UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2007
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
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For the transition period from
to
Commission File No. 000-13059
CERADYNE, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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33-0055414
(I.R.S. Employer
Identification No.)
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3169 Red Hill Avenue, Costa Mesa, CA
(Address of principal executive)
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92626
(Zip Code)
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Registrants telephone number, including area code (714) 549-0421
N/A
(Former name, former address and former fiscal year, if changed since last report)
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding as of October 18, 2007
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Common Stock, $0.01 par value
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27,315,905 Shares
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Exhibit Index on Page 31
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2007
PART I. FINANCIAL INFORMATION
Item 1.
Unaudited Consolidated Financial Statements
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
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September 30,
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December 31,
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2007
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2006
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(Unaudited)
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CURRENT ASSETS
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Cash and cash equivalents
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$
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15,146
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$
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13,547
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Restricted cash
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2,633
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Short-term investments
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155,970
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190,565
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Accounts receivable, net of allowances for doubtful accounts of approximately
$893 and $1,158 at September 30, 2007 and December 31, 2006, respectively
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96,569
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77,162
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Other receivables
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5,236
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3,289
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Inventories, net
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102,552
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73,109
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Production tooling, net
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19,604
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20,975
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Prepaid expenses and other
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15,408
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11,859
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Deferred tax asset
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12,019
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11,469
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TOTAL CURRENT ASSETS
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425,137
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401,975
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PROPERTY, PLANT AND EQUIPMENT, net
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232,529
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183,011
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INTANGIBLE ASSETS, net
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38,221
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8,389
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GOODWILL
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45,813
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16,518
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OTHER ASSETS
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4,122
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3,922
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TOTAL ASSETS
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$
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745,822
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$
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613,815
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CURRENT LIABILITIES
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Accounts payable
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$
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34,103
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$
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35,470
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Accrued expenses
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22,908
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21,821
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Income taxes payable
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2,047
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12,621
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TOTAL CURRENT LIABILITIES
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59,058
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69,912
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LONG-TERM DEBT
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121,000
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121,000
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EMPLOYEE BENEFITS
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15,609
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13,274
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OTHER LONG TERM LIABILITY
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6,964
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DEFERRED TAX LIABILITY
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6,237
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3,018
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TOTAL LIABILITIES
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208,868
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207,204
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COMMITMENTS AND CONTINGENCIES (Note 12)
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SHAREHOLDERS EQUITY
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Common stock, $0.01 par value,
100,000,000 authorized, 27,314,780
and 27,119,012 shares issued and
outstanding at September 30, 2007 and
December 31, 2006, respectively
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272
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272
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Additional paid in capital
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185,915
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178,252
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Retained earnings
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326,078
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217,036
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Accumulated other comprehensive income
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24,689
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11,051
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TOTAL SHAREHOLDERS EQUITY
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536,954
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406,611
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
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$
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745,822
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$
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613,815
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See accompanying condensed notes to Consolidated Financial Statements
3
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2007
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2006
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2007
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2006
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(Unaudited)
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(Unaudited)
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NET SALES
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$
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191,606
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$
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185,796
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$
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565,408
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$
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484,159
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COST OF GOODS SOLD
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115,819
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115,265
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335,125
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295,962
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Gross profit
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75,787
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70,531
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230,283
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188,197
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OPERATING EXPENSES
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Selling
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6,872
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5,678
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19,617
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17,368
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General and administrative
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11,280
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8,744
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30,218
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26,117
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Research and development
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5,680
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2,532
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13,561
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7,731
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23,832
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16,954
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63,396
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51,216
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Income from operations
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51,955
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53,577
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166,887
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136,981
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OTHER INCOME (EXPENSE):
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Royalty income
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30
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30
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105
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90
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Interest income
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3,291
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1,753
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9,542
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4,355
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Interest expense
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(1,104
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)
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(1,023
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)
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(3,154
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)
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(3,081
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)
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Miscellaneous
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(103
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)
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(257
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)
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54
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(377
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)
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2,114
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503
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6,547
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987
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Income before provision for income taxes
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54,069
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54,080
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173,434
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137,968
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PROVISION FOR INCOME TAXES
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21,419
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17,158
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64,392
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47,304
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NET INCOME
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$
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32,650
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$
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36,922
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$
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109,042
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$
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90,664
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BASIC INCOME PER SHARE
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$
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1.20
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$
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1.37
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$
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4.00
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$
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3.37
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DILUTED INCOME PER SHARE
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$
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1.16
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$
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1.34
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$
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3.93
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$
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3.31
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WEIGHTED AVERAGE SHARES OUTSTANDING:
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BASIC
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27,304
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27,000
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27,231
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26,887
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DILUTED
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28,052
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27,461
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27,766
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27,372
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See accompanying condensed notes to Consolidated Financial Statements
4
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
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Nine Months Ended
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September 30,
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2007
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2006
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(Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$
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109,042
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$
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90,664
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ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
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Depreciation and amortization
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17,948
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13,165
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Deferred income taxes
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(2,014
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)
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|
135
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Stock compensation
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1,842
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3,346
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Loss on equipment disposal
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794
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158
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Change in operating assets and liabilities:
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Accounts receivable, net
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(12,995
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)
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(8,742
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)
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Other receivables
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(1,735
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)
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(444
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)
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Inventories
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(16,927
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)
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(3,770
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)
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Production tooling
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1,480
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(6,751
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)
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Prepaid expenses and other assets
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(1,167
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)
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(2,376
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)
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Accounts payable and accrued expenses
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(4,418
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)
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22,826
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Income taxes payable
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(11,042
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)
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(2,489
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)
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Other long term liability
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6,964
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|
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Employee benefits
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1,237
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878
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NET CASH PROVIDED BY OPERATING ACTIVITES
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89,009
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106,600
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchases of property, plant and equipment
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(28,343
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)
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(27,597
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)
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Changes in restricted cash
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(2,633
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)
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Sales and purchases of short-term investments
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34,595
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(107,685
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)
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Acquisition of businesses, net of cash acquired
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(98,606
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)
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(6,605
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)
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NET CASH USED IN INVESTING ACTIVITIES
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(94,987
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)
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(141,887
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)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from issuance of stock due to exercise of
options and vesting of
restricted stock units
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|
603
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|
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|
871
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Proceeds from issuance of stock for stock plans
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|
|
1,085
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|
|
|
828
|
|
Excess tax benefit due to exercise of stock options
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|
|
4,133
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|
|
|
1,129
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Other
|
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|
48
|
|
|
|
(125
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)
|
|
|
|
|
|
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NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
5,869
|
|
|
|
2,703
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS
|
|
|
1,708
|
|
|
|
1,025
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,599
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|
|
|
(31,559
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)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
13,547
|
|
|
|
91,542
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
15,146
|
|
|
$
|
59,983
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,756
|
|
|
$
|
1,712
|
|
Income taxes paid
|
|
$
|
67,286
|
|
|
$
|
49,774
|
|
|
|
|
|
|
|
|
See accompanying condensed notes to Consolidated Financial Statements
5
CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
(Unaudited)
1.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair statement have been
included. Operating results for the nine months ended September 30, 2007 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2007.
The balance sheet at December 31, 2006 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
For further information, refer to the Consolidated Financial Statements and Notes to Financial
Statements included in Ceradynes Annual Report on Form 10-K for the year ended December 31, 2006.
2.
Share Based Compensation
See Note 4 below for information concerning an internal investigation into our stock option grant
practices for the period of 1997 through June 30, 2006.
Share-based compensation expense recognized under SFAS 123(R) for the three and nine months ended
September 30, 2007 was $0.7 million and $1.8 million respectively, which was related to stock
options and restricted stock units. This compared to $433,000 and $3.3 million for the three and
nine months ended September 30, 2006. A pretax stock-based compensation charge of approximately
$2.2 million was included in the charge taken in the nine months ended September 30, 2006.
Share-based compensation expense is based on the value of the portion of share-based payment awards
that is ultimately expected to vest. SFAS 123(R) 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
Companys Consolidated Statements of Income for the three and nine month periods ended September
30, 2007 and the three and nine months ended September 30, 2006 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 pro forma provisions of SFAS 123 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 the provisions of SFAS
123(R). As share-based compensation expense recognized in the Consolidated Statements of Income for
the three and nine month periods ended September 30, 2007 and three and nine months ended September
30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures.
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
395,336 shares through September 30, 2007. 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 Companys 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 227,400 shares under this
plan through September 30, 2007. There have been cancellations of 48,925 shares associated with
this plan through September 30, 2007. The options under this plan have a life of ten years.
During the three and nine months ended September 30, 2007 and 2006, 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 SFAS 123(R), the Company records compensation
expense for the amount of the grant date fair value on a straight line basis
6
over the vesting period. The Company incurred charges associated with the vesting of the Units of
$1.3 million for the nine months ended September 30, 2007 and $0.6 million for the nine months
ended September 30, 2006.
Share-based compensation expense reduced the Companys results of operations as follows (dollars in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Share-based compensation expense recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative, options
|
|
$
|
176
|
|
|
$
|
199
|
|
|
$
|
552
|
|
|
$
|
2,779
|
|
General and administrative, restricted stock units
|
|
|
479
|
|
|
|
234
|
|
|
|
1,290
|
|
|
|
567
|
|
Related deferred income tax benefit
|
|
|
(259
|
)
|
|
|
(137
|
)
|
|
|
(683
|
)
|
|
|
(1,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net income
|
|
$
|
396
|
|
|
$
|
296
|
|
|
$
|
1,159
|
|
|
$
|
2,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in basic earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in diluted earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts above include the impact of recognizing compensation expense related to non-qualified
stock options.
As of September 30, 2007, there was $1.2 million of total unrecognized compensation cost related to
127,425 non-vested outstanding stock options, with a per share weighted average value of $14.22.
The unrecognized expense is anticipated to be recognized on a straight-line basis over a weighted
average period of 1.9 years. In addition, the aggregate intrinsic value of stock options exercised
was $8.5 million and $7.4 million for the nine months ended September 30, 2007 and 2006.
As of September 30, 2007, there was approximately $7.4 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 4.0 years.
