.
In April
2008, the FASB Staff issued guidance which provides for additional
considerations to be used in determining useful lives of intangible assets and
requires additional disclosure regarding renewals. The Company adopted this new
guidance on January 1, 2009, which did not have a significant impact on its
financial position, results of operations or cash flows.
In April
2009, the FASB Staff issued new accounting guidance which the Company adopted on
April 1, 2009, as follows:
i.) Guidance
for making fair value measurements more consistent with existing GAAP. This new
guidance provides additional authoritative principles in determining whether a
market is active or inactive, and whether a transaction is distressed. This
guidance is applicable to all assets and liabilities (i.e. financial and
nonfinancial) and will require enhanced disclosures. The adoption of this new
guidance did not have a significant impact on the Company’s financial position,
results of operations or cash flows.
ii.) Companies
are required to provide greater clarity about the credit and noncredit component
of an other-than-temporary impairment event and to improve presentation and
disclosure of other than temporary impairments in the financial statements. The
impact of the adoption of this new guidance is discussed in Note 4.
iii.) This
guidance requires new disclosures about fair value of financial instruments in
interim as well as in annual financial statements. The Company has adopted this
new guidance and has provided the additional disclosures required as discussed
in Note 4.
In May
2009, the FASB issued new guidance which establishes general standards for
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are available to be issued (“subsequent
events”). More specifically, this new guidance sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition in the financial
statements, identifies the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and the disclosures that should be made about events or transactions
that occur after the balance sheet date. This new guidance provides largely the
same framework for the evaluation of subsequent events which previously existed
only in auditing literature. The Company has performed an evaluation of
subsequent events through February 23, 2010, which is the day the financial
statements were issued.
In August
2009, the FASB issued revised authoritative guidance regarding the measurement
of liabilities at fair value which provides clarification that in circumstances
where a quoted market price in an active market for an identical liability is
not available, a reporting entity must measure fair value of the liability using
one of the following techniques: 1) the quoted price of the identical liability
when traded as an asset; 2) quoted prices for similar liabilities or similar
liabilities when traded as assets; or 3) another valuation technique, such as a
present value technique or the amount that the reporting entity would pay to
transfer the identical liability or would receive to enter into the identical
liability. This statement becomes effective for the first reporting period
(including interim periods) beginning after issuance, which. The Company adopted
this new guidance on October 1, 2009, which did not have an impact on our
consolidated financial position, results of operations or cash
flows.
3.
Acquisitions
Acquisition of Assets of
Diaphorm Technologies, LLC
On June
1, 2009, the Company acquired substantially all of the business and assets and
all technology and intellectual property related to ballistic combat and
non-combat helmets of Diaphorm Technologies, LLC (“Diaphorm”), based in Salem,
New Hampshire. The purchase price consisted of $9.7 million in cash paid at
closing, the assumption of $274,000 of liabilities, plus contingent
consideration not to exceed $10 million over the next 5 years based upon
performance milestones and revenues achieved during that period from Diaphorm’s
existing products and new products developed using Diaphorm technology. The
Company accrued contingent purchase consideration of $5.1 million based on
probability weighted expected future cash flows. The Company used a portion of
its existing cash for the payment made at closing. The Company also incurred
transaction and related costs of approximately $340,000 which were expensed in
2009. Contingent consideration of $1.0 million was earned and paid in September
2009.
The
acquisition has been accounted for under the purchase method of accounting.
Under this method, assets acquired and liabilities assumed are recorded at the
date of acquisition at their respective fair values.
The total
purchase price of the Diaphorm acquisition was as follows (in
thousands):
Cash
consideration paid at closing
|
|
$
|
9,654
|
|
Accrued
contingent purchase consideration
|
|
|
5,100
|
|
Total
purchase price
|
|
$
|
14,754
|
|
The above
purchase price has been allocated based on the fair values of assets acquired
and liabilities assumed.
The
purchase price has been allocated as follows (in thousands):
Accounts
receivable, net
|
|
$
|
466
|
|
Inventories
|
|
|
1,602
|
|
Other
current assets
|
|
|
221
|
|
Property,
plant and equipment
|
|
|
1,225
|
|
Intangible
assets
|
|
|
9,414
|
|
Goodwill
|
|
|
2,100
|
|
Accounts
payable and other liabilities
|
|
|
(274
|
)
|
|
|
$
|
14,754
|
|
The
purchase price allocation is based on a fair market valuation of acquired
intangible assets, inventory and property, plant and equipment. Of the $9.4
million of acquired intangible assets, $8.4 million was assigned to developed
technology rights that have a useful life of approximately 10 years and $1.0
million was assigned to customer relationships with a useful life of
approximately 10 years. The amounts assigned to intangible assets were based on
management’s estimate of the fair value. Developed technology rights recorded in
connection with the acquisition of Diaphorm’s assets were established as
intangible assets as the underlying technologies are legally protected by
patents covering its proprietary ballistic helmets. The developed technology
rights are both transferable and separable from the acquired
assets.
Identification and
allocation of value to the identified intangible assets was based on the
purchase method of accounting. The fair value of the identified intangible
assets was estimated by performing a discounted cash flow analysis using the
“income” approach. This method includes a forecast of direct revenues and costs
associated with the respective intangible assets and charges for economic
returns on tangible and intangible assets utilized in cash flow generation. Net
cash flows attributable to the identified intangible assets are discounted to
their present value at a rate commensurate with the perceived risk. The
projected cash flow assumptions considered contractual relationships, customer
attrition, eventual development of new technologies and market
competition.
The estimates
of expected useful lives take into consideration the effects of competition,
regulatory changes and possible obsolescence. The useful lives of technology
rights were based on the number of years in which net cash flows have been
projected. The useful lives of customer relationships were estimated based upon
the length of the contracts currently in place and probability-based estimates
of contract renewals in the future.
Assumptions
used in forecasting cash flows for each of the identified intangible assets
included consideration of Diaphorm’s historical operating margins and
performance of comparable publicly traded entities; number of customers and
Diaphorm market share; contractual and non-contractual relationships with large
customers and patents held.
The
goodwill resulting from the Diaphorm acquisition is included with the ACO
segment and resulted primarily from intellectual property acquired. Goodwill
will not be amortized but is subject to an ongoing assessment for
impairment. The goodwill from the Diaphorm acquisition is tax
deductible.
The
historical results of the operations acquired from Diaphorm were not material to
the Company’s consolidated results of operations in current and prior
periods.
Acquisition of SemEquip,
Inc.
On August
11, 2008, the Company completed the acquisition of SemEquip, Inc. (“SemEquip”)
pursuant to a merger of SemEquip with a wholly-owned subsidiary of Ceradyne.
SemEquip is a leader in the development of cluster ion implantation sub-systems
and advanced ion source materials for the manufacture of logic and memory chips.
SemEquip’s technologies enable the utilization of cluster beam ion implantation
for manufacturing advanced integrated circuits at low cost and high throughput
rates. Ceradyne paid $25.0 million in cash at closing, of which $1.7
million was distributed as incentive compensation to several SemEquip employees
and advisors as described below, and incurred direct transaction fees and
expenses of $2.0 million. Ceradyne used a portion of its existing cash to make
these payments. In addition, Ceradyne will pay contingent consideration of up to
$100.0 million in cash during the 15-year period following completion of
the merger based upon revenues achieved over that period by SemEquip. The $1.7
million portion of the closing date consideration paid to SemEquip employees and
advisors and a portion of the contingent consideration to be paid by Ceradyne
over 15 years relates to a pre-closing commitment by SemEquip to pay incentive
compensation to several of its employees and advisors. This incentive
compensation will not increase the total consideration Ceradyne will pay for the
acquisition, but it required Ceradyne to record a $9.8 million pre-tax
compensation charge during the year ended December 31, 2008. The liability for
the contingent incentive compensation is reevaluated each reporting period.
Accordingly, the Company reduced the liability and recognized a corresponding
non-cash credit of $0.8 million in the Consolidated Statements of Income during
the year ended December 31, 2009. The net fair value of assets acquired and
liabilities assumed exceeded the total amount of the purchase price paid. As the
Company may be required to pay contingent consideration in the future, the
Company accrued an additional $25.2 million of purchase consideration to
represent the difference between the net fair value of assets acquired and
liabilities assumed and the purchase price paid.
The
acquisition has been accounted for under the purchase method of accounting.
Under the purchase method of accounting, the assets acquired and liabilities
assumed are recorded at the date of acquisition at their respective fair
values.
The total
purchase price of the SemEquip acquisition was as follows (in
thousands):
Cash
consideration paid to SemEquip stockholders
|
|
$
|
23,315
|
|
Accrued
purchase consideration
|
|
|
25,235
|
|
Direct
transaction fees and expenses
|
|
|
1,970
|
|
Total
purchase price
|
|
$
|
50,520
|
|
The above
purchase price has been allocated based on the fair values of assets acquired
and liabilities assumed.
The
purchase price has been allocated as follows (in thousands):
Cash
|
|
$
|
2,192
|
|
Inventories
|
|
|
3,574
|
|
Accounts
receivable, net
|
|
|
446
|
|
Other
current assets
|
|
|
276
|
|
Property,
plant and equipment
|
|
|
1,071
|
|
Intangible
assets
|
|
|
48,189
|
|
Accounts
payable and other liabilities
|
|
|
(3,685
|
)
|
Non-current
deferred tax liability, net
|
|
|
(1,543
|
)
|
Net
assets acquired
|
|
$
|
50,520
|
|
The
non-current deferred tax liability was recorded net of the tax benefit
associated with net operating loss carryforwards of SemEquip that were generated
prior to the acquisition date (see Note 6).
Of the
$48.2 million of acquired intangible assets, $26.9 million was assigned to
developed technology rights that have a useful life of approximately 10 years
and $21.3 million was assigned to customer relationships with a useful life of
approximately 10 years. The amounts assigned to intangible assets were based on
management’s estimate of the fair value. Developed technology rights recorded in
connection with the acquisition of SemEquip were established as intangible
assets as the underlying technologies are legally protected by patents covering
the alternative ion implantation process using “cluster boron” technology. The
developed technology rights are both transferable and separable from the
acquired entity.
Identification
and allocation of value to the identified intangible assets was based on the
purchase method of accounting. The fair value of the identified intangible
assets was estimated by performing a discounted cash flow analysis using the
“income” approach. This method includes a forecast of direct revenues and costs
associated with the respective intangible assets and charges for economic
returns on tangible and intangible assets utilized in cash flow generation. Net
cash flows attributable to the identified intangible assets are discounted to
their present value at a rate commensurate with the perceived risk. The
projected cash flow assumptions considered contractual relationships, customer
attrition, eventual development of new technologies and market
competition.
