CRDN Ceradyne, Inc. (MM)

Ceradyne, Inc. (Nasdaq:CRDN) reported financial results for the third quarter and nine months ended September 30, 2008. Sales for third-quarter 2008 were $167.7 million, compared with $191.6 million in third-quarter 2007.�Net income for third-quarter 2008 decreased by $13.3 million or 40.6% to $19.4 million, or $0.73 per fully diluted share, compared to $32.7 million, or $1.16 per fully diluted share, in the third-quarter of 2007. Net income for third-quarter 2008 includes a previously announced non-recurring pre-tax acquisition related compensation charge of $9.8 million associated with a pre-closing commitment related to SemEquip, Inc., which we acquired in August 2008, to pay incentive compensation to certain employees and advisors and a pre-tax charge of $3.0 million from an other-than-temporary reduction in the value of our investments in auction rate securities. The non-recurring after-tax acquisition related charge amounted to $6.2 million or approximately $0.24 per fully diluted share and the after-tax other-than-temporary reduction in the value of our investments in auction rate securities charge was $1.9 million or approximately $0.07 per fully diluted share. These two charges had a combined negative impact on net income of approximately $0.31 per fully diluted share in the third-quarter 2008. Gross profit margin was 39.7% of net sales in third-quarter 2008 compared to 39.6% in the same period in 2007. The provision for income taxes was 36.1% in third-quarter 2008, compared to 39.6% in the same period in 2007. Fully diluted average shares outstanding were 26.6 million for the third quarter 2008 compared to 28.1 million for the third quarter 2007. The lower average shares outstanding in the current quarter is due primarily to the repurchase of 1.1 million shares under the Company�s stock repurchase program announced on March 4, 2008. Sales for the nine months ended September 30, 2008 were $541.3 million, compared with $565.4 million in the same period last year. Net income for the first nine months of 2008 was $85.5 million, or $3.18 per fully diluted share, on 26.9 million shares, compared to $109.0 million, or $3.93 per fully diluted share, on 27.7 million shares, for the nine-month period in 2007. Net income for the first nine months of 2008 includes a non-recurring pre-tax acquisition related compensation charge of $9.8 million related to a pre-closing commitment by SemEquip, Inc., to pay incentive compensation to certain employees and advisors and a pre-tax charge of $3.5 million from an other-than-temporary reduction in the value of our investments in auction rate securities. The non-recurring after-tax acquisition related charge amounted to $6.2 million or approximately $0.23 per fully diluted share and the after-tax other-than-temporary reduction in the value of our investments in auction rate securities charge was $2.3 million or approximately $0.09 per fully diluted share. These two charges had a combined negative impact on net income of approximately $0.32 per fully diluted share for the first nine months of 2008. Gross profit margin was 39.5% of net sales in the nine months ended September 30, 2008 compared to 40.7% in the same period in 2007. The provision for income taxes was 36.3% in the first nine months of 2008, compared to 37.1% in the same period in 2007. New bookings for third-quarter 2008 were $119.4 million, compared to $163.6 million for the same period last year. For the first nine months of 2008, new bookings were $476.6 million, compared to $395.3 million for the comparable period last year. Total backlog as of September 30, 2008 was $174.9 million, compared to total backlog at September 30, 2007 of $173.1 million. Joel P. Moskowitz, Ceradyne president and chief executive officer, commented, �I think it would be helpful to our shareholders if I explained certain activities which Ceradyne management is focusing on for the future. Additionally, because of the state of the capital markets, I will discuss the Company�s strong balance sheet as well as review the balance of 2008 and provide our initial guidance for 2009. With the additional visibility we have for Q4 2008, we now provide revised guidance for all of 2008 as follows: Sales range from $695 million to $700 million Earnings range from $4.00 to $4.15 per fully diluted share. The foregoing includes the negative impact of the above discussed $0.32 per fully diluted share which is made up of the non-recurring pre-tax charges of $9.8 million related to the SemEquip acquisition and the $3.5 million pre-tax other-than-temporary reduction in the value of our investments in auction rate securities. We believe our shipments of XSAPI body armor in the fourth quarter will be modest and will consist primarily of the First Article Test parts. �In October 2008, we received the largest contract ever awarded to Ceradyne for the next generation of ceramic body