The following is a summary of stock option activity:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
Exercise
|
|
|
Options
|
|
Price
|
Outstanding, December 31, 2006
|
|
|
677,370
|
|
|
$
|
11.41
|
|
Options granted
|
|
|
|
|
|
$
|
|
|
Options exercised
|
|
|
(156,420
|
)
|
|
$
|
8.14
|
|
Options cancelled
|
|
|
(5,625
|
)
|
|
$
|
21.51
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2007
|
|
|
515,325
|
|
|
$
|
12.30
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2007
|
|
|
387,900
|
|
|
$
|
11.66
|
|
The following is a summary of Unit activity:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
Units
|
|
Fair Value
|
Non-vested Units at December 31, 2006
|
|
|
137,100
|
|
|
$
|
41.13
|
|
Granted
|
|
|
72,850
|
|
|
$
|
66.06
|
|
Vested
|
|
|
(30,791
|
)
|
|
$
|
41.11
|
|
Forfeited
|
|
|
(24,300
|
)
|
|
$
|
42.37
|
|
|
|
|
|
|
|
|
|
|
Non-vested Units at September 30, 2007
|
|
|
154,859
|
|
|
$
|
52.67
|
|
|
|
|
|
|
|
|
|
|
7
The following table summarizes information regarding options outstanding and options exercisable at
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
Range of Exercise Prices
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
(000s)
|
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
(000s)
|
|
$1.44 $2.81
|
|
|
5,400
|
|
|
|
1.46
|
|
|
$
|
1.68
|
|
|
$
|
400
|
|
|
|
5,400
|
|
|
|
1.46
|
|
|
$
|
1.68
|
|
|
$
|
400
|
|
$2.98 $4.58
|
|
|
232,450
|
|
|
|
4.32
|
|
|
$
|
4.09
|
|
|
$
|
16,656
|
|
|
|
187,225
|
|
|
|
4.13
|
|
|
$
|
4.25
|
|
|
$
|
13,386
|
|
$10.53 $16.89
|
|
|
132,825
|
|
|
|
5.94
|
|
|
$
|
16.89
|
|
|
$
|
7,817
|
|
|
|
110,775
|
|
|
|
5.94
|
|
|
$
|
16.89
|
|
|
$
|
6,519
|
|
$18.80 $24.07
|
|
|
144,650
|
|
|
|
6.93
|
|
|
$
|
21.66
|
|
|
$
|
7,822
|
|
|
|
84,500
|
|
|
|
6.87
|
|
|
$
|
21.88
|
|
|
$
|
4,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,325
|
|
|
|
5.44
|
|
|
$
|
12.30
|
|
|
$
|
32,695
|
|
|
|
387,900
|
|
|
|
5.21
|
|
|
$
|
11.66
|
|
|
$
|
24,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding Units outstanding at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Grant
|
|
|
Value
|
|
Range of Grant Prices
|
|
Units
|
|
|
Life (Years)
|
|
|
Fair Value
|
|
|
(000s)
|
|
$21.46 $22.68
|
|
|
36,200
|
|
|
|
2.54
|
|
|
$
|
22.38
|
|
|
$
|
1,857
|
|
$42.28 $45.67
|
|
|
13,469
|
|
|
|
3.08
|
|
|
$
|
44.26
|
|
|
$
|
396
|
|
$52.46 $62.07
|
|
|
58,340
|
|
|
|
3.89
|
|
|
$
|
59.11
|
|
|
$
|
850
|
|
$66.35 $81.18
|
|
|
46,850
|
|
|
|
4.56
|
|
|
$
|
69.42
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,859
|
|
|
|
3.71
|
|
|
$
|
52.67
|
|
|
$
|
3,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
Acquisitions
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. Mincos results from
operations are included in the Companys Consolidated Statements of Income from the date of
acquisition.
The purchase price was approximately $27.7 million in cash, which included $179,000 of transaction
costs.
Minco is a key supplier of raw materials to Ceradynes Thermo Materials division. Minco was founded
in 1977 to manufacture and market fused silica powders for a wide range of industrial applications.
Mincos fusing process, which is the basis of its entire product line, is based on its proprietary
technology.
8
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, the acquisition has been accounted for under the purchase method of accounting. The
estimates of fair value of the assets acquired and liabilities assumed are preliminary. The following table summarizes the components of
the purchase price (in thousands):
|
|
|
|
|
Cash
|
|
$
|
27,500
|
|
Transaction costs
|
|
|
179
|
|
|
|
|
|
Total purchase price
|
|
$
|
27,679
|
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
|
|
Cash
|
|
$
|
332
|
|
Accounts receivable, net
|
|
|
2,503
|
|
Inventory
|
|
|
3,301
|
|
Property, plant and equipment
|
|
|
6,964
|
|
Other assets
|
|
|
1,624
|
|
Assumed liabilities
|
|
|
(1,592
|
)
|
Deferred taxes
|
|
|
(4,815
|
)
|
Backlog
|
|
|
110
|
|
Developed technology
|
|
|
1,510
|
|
Tradename
|
|
|
650
|
|
Customer relationships
|
|
|
6,210
|
|
Non-compete agreement
|
|
|
500
|
|
Goodwill
|
|
|
10,382
|
|
|
|
|
|
|
|
$
|
27,679
|
|
|
|
|
|
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. Under SFAS No. 109,
Accounting for Income Taxes, the goodwill from Minco is not tax
deductible.
The estimated useful lives for Mincos intangible assets are as follows:
|
|
|
Identified Intangible Asset
|
|
Estimated Useful Life in Years or Months
|
Developed technology
|
|
10 years
|
Trade name
|
|
10 years
|
Customer relationships
|
|
10 years
|
Backlog
|
|
1 month
|
Non-compete agreement
|
|
15 months
|
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 Companys 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 1970s 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, announced earlier last year, into the nuclear waste containment
and other nuclear power plant related ceramic materials markets.
In accordance with SFAS No. 141, Business Combinations, the acquisition has been accounted for
under the purchase method of accounting. The estimates of fair value of the assets acquired and
liabilities assumed are preliminary. The
following table summarizes the components of the purchase price (in thousands):
|
|
|
|
|
Cash
|
|
$
|
69,600
|
|
Transaction costs
|
|
|
1,659
|
|
|
|
|
|
Total purchase price
|
|
$
|
71,259
|
|
|
|
|
|
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
|
|
|
18,201
|
|
|
|
|
|
|
|
$
|
71,259
|
|
|
|
|
|
In accordance with SFAS No. 141, Business Combinations, the new intangible asset balance for each
acquisition will be allocated between identifiable intangible assets and remaining goodwill. Under
Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, the
goodwill from this acquisition is tax deductible over 15 years.
9
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 determination of the fair value of assets and liabilities as well as the identification of
other intangible assets for these acquisitions is continuing as the purchase price allocation is
preliminary and subject to refinement as more information relative to the fair value as of the acquisition dates becomes available. The Company considers these
acquisitions to be immaterial.
4.
Review of Historical Stock Option Grant Procedures Share Based Compensation
In July 2006, the Company voluntarily initiated a review of its historical stock option grant
practices and related accounting treatment. The review was conducted by a Special Committee
comprised of three independent members of the Companys Board of Directors, with the assistance of
independent legal counsel and forensic accounting experts. The scope of the Special Committees
review included all stock options granted by the Company from January 1997 through September 2003.
The Special Committee has completed its review.
Until September 2003, stock option grants generally were approved by unanimous written consents
signed by the members of the Stock Option Committee of the Board of Directors. Throughout this
period, the Stock Option Committee consisted of the CEO and one other non-management Director. The
date specified as the grant date in each unanimous written consent was used (i) to determine the
exercise price of the options and (ii) as the accounting measurement date.
The review found that from January 1997 through September 2003, the date selected by management as
the grant date and accounting measurement date was the date specified in the unanimous written
consent, but that, in all but one case, the unanimous written consents were not prepared, approved
or executed by the Companys Stock Option Committee until a later date. There were a total of 23
grant dates from January 1997 through September 2003. The Companys CEO was responsible for
selecting the grant dates and followed a consistent practice of seeking low grant prices and he was
unaware of the accounting implications of the method he used. Therefore, the use of the date
specified in the unanimous written consent as the accounting measurement date was incorrect in all
but one case. The proper accounting measurement date was the date the unanimous written consent was
signed by the members of the Stock Option Committee.
Based upon information gathered during the review by independent legal counsel, the Special
Committee and the Board of Directors have concluded that, while the Company applied an option price
date selection practice that resulted in the use of incorrect accounting measurement dates for
options granted between January 1997 and September 2003, the accounting errors resulting from the
use of incorrect measurement dates were not the product of any deliberate or intentional misconduct
by the Company or its executives, staff or Board of Directors. However, as a result of using
revised measurement dates for options granted from January 1997 through September 2003, the Company
recorded a charge in the second quarter ended June 30, 2006 of $3.4 million ($2.3 million after
income taxes) pertaining to the years ended December 31, 1997 to 2005 and the six months ended June
30, 2006 (the Stock-Based Charge). The Stock-Based Charge was included as a component of general
and administrative expenses in the consolidated statements of income as this is where the affected
individuals normal compensation costs are recorded. The Stock-Based Charge includes non-cash
compensation expense of $2.2 million ($1.4 million after income taxes) primarily related to stock
option grants made during the period from January 1997 through September 2003 that should have been
measured as compensation cost at the actual stock option grant dates, and subsequently amortized to
expense over the vesting period for each stock option grant. The Stock-Based Charge also includes
$1.2 million ($0.9 million after income taxes) of estimated additional employment and other taxes
that are expected to become payable.
From September 2003 to February 2005, all stock option grants have been approved at meetings held
by the Stock Option Committee, and, since February 2005, all stock option grants have been approved
at meetings held by the Compensation
10
Committee of the Board of Directors. The dates of these
meetings have been used correctly as the accounting measurement date for all stock options granted
since September 2003.
Had this estimated Stock-Based Charge been reflected, as and when incurred, in the Companys
results of operations for prior years, the impact on net income for Ceradynes fiscal years ended
December 31 would have been a reduction of $21,000 in 1997, a reduction of $45,000 in 1998, a
reduction of $47,000 in 1999, a reduction of $104,000 in 2000, a reduction of $269,000 in 2001, a
reduction of $74,000 in 2002, a reduction of $347,000 in 2003, a reduction of $0.6 million in 2004,
and a reduction of $324,000 in 2005. As of September 30, 2007, the total remaining incremental
stock-based compensation charge related to these stock option grants that are expected to vest in
future periods with a revised accounting measurement date is immaterial. There was no impact on
revenue or net cash provided by operating activities as a result of the estimated compensation
charge.
The Company does not believe that a restatement of its prior-period financial statements is
required for the Stock-Based Charge. Based on the materiality guidelines contained in SEC Staff
Accounting Bulletin No. 99,
Materiality
(SAB 99), the Company believes that the Stock-Based Charge
is not material to any of the individual prior periods affected and the aggregate Stock-Based
Charge is not material to the results for the year ended December 31, 2006.
Prior to December 31, 2006, the current members of Ceradynes Board of Directors, all current
executive officers and all other employees of the Company amended all unexercised stock options
they held which had an exercise price that is less than the price of the Companys common stock on
the actual date of grant, by increasing the exercise price to an amount equal to the closing price
of the common stock as of the actual grant date. The Company has reimbursed and will continue to
reimburse all non-executive officer employees for the increase in the exercise price for the
modified options as they vest. Such reimbursement has not been and will not be material.
5.
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. During the
current period, the average trading price of the Companys stock exceeded the conversion price of
the convertible debt. The potential common shares that would be contingently issueable upon the
conversion of the debt are included in the number of shares used in fully diluted computations.
The following is a summary of the number of shares entering into the computation of net income per
common and potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Weighted average number of shares outstanding
|
|
|
27,304,227
|
|
|
|
27,000,343
|
|
|
|
27,230,846
|
|
|
|
26,886,873
|
|
Dilutive stock options
|
|
|
292,885
|
|
|
|
438,618
|
|
|
|
291,988
|
|
|
|
433,057
|
|
Dilutive restricted stock units
|
|
|
27,544
|
|
|
|
21,946
|
|
|
|
41,626
|
|
|
|
52,030
|
|
Dilutive contingent convertible debt common shares
|
|
|
427,201
|
|
|
|
|
|
|
|
201,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in fully diluted computations
|
|
|
28,051,857
|
|
|
|
27,460,907
|
|
|
|
27,766,325
|
|
|
|
27,371,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
Composition of Certain Financial Statement Captions
The Company holds certain cash balances that are restricted as to use. The restricted cash is used
as collateral for the Companys partially self insured workers compensation policy.
