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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
---------------
Commission File No. 000-13059
CERADYNE, INC.
--------------
(Exact name of Registrant as specified in its charter)
Delaware 33-0055414
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3169 Redhill Avenue, Costa Mesa, CA 92626
- ----------------------------------------------------------------------------
(Address of principal executive) (Zip Code)
Registrant's 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 X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2002
- ---------------------------- -------------------------------------
Common Stock, $.01 par value 8,465,754 Shares
Page 1 of 22 Pages
CERADYNE, INC.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information ......................... 3
Consolidated Balance Sheets-June 30, 2002
and December 31, 2001 ............................................. 4-5
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001 ................. 6
Consolidated Statements of Cash Flow -
Six Months Ended June 30, 2002 and 2001 ........................... 7
Condensed Notes to Consolidated Financial Statements .............. 8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................15-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................20-21
Items 2, 3 N/A ............................................................... 21
and 5.
Item 4. Submission of Matter to Vote of Security Holders .................. 21
Item 6. Exhibits and Reports on Form 8-K .................................. 22
SIGNATURE ...................................................................... 22
2
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Financial Statements included herein have been prepared by
Ceradyne, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange
Commission. Certain information normally included in the
Financial Statements prepared in accordance with accounting
principles generally accepted in the United States has been
omitted pursuant to such rules and regulations. However, the
Company believes the disclosures are adequate to make the
information presented not misleading. All adjustments have
been made which are, in the opinion of management, necessary
to a fair statement of the results of the interim periods
presented. The Financial Statements should be read in
conjunction with the Financial Statements and notes thereto
included in the Company's Annual Report pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 on Form 10-K
for the fiscal year ended December 31, 2001, as filed with the
Securities and Exchange Commission on March 27, 2002.
3
==========================================================================================================
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
(Unaudited)
==========================================================================================================
CURRENT ASSETS
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 329 $ 1,017
- ----------------------------------------------------------------------------------------------------------
Accounts receivable, net of allowances for doubtful 9,484 8,305
accounts of approximately $111 and $101 at June 30,
2002 and December 31, 2001, respectively
- ----------------------------------------------------------------------------------------------------------
Other receivables 243 215
- ----------------------------------------------------------------------------------------------------------
Inventories 14,991 14,581
- ----------------------------------------------------------------------------------------------------------
Production tooling 3,672 2,889
- ----------------------------------------------------------------------------------------------------------
Prepaid expenses and other 1,986 1,689
- ----------------------------------------------------------------------------------------------------------
Deferred Tax Asset 1,149 1,728
------- -------
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 31,854 30,424
------- -------
- ----------------------------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, at cost
- ----------------------------------------------------------------------------------------------------------
Land 422 422
- ----------------------------------------------------------------------------------------------------------
Buildings and improvements 1,851 1,851
- ----------------------------------------------------------------------------------------------------------
Machinery and equipment 33,576 30,126
- ----------------------------------------------------------------------------------------------------------
Leasehold improvements 3,532 3,224
- ----------------------------------------------------------------------------------------------------------
Office equipment 3,404 3,291
- ----------------------------------------------------------------------------------------------------------
Construction in progress 1,114 1,067
-------- --------
- ----------------------------------------------------------------------------------------------------------
43,899 39,981
- ----------------------------------------------------------------------------------------------------------
Less accumulated depreciation and amortization (25,325) (23,965)
-------- -------
- ----------------------------------------------------------------------------------------------------------
18,574 16,016
------- -------
- ----------------------------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,511 1,511
net of accumulated amortization of $2,406 at
June 30, 2002 and December 31, 2001
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $51,939 $47,951
====== ======
==========================================================================================================
See accompanying condensed notes to
Consolidated Financial Statements.
4
===============================================================================
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
- -------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
(Unaudited)
===============================================================================
CURRENT LIABILITIES
- -------------------------------------------------------------------------------
Bank line of credit $ 1,544 $ ---
- -------------------------------------------------------------------------------
Current portion of long-term debt 100 100
- -------------------------------------------------------------------------------
Accounts payable 5,892 5,361
- -------------------------------------------------------------------------------
Accrued expenses:
- -------------------------------------------------------------------------------
Payroll and payroll related 1,286 1,320
- -------------------------------------------------------------------------------
Other 339 476
--- ---
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 9,161 7,257
-------- -------
- -------------------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT PORTION 108 158
-------- ---
- -------------------------------------------------------------------------------
WARRANTY RESERVE 650 ---
--------
- -------------------------------------------------------------------------------
DEFERRED REVENUE 135 270
-------- ---------
- -------------------------------------------------------------------------------
DEFERRED TAX LIABILITY 609 609
-------- ---------
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Common stock, $.01 par value,
Authorized - 12,000,000 shares,
Outstanding - 8,465,754 shares
and 8,402,705 shares at June 30, 2002
and December 31, 2001, respectively. 39,831 39,298
- -------------------------------------------------------------------------------
Retained earnings 1,445 359
------ ---------
- -------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 41,276 39,657
------- -------
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $51,939 $47,951
======= ======
===============================================================================
See accompanying condensed notes to
Consolidated Financial Statements.
