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. Reference is made to the risks and uncertainties which are described in this Item 2 “Management’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission, in Item 1A under the caption “Risk Factors,” and in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, energy, automotive/diesel and commercial applications. Our products include:
|
•
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lightweight ceramic armor for soldiers and other military applications;
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|
•
|
ceramic industrial components for erosion and corrosion resistant applications;
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|
•
|
ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, zirconium diboride and fused silica, which are used in manufacturing armor and a broad range of industrial products and consumer products;
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|
•
|
evaporation boats for metallization of materials for food packaging and other products;
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|
•
|
durable, reduced friction, ceramic diesel engine components;
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|
•
|
functional and frictional coatings primarily for automotive applications;
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|
•
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translucent ceramic orthodontic brackets;
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•
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bio-glass compounds as a key ingredient in tooth paste to rejuvenate the growth of enamel;
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|
•
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ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;
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•
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ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;
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•
|
specialty glass compositions for solar, electronic, industrial and health care markets;
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|
•
|
ceramic missile radomes (nose cones) for the defense industry;
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|
•
|
fused silica powders for precision investment casting (PIC);
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|
•
|
neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composite that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;
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•
|
nuclear chemistry products for use in pressurized water reactors and boiling water reactors;
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•
|
boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers;
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•
|
ceramic bearings and bushings for oil drilling and fluid handling pumps;
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|
•
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ceramic micro-reactors used to process chemicals and pharmaceuticals;
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•
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PetroCeram
®
ceramic sand screens for oil and gas recovery and exploration; and
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•
|
enhanced combat helmets for soldiers.
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Our customers include the U.S. government, prime government contractors, companies engaged in solar energy, oil and natural gas exploration and nuclear energy, and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.
On September 30, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 3M Company (“3M”) and Cyborg Acquisition Corporation, a wholly owned subsidiary of 3M (“Purchaser”). Subject to the terms and conditions of the Merger Agreement, on October 15, 2012, Purchaser commenced a tender offer to purchase all of our outstanding shares of common stock, par value $0.01, at a purchase price of $35.00 per share, net to the holder in cash, without interest, less any required withholding taxes.
The consummation of the tender offer is conditioned on the tender of a majority of the outstanding shares of our common stock on a fully diluted basis, as well as receipt of antitrust clearances, and other conditions that are specified in the Merger Agreement. Following successful completion of the tender offer and, if required, receipt of stockholder approval, the Purchaser will merge with and into the Company (the “Merger”), and the remaining Company stockholders, other than Purchaser, 3M or the Company or any wholly owned subsidiary of 3M or the Company or any stockholders who have properly exercised appraisal rights under the General Corporation Law of the State of Delaware, will receive the same cash price per share as paid in the tender offer. In connection with the completion of the tender offer and the Merger, all of our outstanding stock options and restricted stock units, whether vested or unvested, will become fully vested and converted into a right to receive a cash payment of $35.00 per share, less any applicable exercise price.
The Merger Agreement contains certain termination rights by us and 3M including our acceptance of a superior proposal. In the event that the Merger Agreement is terminated, we may, under specified circumstances, be required to pay a termination fee of approximately $17.1 million.
The tables below show, for each of our four operating segments, revenues and income (loss) from operations in the periods indicated.
Segment revenues (in millions):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Advanced Ceramic Operations
|
|
$
|
53.4
|
|
|
$
|
74.0
|
|
|
|
(27.9
|
%)
|
|
$
|
172.5
|
|
|
$
|
217.4
|
|
|
|
(20.6
|
%)
|
ESK Ceramics
|
|
|
33.2
|
|
|
|
39.9
|
|
|
|
(16.8
|
%)
|
|
|
113.1
|
|
|
|
125.9
|
|
|
|
(10.2
|
%)
|
Thermo Materials
|
|
|
15.4
|
|
|
|
24.2
|
|
|
|
(36.3
|
%)
|
|
|
45.6
|
|
|
|
84.6
|
|
|
|
(46.1
|
%)
|
Boron
|
|
|
8.3
|
|
|
|
13.4
|
|
|
|
(37.5
|
%)
|
|
|
29.4
|
|
|
|
32.7
|
|
|
|
(10.2
|
%)
|
Inter-segment elimination
|
|
|
(4.1
|
)
|
|
|
(3.5
|
)
|
|
|
16.6
|
%
|
|
|
(17.4
|
)
|
|
|
(17.1
|
)
|
|
|
1.7
|
%
|
Total
|
|
$
|
106.2
|
|
|
$
|
148.0
|
|
|
|
(28.2
|
%)
|
|
$
|
343.2
|
|
|
$
|
443.5
|
|
|
|
(22.6
|
%)
|
Segment operating income (loss) (in millions):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Advanced Ceramic Operations
|
|
$
|
0.5
|
|
|
$
|
14.6
|
|
|
|
(96.7
|
%)
|
|
$
|
13.6
|
|
|
$
|
45.7
|
|
|
|
(70.2
|
%)
|
ESK Ceramics
|
|
|
4.0
|
|
|
|
7.0
|
|
|
|
(42.3
|
%)
|
|
|
15.3
|
|
|
|
24.0
|
|
|
|
(36.3
|
%)
|
Thermo Materials
|
|
|
(22.0
|
)
|
|
|
6.0
|
|
|
|
n/m
|
*
|
|
|
(26.3
|
)
|
|
|
22.9
|
|
|
|
n/m
|
|
Boron
|
|
|
1.7
|
|
|
|
2.1
|
|
|
|
(19.3
|
%)
|
|
|
2.8
|
|
|
|
2.8
|
|
|
|
(2.8
|
%)
|
Inter-segment elimination
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
65.5
|
%
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
215.4
|
%
|
Total
|
|
$
|
(15.4
|
)
|
|
$
|
30.8
|
|
|
|
n/m
|
|
|
$
|
(4.9
|
)
|
|
$
|
95.8
|
|
|
|
n/m
|
|
* Not meaningful
We categorize our products into five market applications. The tables below show our sales by market application and the percentage contribution to our total sales of each market application in the different time periods.