armor plates, XSAPI, as well as for the current ESAPI plates, from the U.S. Army REDCOM, Aberdeen Proving Grounds, Maryland. Of this $2.37 billion ID/IQ (Indefinite Delivery/Indefinite Quantity) 5-year contract, we have now received approximately $73 million in initial orders consisting of First Article Test parts, as well as production components. On Monday, October 27, 2008, the Department of the Army issued a 120-day �Stop Work Order� on the Initial Production Delivery Order 0002 for $72 million but not on the Initial First Article Test Order 0001 on this ID/IQ contract. We believe that this Stop Work Order is attributable to a protest filed by BAE Systems. We anticipate the protest will be resolved in a short period of time. Although the ID/IQ contract is for both XSAPI and ESAPI body armor, we expect the Army to primarily order only XSAPI under this contract, which would most likely result in total orders under this 5-year procurement of less than the full $2.37 billion contract amount. �Although we believe that the government may increase its requirements for XSAPI to a �pure fleet� (i.e., full deployment of XSAPI) strategy, we cannot project that decision at this time. Assuming our normal order flow of SAPI, ESAPI sustainment, non �pure fleet� XSAPI, and Special Forces armor, we expect our body armor shipments will be approximately $125 million less in 2009 than in 2008. This reduction in shipments will be partially offset by increased sales of our ceramic crucibles for solar cell applications, which we anticipate will double to about $80 million in 2009, and increased sales in other non-defense areas, such as by our ESK Ceramics subsidiary in Kempten, Germany. Assuming no �pure fleet� increase in Army related XSAPI, our initial guidance for 2009 is as follows: Sales range from $640 million to $650 million Earnings range from $3.00 to $3.25 per fully diluted share �This assumes an annual tax rate of 36% with fully diluted average shares of 26.5 million.� Mr. Moskowitz continued: �As of September 30, 2008, our cash, cash equivalents, restricted cash and short-term investments totaled approximately $215 million. In addition, we have approximately $29 million in auction rate securities which are classified as long-term investments due to their illiquid status.� Joel Moskowitz further stated, �Ceradyne management will continue to focus on the areas we have repeatedly discussed. These include acquisitions, defense products including armor for military vehicles, solar energy and ceramics for the smelting of aluminum. Also, it is interesting to note that with the projected decline of body armor shipments, our 2009 guidance includes revenues from body armor equal to only about 40% of total net sales, down from over 80% less than two years ago. The Company anticipates further growth in non-defense products and will continue to generate strong monthly cash flow in 2009.� Mr. Moskowitz added: �We plan to expand all areas of our operations, particularly industrial and solar related. We are evaluating new operations in China and Singapore and anticipate expansion of our operations in Germany and Atlanta, Georgia.� Ceradyne will host a conference call today at 8:00 a.m. PDT (11:00 a.m. EDT) to discuss its 2008 third quarter results. To participate in the teleconference, please call toll free 877-717-3046 (or 706-634-6364 for international callers) approximately 10 minutes prior to the above start time and provide Conference ID 68371741. Investors or other interested parties may listen to the teleconference live via the Internet at www.ceradyne.com or www.earnings.com. These web sites will also host an archive of the teleconference. A telephonic playback will be available beginning at 11:00 a.m. PDT today through 9:00 p.m. PDT on October 30, 2008. The playback can be accessed by calling 800-642-1687 (or 706-645-9291 for international callers) and providing Conference ID 68371741. Ceradyne develops, manufactures and markets advanced technical ceramic products and components for defense, industrial, automotive/diesel and commercial applications. Additional information can be found at the Company�s web site: www.ceradyne.com. Except for the historical information contained herein, this press release contains forward-looking statements regarding future events and the future performance of Ceradyne that involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "anticipates," "believes," "plans," "expects," "intends," "future," and similar expressions are intended to identify forward-looking statements. These risks and uncertainties are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, and its Quarterly Reports on Form 10-Q, as filed with the U.S. Securities and Exchange Commission. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date thereof. CERADYNE, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) � � Three Months EndedSeptember 30, Nine Months EndedSeptember 30, � 2008 � � � 2007 � � 2008 � � � 2007 � (Unaudited) (Unaudited) NET SALES $ 167,746 $ 191,606 $ 541,258 $ 565,408 COST OF GOODS SOLD � 101,082 � � 115,819 � � 327,504 � � 335,125 � � Gross profit 66,664 75,787 213,754 230,283 OPERATING EXPENSES Selling 8,443 6,872 24,966 19,617 General and administrative 11,703 11,280 35,208 30,218 Acquisition related charge 9,783 - 9,783 - Research and development � 4,527 � � 5,680 � � 10,979 � � 13,561 � � � 34,456 � � 23,832 � � 80,936 � � 63,396 � � INCOME FROM OPERATIONS � 32,208 � � 51,955 � � 132,818 � � 166,887 � � OTHER INCOME (EXPENSE): Royalty income 5 30 65 105 Interest income 1,772 3,281 6,273 9,542 Interest expense (1,026 ) (1,094 ) (3,130 ) (3,154 ) Miscellaneous � (2,581 ) � (103 ) � (1,908 ) � 54 � � (1,830 ) 2,114 1,300 6,547 INCOME BEFORE PROVISION FOR INCOME TAXES 30,378 54,069 134,118 173,434 PROVISION FOR INCOME TAXES � 10,979 � � 21,419 � � 48,621 � � 64,392 � � NET INCOME $ 19,399 � $ 32,650 � $ 85,497 � $ 109,042 � � BASIC INCOME PER SHARE $ 0.74 � $ 1.20 � $ 3.22 � $ 4.00 � � DILUTED INCOME PER SHARE $ 0.73 � $ 1.16 � $ 3.18 � $ 3.93 � � WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 26,272 27,304 26,568 27,231 DILUTED 26,563 28,052 26,888 27,766 CERADYNE, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) � � September 30, 2008 December 31, 2007 (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 204,486 $ 155,103 Restricted cash 2,699 2,660 Short-term investments 7,900 29,582 Accounts receivable, net of allowances for doubtful accounts of approximately $1,038 and $792 at September 30, 2008 and December 31, 2007, respectively 64,138 85,346 Other receivables 8,360 5,704 Inventories, net 101,039 92,781 Production tooling, net 13,997 16,632 Prepaid expenses and other 29,880 12,391 Deferred tax asset � 12,816 12,455 TOTAL CURRENT ASSETS � 445,315 412,654 PROPERTY, PLANT AND EQUIPMENT, net 252,461 243,892 LONG TERM INVESTMENTS 29,489 38,089 INTANGIBLE ASSETS, net 84,491 37,578 GOODWILL 46,484 46,848 OTHER ASSETS � 3,731 4,225 TOTAL ASSETS $ 861,971 $ 783,286 � � CURRENT LIABILITIES Accounts payable $ 29,156 $ 35,990 Accrued expenses 26,492 22,483 Income taxes payable 788 � 258 TOTAL CURRENT LIABILITIES 56,436 58,731 LONG-TERM DEBT 121,000 121,000 EMPLOYEE BENEFITS 14,102 13,650 OTHER LONG TERM LIABILITY 41,501 4,985 DEFERRED TAX LIABILITY 5,677 � 6,291 TOTAL LIABILITIES 238,716 204,657 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS� EQUITY Common stock, $0.01 par value, 100,000,000 authorized, 26,273,611 and 27,318,530 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively 264 272 Additional paid in capital 154,430 185,702 Retained earnings 446,798 361,301 Accumulated other comprehensive income 21,763 � 31,354 TOTAL SHAREHOLDERS� EQUITY 623,255 � 578,629 TOTAL LIABILITIES AND SHAREHOLDERS� EQUITY $ 861,971 $ 783,286 CERADYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) � Nine Months EndedSeptember 30, � 2008 � � � 2007 � (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 85,497 $ 109,042 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization 30,122 17,948 Deferred income taxes 421 (2,014 ) Stock compensation 2,233 1,842 Loss on marketable securities 3,545 - Loss on equipment disposal 125 794 Change in operating assets and liabilities (net of effect of businesses acquired): Accounts receivable, net 22,680 (12,995 ) Other receivables (3,597 ) (1,735 ) Inventories, net (5,079 ) (16,927 ) Production tooling, net 2,597 1,480 Prepaid expenses and other assets (18,005 ) (1,167 ) Accounts payable and accrued expenses (5,456 ) (4,418 ) Income taxes payable 549 (11,042 ) Other long term liability 10,350 6,964 Employee benefits � 1,014 � � 1,237 � � NET CASH PROVIDED BY OPERATING ACTIVITIES � 126,996 � � 89,009 � � CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (35,938 ) (28,343 ) Changes in restricted cash (39 ) (2,633 ) Purchases of marketable securities - (363,317 ) Proceeds from sales and maturities of marketable securities 21,700 397,912 Cash paid for acquisitions, net of cash received (26,855 ) (98,606 ) Proceeds from sale of equipment � 24 � � - � � NET CASH USED IN INVESTING ACTIVITIES � (41,108 ) � (94,987 ) � CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of stock due to exercise of options 302 603 Proceeds from issuance of stock for stock plans - 1,085 Excess tax benefit due to exercise of stock options 287 4,133 Shares repurchased (34,919 ) - Other � - � � 48 � � NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES � (34,330 ) � 5,869 � � EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS � (2,175 ) � 1,708 � � INCREASE IN CASH AND CASH EQUIVALENTS 49,383 1,599 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD � 155,103 � � 13,547 � � CASH AND CASH EQUIVALENTS, END OF PERIOD $ 204,486 � $ 15,146 � � SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES: Interest paid $ 1,744 $ 1,756 Income taxes paid $ 62,692 $ 67,286