5
================================================================================
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
===============================================================================
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
- -------------------------------------------------------------------------------
2002 2001 2002 2001
===============================================================================
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------
NET SALES $ 14,620 $ 11,137 $ 29,298 $ 23,086
- -------------------------------------------------------------------------------
COST OF PRODUCT SALES 11,619 7,844 23,409 15,998
------ ----- ------ ------
- -------------------------------------------------------------------------------
Gross profit 3,001 3,293 5,889 7,088
------ ----- ------ ------
- -------------------------------------------------------------------------------
OPERATING EXPENSES
- -------------------------------------------------------------------------------
Selling 543 540 990 1,057
- -------------------------------------------------------------------------------
General and administrative 1,142 1,201 2,280 2,467
- -------------------------------------------------------------------------------
Research and development 549 89 1,031 536
------ ----- ------ ------
- -------------------------------------------------------------------------------
2,234 1,830 4,301 4,060
------ ----- ------ ------
- -------------------------------------------------------------------------------
Income from operations 767 1,463 1,588 3,028
------ ----- ------ ------
- -------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
- -------------------------------------------------------------------------------
Royalty income 30 50 85 80
Interest income 3 56 8 137
Interest expense (20) (7) (32) (14)
Miscellaneous --- --- 22 30
- -------------------------------------------------------------------------------
13 99 83 233
- -------------------------------------------------------------------------------
Income before provision 780 1,562 1,671 3,261
for income taxes
- -------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 273 305 585 815
------ ----- ------ ------
- -------------------------------------------------------------------------------
NET INCOME $ 507 $ 1,257 $ 1,086 $ 2,446
=== ===== ===== =====
- -------------------------------------------------------------------------------
BASIC INCOME PER SHARE $0.06 $ 0.15 $ 0.13 $ 0.29
==== ==== ==== ====
- -------------------------------------------------------------------------------
DILUTED INCOME PER SHARE $0.06 $ 0.15 $ 0.12 $ 0.28
==== ==== ==== ====
===============================================================================
See accompanying condensed notes to
Consolidated Financial Statements.
6
===================================================================================================================
CERADYNE, INC. SIX MONTHS ENDED JUNE 30,
CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------
(Amounts in thousands)
2002 2001
(Unaudited) (Unaudited)
====================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 1,086 $ 2,446
- --------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,360 1,232
- --------------------------------------------------------------------------------------------------------------------
Deferred income taxes 579 ---
- --------------------------------------------------------------------------------------------------------------------
Gain on equipment disposal --- (12)
- --------------------------------------------------------------------------------------------------------------------
Change in operating assets and liabilities:
- --------------------------------------------------------------------------------------------------------------------
Accounts receivable, net (1,179) (2,322)
- --------------------------------------------------------------------------------------------------------------------
Other receivables (28) (200)
- --------------------------------------------------------------------------------------------------------------------
Inventories (410) (1,886)
- --------------------------------------------------------------------------------------------------------------------
Production tooling (783) (364)
- --------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other (297) 366
- --------------------------------------------------------------------------------------------------------------------
Accounts payable 531 86
- --------------------------------------------------------------------------------------------------------------------
Accrued expenses (171) 550
- --------------------------------------------------------------------------------------------------------------------
Warranty reserve 650 ---
- --------------------------------------------------------------------------------------------------------------------
Deferred revenue (135) 135
--------- ------
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,203 31
----- --------
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment (3,918) (2,971)
------ ------
- --------------------------------------------------------------------------------------------------------------------
Proceeds from sale of equipment --- 68
--------- --------
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,919) (2,903)
------ -----
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of common stock 533 320
- --------------------------------------------------------------------------------------------------------------------
Payments on long-term debt (50) (50)
- --------------------------------------------------------------------------------------------------------------------
Net proceeds from bank line of credit 1,544 ---
-----
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,027 270
------ -------
- --------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (688) (2,602)
---- ------
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 1,017 6,656
------ ------
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 329 $ 4,054
====== ======
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------------------------------------------------------------------------
Interest paid $ 32 $ 18
- --------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 9 $ 253
--------- -------
====================================================================================================================
See accompanying condensed notes to Consolidated Financial Statements
7
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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 generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended June 30,
2002 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the Consolidated Financial Statements
and Notes to Financial Statements included in Ceradyne's Annual Report
on Form 10-K for the year ended December 31, 2001.