The
estimates of expected useful lives take into consideration the effects of
competition, regulatory changes and possible obsolescence. The useful lives of
technology rights were based on the number of years in which net cash flows have
been projected. The useful lives of customer relationships were estimated based
upon the length of the contracts currently in place and probability-based
estimates of contract renewals in the future.
Assumptions
used in forecasting cash flows for each of the identified intangible assets
included consideration of the following:
|
•
|
SemEquip
historical operating margins and performance of comparable publicly traded
entities
|
|
•
|
Number
of customers and SemEquip market
share
|
|
•
|
Contractual
and non-contractual relationships with large customers,
and
|
The
results of operations of SemEquip have been included in the accompanying
consolidated statements of operations from the acquisition date. The following
unaudited pro forma information assumes the SemEquip acquisition occurred at the
beginning of each period presented below. Accordingly, pro forma adjustments
have been included in the information below for disclosure purposes only. These
unaudited pro forma results have been prepared for informational purposes only
and do not purport to represent what the results of operations would have been
had the SemEquip acquisition occurred as of the date indicated, nor of future
results of operations. The unaudited pro forma results for the years ended
December 31, 2008 and 2007 were as follows (amounts in table in thousands,
except per share data):
|
|
2008
|
|
|
2007
|
|
Net
Sales
|
|
$
|
682,978
|
|
|
$
|
760,642
|
|
Net
income
(1)
|
|
$
|
100,639
|
|
|
$
|
127,467
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$
|
3.81
|
|
|
$
|
4.68
|
|
Diluted
income per share
|
|
$
|
3.77
|
|
|
$
|
4.60
|
|
|
|
(1)
|
The
unaudited pro forma information for the years ended December 31, 2008 and
2007 includes the $9.8 million pre-tax acquisition related compensation
charge associated with a pre-closing commitment by SemEquip to pay
incentive compensation to several of its employees and advisors, which has
been recognized in the Company’s historical results of operations for
these periods. The unaudited pro forma information for the years ended
December 31, 2008 and 2007 include pro forma adjustments to reflect
pre-tax increase in amortization expense of $398,000 and $0.7 million,
respectively, related to management’s estimate of the fair value of
intangible assets acquired in the SemEquip acquisition.
|
Asset Purchase – Proprietary
Technical Ceramic Bearing Technology
In June
2008, the Company completed the purchase of certain assets and developed
technology related to proprietary technical ceramic bearings. These patented
bearings are used for “down hole” oil drilling and for coal bed methane pumps
and steam assisted oil extraction pumps. The purchase price was approximately
$3.9 million in cash, which included $115,000 of transaction costs. The Company
paid an additional $250,000 in consideration during November 2008 conditioned
upon the relocation of certain key employees. In addition, the Company will make
future payments of (1) up to an additional $2.0 million if certain revenue
milestones are achieved, and (2) a royalty of three percent of net sales of
these bearings for the life of the acquired patents. The Company considers this
acquisition to be immaterial.
The
acquisition has been accounted for under the purchase method of accounting. The
following table summarizes the components of the purchase price (in thousands):
|
|
|
|
|
Cash
|
|
$
|
4,000
|
|
Transaction
costs
|
|
|
115
|
|
Total
purchase price
|
|
$
|
4,115
|
|
Fair
value of assets acquired:
|
|
|
|
|
Fixed
assets
|
|
$
|
29
|
|
Customer
relationships
|
|
|
120
|
|
Developed
technology
|
|
|
3,966
|
|
Total
fair value of assets acquired
|
|
$
|
4,115
|
|
The
Company considers this acquisition to be immaterial for disclosure of pro forma
financial information.
Acquisition of Minco,
Inc.
On July
10, 2007, the Company completed the acquisition of Minco, Inc. (“Minco”) based
in Midway, Tennessee, pursuant to a Sale and Purchase Agreement of the same
date. Minco’s results from operations are included in the Company’s Consolidated
Statements of Income from the date of acquisition.
The
purchase price was approximately $28.1 million in cash, which included $216,000
of transaction costs.
Minco is
a key supplier of raw materials to Ceradyne’s Thermo Materials division. Minco
was founded in 1977 to manufacture and market fused silica powders for a wide
range of industrial applications. Minco's fusing process, which is the basis of
its entire product line, is based on its proprietary technology.
The
acquisition has been accounted for under the purchase method of accounting. The
following table summarizes the components of the purchase price (in
thousands):
Cash
|
|
$
|
27,905
|
|
Transaction
costs
|
|
|
216
|
|
Total
purchase price
|
|
$
|
28,121
|
|
Fair
value of assets acquired and liabilities assumed:
|
|
|
|
|
Cash
|
|
$
|
332
|
|
Accounts
receivable, net
|
|
|
2,503
|
|
Inventory
|
|
|
3,301
|
|
Property,
plant and equipment
|
|
|
7,114
|
|
Other
assets
|
|
|
1,473
|
|
Assumed
liabilities
|
|
|
(1,892)
|
|
Deferred
taxes
|
|
|
(3,741)
|
|
Backlog
|
|
|
110
|
|
Developed
technology
|
|
|
1,510
|
|
Tradename
|
|
|
650
|
|
Customer
relationships
|
|
|
6,210
|
|
Non-compete
|
|
|
500
|
|
Goodwill
|
|
|
10,051
|
|
|
|
$
|
28,121
|
|
The goodwill
resulting from the Minco acquisition is included with the Thermo Materials
segment. Goodwill will not be amortized but is subject to an ongoing assessment
for impairment. The goodwill from the Minco acquisition is not tax
deductible.
The
estimated useful lives for Minco’s intangible assets are as
follows:
Identified Intangible Asset
|
|
Estimated Useful Life in Years or
Months
|
Developed
technology
|
|
10
years
|
Tradename
|
|
10
years
|
Customer
relationships
|
|
10
years
|
Backlog
|
|
1
month
|
Non-compete
agreement
|
|
15
months
|
The
Company considers this acquisition to be immaterial for disclosure of pro forma
financial information.
Acquisition of EaglePicher
Boron LLC
On August
31, 2007, the Company completed the purchase of EaglePicher Boron LLC. (“EP
Boron”) located in Quapaw, Oklahoma pursuant to a Sale and Purchase Agreement
dated June 27, 2007. EP Boron was renamed Boron Products, LLC and is doing
business as Ceradyne Boron Products. Their results from operations are included
in the Company’s Consolidated Statements of Income from the date of
acquisition.
The purchase
price was approximately $71.3 million in cash which included $1.7 million of
transaction costs.
EP Boron was
established in the early 1970's to produce 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 control. EP Boron also
produces complementary chemical isotopes used in the normal operation and
control of nuclear power plants. Ceradyne anticipates that this acquisition will
further strengthen its entry into the nuclear waste containment and other
nuclear power plant related ceramic materials markets.
The
acquisition has been accounted for under the purchase method of accounting. The
following table summarizes the components of the purchase price (in
thousands):
Cash
|
|
$
|
69,600
|
|
Transaction
costs
|
|
|
1,709
|
|
Total
purchase price
|
|
$
|
71,309
|
|
Fair
value of assets acquired and liabilities assumed:
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
2,811
|
|
Inventory
|
|
|
6,375
|
|
Property,
plant and equipment
|
|
|
23,636
|
|
Other
assets
|
|
|
61
|
|
Assumed
liabilities
|
|
|
(1,505)
|
|
Backlog
|
|
|
1,110
|
|
Developed
technology
|
|
|
2,280
|
|
Customer
relationships
|
|
|
18,290
|
|
Goodwill
|
|
|
18,251
|
|
|
|
$
|
71,309
|
|
The
intangible asset balance for each acquisition will be allocated between
identifiable intangible assets and remaining goodwill. The goodwill from this
acquisition is tax deductible over 15 years.
The
estimated useful lives for Ceradyne Boron Products’ intangible assets are as
follows:
Identified Intangible Asset
|
|
Estimated Useful Life in Years or
Months
|
Developed
technology
|
|
12.5
years
|
Customer
relationships
|
|
12.5
years
|
Backlog
|
|
3
months
|
The
Company considers this acquisition to be immaterial for disclosure of pro forma
financial information.
4.
Debt and Bank Borrowing Arrangements; Convertible Note and Common Stock
Offerings
During
December 2005, the Company completed a public offering of 2,070,000 shares of
common stock at a price to the public of $43.31 per share. The Company received
net proceeds of approximately $84.6 million from this offering after deducting
offering expenses and underwriting discounts of $5.0 million. Concurrent with
the common stock offering, during December 2005, the Company issued $121.0
million of 2.875% senior subordinated convertible notes (“Notes”) due
December 15, 2035.
During
the year ended December 31, 2009, the Company purchased an aggregate of
$27.9 million principal amount of the Notes on the open market at a
purchase price of $23.2 million. The carrying amount of the Notes purchased
was $24.1 million and the estimated fair value of the Notes exclusive of
the conversion feature was $21.8 million. The difference between the
carrying amount of $24.1 million and the estimated fair value of
$21.8 million was recognized as a gain of $2.3 million upon early
extinguishment of debt, which was partially offset by write off of associated
unamortized debt issuance costs of $392,000, resulting in a net gain of $1.9
million. The difference between the estimated fair value of $21.8 million
and the purchase price of $23.2 million was $1.4 million and was charged to
additional paid-in capital. The Company has $26.8 million remaining of the
original $50.0 million authorization to repurchase and retire part of the
outstanding Notes. Cash flow from operating activities in the statement of cash
flows for the year ended December 31, 2009 includes $3.0 million of the purchase
price that was attributable to the payment of accreted interest on the
convertible debt discount and the remaining $20.2 million is presented as
repayments of convertible debt in cash flow from financing
activities.