Sales by Market Application (in millions):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
Defense
|
|
$
|
43.2
|
|
|
$
|
59.1
|
|
|
|
(26.8
|
%)
|
|
$
|
135.4
|
|
|
$
|
179.9
|
|
|
|
(24.7
|
%)
|
Industrial
|
|
|
39.1
|
|
|
|
42.5
|
|
|
|
(7.8
|
%)
|
|
|
120.1
|
|
|
|
126.8
|
|
|
|
(5.3
|
%)
|
Energy
|
|
|
11.9
|
|
|
|
33.2
|
|
|
|
(64.2
|
%)
|
|
|
47.7
|
|
|
|
98.2
|
|
|
|
(51.4
|
%)
|
Automotive/Diesel
|
|
|
7.9
|
|
|
|
10.2
|
|
|
|
(23.3
|
%)
|
|
|
25.8
|
|
|
|
30.2
|
|
|
|
(14.7
|
%)
|
Commercial
|
|
|
4.1
|
|
|
|
3.0
|
|
|
|
37.3
|
%
|
|
|
14.2
|
|
|
|
8.4
|
|
|
|
68.7
|
%
|
Total
|
|
$
|
106.2
|
|
|
$
|
148.0
|
|
|
|
(28.2
|
%)
|
|
$
|
343.2
|
|
|
$
|
443.5
|
|
|
|
(22.6
|
%)
|
Percentage Contribution:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Defense
|
|
|
40.8
|
%
|
|
|
40.0
|
%
|
|
|
39.5
|
%
|
|
|
40.5
|
%
|
Industrial
|
|
|
36.8
|
|
|
|
28.7
|
|
|
|
35.0
|
|
|
|
28.6
|
|
Energy
|
|
|
11.2
|
|
|
|
22.4
|
|
|
|
13.9
|
|
|
|
22.2
|
|
Automotive/Diesel
|
|
|
7.4
|
|
|
|
6.9
|
|
|
|
7.5
|
|
|
|
6.8
|
|
Commercial
|
|
|
3.8
|
|
|
|
2.0
|
|
|
|
4.1
|
|
|
|
1.9
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The principal factor contributing to our growth in sales from 2002 through 2007 was increased demand by the U.S. military for ceramic body armor that protects soldiers, which was driven primarily by military conflicts such as those in Iraq and Afghanistan. This demand was driven by recognition of the performance and life saving benefits of utilizing advanced technical ceramics in lightweight body armor. Our sales declined in 2008 primarily because of a reduction in shipments of body armor. Our sales declined in 2009 primarily because of a continued reduction in shipments of body armor and also due to a decline in sales of our industrial, automotive/diesel and commercial market product lines due to the severe economic recession. In 2010, sales of body armor continued to decline. However, sales from energy related products grew by 61.6% in 2010 when compared to 2009. Most of this growth in energy sales was generated by sales of our ceramic crucibles used in the production of photovoltaic cells for solar panels. Additionally, sales of industrial and automotive/diesel products rebounded sharply in 2010, particularly at our ESK Ceramics subsidiary. In 2011, our sales increased due to higher shipments of body armor due to the increased demand for ESAPI body armor, an increase of sales to the nuclear industry, and continuing growth of sales at our ESK Ceramics subsidiary.
Commencing in 2004, several strategic acquisitions also have contributed to our sales growth. These include our acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we renamed Boron Products, LLC and our acquisition of VIOX Corporation in January 2011.
To illustrate the impact of body armor, energy-related products, and our acquisitions, the following table shows our sales from body armor, energy-related products, from our acquisitions, and from all other sources for each of the years 2002 through 2011 (in millions).