2. Inventories
-----------
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 June 30, 2002 and December 31, 2001 (in thousands):
===================================================================
JUNE 30, 2002 DECEMBER 31, 2001
===================================================================
Raw Materials $8,327 $8,143
-------------------------------------------------------------------
Work-in-Process 5,709 5,616
-------------------------------------------------------------------
Finished Goods 955 822
-------------------------------------------------------------------
Total Inventories $14,991 $14,581
======= =======
===================================================================
8
3. Recent Accounting Pronouncements
--------------------------------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets". This pronouncement
addresses, among other things, how goodwill and other intangible assets
should be accounted for after they have been initially recognized in
the financial statements. Goodwill would no longer be amortized but
would be assessed at least annually for impairment using a fair value
methodology. The Company adopted this statement for all goodwill and
other intangible assets acquired after June 30, 2001 and for all
existing goodwill and other intangible assets beginning January 1,
2002. Upon adoption of this standard on January 1, 2002 the Company
ceased recording amortization of goodwill, which resulted in an
increase to gross income of $50,000 for the second quarter 2002 and
$100,000 for the six month period ended June 30, 2002. The effect on
earnings per share, both basic and diluted as reported, is an increase
of a half cent per share for the six months ended June 30, 2002 as
compared to the prior year. Other than ceasing the amortization of
goodwill, the Company does not anticipate that the adoption of SFAS 142
will have a significant effect on the financial position or the results
of operations, as the Company's review at the end of the second quarter
ended June 30, 2002 of the financial statements denoted no impairment
of existing goodwill.
4. Net Income Per Share
--------------------
Basic net income per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing net
income available to common stockholders by the weighted average number
of common shares outstanding plus the effect of any dilutive stock
options and common stock warrants using the treasury stock method.
The following is a summary of the number of shares entering into the
computation of net income per common and common equivalent share:
=============================================================================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-----------------------------------------------------------------------------
2002 2001 2002 2001
=============================================================================
Weighted average number of 8,465,754 8,338,315 8,455,265 8,316,517
shares outstanding
-----------------------------------------------------------------------------
Dilutive stock options and 383,412 329,989 367,845 325,963
common stock warrants ------- ------- ------- -------
-----------------------------------------------------------------------------
Number of shares used 8,849,166 8,668,304 8,823,110 8,642,480
in diluted computations ========= ========= ========= =========
-----------------------------------------------------------------------------
9
5. Long Term Debt
--------------
=======================================================================
Capital Equipment loan bearing interest at 8.18% $208,000
APR. Payable in monthly installments of $8,333,
expiring July 2004.
-----------------------------------------------------------------------
Less Current Portion (100,000)
---------
-----------------------------------------------------------------------
Long Term Debt $108,000
========
=======================================================================
In addition to the capital equipment loan, the Company also has a bank
line of credit. The Company may borrow up to $7,500,000 with interest
on borrowings charged at the bank's prime rate (4.75 percent at June
30, 2002). The bank line of credit had an outstanding balance at June
30, 2002 of approximately $1,544,000. Pursuant to the bank line of
credit, the Company is subject to certain covenants, which include,
among other things, the maintenance of tangible net worth, quick assets
to current liabilities ratio, and total liabilities to tangible net
worth ratio. At June 30, 2002, the Company was in compliance with these
covenants.
6. Disclosure About Segments of an Enterprise and Related Information
------------------------------------------------------------------
The Company serves its markets and manages its business through three
divisions, each of which has its own manufacturing facilities and
administrative and selling functions. The Company's Advanced Ceramic
Operations, located in Costa Mesa and Irvine, California, primarily
produces armor and orthodontic products, components for semiconductor
equipment, and houses the Company's sintering and reaction bonding of
silicon nitride (SRBSN) research and development activities. The
Company's cathode development and production are handled through its
Semicon Associates division located in Lexington, Kentucky. Fused
silica products, including missile radomes, are produced at the
Company's Thermo Materials division located in Scottdale, Georgia.
Ceradyne's manufacturing structure is summarized in the following
table:
10
===============================================================================================
FACILITY LOCATION PRODUCTS
-----------------------------------------------------------------------------------------------
Advanced Ceramic Operations . Semiconductor Equipment Components
Costa Mesa and Irvine, California . Lightweight ceramic armor
Approximately 126,000 square feet . Orthodontic ceramic brackets
. Ceralloy(R) 147 SRBSN wear parts
. Precision ceramics
. Ceralloy(R) 147 SRBSN diesel/automotive engine parts
. Research and Development
-----------------------------------------------------------------------------------------------
Semicon Associates . Microwave ceramic-impregnated dispenser cathodes
Lexington, Kentucky . Ion laser ceramic-impregnated dispenser cathodes
Approximately 35,000 square feet . Samarium cobalt magnets
-----------------------------------------------------------------------------------------------
Thermo Materials . Glass tempering rolls (fused silica ceramics)
Scottdale, Georgia . Metallurgical tooling (fused silica ceramics)
Approximately 85,000 square feet . Missile radomes (fused silica ceramics)
. Castable and other fused silica product
===============================================================================================
Ceradyne, Inc.