In May
2008, the FASB Staff issued new accounting guidance for convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) which specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that will reflect
the issuer’s nonconvertible debt borrowing rate when interest cost is recognized
in subsequent periods. The Company adopted this new guidance as of January 1,
2009, and the adoption impacted the historical accounting for the Notes, which
resulted in the following retrospective changes in long-term debt, debt issuance
costs (included in other noncurrent assets), deferred tax liability, additional
paid in capital and retained earnings (in thousands):
|
|
Net
Increase (Decrease)
|
|
|
|
Long-
Term
Debt
|
|
|
Debt
Issuance
Costs
|
|
|
Deferred
Tax
Liability
|
|
|
Additional
Paid
In
Capital
|
|
|
Retained
Earnings
|
|
Allocation
of long term debt proceeds and issuance costs
to
equity component on issuance date
|
|
$
|
(29,261
|
)
|
|
$
|
(1,018
|
)
|
|
$
|
11,015
|
|
|
$
|
17,228
|
|
|
$
|
-
|
|
Cumulative
retrospective impact from amortization of
discount
on liability component and debt issuance costs
|
|
|
3,414
|
|
|
|
204
|
|
|
|
(1,252
|
)
|
|
|
-
|
|
|
|
(1,958
|
)
|
Cumulative
retrospective impact at January 1, 2007
|
|
|
(25,847
|
)
|
|
|
(814
|
)
|
|
|
9,763
|
|
|
|
17,228
|
|
|
|
(1,958
|
)
|
Retrospective
impact from amortization of discount on
liability
component and debt issuance costs during the year
|
|
|
3,595
|
|
|
|
182
|
|
|
|
(1,331
|
)
|
|
|
-
|
|
|
|
(2,082
|
)
|
Cumulative
retrospective impact at December 31, 2007
|
|
|
(22,252
|
)
|
|
|
(632
|
)
|
|
|
8,432
|
|
|
|
17,228
|
|
|
|
(4,040
|
)
|
Retrospective
impact from amortization of discount on
liability
component and debt issuance costs during the year
|
|
|
3,883
|
|
|
|
163
|
|
|
|
(1,450
|
)
|
|
|
-
|
|
|
|
(2,270
|
)
|
Cumulative
retrospective impact at December 31, 2008
|
|
$
|
(18,369
|
)
|
|
$
|
(469
|
)
|
|
$
|
6,982
|
|
|
$
|
17,228
|
|
|
$
|
(6,310
|
)
|
The
adoption of the new accounting guidance also resulted in increased interest
expense of approximately $3.7 million in 2008 and $3.4 million in 2007, and
decreased net income by $2.3 million in 2008 and $2.1 million in 2007. The
retrospective impact to earnings per share was a decrease of $0.09 in 2008 and
$0.08 in 2007. As a result of the adoption of the accounting guidance for
convertible debt, interest expense for the year ended December 31, 2009 includes
non-cash interest expense from amortization of the discount on the liability
component of $3.6 million and amortization of debt issuance costs of $399,000
which reduced net income by $4.0 million and earnings per share by
$0.10.
As of
December 31, 2009 and 2008, long-term debt and the equity component (recorded in
additional paid in capital, net of income tax benefit), determined in accordance
with the new accounting guidance for convertible debt, comprised the following
(in thousands):
|
|
December
31, 2009
|
|
|
December
31, 2008
|
|
Long-term
debt
|
|
|
|
|
|
|
Principal
amount
|
|
$
|
93,100
|
|
|
$
|
121,000
|
|
Unamortized
discount
|
|
|
(10,937
|
)
|
|
|
(18,369
|
)
|
Net
carrying amount
|
|
$
|
82,163
|
|
|
$
|
102,631
|
|
Equity
component, net of income tax benefit
|
|
$
|
16,399
|
|
|
$
|
17,228
|
|
The discount
on the liability component of long-term debt is being amortized using the
effective interest method based on an annual effective rate of 7.5%, which
represented the market interest rate for similar debt without a conversion
option on the issuance date, through December 2012, which coincides with the
first date that holders of the Notes can exercise their put option as discussed
below. The amount of interest expense recognized relating to both the
contractual interest coupon and the amortization of the discount on the
liability component was $6.7 million, $7.4 million and $7.1 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
Interest
on the Notes is payable on December 15 and June 15 of each year,
commencing on June 15, 2006. The Notes are convertible into 17.1032 shares
of Ceradyne’s common stock for each $1,000 principal amount of the Notes (which
represents a conversion price of approximately $58.47 per share), subject to
adjustment. The Notes are convertible only under certain circumstances,
including if the price of the Company’s common stock reaches specified
thresholds, if the Notes are called for redemption, if specified corporate
transactions or fundamental changes occur, or during the 10 trading days prior
to maturity of the Notes. The Company may redeem the Notes at any time after
December 20, 2010, for a price equal to 100% of the principal amount plus
accrued and unpaid interest, including contingent interest (as described below),
if any, up to but excluding the redemption date. As of December 31, 2009 the
principal amount of the Notes exceeded the hypothetical if-converted value as
the conversion price was higher than the average market price of the Company’s
common stock.
With
respect to each $1,000 principal amount of the Notes surrendered for conversion,
the Company will deliver the conversion value to holders as follows: (1) an
amount in cash equal to the lesser of (a) the aggregate conversion value of
the Notes to be converted and (b) $1,000, and (2) if the aggregate
conversion value of the Notes to be converted is greater than $1,000, an amount
in shares or cash equal to such aggregate conversion value in excess of
$1,000.
The Notes
contain put options, which may require the Company to repurchase in cash all or
a portion of the Notes on December 15, 2012, December 15,
2015, December 15, 2020, December 15, 2025, and
December 15, 2030 at a repurchase price equal to 100% of the principal
amount of the Notes to be repurchased plus accrued and unpaid interest,
including contingent interest (as described below), if any, up to but excluding
the repurchase date.
The
Company is obligated to pay contingent interest to the holders of the Notes
during any six-month period from June 15 to December 14 and from
December 15 to June 14, commencing with the six-month period beginning
December 20, 2010 and ending on June 14, 2011, if the average trading
price of the note for the five trading day period ending on the third trading
day immediately preceding the first day of the relevant contingent interest
period equals $1,200 (120% of the principal amount of a note) or more. The
amount of contingent interest payable per note for any relevant contingent
interest period shall equal 0.25% per annum of the average trading price of
a note for the five trading day period ending on the third trading day
immediately preceding the first day of the relevant contingent interest period.
This contingent interest payment feature represents an embedded derivative.
However, based on the de minimus value associated with this feature, no value
has been assigned at issuance or at December 31, 2009.
On or
prior to the maturity date of the Notes, upon the occurrence of a fundamental
change, under certain circumstances, the Company will provide for a make whole
amount by increasing, for the time period described herein, the conversion rate
by a number of additional shares for any conversion of the Notes in connection
with such fundamental change transactions. The amount of additional shares will
be determined based on the price paid per share of Ceradyne’s common stock in
the transaction constituting a fundamental change and the effective date of such
transaction. This make whole premium feature represents an embedded derivative.
Since this feature has no measurable impact on the fair value of the Notes and
no separate trading market exists for this derivative, the value of the embedded
derivative was determined to be de minimus. Accordingly, no value has been
assigned at issuance or at December 31, 2009.
The
Company utilizes a convertible bond pricing model and a probability weighted
valuation model, as applicable, to determine the fair values of the embedded
derivatives noted above.
In
December 2005, the Company established an unsecured $10.0 million line of credit
which expires on December 31, 2010. As of December 31, 2009, there were no
outstanding amounts on the line of credit. However, the available line of credit
at December 31, 2009 has been reduced by outstanding letters of credit in the
aggregate amount of $5.0 million. The interest rate on the credit line is based
on the LIBOR rate for a period of one month, plus a margin of 0.6 percent, which
equaled 0.9% as of December 31, 2009.
Pursuant
to the bank line of credit, the Company is subject to certain covenants, which
include, among other things, the maintenance of specified minimum amounts of net
income, tangible net worth and quick assets to current liabilities ratio. At
December 31, 2009, the Company was not in compliance with the covenant that
required minimum annual net income of $10.0 million. During February 2010, the
Company received a waiver for the calculation of the covenant at December 31,
2009. The Company was in compliance with all other covenants at December 31,
2009.
5.
Financial Instruments
Foreign
Exchange Risk Management
The
Company enters into foreign exchange forward contracts to reduce earnings and
cash flow volatility associated with foreign exchange rate changes to allow
management to focus its attention on its core business operations. Accordingly,
the Company enters into contracts which change in value as foreign exchange
rates change to economically offset the effect of changes in value of foreign
currency assets and liabilities, commitments and anticipated foreign currency
denominated sales and operating expenses. The Company enters into foreign
exchange forward contracts in amounts between minimum and maximum anticipated
foreign exchange exposures, generally for periods not to exceed one year. These
derivative instruments are not designated as accounting hedges. As of
December 31, 2009 and 2008, the Company did not have any outstanding
forward exchange contracts.
6.