11
Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs
include the cost of material, labor and manufacturing overhead. The following is a summary of the
inventory components as of September 30, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
Raw materials
|
|
$
|
23,912
|
|
|
$
|
16,398
|
|
Work-in-process
|
|
|
53,881
|
|
|
|
34,265
|
|
Finished goods
|
|
|
24,759
|
|
|
|
22,446
|
|
|
|
|
|
|
|
|
|
|
$
|
102,552
|
|
|
$
|
73,109
|
|
|
|
|
|
|
|
|
Property, plant and equipment is recorded at cost and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
Land
|
|
$
|
14,828
|
|
|
$
|
11,226
|
|
Buildings and improvements
|
|
|
77,547
|
|
|
|
62,509
|
|
Machinery and equipment
|
|
|
177,318
|
|
|
|
138,557
|
|
Leasehold improvements
|
|
|
16,489
|
|
|
|
15,077
|
|
Office equipment
|
|
|
16,416
|
|
|
|
13,816
|
|
Construction in progress
|
|
|
12,052
|
|
|
|
9,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,650
|
|
|
|
250,205
|
|
Less accumulated depreciation and amortization
|
|
|
(82,121
|
)
|
|
|
(67,194
|
)
|
|
|
|
|
|
|
|
|
|
$
|
232,529
|
|
|
$
|
183,011
|
|
|
|
|
|
|
|
|
The components of intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Amortizing Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
$
|
1,795
|
|
|
$
|
1,062
|
|
|
$
|
733
|
|
|
$
|
575
|
|
|
$
|
558
|
|
|
$
|
17
|
|
Developed technology
|
|
|
10,393
|
|
|
|
1,301
|
|
|
|
9,092
|
|
|
|
6,007
|
|
|
|
820
|
|
|
|
5,187
|
|
Tradename
|
|
|
1,110
|
|
|
|
72
|
|
|
|
1,038
|
|
|
|
460
|
|
|
|
23
|
|
|
|
437
|
|
Customer relationships
|
|
|
25,230
|
|
|
|
341
|
|
|
|
24,889
|
|
|
|
730
|
|
|
|
36
|
|
|
|
694
|
|
Non-compete agreement
|
|
|
500
|
|
|
|
85
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizing tradename
|
|
|
2,054
|
|
|
|
|
|
|
|
2,054
|
|
|
|
2,054
|
|
|
|
|
|
|
|
2,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,082
|
|
|
$
|
2,861
|
|
|
$
|
38,221
|
|
|
$
|
9,826
|
|
|
$
|
1,437
|
|
|
$
|
8,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of definite-lived intangible assets will be approximately $4. 2 million in fiscal year
2007, $2.6 million in each of the fiscal years 2008 through 2016, and $1.5 million in fiscal year
2017.
The roll
forward of the goodwill balance by segment for the nine months ended
September 30, 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
Semicon
|
|
Thermo
|
|
ESK
|
|
Canada
|
|
Ceradyne
Boron
Products
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
2,608
|
|
|
$
|
603
|
|
|
$
|
279
|
|
|
$
|
9,196
|
|
|
$
|
3,832
|
|
|
|
|
|
|
$
|
16,518
|
|
Acquisition of Minco, Inc.
|
|
|
|
|
|
|
|
|
|
|
10,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,382
|
|
Acquisition of Ceradyne Boron
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,201
|
|
|
|
18,201
|
|
Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
$
|
2,608
|
|
|
$
|
603
|
|
|
$
|
10,661
|
|
|
$
|
9,908
|
|
|
$
|
3,832
|
|
|
$
|
18,201
|
|
|
$
|
45,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159 Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159) which permits entities to measure many financial instruments
and certain other items at fair value. Companies are required to adopt the new standard for fiscal
years beginning after November 15, 2007. The Company is evaluating the impact of this standard and
currently does not expect it to have a significant impact on its financial position, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement (SFAS 157) which defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurement. Companies are required to adopt the new standard for fiscal years beginning
after November 15, 2007. The Company is evaluating the impact
of this standard and currently does not expect it to have a significant impact on its financial
position, results of operations or cash flows.
In June 2006, the Emerging Issues Task Force (EITF) issued EITF 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross versus Net Presentation) to clarify diversity in practice on the presentation of
different types of taxes in the financial statements. The Task Force concluded that, for taxes
within the scope of the issue, a company may adopt a policy of presenting taxes either gross within
revenue or net. That is, it may include charges to customers for taxes within revenues and the
charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net
the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3
are significant, a company is required to disclose its accounting policy for presenting taxes and
the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is
effective for the
12
Company in the quarter ended March 31, 2007. The adoption does not have a material impact on its
financial position, results of operations, or cash flows.
8.
Convertible Debt and Credit Facility
During December 2005, the Company issued $121.0 million of 2.875% senior subordinated convertible
notes (Notes) due December 15, 2035.
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 Ceradynes 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 Companys 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.
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 and at September 30, 2007.
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 Ceradynes 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 September 30, 2007.
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 a new unsecured $10.0 million line of credit. As of
September 30, 2007, there were no outstanding amounts on the line of credit. However, the available
line of credit at September 30, 2007 has been reduced by an outstanding letter of credit in the
amount of $1.5 million. The interest rate on the credit line is based on the LIBOR rate for a
period of one month, plus a margin of one percent, which equaled 6.2% as of September 30, 2007.
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 tangible net worth and quick
assets to current liabilities ratio. At September 30, 2007, the Company was in compliance with
these covenants.
9.
Disclosure About Segments of an 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 Companys
Advanced Ceramic Operations, located in Costa Mesa, Irvine and San Diego, California; Lexington,
Kentucky; and Wixom, Michigan, primarily produces armor, orthodontic products, diesel engine parts,
components for semiconductor equipment, and houses the Companys SRBSN
13
research and development activities. The Companys cathode development and production are handled
through its Semicon Associates division located in Lexington, Kentucky. Fused silica products,
including missile radomes, are produced at the Companys Thermo Materials division located in
Scottdale and Clarkston, Georgia. The Companys recently constructed manufacturing facility in
Tianjin, China will manufacture fused silica crucibles for photovoltaic solar cell applications,
and will be part of the Thermo Materials operating segment. Minco, Inc., which Ceradyne acquired on
July 10, 2007, is included in the Thermo Materials operating segment. Minco manufactures fused
silica, which is a primary raw material used in products manufactured by our Thermo Materials
division. The Companys ESK Ceramics subsidiary is located in Kempten, Germany and Bazet, France.
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 Companys 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. EaglePicher Boron, LLC
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. EaglePicher Boron, LLC also produces complementary chemical isotopes
used in the normal operation and control of nuclear power plants. The Company has changed the legal
name of EaglePicher Boron, LLC to Boron Products, LLC and will be doing business as Ceradyne Boron
Products.
Ceradynes six segment facilities and products are summarized in the following table:
|
|
|
|
|
Operating Segment and Facility Location
|
|
Products
|
|
|
|
|
|
|
|
Ceradyne Advanced Ceramic Operations
|
|
Defense Applications:
|
|
|
|
|
Lightweight ceramic armor
|
|
|
|
|
|
|
|
Costa Mesa, Irvine and San Diego, California
(1)
|
|
Industrial Applications:
|
|
|
Approximately 249,000 square feet
|
|
Ceralloy
®
147 SRBSN wear parts
Precision ceramics
|
|
|
|
|
|
|
|
Lexington, Kentucky
(2)
|
|
Automotive/Diesel Applications:
|
|
|
Approximately 115,000 square feet
|
|
Ceralloy
®
147 SRBSN automotive/diesel engine parts
|
|
|
|
|
|
|
|
Wixom, Michigan
(3)
|
|
Commercial Applications:
|
|
|
Approximately 29,000 square feet
|
|
Ceramic orthodontic brackets
Components for medical devices
|
|
|
|
|
|
|
|
|
|
|
ESK Ceramics
|
|
Defense Applications:
|
|
|
|
Kempten, Germany
(4)
Approximately 544,000 square feet
|
|
Boron carbide powders for body armor
Industrial Applications:
|
|
|
Bazet, France
(5)
Approximately 88,000 square feet
|
|
Ceramic powders: boron carbide, boron nitride,
titanium
diboride, calcium hexaboride and
zirconium diboride
Silicon carbide parts
Evaporation boats for the packaging industry
High performance pump seals
|
|
|
|
|
|
|
|
|
|
Automotive/Diesel Applications:
|
|
|
|
|
EKagrip
®
functional and frictional coatings
Commercial Applications:
|
|
|
|
|
BORONEIGE
®
powder for cosmetics
|
|
|
|
|
|
|
|
|
|
|
Ceradyne Semicon Associates
|
|
Industrial Applications:
|
|
|
Lexington, Kentucky
(6)
Approximately 35,000 square feet
|
|
Ceramic-impregnated dispenser cathodes for
microwave tubes,
lasers and cathode ray tubes
Samarium cobalt magnets
|
|
|
|
14
|
|
|
|
|
Operating Segment and Facility Location
|
|
Products
|
|
|
|
|
|
|
|
Ceradyne Thermo Materials
|
|
Defense Applications:
|
|
|
|
Scottdale and Clarkston, Georgia
(7)
Approximately 132,000 square feet
Tianjin, China
(8)
|
|
Missile radomes (nose cones)
Raw material supplies for missile radomes (nose cones)
Industrial Applications:
|
|
|
Approximately 98,000 square feet
Midway, Tennessee
(9)
Approximately 105,000 square feet
|
|
Glass tempering rolls
Metallurgical tooling
Castable and other fused silica products
Crucibles for photovoltaic solar cell applications
Aerospace (turbine components)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceradyne Canada
|
|
Industrial Applications:
|
|
|
|
Chicoutimi, Quebec, Canada
(10)
Approximately 86,000 square feet
|
|
Boral
®
structural neutron absorbing materials
Metal matrix composite structures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceradyne Boron Products
|
|
Industrial Applications:
|
|
|
|
|
|
Nuclear Applications:
|
|
|
Quapaw, Oklahoma
(11)
Approximately 128,000 square feet
|
|
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:
|
|
|
|
|
P-dopants for silicon boule manufacturing
P-dopants for ion implaning of silicon wafers
|
|
|
|
|
|
(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. We lease in Irvine, California, a 24,000 square foot facility that expires
in April 2009 and a 76,000 square foot facility that expires in April 2011. We lease a 10,000
square foot facility in San Diego, California that expires on December 31, 2007.
|
|
(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 own our facility in Kempten, Germany, as well as the 22-acre property on which our
facility is located.
|
|
(5)
|
|
We own our facility in Bazet, France, as well as the four-acre property on which our facility
is located.
|
|
(6)
|
|
We own our facility in Lexington, Kentucky, as well as the five-acre property on which our
facility is located.
|
|
(7)
|
|
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 47,000 square foot facility
in Clarkson, Georgia which expires in May 2009.
|
|
(8)
|
|
We own our facility in Tianjin, China, as well as the four-acre property on which our facility is located.
|
|
(9)
|
|
We own our facility in Midway, Tennessee as well as the 40-acre property on which our facility is located.
|
|
(10)
|
|
We own our facility in Chicoutimi, Quebec, Canada, as well as the seven-acre property on which our facility is located.
|
|
(11)
|
|
We own our facility in Quapaw, Oklahoma as well as the 155-acre property on which our
facility is located.