Segment Disclosures
(Amounts in thousands)
Three Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- ---------------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
- ---------------- ----------------------------------------------------------------------------------------
Revenue from $11,268 $ 7,921 $ 1,596 $ 2,031 $ 1,756 $ 1,185 $14,620 $11,137
External ------- -------- ------- ------- ------- ------- ------- -------
Customers
Depreciation $ 440 $ 410 $ 113 $ 114 $ 122 $ 121 $ 675 $ 645
and ------- -------- ------- ------- -------- ------- ------- -------
Amortization
Segment $ 862 $ 1,367 $ 91 $ 440 $ (173) $ (245) $ 780 $ 1,562
Income before ------- -------- ------- ------- --------- ------- ------- -------
provision for
Income Taxes
Segment Assets $39,220 $ 29,940 $ 6,344 $ 6,447 $ 6,375 $ 5,562 $51,939 $41,949
------- -------- ------- ------- ------- ------- ------- -------
Expenditures $ 1,588 $ 1,210 $ 23 $ 122 $ 133 $ 297 $ 1,744 $ 1,629
for PP&E ------- -------- ------- ------- -------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------
The following is revenue by product line for Advanced Ceramic Operations
for the quarter ended June 30:
2002 2001
-------- --------
Semiconductor $ 279 $ 372
Armor 5,816 3,031
Orthodontics 1,837 2,245
Other 3,336 2,273
-------- --------
$ 11,268 $ 7,921
======== ========
11
Six Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- ---------------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
Revenue from $ 22,791 $ 16,156 $ 3,087 $ 3,972 $ 3,420 $ 2,958 $29,298 $23,086
External -------- -------- ------- ------- ------- ------- ------- -------
Customers
Depreciation $ 884 $ 810 $ 226 $ 219 $ 250 $ 203 $ 1,360 $ 1,232
and -------- -------- ------- ------- ------- ------- ------- -------
Amortization
Segment $ 1,823 $ 2,534 $ 164 $ 805 $ (316) $ (78) $ 1,671 $ 3,261
Income before -------- -------- ------- ------- ------- ------- ------- -------
provision for
Income Taxes
Expenditures $ 3,497 $ 2,099 $ 43 $ 262 $ 378 $ 610 $ 3,918 $ 2,971
for PP&E -------- -------- ------- ------- ------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------
The following is revenue by product line for Advanced Ceramic Operations
for the six months ended June 30:
2002 2001
-------- -------
Semiconductor $ 531 $ 1,313
Armor 12,467 5,996
Orthodontics 3,891 4,113
Other 5,902 4,734
-------- -------
$ 22,791 $16,156
======== =======
12
Segment Disclosures for Net Sales by Area
Three Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- -----------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
U.S. Net Sales 73% 60% 9% 13% 6% 7% 88% 80%
Western 4% 4% 2% 4% 1% 1% 7% 9%
Europe Net
Sales
Asia Net Sales --- 3% --- 1% 4% 2% 4% 6%
Israel Net --- 4% --- --- --- --- --- 4%
Sales
Canada Net
Sales --- --- --- --- 1% 1% 1% 1%
Other --- --- --- --- --- --- --- ---
------- ------- ------- ------- ------- ------- ------- -------
Total Net 77% 71% 11% 18% 12% 11% 100% 100%
Sales ======= ======= ======= ======= ======= ======= ======= =======
- -----------------------------------------------------------------------------------------
Six Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- -----------------------------------------------------------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
U.S. Net Sales 74% 58% 8% 13% 6% 9% 88% 80%
Western 3% 5% 2% 3% 1% 1% 6% 9%
Europe Net
Sales
Asia Net Sales 1% 2% 1% 1% 4% 2% 6% 5%
Israel Net --- 5% --- --- --- --- --- 5%
Sales
Canada Net
Sales --- --- --- --- --- 1% --- 1%
Other --- --- --- --- --- --- --- ---
------- ------ ----- ----- ------ ------ ------ ------
Total Net 78% 70% 11% 17% 11% 13% 100% 100%
Sales ======= ====== ===== ======= ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------
13
7. Legal Proceedings
-----------------
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its
business, including, but not limited to, employment-related actions and
workers' compensation claims.