Income Taxes
The
provision (benefit) for income taxes comprised the following for each of the
years ended December 31 (in thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current,
domestic
|
|
$
|
(5,995
|
)
|
|
$
|
59,303
|
|
|
$
|
79,406
|
|
Current,
foreign
|
|
|
(531
|
)
|
|
|
229
|
|
|
|
4,897
|
|
Current,
total
|
|
|
(6,526
|
)
|
|
|
59,532
|
|
|
|
84,303
|
|
Deferred,
domestic
|
|
|
1,904
|
|
|
|
(3,041
|
)
|
|
|
(2,316
|
)
|
Deferred,
foreign
|
|
|
(3,476
|
)
|
|
|
(67
|
)
|
|
|
(1,041
|
)
|
Deferred,
total
|
|
|
(1,572
|
)
|
|
|
(3,108
|
)
|
|
|
(3,357
|
)
|
(Benefit)
provision for income taxes
|
|
$
|
(8,098
|
)
|
|
$
|
56,424
|
|
|
$
|
80,946
|
|
The
components of the Company’s deferred tax asset (liability) as of
December 31, 2009 and 2008 are as follows (in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax asset:
|
|
|
|
|
|
|
Inventory
|
|
$
|
7,360
|
|
|
$
|
6,806
|
|
Vacation
accrual
|
|
|
835
|
|
|
|
950
|
|
Bad
debt allowance
|
|
|
313
|
|
|
|
199
|
|
Employee
compensation
|
|
|
2,157
|
|
|
|
1,615
|
|
State
taxes
|
|
|
-
|
|
|
|
1,992
|
|
Foreign
taxes
|
|
|
4,558
|
|
|
|
1,011
|
|
Other
|
|
|
464
|
|
|
|
476
|
|
Total
current deferred tax asset, before valuation allowance
|
|
|
15,687
|
|
|
|
13,049
|
|
Valuation
allowance
|
|
|
(873
|
)
|
|
|
(467
|
)
|
Current
deferred tax asset, net of valuation allowance
|
|
$
|
14,814
|
|
|
$
|
12,582
|
|
|
|
|
|
|
|
|
|
|
Current
deferred tax (liability):
|
|
|
|
|
|
|
|
|
State
taxes
|
|
|
(495
|
)
|
|
|
-
|
|
Prepaid
expenses
|
|
|
(523
|
)
|
|
|
(615
|
)
|
Total
current deferred tax (liability):
|
|
|
(1,018
|
)
|
|
|
(615
|
)
|
|
|
|
|
|
|
|
|
|
Net
current deferred tax asset
|
|
$
|
13,796
|
|
|
$
|
11,967
|
|
|
|
|
|
|
|
|
|
|
Non
current deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
$
|
2,909
|
|
|
$
|
2,906
|
|
Employee
compensation
|
|
|
1,610
|
|
|
|
1,355
|
|
Acquisition
related compensation
|
|
|
2.913
|
|
|
|
4,012
|
|
State
taxes
|
|
|
650
|
|
|
|
558
|
|
Net
operating loss carryforwards
|
|
|
19,063
|
|
|
|
18,842
|
|
Research
credits
|
|
|
2,773
|
|
|
|
2,091
|
|
Unrealized
investment loss
|
|
|
5,438
|
|
|
|
6,605
|
|
Pension
liability
|
|
|
2,034
|
|
|
|
1,889
|
|
Capital
loss carryforward
|
|
|
913
|
|
|
|
-
|
|
Foreign
tax credit carryforward and other
|
|
|
289
|
|
|
|
771
|
|
Total
non current deferred tax assets
|
|
|
38,592
|
|
|
|
39,029
|
|
Valuation
allowance
|
|
|
(4,492
|
)
|
|
|
(2,222
|
)
|
Non
current deferred tax assets, net of valuation allowance
|
|
|
34,100
|
|
|
|
36,807
|
|
|
|
|
|
|
|
|
|
|
Non
current deferred tax (liabilities):
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(11,191
|
)
|
|
|
(10,821
|
)
|
Fixed
asset step up
|
|
|
-
|
|
|
|
(962
|
)
|
Intangible
asset step up
|
|
|
(20,552
|
)
|
|
|
(24,382
|
)
|
Convertible
debt
|
|
|
(6,002
|
)
|
|
|
(6,981
|
)
|
Other
|
|
|
(4,703
|
)
|
|
|
(706
|
)
|
Total
non current deferred tax (liabilities)
|
|
|
(42,448
|
)
|
|
|
(43,852
|
)
|
Net
non current deferred tax (liability)
|
|
$
|
(8,348
|
)
|
|
$
|
(7,045
|
)
|
The
Company had net operating loss ("NOL") carryforwards at December 31, 2009, of
$42.8 million and $40.4 million for federal and state income tax purposes,
respectively. These NOL carryforwards were primarily attributable to the
acquisition of SemEquip, Inc. in August 2008. They are subject to
potential utilization restrictions on an annual basis as a result of the
ownership change. The NOL carryforwards will begin to expire in 2021 if not
utilized.
At
December 31, 2009, the Company had approximately $1.2 million and $1.6 million
in federal and state research and development credit carryforwards,
respectively, which will begin to expire in 2016. These credits were
attributable to the acquisition of SemEquip, Inc. These credits are subject to
potential utilization restrictions on an annual basis as a result of the
ownership change.
At
December 31, 2009, the Company had a valuation allowance of $5.4 million for
state NOLs and state research credits as the ultimate utilization of these items
were less than “more likely than not”. The valuation allowance increased by $2.7
million during 2009 primarily due the continuing operating losses from SemEquip,
Inc. which reduced the likelihood that the state NOLs and state research credits
would be utilized.
The effective
income tax rate for the years ended December 31, 2009, 2008 and 2007
differs from the Federal statutory income tax rate due to the following items
(in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
before taxes, domestic
|
|
$
|
24,178
|
|
|
$
|
136,801
|
|
|
$
|
212,284
|
|
Income
(loss) before taxes, foreign
|
|
|
(23,761
|
)
|
|
|
24,103
|
|
|
|
10,845
|
|
Income
before taxes, total
|
|
$
|
417
|
|
|
$
|
160,904
|
|
|
$
|
223,129
|
|
Provision
for income taxes at federal statutory rate (35%)
|
|
|
146
|
|
|
|
56,317
|
|
|
|
78,095
|
|
State
income taxes, net of federal benefit
|
|
|
(3,572
|
)
|
|
|
4,575
|
|
|
|
9,331
|
|
Non
deductible items
|
|
|
242
|
|
|
|
247
|
|
|
|
584
|
|
Worthless
stock deduction
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
Foreign
tax provision (credits)
|
|
|
(1,059
|
)
|
|
|
(564
|
)
|
|
|
(502
|
)
|
Manufacturing
deduction
|
|
|
-
|
|
|
|
(2,882
|
)
|
|
|
(4,147
|
)
|
Foreign
earnings not taxed at federal rate
|
|
|
(2,031
|
)
|
|
|
(5,583
|
)
|
|
|
-
|
|
Contingency
reserve
|
|
|
(3,697
|
)
|
|
|
-
|
|
|
|
-
|
|
SemEquip
NOL adjustment
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
2,675
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
4,314
|
|
|
|
(2,415
|
)
|
Provision
(benefit) for income taxes
|
|
|
(8,098
|
)
|
|
$
|
56,424
|
|
|
$
|
80,946
|
|
The
exercise of stock options and vesting of restricted stock units result in a tax
benefit when the tax deduction exceeds share-based compensation expense
recognized under generally accepted accounting principles and is recorded as a
reduction of taxes payable with corresponding increase to the additional paid-in
capital account. Conversely, a tax shortfall occurs when the share-based
compensation expense recognized under generally accounting principles exceeds
the associated tax deduction and is recorded as an increase of income taxes
payable with a corresponding reduction to the additional paid-in capital account
as the Company has accumulated sufficient tax benefits in the past. Tax
benefits of $149,000, $0.8 million and $3.3 million were recognized for the
years ended December 31, 2009, 2008 and 2007, respectively.
The
Company's effective tax rate considers the impact of undistributed earnings of
subsidiary companies outside of the U.S. The Company does not provide for U.S.
federal income taxes or tax benefits on the undistributed earnings or losses of
its international subsidiaries because such earnings are reinvested and, in the
opinion of management, will continue to be reinvested indefinitely. As of
December 31, 2009, the Company had not provided federal income taxes on earnings
of approximately $23.3 million from its international subsidiaries. Should these
earnings be distributed in the form of dividends or otherwise, the Company would
be subject to both U.S. income taxes and withholding taxes in various
international jurisdictions. These taxes would be partially offset by U.S.
foreign tax credits. Determination of the related amount of unrecognized
deferred U.S. income taxes is not practicable because of the complexities
associated with this hypothetical calculation. However, from time to time and to
the extent that the Company can repatriate overseas earnings on a tax-free
basis, the Company's foreign subsidiaries will pay dividends to the U.S.
Material changes in the Company's working capital and long-term investment
requirements could impact the decisions made by management with respect to the
level and source of future remittances and, as a result, the Company's effective
tax rate.
Effective
January 1, 2008, the Company was granted an income tax holiday for its
manufacturing facility in China. The tax holiday allows for tax-free operations
through December 31, 2009, followed by operations at a reduced income tax rate
of 12.5% on the profits generated in 2010 through 2012, with a return to the
full statutory rate of 25% for periods thereafter. As a result of the tax
holiday in China, income tax expense was reduced by approximately $2.3 million
and $3.5 million in 2009 and 2008, respectively, with a corresponding earnings
per share impact of approximately $0.09 and $0.13 in 2009 and 2008,
respectively.
The
Company recorded a liability for unrecognized tax benefits (“UTBs”) at December
31, 2009, 2008 and 2007. A reconciliation of the beginning and ending
amount of UTBs is as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at January 1,
|
|
$
|
7,227
|
|
|
$
|
4,556
|
|
$
|
6,178
|
|
Additions
based on tax positions related to the current year
|
|
|
777
|
|
|
|
676
|
|
|
494
|
|
Additions
for tax positions of prior years
|
|
|
-
|
|
|
|
2,724
|
|
|
-
|
|
Reductions
for settlements with taxing authorities
|
|
|
(1,675
|
)
|
|
|
-
|
|
|
-
|
|
Reductions
of tax positions of prior years
|
|
|
(4,512
|
)
|
|
|
(729
|
)
|
|
(2,116
|
)
|
Balance
at December 31,
|
|
$
|
1,817
|
|
|
$
|
7,227
|
|
$
|
4,556
|
|
It is the
Company's policy to classify accrued interest and penalties as part of the
income tax provision. The Company reversed $2.4 million of interest expense
related to UTBs for the year ended December 31, 2009 and recognized $1.2 million
of interest expense for the year ended December 31, 2008. The accrued interest
on the UTBs at December 31, 2009 and December 31, 2008 was $0.2 million and $1.9
million, respectively. It is anticipated that any change in the above UTBs will
impact the effective tax rate. At December 31, 2009, the 2008 and 2009 years are
open and subject to potential examination in one or more jurisdictions. The
Company has settled federal income tax examinations for the 2005 through 2007
tax years and a state income tax examination for the tax years 2003 through
2005.
The Company
expects the federal income tax examination for the 2008 tax year to commence in
early 2010. The Company does not expect any significant release of UTBs within
the next twelve months.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7.
Employee Retirement and Other Benefit Plans
Supplemental Retirement
Plan
In
December 1988, the Board of Directors of the Company approved the adoption
of a supplemental retirement plan, the Ceradyne SMART 401(k) Plan (the Plan), in
which substantially all employees are eligible to participate after completing
90 days of employment. Participation in the Plan is voluntary. An employee may
elect to contribute up to the maximum deferred tax amount of $16,500 in 2009 as
a basic contribution. The Company may contribute any amount which the Board of
Directors annually determines appropriate. Company contributions fully vest and
are non-forfeitable after the participant has completed five years of service.
The Company’s related contributions for the years ended December 31, 2009,
2008 and 2007 were $1.3 million, $1.5 million and $1.3 million,
respectively.
Pension and Other
Postretirement Benefit Plans
The
Company has defined benefit pension and benefit plans for employees in its ESK
Ceramics and Ceradyne Boron Products subsidiaries. The overfunded or underfunded
status of the defined benefit pension and benefit plans are recognized as an
asset or liability in the statement of financial position and changes in that
funded status in the year in which the changes occur are recognized through
other comprehensive income.