|
15
The financial information for all segments is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from External Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
145,881
|
|
|
$
|
152,482
|
|
|
$
|
447,069
|
|
|
$
|
383,368
|
|
ESK Ceramics
|
|
|
39,009
|
|
|
|
36,956
|
|
|
|
121,463
|
|
|
|
110,381
|
|
Semicon Associates
|
|
|
1,640
|
|
|
|
2,150
|
|
|
|
6,021
|
|
|
|
6,838
|
|
Thermo Materials
|
|
|
10,250
|
|
|
|
4,175
|
|
|
|
18,534
|
|
|
|
11,006
|
|
Ceradyne Canada
|
|
|
1,389
|
|
|
|
485
|
|
|
|
3,172
|
|
|
|
485
|
|
Ceradyne Boron Products
|
|
|
2,114
|
|
|
|
|
|
|
|
2,114
|
|
|
|
|
|
Inter-segment elimination
|
|
|
(8,677
|
)
|
|
|
(10,452
|
)
|
|
|
(32,965
|
)
|
|
|
(27,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
191,606
|
|
|
$
|
185,796
|
|
|
$
|
565,408
|
|
|
$
|
484,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
2,303
|
|
|
$
|
1,975
|
|
|
$
|
6,880
|
|
|
$
|
5,494
|
|
ESK Ceramics
|
|
|
2,843
|
|
|
|
2,276
|
|
|
|
7,801
|
|
|
|
6,558
|
|
Semicon Associates
|
|
|
92
|
|
|
|
90
|
|
|
|
261
|
|
|
|
272
|
|
Thermo Materials
|
|
|
1,087
|
|
|
|
103
|
|
|
|
1,732
|
|
|
|
626
|
|
Ceradyne Canada
|
|
|
177
|
|
|
|
215
|
|
|
|
529
|
|
|
|
215
|
|
Ceradyne Boron Products
|
|
|
745
|
|
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,247
|
|
|
$
|
4,659
|
|
|
$
|
17,948
|
|
|
$
|
13,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss) before Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
52,332
|
|
|
$
|
47,746
|
|
|
$
|
165,611
|
|
|
$
|
123,194
|
|
ESK Ceramics
|
|
|
2,103
|
|
|
|
5,771
|
|
|
|
10,446
|
|
|
|
14,005
|
|
Semicon Associates
|
|
|
78
|
|
|
|
337
|
|
|
|
577
|
|
|
|
1,246
|
|
Thermo Materials
|
|
|
(30
|
)
|
|
|
293
|
|
|
|
492
|
|
|
|
694
|
|
Ceradyne Canada
|
|
|
(342
|
)
|
|
|
(297
|
)
|
|
|
(2,430
|
)
|
|
|
(321
|
)
|
Ceradyne Boron Products
|
|
|
(84
|
)
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
Inter-segment elimination
|
|
|
12
|
|
|
|
230
|
|
|
|
(1,178
|
)
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,069
|
|
|
$
|
54,080
|
|
|
$
|
173,434
|
|
|
$
|
137,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
382,112
|
|
|
$
|
350,028
|
|
|
$
|
382,112
|
|
|
$
|
350,028
|
|
ESK Ceramics
|
|
|
202,587
|
|
|
|
172,313
|
|
|
|
202,587
|
|
|
|
172,313
|
|
Semicon Associates
|
|
|
5,458
|
|
|
|
6,220
|
|
|
|
5,458
|
|
|
|
6,220
|
|
Thermo Materials
|
|
|
62,999
|
|
|
|
17,395
|
|
|
|
62,999
|
|
|
|
17,395
|
|
Ceradyne Canada
|
|
|
19,568
|
|
|
|
15,914
|
|
|
|
19,568
|
|
|
|
15,914
|
|
Ceradyne Boron Products
|
|
|
73,098
|
|
|
|
|
|
|
|
73,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
745,822
|
|
|
$
|
561,870
|
|
|
$
|
745,822
|
|
|
$
|
561,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for PP&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
$
|
2,071
|
|
|
$
|
3,039
|
|
|
$
|
6,658
|
|
|
$
|
13,127
|
|
ESK Ceramics
|
|
|
4,502
|
|
|
|
2,079
|
|
|
|
9,510
|
|
|
|
4,495
|
|
Semicon Associates
|
|
|
134
|
|
|
|
69
|
|
|
|
312
|
|
|
|
228
|
|
Thermo Materials
|
|
|
5,763
|
|
|
|
888
|
|
|
|
10,863
|
|
|
|
1,741
|
|
Ceradyne Canada
|
|
|
412
|
|
|
|
6
|
|
|
|
1,000
|
|
|
|
8,006
|
|
Ceradyne Boron Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,882
|
|
|
$
|
6,081
|
|
|
$
|
28,343
|
|
|
$
|
27,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Percentage of U.S. net sales from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
74
|
%
|
|
|
80
|
%
|
|
|
77
|
%
|
|
|
78
|
%
|
ESK Ceramics
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
4
|
%
|
Semicon Associates
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Thermo Materials
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Ceradyne Canada
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Ceradyne Boron Products
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total percentage of U.S. net sales from external customers
|
|
|
82
|
%
|
|
|
86
|
%
|
|
|
83
|
%
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of foreign net sales from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
ESK Ceramics
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
13
|
%
|
Semicon Associates
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Thermo Materials
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Ceradyne Canada
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Ceradyne Boron Products
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total percentage of foreign net sales from external customers
|
|
|
18
|
%
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net sales from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACO
|
|
|
76
|
%
|
|
|
82
|
%
|
|
|
79
|
%
|
|
|
80
|
%
|
ESK Ceramics
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
Semicon Associates
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Thermo Materials
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Ceradyne Canada
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Ceradyne Boron Products
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total percentage of total net sales from external customers
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is revenue by product line for ACO (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Armor
|
|
$
|
136,658
|
|
|
$
|
141,899
|
|
|
$
|
421,062
|
|
|
$
|
353,501
|
|
Automotive
|
|
|
2,806
|
|
|
|
4,277
|
|
|
|
7,069
|
|
|
|
13,077
|
|
Orthodontics
|
|
|
2,547
|
|
|
|
2,738
|
|
|
|
8,042
|
|
|
|
7,685
|
|
Industrial
|
|
|
3,870
|
|
|
|
3,568
|
|
|
|
10,896
|
|
|
|
9,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,881
|
|
|
$
|
152,482
|
|
|
$
|
447,069
|
|
|
$
|
383,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
Pension and Other Post-retirement Benefit Plans
The Company provides pension benefits to its employees in Germany. 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 Company also provides pension benefits to its employees of Ceradyne
Boron Products located in Quapaw, Oklahoma. There are two defined benefit retirement plans, one
for eligible salaried employees and one for hourly employees. The benefits for the salaried
employee plan are based on years of credited service and compensation. The benefits for the hourly
employee plan are based on stated amounts per year of service.
17
Components of net periodic benefit costs under these plans were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service cost
|
|
$
|
126
|
|
|
$
|
553
|
|
|
$
|
351
|
|
|
$
|
1,617
|
|
Interest cost
|
|
|
146
|
|
|
|
464
|
|
|
|
340
|
|
|
|
1,354
|
|
Expected return on plan assets
|
|
|
(59
|
)
|
|
|
(558
|
)
|
|
|
(59
|
)
|
|
|
(1,616
|
)
|
Amortization of unrecognized gain
|
|
|
15
|
|
|
|
20
|
|
|
|
44
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
228
|
|
|
$
|
479
|
|
|
$
|
676
|
|
|
$
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
Financial Instruments
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.
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. Gains and losses from foreign currency transactions are included
in other income, miscellaneous.
12.
Income Taxes
The Company has adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, effective January 1, 2007. The adoption of FIN 48 resulted in no change to the reserve for
unrecognized tax benefits (UTBs) that existed under FASB No. 5 at December 31, 2006. As such,
there is no change recorded to retained earnings as a result of the adoption. It is the Companys
policy to classify accrued interest and penalties as part of the accrued FIN 48 liability.
Components of the required reserve at adoption and September 30, 2007 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
January 1, 2007
|
|
Federal, state and foreign UTBs
|
|
$
|
6,363
|
|
|
$
|
6,178
|
|
Interest
|
|
|
942
|
|
|
|
554
|
|
Federal/State Benefit of Interest
|
|
|
(341
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
Total reserve for UTBs
|
|
$
|
6,964
|
|
|
$
|
6,530
|
|
|
|
|
|
|
|
|
In accordance with the provisions of FIN 48, this reserve was reclassified to other long term
liabilities at the time of adoption from income taxes payable.
It is anticipated that any change in the above UTBs will impact the effective tax rate. During
the quarter ended September 30, 2007, the Company released $130,000 of UTBs which related to
statute expirations, interest and increases on certain positions. For UTBs that exist at
September 30, 2007, the Company anticipates there will be no material changes in the next twelve
months. At September 30, 2007, the 2002 through 2006 years are open and subject to potential
examination in one or more jurisdictions. The Company is not currently under federal, state or
foreign income tax examination.
During the three months and the nine months
ended September 30, 2007, a tax adjustment of $2.9 million
was recorded that related to prior periods due to an under accrual of
state income taxes related to an apportionment factor.
18
13.
Commitments and Contingencies
The Company leases certain of its manufacturing facilities under noncancelable operating leases
expiring at various dates through April 2011. The Company incurred rental expense under these
leases of $2.1 million and $2.0 million for the nine months ended September 30, 2007 and 2006,
respectively. The approximate minimum rental commitments required under existing noncancelable
leases as of September 30, 2007 are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
651
|
|
2008
|
|
|
2,280
|
|
2009
|
|
|
2,033
|
|
2010
|
|
|
1,596
|
|
2011
|
|
|
208
|
|
Thereafter
|
|
|
9
|
|
|
|
|
|
|
|
$
|
6,777
|
|
|
|
|
|
In August, September and December 2006,
shareholder derivative lawsuits were filed in the California Superior Court for Orange County,
purportedly on behalf of Ceradyne against various current and former
officers and directors of the Company relating to alleged backdating
of stock options. Each state court complaint alleged claims for breach
of fiduciary duty, abuse of control, gross mismanagement, waste
of corporate assets, unjust enrichment, accounting, rescission,
constructive trust, and violations of California Corporations Code.
All state court actions have been consolidated into one case,
designated, In re Ceradyne, Inc. Derivative Litigation, Orange County
Superior Court, Case No. 06CC00156.
In
September and December 2006, shareholder derivative lawsuits were
filed in the United States District Court for the Central District
of California, purportedly on behalf of Ceradyne against various
current and former officers and directors of the Company relating to
alleged backdating of stock options. All federal court actions have
been consolidated into one case, designated, In re Ceradyne, Inc.
Derivative Litigation, Master File No. SA CV 06919 JVS. The
consolidated federal action alleges, pursuant to a first amended
consolidated complaint filed on September 17, 2007, claims for
violations of Section 10(b) of the Securities Exchange Act and Rule
10b-5 thereunder, violations of Section 14(a) of the Securities
Exchange Act, violations of Section 20(a) of the Securities Exchange
Act, insider selling under the California Corporations Code, as well as common law
claims for accounting, breach of fiduciary duty, aiding and abetting
breaches of fiduciary duty, unjust enrichment, rescission and waste.
The
plaintiffs in both the state and federal actions seek to require the
individual defendants to rescind stock options they received which
have an exercise price below the closing price of the Companys
common stock on the date of grant, to disgorge the proceeds of
options exercised, to reimburse the Company for damages of an
unspecified amount, and also seek certain equitable relief,
attorneys fees and costs.
On October
26, 2007, the Company and the individual defendants filed motions to
dismiss the first amended consolidated complaint in the federal
action. These motions are set for hearing in January 2008. The
plaintiffs in the state court action have agreed to voluntarily stay
the state court action until January 2008, pending the federal
courts rulings on the motions to dismiss.
In
summary, there are currently two shareholder derivative actions
pending which contain substantially similar allegations. The cases
filed in the Orange County Superior Court have been consolidated into
one case, designated, In re Ceradyne, Inc. Derivative Litigation,
Orange County Superior Court, Case No. 06CC00156. The cases filed
in the United States District Court for the Central District of
California have all been consolidated into one case, designated, In
re Ceradyne, Inc. Derivative Litigation, Master File No. SA CV 06919 JVS.
Settlement
discussions have been actively pursued in both the state and federal
actions, with the last global mediation session held on July 18,
2007; however, no agreements have been reached to date. The impact of
the outcome of these lawsuits is undeterminable at this time.
A class
action lawsuit was filed on March 23, 2007, in the California
Superior Court for Orange County, in which it is 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 alleges 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. The
complaint further alleges that a waiting time penalty should be
assessed for the failure to timely pay the correct overtime payment.
Ceradyne has filed an answer denying the material allegations of the complaint.
We believe that the lawsuit is without merit on the basis that our bonus policy
is discretionary and is not of the type that is subject to inclusion in the regular hourly rate
for purposes of calculating overtime, and we intend to vigorously
defend this action. We also believe that the putative class members
are not similarly situated and, therefore, this case should not
proceed as a class action.