On December 21, 2001, the Company was served with a complaint filed by
the Company's insurance carrier in the Superior Court of California in
Santa Ana, California. The complaint seeks a declaration that the
Company is obligated to reimburse the insurance carrier for defense
expenses that the insurance carrier has or will pay on behalf of the
Company's prior lessor. The lessor was sued by an employee of the
Company alleging he contracted chronic beryllium disease while employed
at the lessor's facility in the 1980's. The Company's insurance carrier
has or will pay the lessor's defense costs under a reservation of
rights to seek reimbursement from the Company if it is determined by
the Court that the Company's insurance carrier is not obligated to pay.
The Company believes that the insurance carrier's claim is without
merit and is vigorously defending against this claim. The case is in
the early stage of discovery and no trial date has been set. The
complaint does not state the amount of legal expenses for which
reimbursement is sought, but the Company believes that the resolution
of this matter will not have a material adverse effect on the financial
condition, results of operations and/or cash flow of the Company.
8. Commitments and Contingencies
-----------------------------
The U.S. Government Defense Logistics Agency (DLA) notified the Company
on March 27, 2002, that 3 lots of Ceradyne's small arms protective
inserts (SAPI) for light weight ceramic armor shipped in January 2002
failed to pass ballistics "reverification" tests by the Government's
designated independent commercial testing laboratory. During the period
of December 2001 through March 27, 2002, the Company had shipped
approximately $5.1 million under its existing contract with the DLA.
Subsequent to March 27, 2002, the DLA directed the independent testing
laboratory to perform "reverification" testing and $3.4 million of the
shipments were not in testing compliance.
Since first being notified of these issues on March 27, 2002, the
Company voluntarily stopped producing its original SAPI design and has
been actively working with the Government to understand the quality and
testing issues and to resolve the status and disposition of the SAPI
plates in question. The Company has completed the development of a
modified design for its ceramic SAPI armor plates. Independently
performed tests by the Government's designated testing laboratory of
the modified design have been successful and the "first article"
(initial production parts) of this modified design was approved in June
2002. In July 2002, the Company received a $5.3 million delivery order
from the U.S. Army for its newly designed, robust small arms protective
inserts (SAPI) Design II. Shipments began in July 2002 and are expected
to be completed during the fourth quarter of 2002.
14
The Company has entered into warranty discussions with the Government
regarding certain of the SAPI plates shipped in December 2001, and
first quarter 2002. The Company has proposed that the military return
individual lots over a period of time for reworking and upgrading to
incorporate certain improved features of the recently approved SAPI
design. Although these discussions are ongoing and have not been
finalized, the Company currently estimates it will cost approximately
$650,000 to rework and upgrade the SAPI plates under discussion and has
set up a warranty reserve in that amount recorded in the second quarter
ended June 30, 2002. The charge was booked into cost of goods sold.
Item 2. Management's 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. These risks and uncertainties are described in
Note 8, "Commitments and Contingencies", of Condensed Notes to
Consolidated Financial Statements at page 14 of this report, and in the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2001, as filed with the Securities and Exchange Commission, under
"Item 1-Business", including the section therein entitled "Risk
Factors", and "Item 7-Management's Discussion and Analysis of Financial
Condition and Result of Operations".
Results of Operations for the Three and Six Months Ended June 30, 2002
----------------------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, for an analysis and detailed
discussion of the Company's financial condition and results of
operations for the period covered by that report.
Net Sales. Net sales for the three months ended June 30, 2002 were
---------
$14.6 million. This represents an increase of 32%, or $3.5 million,
from the corresponding quarter of the prior year. For the six months
ended June 30, 2002, net sales were $29.3 million, an increase of 27%,
or $6.2 million from the prior year's six months.
Advanced Ceramic Operations in Costa Mesa, California, had net sales
for the quarter of $11.3 million representing an increase of $3.3
million, or 42% over the comparable prior year quarter. The primary
reason for this improvement was an increase of $2.8 million, or 92%, in
sales of ceramic armor for defense customers, compared to the second
quarter of 2001, due to orders received in the fourth quarter
15
of 2001, and first and second quarters of 2002 from the U.S.
Department of Defense for lightweight body armor for military
personnel. Also, net sales of automotive ceramic products during the
three months ended June 30, 2002 increased by $1.2 million, or four
times over the year-ago quarter due to increasing demand by diesel
truck manufacturers for ceramic components for diesel engines to
decrease their warranty cost. These increases were partially offset by
a $.4 million decrease in sales for ceramic orthodontic brackets due
to the Company's customer, 3M Unitek, reducing its inventory supply,
as well as a decrease of $.1 million in sales of semiconductor
components due to continued weakness in that market.