German Pension and Benefit
Plans
The
Company provides pension benefits to the employees of its ESK Ceramics
subsidiary in Germany and France. These pension benefits are rendered for the
time after the retirement of the employees by payments into legally independent
pension and relief facilities. They are generally based on length of service,
wage level and position in the company. The direct and indirect obligations
comprise obligations for pensions that are already paid currently and
expectations for those pensions payable in the future. The Company has four
separate plans in Germany: a) Pensionskasse - Old; b) Pensionskasse - New; c)
Additional Compensation Plan; and d) Deferred Compensation plan. For financial
accounting purposes, the Additional and Deferred Compensation Plans are
accounted for as single-employer defined benefit plans, Pensionskasse - Old is a
multiemployer defined benefit plan and the Pensionskasse - New is a defined
contribution plan.
The
measurement date for the Company's pension plan assets and obligations,
including Pensionskasse - Old, is December 31. Assumed discount rates and
rates of increase in remuneration used in calculating the projected benefit
obligation together with long-term rates of return on plan assets vary according
to the economic conditions of Germany, where the pension plans are
situated.
As noted
above the Pensionskasse - Old is a multi employer defined benefit pension plan.
ESK Ceramics is one of numerous employers who participate in the plan.
Therefore, the Company has recognized as net pension benefit cost the required
contribution for the period. However, due to the current development of the
financial markets and the overall decrease of the return on pension plan assets,
the pension facility (“WACKER-Pensionskasse”) requested a one-off payment in
2008 from its members to further ensure its risk-bearing capacity and in
addition requested that future pension adjustments from 2009 onwards have to be
paid by the employers. Management believes, based on the bylaws of
WACKER-Pensionskasse and its expected future performance, that this obligation
will exist only for a limited period of time. The projected benefit obligation
for those future pension adjustments which management believes the Company will
have to pay was accrued as an additional liability.
The
accumulated benefit obligations and projected benefit obligations are computed
utilizing the same methods and assumptions as those used in the Additional and
Deferred Compensation Plans noted above and are solely based on the ESK Ceramics
employees participating in the plan. However, the assets of the plan are
allocated based upon the relative percentage of the projected benefit obligation
to the total for all participating employers. The long-term asset structure of
the Pensionskasse is determined significantly by asset-liability-studies
conducted regularly calculating an optimal investment portfolio based on the
known business in force and the actuarial assumptions. Input parameters are
assumed risk and return rates as well as specific correlation samples of the
respective asset categories. The priority objective of the asset allocation is
to achieve a rate of return compensating the benefit commitments within the
limits of a justifiable risk and volatility. The operative investment policy has
to conform to legal requirements (insurance control and investment law) as well
as to internal investment guidelines and restrictions. The use of derivatives is
permitted within the legally allowed scope. The expected overall rate of return
is based on numerous factors like the portfolio selection and the anticipated
long-term rate of return of the respective asset categories determined by the
Black-Litterman Market Equilibrium Model. The expected long-term rate of return
therewith is approximated to long-term historical averages, future expectations
are also covered by the Black-Litterman Model. In certain cases assumptions in
expected long-term rates of return are modified marginally by the responsible
manager of the WACKER Pensionskasse in order to consider personal experience and
different medium-term market expectations respectively. The projected benefit
obligations for the pension plan “continuation of payments in case of death”
were $55,554 and $55,489 for the years ended December 31, 2009 and 2008,
respectively.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Pensionskasse - New covers all German employees with membership as of January 1,
2005. Contributions and costs are determined as 2.0 percent of each covered
employee’s salary and totalled $134,346 in 2009, $165,982 in 2008, and $110,116
in 2007.
Components
of net periodic benefit costs under the Additional and Deferred Compensation
Plans for the years ended December 31, 2009, 2008 and 2007 were as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$
|
(592
|
)
|
|
$
|
(437
|
)
|
|
$
|
(463
|
)
|
Interest
cost
|
|
|
(681
|
)
|
|
|
(490
|
)
|
|
|
(400
|
)
|
Amortization
|
|
|
(88
|
)
|
|
|
-
|
|
|
|
(60
|
)
|
Net
periodic benefit cost
|
|
$
|
(1,361
|
)
|
|
$
|
(927
|
)
|
|
$
|
(923
|
)
|
The
weighted-average assumptions used to determine net periodic benefit cost were as
follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Rate
of long-term compensation increase
|
|
|
3.00
|
%
|
|
|
2.50
|
%
|
|
|
2.50
|
%
|
The
funded status and components of the change in benefit obligations of the
Additional and Deferred Compensation Plans for December 31, 2009 and 2008 were
as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Funded
status at end of year:
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
(14,657
|
)
|
|
$
|
(11,032
|
)
|
Assets
at fair value
|
|
|
-
|
|
|
|
-
|
|
Funded
status
|
|
$
|
(14,657
|
)
|
|
$
|
(11,032
|
)
|
Net
amounts recognized in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
(154
|
)
|
|
$
|
(106
|
)
|
Non-current
liabilities
|
|
$
|
(14,503
|
)
|
|
$
|
(10,926
|
)
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at beginning of year
|
|
$
|
(11,032
|
)
|
|
$
|
(8,503
|
)
|
Foreign
currency exchange rate changes
|
|
|
(439
|
)
|
|
|
568
|
|
Service
costs
|
|
|
(592
|
)
|
|
|
(437
|
)
|
Interest
costs
|
|
|
(681
|
)
|
|
|
(490
|
)
|
Actuarial
gains (losses)
|
|
|
(2,061
|
)
|
|
|
(2,280
|
)
|
Benefits
paid
|
|
|
148
|
|
|
|
110
|
|
Projected
benefit obligation at end of year
|
|
$
|
(14,657
|
)
|
|
$
|
(11,032
|
)
|
Accumulated
benefit obligation
|
|
$
|
(13,222
|
)
|
|
$
|
(10,173
|
)
|
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
weighted-average assumptions used to determine pension benefit obligations were
as follows:
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
5.40
|
%
|
|
|
6.25
|
%
|
Rate
of long-term compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Components
of the related tax effects for each component of other comprehensive income
follows related to the Additional and Deferred Compensation Plans for December
31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
2009
|
|
|
|
|
|
|
Before-Tax
Amount
|
|
|
Tax (Expense)
or Benefit
|
|
|
Net-of-Tax
Amount
|
|
Accumulated
other comprehensive (loss) income at beginning of year
|
|
$
|
(1,875
|
)
|
|
$
|
530
|
|
|
$
|
(1,345
|
)
|
Net
actuarial (loss) gain arising during current year
|
|
|
(2,061
|
)
|
|
|
604
|
|
|
|
(1,457
|
)
|
Amortization
of actuarial gain
|
|
|
88
|
|
|
|
(26
|
)
|
|
|
62
|
|
Foreign
currency effect
|
|
|
(108
|
)
|
|
|
52
|
|
|
|
(56
|
)
|
Accumulated
other comprehensive (loss) income at end of year
(1)
|
|
$
|
(3,956
|
)
|
|
$
|
1,160
|
|
|
$
|
(2,796
|
)
|
|
(1)
Approximately $173 of net actuarial loss included in accumulated
other comprehensive loss will be amortized into income in
2010.
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
Before-Tax
Amount
|
|
|
Tax (Expense)
or Benefit
|
|
|
Net-of-Tax
Amount
|
|
Accumulated
other comprehensive income (loss) at beginning of year
|
|
$
|
362
|
|
|
$
|
(134
|
)
|
|
$
|
228
|
|
Amortization
of actuarial gain
|
|
|
(2,280
|
)
|
|
|
670
|
|
|
|
(1,610
|
)
|
Foreign
currency effect
|
|
|
43
|
|
|
|
(6
|
)
|
|
|
37
|
|
Accumulated
other comprehensive (loss) income at end of year
(1)
|
|
$
|
(1,875
|
)
|
|
$
|
530
|
|
|
$
|
(1,345
|
)
|
The
Company expects to contribute to its defined benefit plans in 2010 (in
thousands):
Pensionkasse
– old
|
|
$
|
1,310
|
|
Additional
compensation
|
|
|
1,257
|
|
Deferred
compensation
|
|
|
226
|
|
Total
contributions expected in 2010
|
|
$
|
2,793
|
|
The
following estimated future benefit payments are expected to be paid in the years
indicated (in thousands):
2010
|
|
$
|
154
|
|
2011
|
|
|
243
|
|
2012
|
|
|
310
|
|
2013
|
|
|
344
|
|
2014
|
|
|
418
|
|
2015
– 2019
|
|
|
2,829
|
|
Assumed
discount rates and rates of increase in remuneration used in calculating the
projected benefit obligation together with long-term rates of return on plan
assets vary according to the economic conditions of Germany in which pension
plans are situated. The discount rate is typically changed at least annually.
The interest rate used is comparable to long-term corporate bonds with an AA
rating.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ceradyne Boron Products
Pension Plans
The
Company provides pension benefits to employees in its Ceradyne Boron Products
subsidiary. The plans cover employees who meet specified eligibility
requirements. The measurement date for the Company's pension plan assets and
obligations is December 31. The plans became obligations of the Company as
a result of the acquisition of Ceradyne Boron Products on August 31, 2007 (refer
to Note 3). The 2007 information presented below is for the period September 1,
2007 through December 31, 2007.
The
Company expects to make a contribution at least as great as the minimum required
by the IRS funding rules to the plan during the upcoming year. Funding
requirements for subsequent years are uncertain and will significantly depend
on the assumptions used to calculate plan funding levels, the actual
return on plan assets, changes in the employee groups covered by the plan, and
any legislative or regulatory changes affecting plan funding requirements. For
tax planning, financial planning, cash flow management or cost reduction
purposes the Company may increase, accelerate, decrease or delay contributions
to the plan to the extent permitted by law.