14.
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
adjustments and unrealized net gains and losses on investments classified as available-for-sale.
Comprehensive income is net income adjusted for changes in unrealized gains and losses on
marketable securities and foreign currency translation.
Comprehensive income was (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net income
|
|
$
|
32,650
|
|
|
$
|
36,922
|
|
|
$
|
109,042
|
|
|
$
|
90,664
|
|
Foreign currency translation
|
|
|
9,260
|
|
|
|
(1,169
|
)
|
|
|
13,590
|
|
|
|
10,418
|
|
Unrealized gain (loss) on investments
|
|
|
42
|
|
|
|
(54
|
)
|
|
|
48
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
41,952
|
|
|
$
|
35,699
|
|
|
$
|
122,680
|
|
|
$
|
100,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934. One generally can identify forward-looking statements by the
use of forward-looking terminology such as believes, may, will, expects, intends,
estimates, anticipates, plans, seeks, or continues, or the negative thereof, or
variations thereon, or similar terminology. Forward-looking statements regarding future events and
the future performance of the Company involve risks and uncertainties that could cause actual
results to differ materially. Reference is made to the risks and uncertainties which are described
in this report in Note 13 Commitments and Contingencies of the Condensed Notes to Consolidated
Financial Statements, in this Item 2 Managements Discussion and Analysis of Financial Condition
and Results of Operations, and in Part II, Item 1A under the caption Risk Factors. Reference is
also made to the risks and uncertainties described in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission, in
Item 1A under the caption Risk Factors, and in Item 7 under the caption Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Overview
We develop, manufacture and market advanced technical ceramic products, ceramic powders and
components for defense, industrial, automotive/diesel and commercial applications. Our products
include:
|
|
|
lightweight ceramic armor for soldiers and other military applications;
|
|
|
|
|
ceramic industrial components for erosion and corrosion resistant applications;
|
|
|
|
|
ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium
hexaboride, and zirconium diboride, which are used in manufacturing armor and a broad
range of industrial products; and BORONEIGE
®
boron nitride powder for cosmetic products;
|
|
|
|
|
evaporation boats for metallization of materials for food packaging and other
products;
|
|
|
|
|
durable, reduced friction, ceramic diesel engine components;
|
|
|
|
|
functional and frictional coatings primarily for automotive applications;
|
|
|
|
|
translucent ceramic orthodontic brackets;
|
|
|
|
|
ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray
tubes;
|
|
|
|
|
ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing
process;
|
|
|
|
|
ceramic missile radomes (nose cones) for the defense industry;
|
|
|
|
|
structural neutron absorbing materials for use in the storage of spent nuclear rods;
|
|
|
|
|
metal matrix composite structures;
|
|
|
|
|
fused silica powders for industrial applications and ceramic crucibles;
|
|
|
|
|
nuclear chemistry products for use in pressurized water reactors and boiling water reactors;
|
|
|
|
|
radioactive containment products for spent fuel transport, storage and encapsulation of
hazardous wastes; and
|
|
|
|
|
p-dopants for silicon boule manufacturing and for ion implanting of silicon wafers.
|
Our customers include the U.S. government, prime government contractors and large industrial,
automotive, diesel and commercial manufacturers in both domestic and international markets.
20
We categorize our products into four market applications. The table below shows the percentage
contribution to our total sales of each market application in the different time periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Defense
|
|
|
72.6
|
%
|
|
|
78.2
|
%
|
|
|
75.8
|
%
|
|
|
76.1
|
%
|
Industrial
|
|
|
21.6
|
|
|
|
15.5
|
|
|
|
18.6
|
|
|
|
16.9
|
|
Automotive/Diesel
|
|
|
4.2
|
|
|
|
4.8
|
|
|
|
3.9
|
|
|
|
5.4
|
|
Commercial
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
1.7
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal factor contributing to our growth in sales since 2001 is increased demand by the
U.S. military for ceramic body armor that protects soldiers. In addition, the market for ceramic
body armor increased further beginning in 2006 with the introduction of enhanced side ballistic
inserts, known as ESBI, which protect the side areas of the soldiers torso.
Military conflicts in Iraq and Afghanistan, as well as an increasingly unstable geopolitical
climate and the heightened risk of international conflicts, have resulted in increased shipments of
our ceramic body armor in each year since 2001. We were awarded an Indefinite Delivery/Indefinite
Quantity contract by the U.S. Army in August 2004 with an adjusted maximum value of $562.0 million
from an original estimated contract value of $461.0 million. Through February 2007, we received
fourteen delivery orders equaling the contract amount. We expect to complete the delivery of this
adjusted contract amount by the end of December 2007. We have also received a number of other
orders for ceramic body armor, not covered by the Indefinite Delivery/Indefinite Quantity contract,
from the Army and other branches of the U.S. military. In January 2006, we received our first
production order for ESBI, or side plates, which are designed to protect the side areas of a
soldiers torso when used in conjunction with our ESAPI ceramic body armor plates. This delivery
order, which totals $70.0 million, was issued to us by the U.S. Army. In June 2006, we were awarded
an Indefinite Delivery/Indefinite Quantity contract by the U.S. Army with a maximum value of $611.7
million for ESBI plates. Through October 2007, six delivery orders totaling approximately $310.8
million have been issued to us under this contract. Based on our current backlog and anticipated
orders for ceramic body armor, we expect our shipments of ceramic body armor to be higher in fiscal
year 2007 than in 2006. In addition, there is a new government request for quotation for ceramic
body armor. We will be submitting our quotation to the government in November 2007 and expect to
receive results in the second quarter of 2008. Unless we receive additional orders under existing
contracts or are successful in obtaining new contracts for ceramic body armor, our shipments of
ceramic body armor will decline materially in 2008 from levels we expect to achieve in 2007.
Moreover, government contracts typically may be cancelled by the government at any time without
penalty. For the next several quarters, and perhaps longer, demand for ceramic body armor is likely
to be the most significant factor affecting our sales.
Although we believe that demand for ceramic body armor will continue for many years, the quantity
and timing of government orders depends on a number of factors outside of our control, such as the
amount of U.S. defense budget appropriations and the level of international conflicts. Moreover,
ceramic armor contracts generally are awarded in an open competitive bidding process. Therefore,
our future level of sales of ceramic body armor will depend on our ability to successfully compete
for and retain this business.
We recently entered into an agreement with Oshkosh Truck Corporation (NYSE: OSK) and Ideal
Innovations, Inc. (I-3) to further develop, produce and market the Bull
armored
vehicle. The Bull
armored vehicle is intended to address the increasing need for protection from
improvised explosive devices (IED), mine blasts and high-threat, explosively formed projectiles
(EFP) and will be built on a combat-proven Oshkosh Truck chassis. The Bull advanced technology
armored solution, conceived by I-3 in 2005 and developed with Ceradyne in 2006, has been tested by
the Army Test Center, Aberdeen, Maryland, and demonstrated to be capable of protecting vehicle
occupants against IED, EFP and mine blast threats. It is designed to meet current IED threats, and
is intended to withstand the increasingly prevalent and higher EFP threats now faced by the U.S.
military. In September 2007, in response to a solicitation notice from the U.S. Military regarding
Mine Resistant Ambush Protected Vehicles (MRAP) II Enhanced Vehicle Competitive, we submitted our
quotation and delivered both a 6-person and a 10-person MRAP II vehicle named the Bull
,
to the U.S. Army Aberdeen Test Center for further service evaluation. We expect to hear results of
the competitive bidding process in or before January 2008.
Our ESK Ceramics subsidiary produces boron carbide powder, which serves as a starter ceramic powder
in the manufacture of our lightweight ceramic body armor. Owning this source of our principal raw
material, together with the recent expansion of our manufacturing capacity for ceramic armor at our
new Lexington, Kentucky plant and in our Irvine, California facility, should allow us to fulfill
current and anticipated demand for our ceramic body armor.
21
We acquired two business during the quarter ended September 30, 2007, Minco, Inc. and EaglePicher
Boron, LLC. Minco manufactures fused silica powders for a wide range of industrial applications
and is a key supplier of this raw material to our Thermo Materials division. EaglePicher Boron,
LLC, which we have renamed Boron Products, LLC, produces the boron isotope B10. 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. We anticipate that Boron Products will
further strengthen our entry, announced during 2006, into the nuclear waste containment and other
nuclear power plant related ceramic materials markets.
The total purchase price for these two acquisitions was $98.9 million, including transaction costs.
The operations of these two acquired businesses have been included in our consolidated results of
operations from July 10, 2007, in the case of Minco, and from September 1, 2007, in the case of
Boron Products. Additional information regarding these acquisitions is contained in Note 3 of the
Notes to Consolidated Financial Statements in Part I, Item 1 of this report.
Our order backlog was $173.1 million as of September 30, 2007 and $209.1 million as of September
30, 2006. Orders for ceramic armor represented approximately $147.9 million, or 85.5% of the total
backlog as of September 30, 2007 and $182.3 million, or 87.2% of the total backlog as of September
30, 2006. We expect that substantially all of our order backlog as of September 30, 2007 will be
shipped during 2007.
Review of Historical Stock Option Grant Procedures
In July 2006, the Company voluntarily initiated a review of its historical stock option grant
practices and related accounting treatment. The review was conducted by a Special Committee
comprised of three independent members of the Companys Board of Directors, with the assistance of
independent legal counsel and forensic accounting experts. The scope of the Special Committees
review included all stock options granted by the Company from January 1997 through September 2003.
The Special Committee has completed its review.
Until September 2003, stock option grants generally were approved by unanimous written consents
signed by the members of the Stock Option Committee of the Board of Directors. Throughout this
period, the Stock Option Committee consisted of the CEO and one other non-management Director. The
date specified as the grant date in each unanimous written consent was used (i) to determine the
exercise price of the options and (ii) as the accounting measurement date.
The review found that from January 1997 through September 2003, the date selected by management as
the grant date and accounting measurement date was the date specified in the unanimous written
consent, but that, in all but one case, the unanimous written consents were not prepared, approved
or executed by the Companys Stock Option Committee until a later date. There were a total of 23
grant dates from January 1997 through September 2003. The Companys CEO was responsible for
selecting the grant dates and followed a consistent practice of seeking low grant prices and he was
unaware of the accounting implications of the method he used. Therefore, the use of the date
specified in the unanimous written consent as the accounting measurement date was incorrect in all
but one case. The proper accounting measurement date was the date the unanimous written consent was
signed by the members of the Stock Option Committee.
Based upon information gathered during the review by independent legal counsel, the Special
Committee and the Board of Directors have concluded that, while the Company applied an option price
date selection practice that resulted in the use of incorrect accounting measurement dates for
options granted between January 1997 and September 2003, the accounting errors resulting from the
use of incorrect measurement dates were not the product of any deliberate or intentional misconduct
by the Company or its executives, staff or Board of Directors. However, as a result of using
revised measurement dates for options granted from January 1997 through September 2003, the Company
recorded a charge in the second quarter ended June 30, 2006 of $3.4 million ($2.3 million after
income taxes) pertaining to the years ended December 31, 1997 to 2005 and the six months ended June
30, 2006 (the Stock-Based Charge). The Stock-Based Charge was included as a component of general
and administrative expenses in the consolidated statements of income as this is where the affected
individuals normal compensation costs are recorded. The Stock-Based Charge includes non-cash
compensation expense of $2.2 million ($1.4 million after income taxes) primarily related to stock
option grants made during the period from January 1997 through September 2003 that should have been
measured as compensation cost at the actual stock option grant dates, and subsequently amortized to
expense over the vesting period for each stock option grant. The Stock-Based Charge also includes
$1.2 million ($0.9 million after income taxes) of estimated additional employment and other taxes
that are expected to become payable.