For the six months period, sales at the Company's Advanced Ceramic
Operations were $22.8 million, representing an increase of $6.6
million, or 41%, over the comparable prior year period. The primary
reasons for the improvement were an increase of $6.5 million in ceramic
armor for defense customers, and a $1.9 million increase in ceramic
components for diesel engines due to the same reasons stated above
under the quarter-to-quarter comparison. The major offset was an $.8
million decrease in sales of semiconductor components due to the
weakness of that market. Sales of ceramic orthodontic brackets
decreased $.2 million for the same reason stated above under the
quarter-to-quarter comparison. Sales of all other product lines
decreased by $.9 million in the aggregate compared with last year's
comparable period due to weaknesses in other industrial wear product
businesses.
The Company believes that the rapid growth in sales of ceramic
components for diesel engine components has been due, in part, to an
effort by diesel truck manufacturers to sell as many diesel trucks as
possible prior to October 1, 2002, when new, stricter federal
environmental regulations become effective. As a result, the Company
expects that sales of ceramic components for diesel engines will
decline substantially in the fourth quarter of 2002.
The Company's Semicon Associates division in Lexington, Kentucky,
posted a sales decrease of $.4 million for the second quarter, and a
six month decrease of $.9 million as compared to the prior year
periods. The sales decrease reflect lower bookings of incoming orders
in the first quarter of 2002 versus the year-ago period. In the second
quarter ended June 30, 2002, bookings of incoming orders were 57%
higher than the first quarter of 2002, but still lower than the
year-ago period by 15%. The trend for the remainder of the year in
sales is anticipated to be lower than the previous year by 15% due to
cutbacks in the communication industries.
The Company's Thermo Materials division in Scottdale, Georgia, posted a
sales increase for the quarter of $.6 million, and a six months
increase of $.5 million as compared to the prior year periods. The
increases in both periods were mainly due to incoming sales orders for
fused silica ceramic for the tempered glass making industry.
International sales have been, and are expected to continue to be an
important part of the Company's business. International sales were 12%
of total sales for the quarter and first six months of 2002 as compared
to 20% in each of the prior year periods. The main reasons for the
decline in international sales was a large shipment
16
of product to Israel in the prior year's second quarter and six
months' period that did not reoccur in the current year's periods, and
to increases in domestic sales in both the second quarter and first
six months of 2002, compared to the same periods of 2001.
Gross Profit. The Company's gross profit was $3.0 million, or 21% of
------------
sales, for the second quarter ended June 30, 2002, compared to $3.3
million, or 30% of sales, for the prior year's second quarter. For the
six months ended June 30, 2002, gross profit was $5.9 million, or 20%
of sales, compared to $7.1 million, or 31% of sales, in the first six
months of 2001.
The Company's Advanced Ceramic Operations in Costa Mesa, California,
posted gross profit of $2.5 million for the quarter ended June 30,
2002, compared to $2.6 million, or a 4% decrease over the year ago
quarter. For the six months ended June 30, 2002, gross profit was $4.9
million compared to $5.3 million, or an 8% decrease over the year ago
period. The results were mainly due to the following for both the
second quarter and six month periods ended June 30, 2002 as compared to
the year-ago periods: The Company has entered into warranty discussions
with the Government regarding certain of the small arms protective
inserts (SAPI) plates shipped in December 2001 and first quarter 2002
(see Commitments and Contingencies, Note 8 on page 14). The Company has
proposed that the military return individual lots over a period of time
for reworking and upgrading to incorporate certain improved features of
the recently government-approved SAPI design. Although these
discussions are ongoing and have not been finalized, the Company
currently estimates it will cost approximately $650,000 to rework and
upgrade the SAPI plates under discussion and has set up a warranty
reserve in that amount, recorded in the second quarter ended June 30,
2002. The charge was booked into cost of goods sold. Also, the Company
recently leased a new facility containing approximately 41,000 square
feet, most of which will be used for manufacturing, and it will take
several quarters to fully utilize the cost of this additional capacity
and realize the same level of economies of scale as were achieved in
2001. In late June 2002, the product group for ceramic orthodontic
brackets moved into the new facility and more product groups are
planned to move in the next two quarters. Currently, the Company is
experiencing poorer product yields and other manufacturing
inefficiencies (as compared to the year-ago periods) as production
capacities are being significantly increased to meet rising demand for
personnel armor and diesel engine components. Consequently, gross
profit margins have decreased in the first six months of 2002 as
compared to 2001, but are expected to improve gradually thereafter if
the mix of product remains relatively the same.
Semicon Associates in Lexington, Kentucky, posted gross profit of $.3
million compared to $.7 million, or a 57% decrease over the year ago
quarter. For the six month periods, gross profit was $.5 million
compared to $1.2 million, or a 58% decrease over the year ago period.