Components
of the net periodic pension (benefit) for the years ended December 31, 2009,
2008 and 2007 were as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
costs
|
|
$
|
86
|
|
|
$
|
110
|
|
|
$
|
39
|
|
Interest
costs
|
|
|
513
|
|
|
|
510
|
|
|
|
183
|
|
Amortization
of actuarial loss
|
|
|
202
|
|
|
|
-
|
|
|
|
-
|
|
Expected
return on assets
|
|
|
(490
|
)
|
|
|
(697
|
)
|
|
|
(235
|
)
|
Net
periodic pension (benefit)
|
|
$
|
311
|
|
|
$
|
(77
|
)
|
|
$
|
(13
|
)
|
The weighted-average assumptions used
to determine net periodic benefit costs were as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
5.74
|
%
|
|
|
5.92
|
%
|
|
|
6.17
|
%
|
Rate
of long-term compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Expected
return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The
funded status and components of the change in benefit obligations and changes in
plan assets for the years ended December 31, 2009 and 2008 were as follows (in
thousands):
Funded
status at end of year:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
9,088
|
|
|
$
|
9,210
|
|
Assets
at fair value
|
|
|
6,857
|
|
|
|
6,446
|
|
Funded
status
|
|
$
|
(2,231
|
)
|
|
$
|
(2,764
|
)
|
|
|
|
|
|
|
|
|
|
Net
amount recorded in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities
|
|
$
|
(2,231
|
)
|
|
$
|
(2,764
|
)
|
|
|
|
|
|
|
|
|
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of period
|
|
$
|
(9,210
|
)
|
|
$
|
(8,963
|
)
|
Service
costs
|
|
|
(86
|
)
|
|
|
(110
|
)
|
Interest
costs
|
|
|
(513
|
)
|
|
|
(510
|
)
|
Actuarial
gains (losses)
|
|
|
108
|
|
|
|
(146
|
)
|
Benefits
paid
|
|
|
613
|
|
|
|
519
|
|
Projected
benefit obligation at end of year
|
|
$
|
(9,088
|
)
|
|
$
|
(9,210
|
)
|
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Changes
in plan assets:
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of period
|
|
$
|
6,447
|
|
|
$
|
8,947
|
|
Actual
return (loss) on plan assets
|
|
|
1,022
|
|
|
|
(1,981
|
)
|
Benefits
paid
|
|
|
(612
|
)
|
|
|
(519
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
6,857
|
|
|
$
|
6,447
|
|
The fair
value of plan assets was determined based on observable inputs (Level 2) using
the net asset value of the investment funds. The net asset value represents
price per share and is calculated by dividing the total value of all securities
in the portfolio, less any liabilities, by the number of fund shares
outstanding. Plan assets as of December 31 2009 and 2008 comprised the
following:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Investment
fund – equity securities
|
|
$
|
4,461
|
|
|
$
|
4,244
|
|
Investment
fund – fixed income securities
|
|
|
2,396
|
|
|
|
2,203
|
|
Fair
value of plan assets at end of year
|
|
$
|
6,857
|
|
|
$
|
6,447
|
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation at end of year
|
|
$
|
(9,082
|
)
|
|
$
|
(9,188
|
)
|
The weighted-average assumptions used
to determine pension benefit obligation were as follows:
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
5.75
|
%
|
|
|
5.74
|
%
|
Rate
of long-term compensation increase
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
Components
of the related tax effects for each component of other comprehensive income
follows related to the plan for the years ended December 31, 2009 and 2008 are
as follows (in thousands):
|
|
2009
|
|
|
|
Before-Tax
Amount
|
|
|
Tax
(Expense)
or Benefit
|
|
|
Net-of-Tax
Amount
|
|
Accumulated
other comprehensive income (loss) at beginning of year
|
|
$
|
(2,915
|
)
|
|
$
|
1,136
|
|
|
$
|
(1,779
|
)
|
Net
actuarial gain arising during current year
|
|
|
843
|
|
|
|
(329
|
)
|
|
|
514
|
|
Accumulated
other comprehensive income (loss) at end of year
(1)
|
|
$
|
(2,072
|
)
|
|
$
|
807
|
|
|
$
|
(1,265
|
)
|
|
(1)
Approximately
$116 of actuarial net loss included in accumulated other comprehensive
loss will be amortized into income in
2010.
|
|
|
2008
|
|
|
|
Before-Tax
Amount
|
|
|
Tax (Expense)
or Benefit
|
|
|
Net-of-Tax
Amount
|
|
Accumulated
other comprehensive income (loss) at beginning of year
|
|
$
|
(91
|
)
|
|
$
|
35
|
|
|
$
|
(56
|
)
|
Net
actuarial gain arising during current year
|
|
|
(2,824
|
)
|
|
|
1,101
|
|
|
|
(1,723
|
)
|
Accumulated
other comprehensive income (loss) at end of year
|
|
$
|
(2,915
|
)
|
|
$
|
1,136
|
|
|
$
|
(1,779
|
)
|
The
change in unrecognized net gain/loss is one measure of the degree to which
important assumptions have coincided with actual experience. The company changes
important assumptions whenever changing conditions warrant. The discount rate
and the expected long term return on plan asset assumptions are assessed
annually. Other material assumptions include the compensation increase rates,
rates of employee termination, and rates of participant mortality. The discount
rate was determined by projecting the plan’s expected future benefit payments as
defined for the projected benefit obligation, discounting those expected
payments using a theoretical zero-coupon spot yield curve derived from a
universe of high-quality bonds as of the measurement date, and solving for the
single equivalent discount rate that resulted in the same projected benefit
obligation. The expected return on plan assets was determined based on
historical and expected future returns of the various asset classes, using the
target allocations as follows: equity securities (65%), debt
securities (25%) and other (10%). The plan’s investment policy includes a
mandate to diversify assets and invest in a variety of asset classes to achieve
that goal. The plan’s assets are currently invested in a variety of funds
representing most standard equity and debt securityclasses. While no significant
changes in the asset allocation are expected during the coming year, the Company
may make changes at any time.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following estimated future benefit payments are expected to be paid in the years
indicated (in thousands):
2010
|
|
$
|
593
|
|
2011
|
|
|
608
|
|
2012
|
|
|
588
|
|
2013
|
|
|
602
|
|
2014
|
|
|
678
|
|
2015
– 2019
|
|
|
3,726
|
|
8. Commitments and
Contingencies
a.
Operating Lease Obligations
The
Company leases certain of its manufacturing facilities under noncancelable
operating leases expiring at various dates through December 2014. The Company
incurred rental expense under these leases of $3.3 million, $3.0 million and
$2.7 million for the years ended 2009, 2008 and 2007, respectively. The
approximate minimum rental commitments required under existing noncancelable
leases as of December 31, 2009 are as follows (in thousands):
2010
|
|
$
|
3,383
|
|
2011
|
|
|
1,472
|
|
2012
|
|
|
735
|
|
2013
|
|
|
339
|
|
2014
|
|
|
145
|
|
Thereafter
|
|
|
27
|
|
|
|
$
|
6,101
|
|
b.
Legal Proceedings
Daniel Vargas, Jr. v.
Ceradyne, Inc., Orange County Superior Court, Civil Action No.
07CC01232
:
A class
action lawsuit was filed on March 23, 2007, in the California Superior
Court for Orange County, in which it was asserted that the
representative plaintiff, a former Ceradyne employee, and the putative
class members, were not paid overtime at an appropriate overtime rate. The
complaint alleged that the purportedly affected employees should have had their
regular rate of pay for purposes of calculating overtime adjusted to reflect the
payment of a bonus to them for the four years preceding the filing of the
complaint, up to the present time. The complaint further alleged that a waiting
time penalty should be assessed for the failure to timely pay the correct
overtime payment. Ceradyne filed an answer denying the material allegations
of the complaint. The motion for class certification was heard on November 13,
2008 and class certification was granted. On January 6, 2009, the court entered
an order certifying the class. Ceradyne contends that the lawsuit is
without merit on the basis that the bonuses that have been paid are
discretionary and not of the type that are subject to inclusion in the regular
hourly rate for purposes of calculating overtime. After a request for review by
the Court of Appeal of the decision to grant class certification, a day-long
mediation before a third-party neutral mediator, and an evaluation of the cost
of litigation and the financial exposure in the case, Ceradyne agreed to provide
a settlement fund of $1.25 million to resolve all issues in the litigation. The
settlement specifically states that neither party is admitting to liability or
lack thereof. Ceradyne believed that based upon the cost of further defense and
the exposure in the case, it was best to settle the matter. On January 8, 2010,
the Court has granted final approval of the settlement. The settlement funds
will be paid to a third party administrator on or before March 18,
2010.
On
October 21, 2009, Ceradyne made a settlement offer in relation to a claim
pertaining to ballistic tests of armored wing assemblies. Ceradyne established a
reserve of $1.0 million for this matter as of September 30,
2009.
9. Disclosure
About Segments of Enterprise and Related Information
The
Company serves its markets and manages its business through six operating
segments, each of which has its own manufacturing facilities and administrative
and selling functions. The Company’s Advanced Ceramic Operations, with
operations located in Costa Mesa and Irvine, California, Lexington, Kentucky,
Wixom, Michigan, Salem, New Hampshire, Mountain Green, Utah and Bangalore, India
primarily produces armor, orthodontic products, diesel engine parts, components
for semiconductor equipment, and houses the Company’s SRBSN research and
development activities. The Company’s cathode development and production are
handled through its Semicon Associates division located in Lexington, Kentucky.
Fused silica products, including missile radomes and crucibles for photovoltaic
solar cell applications are produced at the Company’s Thermo Materials division
located in Scottdale and Clarkston, Georgia. The Company’s manufacturing
facility in Tianjin, China manufactures fused silica crucibles, and is part of
the Thermo Materials operating segment. Minco, Inc., which Ceradyne
acquired in July 2007, also is included in the Thermo Materials operating
segment. Minco, located in Midway, Tennessee, manufactures fused silica, which
is a primary raw material used in products manufactured by our Thermo Materials
division. The Company’s ESK Ceramics subsidiary is located in Kempten, Germany.
This subsidiary produces ceramic powders, including boron carbide powder for
ceramic body armor, evaporation boats for metallization, functional and
frictional coatings utilized in the automotive and textile industries, high
performance pump seals, fluid handling, refactory products and ceramic powders
used in cosmetics. The Company’s Ceradyne Canada subsidiary acquired certain
assets in June 2006, including a building, equipment and technology, related to
the production of structural neutron absorbing materials for use in the storage
of spent nuclear rods. The building and operations of Ceradyne Canada are
located in Chicoutimi, Quebec, Canada. The Company added a sixth operating
segment in August 2007, when it acquired EaglePicher Boron, LLC. The Company has
changed the name of this subsidiary to Boron Products, LLC and does business
as
Ceradyne Boron Products. Boron Products owns certain assets, including
approximately 155 acres and several buildings, equipment and technology, related
to the production of 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 control. Boron Products
also produces complementary chemical isotopes used in the normal operation and
control of nuclear power plants. SemEquip, Inc., which the Company acquired in
August 2008, develops and markets cluster ion implantation sub-systems and
advanced ion source materials for the manufacture of logic and memory
semiconductor chips. SemEquip is included in the Boron Products operating
segment.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The U.S.