From September 2003 to February 2005, all stock option grants were approved at meetings held by the
Stock Option Committee, and, since February 2005, all stock option grants have been approved at
meetings held by the Compensation Committee of the Board of Directors. The dates of these meetings
have been used correctly as the accounting measurement date for all stock options granted since
September 2003.
22
Had this estimated Stock-Based Charge been reflected, as and when incurred, in the Companys
results of operations for prior years, the impact on net income for Ceradynes fiscal years ended
December 31 would have been a reduction of $21,000 in 1997, a reduction of $45,000 in 1998, a
reduction of $47,000 in 1999, a reduction of $104,000 in 2000, a reduction of $269,000 in 2001, a
reduction of $74,000 in 2002, a reduction of $347,000 in 2003, a reduction of $0.6 million in 2004,
and a reduction of $324,000 in 2005. As of September 30, 2007, the total remaining incremental
stock-based compensation charge related to these stock option grants that are expected to vest in
future periods with a revised accounting measurement date is immaterial. There was no impact on
revenue or net cash provided by operating activities as a result of the estimated compensation
charge.
The Company does not believe that a restatement of its prior-period financial statements is
required for the Stock-Based Charge. Based on the materiality guidelines contained in SEC Staff
Accounting Bulletin No. 99, Materiality (SAB 99), the Company believes that the Stock-Based Charge
is not material to any of the individual prior periods affected and the aggregate Stock-Based
Charge is not material to the results for the year ended December 31, 2006.
Prior to December 31, 2006, the current members of Ceradynes Board of Directors, all current
executive officers and all other employees of the Company amended all unexercised stock options
they held which had an exercise price that is less than the price of the Companys common stock on
the actual date of grant, by increasing the exercise price to an amount equal to the closing price
of the common stock as of the actual grant date. The Company has reimbursed and will continue to
reimburse all non-executive officer employees for the increase in the exercise price for the
modified options as they vest. Such reimbursement has not been and will not be material.
Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
Net Sales.
Our net sales for the three months ended September 30, 2007 were $191.6 million, an
increase of $5.8 million, or 3.1%, from $185.8 million of net sales in the corresponding quarter of
the prior year. Net sales for the nine months ended September 30, 2007 were $565.4 million, an
increase of $81.2 million, or 16.8%, from $484.2 million in the corresponding prior year period.
During the three months ended September 30, 2007, sales recorded from acquisitions during the
quarter contributed $7.5 million to the increase in consolidated net sales, which was partially
offset by decreases in sales of body armor.
Net sales for our Advanced Ceramic Operations division for the three months ended September 30,
2007 were $145.9 million, a decrease of $6.6 million, or 4.3%, from $152.5 million of net sales in
the corresponding quarter of the prior year. The primary reason for the decrease was a decline in
shipments of ceramic body armor and other armor components for defense contractors in the amount of
$5.2 million, or 3.7%, to $136.7 million from the $141.9 million of ceramic armor shipments in the
third quarter of 2006. Net sales for our automotive/diesel component product line were $2.8
million, a decrease of $1.5 million, or 34.4%, from $4.3 million in the corresponding quarter of
the prior year. The primary reason for this decrease is that in 2006 our customers produced more
heavy-duty diesel truck engines than in 2007 due to forward buying in 2006 in anticipation of
increased emission standards that became effective in 2007. Additionally, we are aware that some of
our customers are designing new engines that do not include our cam rollers and, as a result, we
expect that sales of cam rollers will decline in 2007 compared to 2006. Net sales of our
orthodontic brackets product line were $2.5 million, a decrease of $192,000, or 7.0%, from net
sales of $2.7 million in the corresponding quarter of the prior year.
Net sales for our Advanced Ceramic Operations division for the nine months ended September 30, 2007
were $447.1 million, an increase of $63.7 million, or 16.6% from $383.4 million in the
corresponding period of the prior year. The primary reason for this improvement was the shipment of
$421.1 million of ceramic body and other armor components for defense customers, an increase of
$67.6 million, or 19.1%, from $353.5 million in the corresponding prior year period. This increase
in net sales is due to increased demand from the U.S. Department of Defense as compared to the nine
months ended September 30, 2006. Net sales for our automotive/diesel component product line,
including cam rollers, were $7.1 million, a decrease of $6.0 million, or 45.9%, from $13.1 million
in the corresponding prior year period. The primary reason for this decrease is that in 2006 our
customers produced more heavy-duty diesel truck engines than in 2007 due to forward buying in 2006
in anticipation of increased emission standards that became effective in 2007. Net sales of our
orthodontic brackets product line were $8.0 million, an increase of $355,000, or 4.6%, from $7.7
million in the corresponding prior year period. This was the result of an increase in sales
incentive plans deployed by our customer in the markets it serves.
Our ESK Ceramics subsidiary had net sales for the three months ended September 30, 2007 of $39.0
million, an increase of $2.0 million, or 5.6%, from $37.0 million in the corresponding quarter of
the prior year. Approximately $1.7 million of this increase is attributable to a higher value of
the Euro versus the U.S. dollar during the three months ended September 30, 2007 compared to the
corresponding quarter of the prior year. Sales of industrial products for the three months ended
September 30, 2007 were $23.5 million, an increase of $3.6 million, or 18.0%, from $19.9 million in
the corresponding quarter of the prior year. This increase was the result of a higher demand for
industrial wear parts from the textile industry. Sales of automotive/diesel products for the three
months ended September 30, 2007 were $5.2 million, an increase of $0.5 million, or
23
11.6%, from $4.7 million in the corresponding quarter of the prior year. Increased demand from
automotive original equipment manufacturers accounted for the increased sales. Sales of commercial
products, consisting of boron nitride for the cosmetic industry began in 2007, and for the three
months ended September 30, 2007 were $0.6 million. Sales of defense products for the three months
ended September 30, 2007 were $9.7 million, a decrease of $2.6 million, or 21.3%, from the $12.4
million in the corresponding quarter of the prior year. Included in sales of defense products for
the three months ended September 30, 2007 were inter-segment sales of $8.2 million compared to
$10.5 million in the prior year. The decrease of $2.3 million in inter-segment sales was due to a
reduction in demand of boron carbide at our Advanced Ceramic Operations division. In addition there
was a decrease of $427,000 in sales of defense products to third parties for the three months
ended September 30, 2007.
For the nine months ended September 30, 2007, net sales for ESK Ceramics were $121.5 million, an
increase of $11.1 million, or 10.0%, from $110.4 million in the corresponding prior year period.
Approximately $3.3 million of this increase is attributable to a higher value of the Euro versus
the U.S. dollar during the nine months ended September 30, 2007 compared to the corresponding prior
year period. Sales of industrial products for the nine months ended September 30, 2007 were $68.4
million, an increase of $10.3 million, or 17.8%, from $58.1 million in the corresponding prior year
period. This increase was the result of a higher demand for fluid handling, metallurgy and industrial wear
parts. Sales of automotive/diesel
products for the nine months ended September 30, 2007 were $15.1 million, an increase of $1.9
million, or 14.8%, from $13.2 million in the prior year. Further market penetration into more
automobile original equipment manufacturers with more sales of surfaced engineered parts was the
primary cause of this increase. Sales of commercial products, consisting of boron nitride for the
cosmetic industry, for the nine months ended September 30, 2007 were $1.6 million. Sales of defense
products for the nine months ended September 30, 2007 were $36.3 million, a decrease of $2.8
million, or 7.2%, from $39.1 million in the prior year. Included in sales of defense products for
the nine months ended September 30, 2007 were inter-segment sales of $32.5 million compared to
$27.9 million in the prior year. The increase of $4.6 million was due to an increase in demand of
boron carbide at our Advanced Ceramic Operations division which was offset by a decrease of $7.4
million in sales to third parties in the defense industry for the nine months ended September 30,
2007. This decrease was due to a reduction in demand for boron carbide from competitors of our
Advanced Ceramic Operations division.
Our Semicon Associates division had net sales for the three months ended September 30, 2007 of $1.6
million, a decrease of $0.6 million, or 23.7%, from $2.2 million in the corresponding quarter of
the prior year. For the nine months ended September 30, 2007, net sales for Semicon Associates
were $6.0 million, a decrease of $0.8 million, or 11.9%, from $6.8 million in the corresponding
prior year period, reflecting lower shipments of magnets and cathodes for cathode ray tubes.
Our Thermo Materials division had net sales for the three months ended September 30, 2007 of $10.2
million, an increase of $6.0 million, or 145.5%, from $4.2 million in the corresponding quarter of
the prior year. For the nine months ended September 30, 2007, net sales for Thermo Materials were
$18.5 million, an increase of $7.5 million, or 68.4%, from $11.0 million in the corresponding prior
year period. We acquired Minco, Inc. on July 10, 2007, which contributed $5.8 million of external
sales during the three months ended September 30, 2007. For the three months ended September 30,
2007, the balance of the increase in sales of our Thermo Materials division was due to an increase
in sales of crucibles used in the manufacture of photovoltaic cells for the solar energy markets of
$488,000, or 27.9%, when compared to the same period last year. Offsetting this increase were
declines in sales of $0.6 million, or 38.8%, to the defense industry. For the nine months ended
September 30, 2007, in addition to the sales contribution of $5.8 million from sales by Minco,
sales of crucibles increased $1.7 million, or 40.4%, when compared to the same period last year.
Offsetting this increase was a decline in sales to the defense industry of $447,000, or 11.8%.
Our Ceradyne Canada subsidiary, which commenced operations in July 2006, had net sales of $1.4
million for the three months ended September 30, 2007, an increase of $0.9 million, or 186.4%, from
$485,000 in the corresponding quarter of the prior year. For the nine months ended September 30,
2007, net sales of Ceradyne Canada were $3.2 million, an increase of $2.7 million, or 554.0%, from
the $485,000 for the corresponding prior year period. Net sales at our Ceradyne Canada subsidiary
include nine months of operations in 2007, compared to only two months of operations in 2006. In
addition, sales during both periods were adversely affected by the relocation of production
equipment to Canada. Sales in 2007 were adversely affected by a a delay in qualifying for Nuclear
Quality Assurance Certification.
Our Ceradyne Boron Products subsidiary, which we acquired on August 31, 2007, had sales of $2.1
million for the one month ended September 30, 2007.
Gross Profit.
Our gross profit was $75.8 million for the three months ended September 30, 2007, an
increase of $5.3 million or 7.5%, from $70.5 million in the corresponding prior year quarter. As a
percentage of net sales, gross profit was 39.6% for the three months ended September 30, 2007
compared to 38.0% for the corresponding prior year quarter. For the nine months ended September 30,
2007, our gross profit was $230.3 million, an increase of $42.1 million, or 22.4%, from $188.2
million
24
in the prior year. As a percentage of net sales, gross profit was 40.7% for the nine months ended
September 30, 2007 compared to 38.9% for the corresponding prior year period. The increase in gross
profit as a percentage of net sales was the result of improved manufacturing production rates in
our armor assembly areas compared to the corresponding prior year quarter. Gross profit during the
three and nine months ended September 30, 2007 included $1.5 million of gross profit from the two
businesses we acquired in the third quarter of 2007, Ceradyne Boron Products and Minco, Inc.
Our Advanced Ceramic Operations division posted gross profit of $61.2 million for the three months
ended September 30, 2007 an increase of $4.7 million, or 8.3%, from $56.5 million in the
corresponding prior year quarter. As a percentage of net sales, gross profit was 41.9% for the
three months ended September 30, 2007, compared to 37.0% for the corresponding prior year quarter.