The decreases for both the second quarter and six month periods are
attributed to a decline in revenue volume and to less capacity
utilization resulting in higher cost of sales. The Company expects the
trend of gross profit as a percent of sales to be lower for the
remainder of the year because of the lowered sales volume, and the lag
time to decrease fixed and variable cost quickly.
17
Thermo Materials in Scottdale, Georgia, posted gross profit of $.2
million compared to $.1 million, or a 100% increase from the year ago
quarter. For the six month period, gross profit was at $.5 million for
both the current and the year-ago period. The increase in the
quarter-over-quarter amount is due to less scrap and rework. The
year-over-year comparison is the same gross profit in dollars;
however, the current six months period has a lower gross profit margin
due to higher than expected scrap, product replacement and rework than
the year-ago period. The Company anticipates that in the following
quarters, gross profit as a percent of sales will increase as volume
and efficiencies increase.
Selling Expenses. Selling expenses were $.5 million for the quarter,
----------------
and $1.0 million for the six months ended June 30, 2002. The above
compares to prior year amounts of $.5 million for the quarter, and $1.1
million for the six months period. Salary and benefit increases were
offset by lower commission expenses than in the prior year periods.
General and Administrative Expenses. General and Administrative
-----------------------------------
expenses were $1.1 million for the quarter, and $2.3 million for the
six months ended June 30, 2002. The above compares with prior year
amounts of $1.2 million for the quarter and $2.5 million for the six
months period. Salary and benefit increases were offset by a decrease
of bonus accrual because of less profit than in the prior year periods.
Research and Development. The Company's research and development
------------------------
efforts consist primarily of ongoing application engineering in
response to customer requirements, and the research and development of
new materials technology and products. These efforts are directed to
the creation of new products, the modification of existing products to
fit specific customer needs, and the development of enhanced ceramic
process technology.
Expenses for the second quarter ended June 30, 2002 and 2001 for
Research and Development were $.5 million and $.1 million,
respectively, and for the six months period ended June 30, 2002 and
2001 were $1.0 million and $.5 million, respectively. The expenses over
the prior year periods are related to increases in research and
development in ceramic technology, and for the new design of personnel
armor plates for the U.S. Army. The expenses for both years are related
to wages for engineering, technicians and production personnel,
materials, outside services, small tools and travel. In addition,
approximately $.3 million for the second quarter and $.4 million for
the six months period are cost related to research and development that
are included in cost of sales due to Small Business Innovation Research
(SBIR) grants, which are recorded as sales.
In addition, the company historically has and continues to engage in
application engineering to improve and reduce the cost of production
and to develop new products. These costs are expensed as incurred and
are included in cost of product sales by the engineering department.
Other Income. Other income was $33,000 for the quarter and $93,000 for
------------
the six months ended June 30, 2002. The above compares to prior year
amounts of
18
$106,000 for the quarter and $217,000 for the six month period. The
major cause for the decrease in both the quarter and six month periods
was a reduction in interest income due to less cash reserves.
Interest Expense
----------------
Interest expense was $20,000 for the quarter as compared to $7,000 in
the year-ago quarter. For the six month period, interest expense was
$32,000 compared to $14,000 in the year-ago period. The increases were
due to increased cash borrowings.
Income Taxes
------------
The provision for income taxes for the quarter is 35% compared to a 20%
rate in the year-ago period. For the six month period, the rate is 35%
compared to 25% for the year-ago period. The change in the provision
percentage is due to the complete utilization of net operating loss
carryforwards in 2001.
Net Income. Reflecting all of the matters discussed above, net income
----------
was $.5 million (or $0.06 per share basic and diluted) for the quarter
ended June 30, 2002, and $1.1 million (or $0.13 basic and $0.12
diluted) for the six months ended June 30, 2002.
Liquidity and Capital Resources
-------------------------------
The Company generally meets its operating and capital requirements for
cash flow from operating activities and borrowings under its credit
facilities.
On May 16, 2002, the Company increased from $4.0 million to $7.5
million its revolving credit agreement with Comerica Bank. As of June
30, 2002, the Company has borrowed $1.5 million for operating needs.
The need to increase the credit line is because of expansion needs in
the present and future growth of the Company. Under a separate credit
facility with Comerica Bank, the Company entered into a $500,000
capital equipment loan agreement during the third quarter of 1999. The
term of the loan is for 60 months with no prepayment penalty, and as of
June 30, 2002, this loan balance is $208,000.