government and government agencies collectively represented approximately 40.8%
of our net sales in 2009, 54.1% in 2008 and 71.6% in 2007. As of December 31,
2009 and 2008, there were no other external customers that accounted for 10% or
more of our revenue.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEGMENT
INFORMATION FOR THE YEARS ENDED
DECEMBER
31, 2009, 2008 AND 2007
(amounts
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
214,074
|
|
|
$
|
450,452
|
|
|
$
|
587,279
|
|
ESK
Ceramics
|
|
|
105,117
|
|
|
|
152,238
|
|
|
|
160,623
|
|
Semicon
Associates
|
|
|
7,677
|
|
|
|
8,551
|
|
|
|
7,970
|
|
Thermo
Materials
|
|
|
66,116
|
|
|
|
80,158
|
|
|
|
32,025
|
|
Ceradyne
Canada
|
|
|
1,664
|
|
|
|
5,222
|
|
|
|
3,916
|
|
Boron
|
|
|
27,287
|
|
|
|
19,007
|
|
|
|
7,766
|
|
Inter-segment
elimination
|
|
|
(21,360
|
)
|
|
|
(35,431
|
)
|
|
|
(42,744
|
)
|
Total
revenue from external customers
|
|
$
|
400,575
|
|
|
$
|
680,197
|
|
|
$
|
756,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
10,036
|
|
|
$
|
10,523
|
|
|
$
|
9,328
|
|
ESK
Ceramics
|
|
|
11,686
|
|
|
|
13,144
|
|
|
|
10,630
|
|
Semicon
Associates
|
|
|
353
|
|
|
|
423
|
|
|
|
346
|
|
Thermo
Materials
|
|
|
4,878
|
|
|
|
5,497
|
|
|
|
3,061
|
|
Ceradyne
Canada
|
|
|
1,339
|
|
|
|
1,043
|
|
|
|
732
|
|
Boron
|
|
|
6,854
|
|
|
|
6,038
|
|
|
|
2,654
|
|
Total
|
|
$
|
35,146
|
|
|
$
|
36,668
|
|
|
$
|
26,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income before Provision for Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
22,855
|
|
|
$
|
145,339
|
|
|
$
|
209,267
|
|
ESK
Ceramics
|
|
|
(24,897
|
)
|
|
|
4,214
|
|
|
|
13,373
|
|
Semicon
Associates
|
|
|
674
|
|
|
|
1,377
|
|
|
|
1,131
|
|
Thermo
Materials
|
|
|
12,825
|
|
|
|
23,694
|
|
|
|
2,304
|
|
Ceradyne
Canada
|
|
|
(6,926
|
)
|
|
|
(69
|
)
|
|
|
(3,041
|
)
|
Boron
|
|
|
(4,092
|
)
|
|
|
(15,508
|
)
|
|
|
727
|
|
Inter-segment
elimination
|
|
|
(22
|
)
|
|
|
1,857
|
|
|
|
(632
|
)
|
Total
|
|
$
|
417
|
|
|
$
|
160,904
|
|
|
$
|
223,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
401,496
|
|
|
$
|
384,346
|
|
|
$
|
409,612
|
|
ESK
Ceramics
|
|
|
207,733
|
|
|
|
226,626
|
|
|
|
209,384
|
|
Semicon
Associates
|
|
|
5,370
|
|
|
|
5,939
|
|
|
|
5,682
|
|
Thermo
Materials
|
|
|
105,332
|
|
|
|
96,163
|
|
|
|
67,465
|
|
Ceradyne
Canada
|
|
|
17,489
|
|
|
|
21,667
|
|
|
|
20,480
|
|
Boron
|
|
|
112,284
|
|
|
|
119,786
|
|
|
|
70,031
|
|
Total
|
|
$
|
849,704
|
|
|
$
|
854,527
|
|
|
$
|
782,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for PP&E
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
4,680
|
|
|
$
|
5,150
|
|
|
$
|
8,174
|
|
ESK
Ceramics
|
|
|
426
|
|
|
|
22,079
|
|
|
|
17,384
|
|
Semicon
Associates
|
|
|
200
|
|
|
|
371
|
|
|
|
396
|
|
Thermo
Materials
|
|
|
7,952
|
|
|
|
12,635
|
|
|
|
14,696
|
|
Ceradyne
Canada
|
|
|
140
|
|
|
|
3,381
|
|
|
|
1,528
|
|
Boron
|
|
|
1,136
|
|
|
|
431
|
|
|
|
67
|
|
Total
|
|
$
|
14,534
|
|
|
$
|
44,047
|
|
|
$
|
42,245
|
|
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEGMENT
INFORMATION FOR THE YEARS ENDED
DECEMBER
31, 2009, 2008 AND 2007
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Percentage of U.S. net sales
from external customers
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
52
|
%
|
|
|
63
|
%
|
|
|
75
|
%
|
ESK
Ceramics
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Semicon
Associates
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Thermo
Materials
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
Ceradyne
Canada
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Boron
|
|
|
4
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
Total
percentage of U.S. net sales from external customers
|
|
|
66
|
%
|
|
|
73
|
%
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of foreign net sales from external
customers
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
2
|
%
|
ESK
Ceramics
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
Semicon
Associates
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Thermo
Materials
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
2
|
%
|
Ceradyne
Canada
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Boron
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Total
percentage of foreign net sales from external customers
|
|
|
34
|
%
|
|
|
27
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net sales from external
customers
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
54
|
%
|
|
|
66
|
%
|
|
|
77
|
%
|
ESK
Ceramics
|
|
|
23
|
%
|
|
|
18
|
%
|
|
|
16
|
%
|
Semicon
Associates
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Thermo
Materials
|
|
|
15
|
%
|
|
|
11
|
%
|
|
|
4
|
%
|
Ceradyne
Canada
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Boron
|
|
|
7
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
Total
percentage of net sales from external customers
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The following
is revenue by product line for Advanced Ceramic Operations for the years ended
(amounts in thousands):
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Armor
|
|
$
|
189,028
|
|
|
$
|
410,649
|
|
|
$
|
551,301
|
|
Automotive
|
|
|
5,006
|
|
|
|
17,604
|
|
|
|
10,961
|
|
Orthodontics
|
|
|
9,487
|
|
|
|
9,977
|
|
|
|
10,603
|
|
Industrial
|
|
|
10,553
|
|
|
|
12,222
|
|
|
|
14,414
|
|
|
|
$
|
214,074
|
|
|
$
|
450,452
|
|
|
$
|
587,279
|
|
10.
Share Based Compensation
Share-based
compensation expense is based on the value of the portion of share-based payment
awards that is ultimately expected to vest. Guidance for share-based
compensation requires forfeitures to be estimated at the time of grant in order
to estimate the amount of share-based awards that will ultimately vest. The
forfeiture rate is based on historical rates. Share-based compensation expense
recognized in the Company’s Consolidated Statements of Income for the years
ended December 31, 2009, December 31, 2008 and December 31,
2007 includes (i) compensation expense for share-based payment
awards granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the guidance for
share-based compensation and (ii) compensation expense for the share-based
payment awards granted subsequent to December 31, 2005, based on the grant
date fair value estimated in accordance with guidance for share-based
compensation. As share-based compensation expense recognized in the Consolidated
Statement of Income for the years ended December 31, 2009, December 31, 2008 and
December 31, 2007 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company
maintains the 1994 Stock Incentive Plan and 2003 Stock Incentive Plan. The
Company was authorized to grant options for up to 2,362,500 shares under its
1994 Stock Incentive Plan. The Company has granted options
for 2,691,225
shares and has had
cancellations of 396,911 shares through December 31, 2009. There are no
remaining stock options available to grant under this plan. The options granted
under this plan generally became exercisable over a five-year period for
incentive stock options and six months for nonqualified stock options and have a
maximum term of ten years.
The 2003
Stock Incentive Plan was amended in 2005 to allow the issuance of Restricted
Stock Units (the “Units”) to eligible employees and non-employee directors. The
Units are payable in shares of the Company’s common stock upon vesting. For
directors, the Units vest annually over three years on the anniversary date of
their issuance. For officers and employees, the Units vest annually over five
years on the anniversary date of their issuance.
The Company
may grant options and Units for up to 1,125,000 shares under the 2003 Stock
Incentive Plan. The Company has granted options for 475,125 shares
and Units for 593,826 shares under this plan through December 31, 2009. There
have been cancellations of 99,375
shares associated with
this plan through December 31, 2009. The options under this plan have a life of
ten years.
During
the years ended December 31, 2009 and 2008, the Company issued Units to certain
directors, officers and employees with weighted average grant date fair values
and Units issued as indicated in the table below. Pursuant to guidance of
share-based compensation, the Company records compensation expense for the
amount of the grant date fair value on a straight line basis over the vesting
period. The Company incurred charges associated with the vesting of the Units of
$3.6 million for the year ended December 31, 2009, $2.7 million for the
year ended December 31, 2008, and $1.7 million for the year ended December 31,
2007.
Share-based compensation expense
reduced the Company’s results of operations as follows (in thousands, except per
share amounts):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Share-based
compensation expense recognized:
|
|
|
|
|
|
|
|
|
|
General
and administrative, options
|
|
$
|
214
|
|
|
$
|
438
|
|
|
$
|
710
|
|
General
and administrative, Units
|
|
|
3,624
|
|
|
|
2,671
|
|
|
|
1,741
|
|
Related
deferred income tax benefit
|
|
|
(1,529
|
)
|
|
|
(1,094
|
)
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in net income
|
|
$
|
2,309
|
|
|
$
|
2,015
|
|
|
$
|
1,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
0.06
|
|
The
amounts above include the impact of recognizing compensation expense related to
non-qualified stock options.
As of
December 31, 2009, there was $0.5 million of total unrecognized compensation
cost related to 6,000 non-vested outstanding stock options, with a weighted
average value of $19.24 per share. The unrecognized expense is anticipated to be
recognized on a straight-line basis over a weighted average period
of 0.3 years. In addition, the aggregate intrinsic value of stock
options exercised was $127,000 and $0.8 million for the years ended December 31,
2009 and 2008, respectively.
As of
December 31, 2009, there was approximately $9.4 million of total unrecognized
compensation cost related to non-vested Units granted under the 2003 Stock
Incentive Plan. That cost is expected to be recognized over a weighted average
period of 3.2 years.