For the nine months ended September 30, 2007, gross profit for the Advanced Ceramic Operations
division was $189.4 million, an increase of $40.5 million, or 27.2%, from $148.9 million in the
corresponding prior year period. As a percentage of net sales, gross profit was 42.4% for the nine
months ended September 30, 2007 compared to 38.9% for the corresponding prior year period. For
both the three and nine months ended September 30, 2007, the
reasons for the increase in gross profit and gross profit as a percentage of net sales were
improved manufacturing production rates and lower workers compensation costs.
Our ESK Ceramics subsidiary had gross profit of $11.6 million for the three months ended September
30, 2007, a decrease of $1.1 million, or 8.7%, from $12.7 million in the corresponding prior year
quarter. As a percentage of net sales, gross profit was 29.7% for the three months ended September
30, 2007, compared to 34.3% for the three months ended September 30, 2006. The decrease in gross
profit as a percentage of net sales for the three months ended September 30, 2007 was the result of
an unfavorable sales mix due to lower sales of ceramic powder for armor applications and more
competitive pricing for the sales of evaporation boats.
For the nine months ended September 30, 2007, gross profit for ESK Ceramics was $37.6 million, an
increase of $1.5 million, or 4.1% as compared to $36.1 million in the prior comparable period. As
a percentage of net sales, gross profit was 31.0% for the nine months ended September 30, 2007,
compared to 32.7% for the nine months ended September 30, 2006. The decrease in gross profit as a
percentage of net sales in the nine month period ended September 30, 2007 was the result of an
unfavorable sales mix due to lower sales of ceramic powder for armor applications and more
competitive pricing for the sales of evaporation boats.
Our Semicon Associates division had gross profit of $275,000 for the three months ended September
30, 2007, a decrease of $277,000, or 50.2%, compared to $0.6 million in the corresponding quarter
of the prior year. As a percentage of net sales, gross profit was 16.8% for the three months ended
September 30, 2007, compared to 25.7% for the corresponding prior year period. For the nine months
ended September 30, 2007, gross profit for Semicon Associates was $1.2 million, a decrease of $0.8
million, or 38.5%, from $2.0 million in the corresponding prior year period. As a percentage of net
sales, gross profit was 20.0% for the nine months ended September 30, 2007 compared to 28.6% for
the corresponding prior year period. The decrease in gross profit and in gross profit as a
percentage of net sales in the nine month period ended September 30, 2007 was due primarily to
reduced sales, unfavorable product mix, higher expenses related to the production of magnets and
higher spending for repairs and maintenance.
Our Thermo Materials division had gross profit of $2.2 million for the three months ended September
30, 2007, an increase of $1.3 million, or 153.3%, from $0.9 million in the corresponding prior year
quarter. As a percentage of net sales, gross profit was 21.4% for the three months ended September
30, 2007 compared to 20.7% for the corresponding prior year quarter. The increase in gross profit
as a percentage of sales for the three months ended September 30, 2007 was primarily due to sales
mix and improved yields in the production of crucibles. During the three months ended September 30,
2007, our Minco, Inc. subsidiary, acquired on July 10, 2007, contributed gross profit of $0.9
million, but this was substantially offset by higher cost of goods sold on inventory purchased in the acquisition for the step-up of inventory to fair value of $0.7 million. For the nine months ended September 30, 2007, Thermo Materials had gross
profit of $4.1 million, an increase of $1.8 million, or 75.9%, compared to $2.3 million in the
prior year period. As a percentage of net sales, gross profit was 21.9% for the nine months ended
September 30, 2007, compared to 21.0% for the corresponding prior year period. The improvements in
gross profit and gross profit as a percentage of sales were primarily due to an increase in the
sales of crucibles, which have higher gross margins compared to Thermo Materials other products.
Our Ceradyne Canada subsidiary, which commenced operations in July 2006, had a gross loss of
$31,000 for the three months ended September 30, 2007 and a gross loss of $1.4 million for the nine
months ended September 30, 2007. The loss was caused by under absorbed manufacturing overhead due
to lower than budgeted sales caused by a delay in qualifying for Nuclear Quality Assurance
Certification.
Our Ceradyne Boron Products subsidiary, which we acquired on August 31, 2007, had gross profit of
$0.6 million for the one month ended September 30, 2007. During this period, gross profit was
decreased by higher cost of goods sold inventory purchased in the acquisition for the step-up of inventory to fair value of
$357,000.
25
Selling Expenses.
Our selling expenses were $6.9 million for the three months ended September 30,
2007, an increase of $1.2 million or 21.0%, from $5.7 million in the corresponding prior year
quarter. Selling expenses, as a percentage of net sales, increased from 3.1% for the three months
ended September 30, 2006 to 3.6% of net sales for the three months ended September 30, 2007.
The primary reasons for the increase of $1.2 million were severance expenses of $0.8 million incurred in connection with the termination of the president of ESK Ceramics in the quarter ended September 30, 2007, the negative
impact of exchange rates on the dollar, and $212,000 of selling expenses due to the inclusion of the results of the Minco, Inc. acquisition.
For the nine months ended September
30, 2007, selling expenses were $19.6 million, an increase of $2.2 million, or 12.9%, from $17.4
million in the corresponding prior year period. Selling expenses, as a percentage of net sales,
decreased from 3.6% for the nine months ended September 30, 2006 to 3.5% of net sales for the nine
months ended September 30, 2007. The decrease in selling expenses as a percentage of net sales was
due to the inclusion of operations of our recent acquisitions of Ceradyne Boron Products and Minco
from their respective dates of acquisition for the three months ended September 30, 2007. These
acquisitions contributed $7.9 million of sales but only $212,000 of sales expenses. The primary reasons for the increase of $2.2 million in sales expenses in the nine months
ended September 30, 2007, compared to the prior period were severance expenses of $0.8 million incurred in connection with the termination
of the president of ESK Ceramics in the quarter ended September 30, 2007, and increases in the number of employees and related personnel expenses primarily accounted for the increase in selling
expenses for the nine months ended September 30, 2007.
General and Administrative Expenses.
Our general and administrative expenses for the three months
ended September 30, 2007 were $11.3 million, an increase of $2.6 million, or 29.0%, from $8.7
million in the corresponding prior year quarter. General and administrative expenses, as a
percentage of net sales, increased from 4.7% for the three months ended September 30, 2006 to 5.9%
for the three months ended September 30, 2007. The primary reasons for the increase were the reporting of $1.5 million of general and
administrative expenses contributed by our recent acquisitions, $0.5 million of general and administrative expenses
in connection with the start up of our China facility that we did not have in the nine months ended September 30, 2006 and the negative impact of exchange rates on the dollar. For the nine months ended
September 30, 2007, general and administrative expenses were $30.2 million, an increase of $4.1
million, or 15.7%, from $26.1 million in the corresponding prior year period. General and
administrative expenses, as a percentage of net sales, decreased from 5.4% for the nine months
ended September 30, 2006 to 5.3% for the nine months ended September 30, 2007. Increases in the
number of employees and related personnel expenses, termination expenses discussed above, increased
bonus accruals as a result of the Companys higher operating profits, start up expenses for our
China facility, and higher expenses for information technology accounted for the increase in
general and administrative expenses. Also, contributing to the increase was the recording of $1.5
million of general and administrative expenses as a result of our acquisitions of Ceradyne Boron
Products and Minco from their respective dates of acquisition for the three months ended September
30, 2007.
Research and Development Expenses.
Our research and development expenses for the three months ended
September 30, 2007 were $5.7 million, an increase of $3.2 million, or 124.3%, from $2.5 million in
the corresponding prior year quarter. Research and development expenses, as a percentage of net
sales, increased from 1.4% of net sales for the three months ended September 30, 2006 to 3.0% of
net sales for the three months ended September 30, 2007. For the nine months ended September 30,
2007, research and development expenses were $13.6 million, an increase of $5.9 million, or 75.4%,
from $7.7 million in the corresponding prior year period. Research and development expenses, as a
percentage of net sales, increased from 1.6% of net sales for the nine months ended September 30,
2006 to 2.4% of net sales for the nine months ended September 30, 2007. The primary reason for the
increased research and development expenses were expenditures for body armor and combat vehicle
armor development, particularly for producing and delivering the Bull
armored vehicle
in response to a solicitation notice from the U.S. Military regarding a Mine Resistant Ambush
Protected Vehicles (MRAP) II Enhanced Vehicle.
Other Income (Expense).
Our net other income for the three months ended September 30, 2007 was $2.1
million, an increase of $1.6 million, or 320.3%, compared to $0.5 million in the corresponding
prior year quarter. Other income for the nine months ended September 30, 2007 was $6.5 million, an
increase of $5.6 million, or 563.3%, compared to net other income of $1.0 million for the nine
months ended September 30, 2006. The primary reason for the change was an increase in interest
income received from investing higher cash balances in short-term marketable securities. Interest
expense was $1.1 million for the three months ended September 30, 2007 and $3.2 million for the
nine months ended September 30, 2007, virtually unchanged from the prior year periods.
Income before Provision for Income Taxes.
Our income before provision for income taxes for the
three months ended September 30, 2007 was $54.1 million, virtually unchanged from the corresponding
prior year quarter. For the nine months ended September 30, 2007, income before provision for
income taxes was $173.4 million, an increase of $35.4 million, or 25.7%, from $138.0 million for
the nine months ended September 30, 2006.
Our Advanced Ceramic Operations divisions income before provision for income taxes for the three
months ended September 30, 2007 was $52.3 million, an increase of $4.6 million, or 9.6%, compared
to $47.7 million in the corresponding prior year quarter. For the nine months ended September 30,
2007, income before provision for income taxes was $165.6
million, an increase of $42.4 million, or 34.4%, from $123.2 million for the nine months ended
September 30, 2006. The increase in income before provision for income taxes for the nine months
ended September 30, 2007 was a result of higher
26
sales of body armor, improved manufacturing production rates in our armor assembly areas and a
reduction of start up and training expenses in our Lexington, Kentucky hot press facility, compared
to the nine months ended September 30, 2006. Offsetting these improvements were higher research and
development expenses for armor products.
Our ESK Ceramics subsidiarys income before provision for income taxes for the three months ended
September 30, 2007 was $2.1 million, a decrease of $3.7 million, or 63.6%, compared to $5.8 million
in the corresponding prior year quarter. For the nine months ended September 30, 2007 income before
provision for income taxes was $10.4 million, a decrease of $3.6 million, or 25.4%, from $14.0
million in the corresponding prior year period. The decrease in income before provision for income
taxes was due to an unfavorable sales mix due to lower sales of ceramic powder for armor
applications, severance expenses, higher research and development expenses in connection with new
ceramic powders for armor applications and other new products, and higher personnel costs in
connection with selling, general and administrative expenses.
Our Semicon Associates divisions income before provision for income taxes for the three months
ended September 30, 2007 was $78,000, a decrease of $259,000, or 76.9%, from $337,000 in the
corresponding prior year quarter. For the nine months ended September 30, 2007 income before
provision for income taxes was $0.6 million, a decrease of $0.6 million, or 53.7%, from $1.2
million in the corresponding prior year period. The decrease in income before provision for income
taxes for the nine months ended September 30, 2007 was due primarily to reduced sales of laser
cathodes and magnets, unfavorable product mix, higher expenses related to the production of magnets
and higher spending for repairs and maintenance.
Our Thermo Materials divisions loss before provision for income taxes for the three months ended
September 30, 2007 was $30,000, a decrease of $323,000 from income before provision for taxes of
$293,000 in the corresponding prior year quarter. For the nine months ended September 30, 2007
income before provision for income taxes was $492,000 million, a decrease of $202,000, or 29.1%,
from $0.7 million in the corresponding prior year period. The decrease in income before provision
for income taxes for the nine months ended September 30, 2007 was primarily due to start up
expenses in China in connection with the new crucible plant that opened in June 2007.