The Company's net cash position decreased by $.7 million during the six
months ended June 30, 2002, compared to a decrease of $2.6 million in
the six months ended June 30, 2001. An important component of this
change was the Company's investment of $4.0 million in purchase of
machinery, equipment and leasehold improvements in the current year,
compared to $3.0 million in 2001, to continue to expand production
capacity primarily at the Company's Advanced Ceramic Operations in
Costa Mesa and Irvine, California. Another main component was the
current net income of $1.1 million compared to the year-ago period of
$2.4 million in net income. The above was partially offset by net
borrowings from the credit line of $1.5 million in the current period
as compared to none in the prior year.
19
Management believes that its current cash and cash equivalents on hand,
as well as cash generated from operations and the ability to borrow
under the existing credit facilities, will be sufficient to finance
anticipated capital and operating requirements for at least the next 12
months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risks related to fluctuations in
interest rates on its debt. Currently, the Company does not utilize
interest rate swaps, forward or option contracts on foreign currencies
or commodities, or other types of derivative financial instruments. The
purpose of the following analysis is to provide a framework to
understand the Company's sensitivity to hypothetical changes in
interest rates as of June 30, 2002.
The Company utilized fixed rate debt financing during 1999 primarily
for the purpose of acquiring manufacturing equipment. For fixed rate
debt, changes in interest rates generally affect the fair market value
of the debt instrument, but not the Company's earnings or cash flows.
The Company does not have an obligation to prepay fixed rate debt prior
to maturity, and as a result, interest rate risk and changes in fair
market value should not have a significant impact on the fixed rate
debt until the Company would be required to refinance such debt. The
fair market value estimates for debt securities are based on
discounting future cash flows utilizing current rates offered to the
Company for debt of the same type and remaining maturity.
As of June 30, 2002, the Company's debt consisted of a $208,000 capital
equipment loan at a fixed interest rate of 8.18% due July 28, 2004, and
a bank line of credit of $1,544,000 for operating requirements. The
bank line of credit interest rate is at prime (4.75% as of June 30,
2002). The carrying amount is a reasonable estimate of fair value as
the rate of interest paid on the note and revolving credit facility
approximates the current rate available for financing with similar
terms and maturities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is, from time to time, involved in various legal and other
proceedings that relate to the ordinary course of operating its
business, including, but not limited to, employment-related actions and
workers' compensation claims.
On December 21, 2001, the Company was served with a complaint filed by
the Company's insurance carrier in the Superior Court of California in
Santa Ana, California. The complaint seeks a declaration that the
Company is obligated to reimburse the insurance carrier for defense
expenses that the insurance carrier has or will pay on behalf of the
Company's prior lessor. The lessor was sued by an employee of the
Company alleging he contracted chronic beryllium disease while employed
at the lessor's facility in the 1980's. The Company's insurance carrier
has or will pay the lessor's defense costs under a reservation of
rights to seek
20
reimbursement from the Company if it is determined by the Court that
the Company's insurance carrier is not obligated to pay.
The Company believes that the insurance carrier's claim is without
merit and is vigorously defending against this claim. The case is in
the early stage of discovery and no trial date has been set. The
complaint does not state the amount of legal expenses for which
reimbursement is sought, but the Company believes that the resolution
of this matter will not have a material adverse effect on the
financial condition, results of operations and/or cash flow of the
Company.
Item 2. N/A
Item 3. N/A
Item 4. Submission of Matter to Vote of Security Holders
------------------------------------------------
The following matters were voted upon at the Annual Meeting of
Stockholders held on July 29, 2002.
(A) The following seven persons were elected as Directors of the
Company to serve until the next annual meeting of stockholders
or until their successors are elected and have qualified:
-----------------------------------------------------------
NUMBER OF SHARES
-----------------------------------------------------------
FOR AUTHORITY WITHHELD
-----------------------------------------------------------
J. P. Moskowitz 6,930,918 231,011
-----------------------------------------------------------
R. A. Alliegro 7,111,532 50,397
-----------------------------------------------------------
E. Bagdasarian 7,111,532 50,397
-----------------------------------------------------------
F. Edelstein 7,110,832 51,097
-----------------------------------------------------------
W. D. Godbold, Jr. 7,111,532 50,397
-----------------------------------------------------------
C. D. Johnson 7,111,532 50,397
-----------------------------------------------------------
M. L. Lohr 7,111,532 50,397
-----------------------------------------------------------
(B) The amendment to increase the number of shares of Common Stock
authorized for issuance by 100,000 shares to 1,050,000 shares of
Common Stock under the Company's 1994 Stock Incentive Plan was
approved.
Votes:
-----
For 6,866,577
Against 257,702
Abstain 37,650
Broker Non-Votes -0-
Item 5. N/A
21
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
99.1 Certification of Periodic Report by Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None
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.
By: s/Howard F. George
------------------
Howard F. George
Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 14, 2002
22
Index to Exhibits
-----------------
Exhibit Description
- ------- -----------
99.1 Certification of Periodic Report by Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Periodic Report by Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
23