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following is a summary of stock option activity:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding,
beginning of year
|
|
|
462,900
|
|
|
$
|
12.22
|
|
|
|
497,325
|
|
|
$
|
12.04
|
|
|
|
677,370
|
|
|
$
|
11.41
|
|
Options
granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options
exercised
|
|
|
(8,500
|
)
|
|
$
|
3.96
|
|
|
|
(30,675
|
)
|
|
$
|
9.04
|
|
|
|
(159,495
|
)
|
|
$
|
8.15
|
|
Options
cancelled
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(3,750
|
)
|
|
$
|
15.05
|
|
|
|
(20,550
|
)
|
|
$
|
21.50
|
|
Outstanding,
end of year
|
|
|
454,400
|
|
|
$
|
12.37
|
|
|
|
462,900
|
|
|
$
|
12.22
|
|
|
|
497,325
|
|
|
$
|
12.04
|
|
Exercisable,
end of year
|
|
|
448,400
|
|
|
$
|
12.28
|
|
|
|
437,025
|
|
|
$
|
11.71
|
|
|
|
429,600
|
|
|
$
|
10.83
|
|
The
following is a summary of Unit activity:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Units
|
|
|
Weighted
Average
Grant
Fair Value
|
|
|
Units
|
|
|
Weighted
Average
Grant
Fair Value
|
|
|
Units
|
|
|
Weighted
Average
Grant
Fair Value
|
|
Outstanding,
beginning of year
|
|
|
271,264
|
|
|
$
|
45.90
|
|
|
|
149,759
|
|
|
$
|
52.94
|
|
|
|
137,100
|
|
|
$
|
41.13
|
|
Granted
|
|
|
198,350
|
|
|
$
|
19.35
|
|
|
|
168,076
|
|
|
$
|
40.54
|
|
|
|
72,850
|
|
|
$
|
66.06
|
|
Vested
|
|
|
(82,340
|
)
|
|
$
|
41.57
|
|
|
|
(40,671
|
)
|
|
$
|
49.09
|
|
|
|
(31,791
|
)
|
|
$
|
41.47
|
|
Forfeited
|
|
|
(23,350
|
)
|
|
$
|
44.98
|
|
|
|
(5,900
|
)
|
|
$
|
49.08
|
|
|
|
(28,400
|
)
|
|
$
|
42.39
|
|
Non-vested
Units at end of year
|
|
|
363,924
|
|
|
$
|
32.47
|
|
|
|
271,264
|
|
|
$
|
45.90
|
|
|
|
149,759
|
|
|
$
|
52.94
|
|
The
following table summarizes information regarding options outstanding and options
exercisable at December 31, 2009:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Range
of Exercise Prices
|
|
|
Number of
Options
|
|
|
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(000s)
|
|
|
Number of
Options
|
|
|
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(000s)
|
|
$
|
2.98 - $4.58
|
|
|
|
206,375
|
|
|
|
2.08
|
|
|
$
|
4.12
|
|
|
$
|
3,117
|
|
|
|
206,375
|
|
|
|
2.08
|
|
|
$
|
4.12
|
|
|
$
|
3,117
|
|
$
|
10.53 - $16.89
|
|
|
|
122,025
|
|
|
|
3.70
|
|
|
$
|
16.89
|
|
|
$
|
284
|
|
|
|
122,025
|
|
|
|
3.70
|
|
|
$
|
16.89
|
|
|
$
|
284
|
|
$
|
18.80 - $24.07
|
|
|
|
126,000
|
|
|
|
4.72
|
|
|
$
|
21.51
|
|
|
$
|
6
|
|
|
|
120,000
|
|
|
|
4.69
|
|
|
$
|
21.63
|
|
|
$
|
4
|
|
|
|
|
|
|
454,400
|
|
|
|
3.25
|
|
|
$
|
12.37
|
|
|
$
|
3,407
|
|
|
|
448,400
|
|
|
|
3.22
|
|
|
$
|
12.28
|
|
|
$
|
3,405
|
|
The
following table summarizes information regarding Units outstanding at December
31, 2009:
|
|
|
Outstanding
|
|
Range
of Grant Prices
|
|
|
Number of
Units
|
|
|
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Grant
Fair
Value
|
|
$
|
16.53
- $22.68
|
|
|
|
193,150
|
|
|
|
3.63
|
|
|
$
|
19.64
|
|
$
|
37.41 - $39.43
|
|
|
|
80,084
|
|
|
|
3.22
|
|
|
$
|
38.60
|
|
$
|
42.28
- $45.70
|
|
|
|
44,900
|
|
|
|
3.13
|
|
|
$
|
44.51
|
|
$
|
52.47
- $62.07
|
|
|
|
25,520
|
|
|
|
1.71
|
|
|
$
|
58.87
|
|
$
|
66.35
- $81.18
|
|
|
|
20,270
|
|
|
|
2.17
|
|
|
$
|
70.56
|
|
|
|
|
|
|
363,924
|
|
|
|
3.26
|
|
|
$
|
32.47
|
|
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company’s options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate.
The
Company calculates expected volatility based on historical data of the Company’s
common stock. The risk-free interest rate assumption is based upon an observed
interest rate appropriate for the term of the Company’s employee stock options.
The dividend yield assumption is based on the Company’s intent not to issue a
dividend under its dividend policy. The expected holding period assumption was
estimated based on historical experience.
12.
Restructuring – Plant Closure and Severance
In May
2009, the Company announced that, in accordance with the French legal process,
its ESK Ceramics France subsidiary (“ESK France”) is presenting to the local
employees’ representatives a plan for closing its manufacturing plant in Bazet,
France. The plant was closed in December 2009 and, as a result, ESK France
reduced its workforce by 97 employees, primarily composed of manufacturing,
production and additional support staff at the plant. This action was
implemented as a cost-cutting measure to eliminate losses that were incurred at
this facility due to the recent severe economic contraction and is consistent
with Ceradyne’s ongoing objective to lower the costs of its manufacturing
operations. This manufacturing facility was an 88,000 square foot building owned
by ESK France that has been used to support the production of various industrial
ceramic products. We transferred production of these products to our German
subsidiary, ESK Ceramics GmbH & Co. KG (“ESK Ceramics”) in Kempten, Germany.
Affected employees were eligible for a severance package that included severance
pay, continuation of benefits and outplacement services. Pre-tax charges
relating to this corporate restructuring also included accelerated depreciation
of fixed assets and various other costs to close the plant.
ESK Ceramics
recorded pre-tax charges totaling $12.2 million in connection for the Bazet
restructuring and plant closure, which comprised $10.3 million for severance,
termination of contracts and other shutdown costs that was reported as
Restructuring - plant closure and severance in Operating Expenses and $1.9
million for accelerated depreciation of fixed assets that was reported in Cost
of Goods Sold in the year ended December 31, 2009. The severance charge was
recognized as a postemployment benefit as the Company’s obligation related to
employees' rights to receive compensation for future absences was attributable
to employees' services already rendered, the obligation relates to rights that
legally vest, payment of the compensation is probable, and the amount could be
reasonably estimated based on local statutory requirements. The Company also
incurred other severance costs in connection with headcount reductions in the
United States and Germany of $2.7 million during the year ended December 31,
2009.
Activities in
the restructuring charges accrual balances during the year ended December 31,
2009 were as follows (in thousands):
|
|
Costs
Incurred
|
|
|
Cash
Payments
|
|
|
Non-Cash
Adjustments
|
|
|
Balance at
December
31,
2009
|
|
Severance,
retention bonuses and other one-time termination benefits
|
|
$
|
12,090
|
|
|
$
|
(7,039
|
)
|
|
$
|
474
|
|
|
$
|
5,525
|
|
Termination
of redundant supplier contracts
|
|
|
107
|
|
|
|
-
|
|
|
|
3
|
|
|
|
110
|
|
Legal
fees and other shutdown costs
|
|
|
727
|
|
|
|
(121
|
)
|
|
|
2
|
|
|
|
608
|
|
|
|
$
|
12,924
|
|
|
$
|
(7,160
|
)
|
|
$
|
479
|
|
|
$
|
6,243
|
|
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13.
Quarterly Financial Information (unaudited)
The
results by quarter for 2009 and 2008 (amounts in thousands except per share
data):
Quarter
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2008
|
|
|
June 30,
2008
|
|
|
September 30,
2008
|
|
|
December 31,
2008
|
|
Net
sales
|
|
$
|
188,537
|
|
|
$
|
184,975
|
|
|
$
|
167,746
|
|
|
$
|
138,939
|
|
Gross
profit
|
|
|
71,529
|
|
|
|
75,561
|
|
|
|
66,664
|
|
|
|
51,558
|
|
Net
income
|
|
|
32,351
|
|
|
|
32,641
|
|
|
|
18,819
|
|
|
|
20,669
|
|
Basic
income per share
|
|
$
|
1.19
|
|
|
$
|
1.24
|
|
|
$
|
0.72
|
|
|
$
|
0.79
|
|
Diluted
income per share
|
|
$
|
1.18
|
|
|
$
|
1.23
|
|
|
$
|
0.71
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009
|
|
|
June 30,
2009
|
|
|
September 30,
2009
|
|
|
December 31,
2009
|
|
Net
sales
|
|
$
|
99,772
|
|
|
$
|
95,267
|
|
|
$
|
107,954
|
|
|
$
|
97,582
|
|
Gross
profit
|
|
|
23,587
|
|
|
|
23,064
|
|
|
|
28,625
|
|
|
|
26,343
|
|
Net
income (loss)
|
|
|
708
|
|
|
|
(11,210
|
)
|
|
|
4,936
|
|
|
|
14,081
|
|
Basic
income (loss) per share
|
|
$
|
.03
|
|
|
$
|
(0.44
|
)
|
|
$
|
0.19
|
|
|
$
|
0.55
|
|
Diluted
income (loss) per share
|
|
$
|
.03
|
|
|
$
|
(0.44
|
)
|
|
$
|
0.19
|
|
|
$
|
0.55
|
|
CERADYNE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
February
23, 2010
|
CERADYNE,
INC.
|
|
|
|
|
By:
|
/s/
JOEL P. MOSKOWITZ
|
|
|
Joel
P. Moskowitz
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ J
OEL
P. M
OSKOWITZ
Joel
P. Moskowitz
|
Chairman
of the Board,
Chief
Executive Officer, President and Director (Principal Executive
Officer)
|
February
23, 2010
|
|
|
|
/s/ J
ERROLD
J. P
ELLIZZON
Jerrold
J. Pellizzon
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
February
23, 2010
|
|
|
|
/s/ R
ICHARD
A. A
LLIEGRO
Richard
A. Alliegro
|
Director
|
February
23, 2010
|
|
|
|
/s/ F
RANK
E
DELSTEIN
Frank
Edelstein
|
Director
|
February
23, 2010
|
|
|
|
/s/ R
ICHARD
A. K
ERTSON
|
Director
|
February
23, 2010
|
Richard
A. Kertson
|
|
|
|
|
|
/s/ William
C. LaCourse
|
Director
|
February
23, 2010
|
William
C. LaCourse
|
|
|
|
|
|
/s/ M
ILTON
L. L
OHR
Milton
L. Lohr
|
Director
|
February
23, 2010
|
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