Our Ceradyne Canada subsidiarys loss before provision for income taxes for the three months ended
September 30, 2007 was $342,000, an increase of $45,000, or 15.2%, from $297,000 in the corresponding
prior year quarter. For the nine months ended September 30, 2007, the loss before provision for
income taxes was $2.4 million, an increase of $2.1 million, or 657.0%, from $321,000 in the
corresponding prior year period. Ceradyne Canada commenced operations in July 2006 so the
comparison of the nine months ended September 30, 2007 is comparable to only three months activity
in 2006. The loss was caused by operational start up expenses, the relocation of production
equipment to Canada and the low absorption of manufacturing overhead due to lower than budgeted
sales caused by a delay in qualifying for Nuclear Quality Assurance Certification.
Our Ceradyne Boron Products subsidiary, which we acquired on August 31, 2007, had a loss before
provision for income taxes of $84,000 for the three months ended September 30, 2007 and for the
nine months ended September 30, 2007. The loss includes a reduction in gross profit caused by higher cost of goods sold on inventory purchased in the acquisition for the step-up of inventory to fair value of
$357,000 and included in general and administrative expenses
was $377,000 for the amortization of backlog in connection with the acquisition.
Income Taxes.
We had a combined federal and state tax rate of 39.6% for the three months ended
September 30, 2007 resulting in a provision for taxes of $21.4 million, an increase of $4.2
million, or 24.8%, from the $17.2 million in the corresponding prior year quarter. Included in the
increase was an out of period after tax adjustment of $2.9 million due to an under accrual of state
income taxes related to the apportionment factor. Our provision for income taxes for the nine
months ended September 30, 2007 was $64.4 million, an increase of $17.1 million, or 36.1%, from the
$47.3 million in the corresponding prior year period. The effective income tax rate for the nine
months ended September 30, 2007 was 37.1% compared to 34.3% in the corresponding year period. For
the three and nine months ended September 30, 2007, the increase in the effective income tax rates
was a result of higher state income taxes and the out of period after tax adjustment of $2.9
million discussed above.
Liquidity and Capital Resources
We generally have met our operating and capital requirements with cash flow from operating
activities, borrowings under our credit facility, and proceeds from the sale of shares of our
common stock.
Our net cash position increased by $1.6 million during the nine months ended September 30, 2007
compared to a $31.6 million decrease during the nine months ended September 30, 2006. For the nine
months ended September 30, 2007, cash flow provided by operating activities amounted to $89.0
million compared to $106.6 million during the nine months ended September 30, 2006. The primary
factors contributing to cash flow from operating activities in the nine months ended September 30,
2007, were net income of $109.0 million, and adjustments of non-cash amounts related to
depreciation and amortization of $17.9 million, a decrease in cash of $2.0 million due to a change in deferred
income taxes, and stock compensation of $1.8 million. Additional factors contributing to the
increase in cash flow provided by operating activities
27
were an increase of $7.0 million in other long term liabilities due to an increase in the reserve
for unrecognized tax benefits, a decrease in production tooling of $1.5 million, and an increase of
$1.2 million in employee benefits liability. These increases in cash provided by operating
activities were partially offset by an increase in accounts receivable of $13.0 million due to
higher sales and slower collections from customers, an increase in other receivables of $1.7
million, an increase in inventories of $16.9 million, primarily as a result of higher production
levels of body armor at our Advanced Ceramic Operations segment, an increase in prepaid expenses
and other assets of $1.2 million, a reduction in accounts payable and accrued expenses of $4.4
million and a reduction in income taxes payable of $11.0 million, due to payments of income tax
installments.
Investing activities consumed $95.0 million of cash during the nine months ended September 30,
2007. This included $98.6 million for the purchase of EaglePicher Boron, LLC and Minco, Inc., $28.3
million for the purchase of property, plant and equipment and the allocation of $2.6 million of
cash to a restricted status. This was offset by a $34.6 million increase in the amount of excess
cash balances invested in short-term securities.
Financing activities during the nine months ended September 30, 2007 provided net cash of $5.9
million, primarily generated by the exercise of stock options of $0.6 million, the issuance of
stock for the employer matching contribution to our 401(k) plan of $1.1 million and a tax benefit
of $4.1 million due to the exercise of stock options. The effect of exchange rates on cash and
equivalents due to our investment in ESK Ceramics was $1.7 million.
During December 2005, we issued $121.0 million principal amount of 2.875% senior subordinated
convertible notes due December 15, 2035.
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. 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 and at September 30, 2007.
In December 2005, we established a new unsecured $10.0 million line of credit. As of September 30,
2007, there were no outstanding amounts on the line of credit. However, the available line of
credit at September 30, 2007 has been reduced by an outstanding letter of credit in the amount of
$1.5 million. The interest rate on the credit line is based on the LIBOR rate for a period of one
month, plus a margin of one percent, which equaled 6.2% as of September 30, 2007.
Pursuant to the bank line of credit, we are subject to certain covenants, which include, among
other things, the maintenance of specified minimum amounts of tangible net worth and quick assets
to current liabilities ratio. At September 30, 2007, we were in compliance with these covenants.
Our cash, cash equivalents, restricted cash and short-term investments totaled $173.7 million at
September 30, 2007, compared to $204.1 million at December 31, 2006. At September 30, 2007, we had
working capital of $366.1 million,
28
compared to $332.1 million at December 31, 2006. 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 additional
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 primarily relate to the expansion of our
manufacturing facilities in both the United States and Germany. 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.
Our material contractual obligations and commitments as of September 30, 2007 include a $7.0
million reserve for unrecognized tax benefits. The reserve is classified as long term liabilities
on our Consolidated Balance Sheet as of September 30, 2007.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our debt. We routinely
monitor our risks associated with fluctuations in currency exchange rates and interest rates. We
address these risks through controlled risk management that may, in the future, include the use of
derivative financial instruments to economically hedge or reduce these exposures. We do not enter
into foreign exchange contracts for speculative or trading purposes. Currently, we do not utilize
interest rate swaps.
Given the inherent limitations of forecasting and the anticipatory nature of the exposures intended
to be hedged, there can be no assurance that such programs will offset more than a portion of the
adverse financial impact resulting from unfavorable movements in either interest or foreign
exchange rates. In addition, the timing of the accounting for recognition of gains and losses
related to mark-to-market instruments for any given period may not coincide with the timing of
gains and losses related to the underlying economic exposures and, therefore, may adversely affect
our operating results and financial position and cash flows.
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.
Our debt is comprised of $121.0 million of a convertible note with a fixed coupon rate of 2.875%.
The fair value of long-term debt was $172.2 million and is based on quoted market prices at
September 30, 2007.
Approximately 17.0% of our revenues for the nine months ended September 30, 2007 were derived from
operations outside the United States. Overall, we are a net recipient of currencies other than the
U.S. dollar and, as such, we benefit from a weaker dollar and are adversely affected by a stronger
dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in
particular a strengthening of the U.S. dollar, may negatively affect net sales, gross profit, and
net income from our subsidiary, ESK Ceramics, as expressed in U.S. dollars. This would also
negatively impact our consolidated reported results.
Item 4.
Controls and Procedures
Review of Historical Stock Option Grant Procedures
In July 2006, the Company voluntarily initiated a review of its historical stock option grant
practices and related accounting treatment. The review was conducted by a special committee
comprised of three independent members of the Companys Board of Directors, with the assistance of
independent legal counsel and forensic accounting experts. This review has been completed and the
special committee presented its report to the Companys Board of Directors. It was the finding of
the special committee that control deficiencies that led to the Company utilizing incorrect
measurement dates for stock option
29
grants had been corrected subsequent to September 2003. The special committee did not propose any
recommendations for improvements in the current process of granting stock options and restricted
stock unit awards as a result of its investigation.
Additional information regarding the special committees review is provided in this report in Note
4 of the Notes to Consolidated Financial Statements.
Evaluation of Disclosure Controls and Procedures
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 as of September 30, 2007 (the end of the period covered
by this report). Based on this evaluation, taking into account the items discussed above in this
Item 4, our principal executive officer and principal financial officer concluded that our current
disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934) are 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 September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
In August,
September and December 2006, shareholder derivative lawsuits were
filed in the California Superior Court for Orange County,
purportedly on behalf of Ceradyne against various current and former
officers and directors of the Company relating to alleged backdating
of stock options. Each state court complaint alleged claims for
breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, unjust enrichment, accounting, rescission,
constructive trust, and violations of California Corporations Code.
All state court actions have been consolidated into one case,
designated, In re Ceradyne, Inc. Derivative Litigation, Orange
County Superior Court, Case No. 06CC00156.
In
September and December 2006, shareholder derivative lawsuits were
filed in the United States District Court for the Central District of
California, purportedly on behalf of Ceradyne against various current
and former officers and directors of the Company relating to alleged
backdating of stock options. All federal court actions have been
consolidated into one case, designated, In re Ceradyne, Inc.
Derivative Litigation, Master File No. SA CV 06919 JVS. the
consolidated federal action alleges, pursuant to a first amended
consolidated complaint filed on September 17, 2007, claims for
violations of Section 10(b) of the Securities Exchange Act and Rule
10b-5 thereunder, violations of Section 14(a) of the Securities
Exchange Act, violations of Section 20(a) of the Securities Exchange
Act, insider selling under the California Corporations Code, as well
as common law claims for accounting, breach of fiduciary duty, aiding
and abetting breaches of fiduciary duty, unjust enrichment,
rescission and waste.
The
plaintiffs in both the state and federal actions seek to require the
individual defendants to rescind stock options they received which
have an exercise price below the closing price of the Companys
common stock on the date of grant, to disgorge the proceeds of
options exercised, to reimburse the Company for damages of an
unspecified amount, and also seek certain equitable relief,
attorneys fees and costs.
On October
26, 2007, the Company and the individual defendants filed motions to
dismiss the first amended consolidated complaint in the federal
action. These motions are set for hearing in January 2008. The
plaintiffs in the state court action have agreed to voluntarily stay
the state court action until January 2008, pending the federal
courts rulings on the motions to dismiss.
In
summary, there are currently two shareholder derivative actions
pending which contain substantially similar allegations. The cases
filed in the Orange County Superior Court have been consolidated into
one case, designated, In re Ceradyne, Inc. Derivative Litigation,
Orange County Superior Court, Case No. 06CC00156. The cases filed
in the United States District Court for the Central District of
California have all been consolidated into one case, designated, In
re Ceradyne, Inc. Derivative Litigation, Master File No. SA CV 06919
JVS.
Settlement
discussions have been actively pursued in both the state and federal
actions, with the last global mediation session held on July 18,
2007; however, no agreements have been reached to date. The impact of
the outcome of these lawsuits is undeterminable at this time.
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 is 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 alleges 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. The
complaint further alleges that a waiting time penalty should be
assessed for the failure to timely pay the correct overtime payment.
Ceradyne has filed an answer denying the material allegations of the
complaint. We believe that the lawsuit is without merit on the basis
that our bonus policy is discretionary and is not of the type that is
subject to inclusion in the regular hourly rate for purposes of
calculating overtime, and we intend to vigorously defend this action.
We also believe that the putative class members are not similarly situated and,
therefore, this case should not proceed as a class action.
Item 1A.
Risk Factors
There have been no significant changes to the risk factors disclosed in the Companys Annual Report
on Form 10-K for the year ended December 31, 2006.
Item 2. Not applicable
Item 3. Not applicable
30
Item 4. Not applicable
Item 5. Not applicable
Item 6.
Exhibits
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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.
|
31
SIGNATURE
Pursuant to the requirements 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.
|
|
|
|
|
|
CERADYNE, INC.
|
|
Date: October 30, 2007
|
By:
|
/s/ JERROLD J. PELLIZZON
|
|
|
|
Jerrold J. Pellizzon
|
|
|
|
Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
32
Index to Exhibits
|
|
|
Exhibit
|
|
Description
|
|
|
|
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.
|
33
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