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
Sales from body armor
|
|
$
|
193.8
|
|
|
$
|
70.4
|
|
|
$
|
170.0
|
|
|
$
|
385.0
|
|
|
$
|
535.3
|
|
|
$
|
479.4
|
|
|
$
|
199.5
|
|
|
$
|
120.3
|
|
|
$
|
58.2
|
|
|
$
|
26.2
|
|
Sales from energy products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales from energy products
|
|
|
129.0
|
|
|
|
99.9
|
|
|
|
62.2
|
|
|
|
57.7
|
|
|
|
20.9
|
|
|
|
11.9
|
|
|
|
9.8
|
|
|
|
5.3
|
|
|
|
2.5
|
|
|
|
1.7
|
|
Less sales from energy products included in acquired companies
|
|
|
(66.2
|
)
|
|
|
(28.5
|
)
|
|
|
(24.5
|
)
|
|
|
(11.4
|
)
|
|
|
(4.5
|
)
|
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
|
|
(0.7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from energy products due to organic growth
|
|
|
62.8
|
|
|
|
71.4
|
|
|
|
37.7
|
|
|
|
46.3
|
|
|
|
16.4
|
|
|
|
8.7
|
|
|
|
6.6
|
|
|
|
4.6
|
|
|
|
2.5
|
|
|
|
1.7
|
|
Sales from acquired companies
|
|
|
254.5
|
|
|
|
191.1
|
|
|
|
136.8
|
|
|
|
177.1
|
|
|
|
142.6
|
|
|
|
110.2
|
|
|
|
109.8
|
|
|
|
36.0
|
|
|
|
-
|
|
|
|
-
|
|
All other sales
|
|
|
60.9
|
|
|
|
70.0
|
|
|
|
56.1
|
|
|
|
71.8
|
|
|
|
62.5
|
|
|
|
64.6
|
|
|
|
52.4
|
|
|
|
54.7
|
|
|
|
40.8
|
|
|
|
33.3
|
|
Total sales
|
|
$
|
572.0
|
|
|
$
|
402.9
|
|
|
$
|
400.6
|
|
|
$
|
680.2
|
|
|
$
|
756.8
|
|
|
$
|
662.9
|
|
|
$
|
368.3
|
|
|
$
|
215.6
|
|
|
$
|
101.5
|
|
|
$
|
61.2
|
|
Sales decreased by $100.3 million during the nine month period ended September 30, 2012 compared to the same period last year as shipments of body armor and ceramic crucibles were lower by $43.9 million and $46.7 million, respectively. Partially offsetting this were increased sales of nuclear products, ceramic missile radomes, non-ECH Helmets and specialty glass or bio-glass products.
Sales in the third quarter of 2012 decreased $41.8 million compared to sales in the same quarter of 2011 due to decreased shipments of body armor as demand for ESAPI plates was lower, continued very weak shipments of ceramic crucibles and solar paste to the solar industry. We continued to incur approximately the same amount of operating losses from our crucible product line during the third quarter 2012 as we did in the first two quarters of 2012. Our ESK Ceramics subsidiary recorded lower sales in the third quarter of 2012 compared to the same quarter last year due to weakness in the European economy especially in the industrial and automotive segments of the economy.
In October 2008, we were awarded an Indefinite Delivery/Indefinite Quantity, or ID/IQ, contract by the U.S. Army for the next ballistic threat generation of ceramic body armor plates, called XSAPI, as well as for the current generation ESAPI plates. This five-year contract has a maximum value of $2.37 billion and allows the U.S. Army to order either XSAPI or ESAPI body armor from us.
Through September 30, 2012, we have received delivery orders under the October 2008 ID/IQ contract totaling $278.8 million. We have completed the shipmentsof these delivery orders. With less than two years remaining under this ID/IQ contract, the war in Iraq concluded, and the war in Afghanistan winding down, we expect that the total amount of body armor that we ultimately ship under this contract will be substantially less than the maximum amount.
In September 2011, we were awarded a three-year ID/IQ contract for ESAPI ceramic armor plates from Defense Logistics Agency Troop Support group. This purchasing group services the United States Army, Navy, Air Force and Marine Corps. This award was in response to our bid to the Defense Supply Center Philadelphia (DSCP) in response to their requirement for a three-year sustainment order for the replacement of body armor inserts. Simultaneously with the receipt of this award, we received an initial delivery order for $127.1 million for ESAPI ceramic body armor plates and two additional delivery orders of $15.4 million for a total of $142.5 million. Of this amount, we have shipped $84.7 million of body armor through September 30, 2012 and we expect to ship the balance of $57.9 million by April 30, 2013. This ID/IQ contract includes options for additional deliveries of up to $127.3 million in each of the second and third years. We estimate that we will receive $71.1 million in ESAPI delivery orders for all of 2013.
In October 2011, we announced the receipt of a delivery order for approximately $6.9 million for ceramic body armor plates from the United States Special Operations Command (“SOCOM”). In March 2012, we received a stop work notice on this order and other orders from SOCOM because the ceramic body armor plates failed government testing. On June 1, 2012, we received an extension of this stop work notice. We recommended solutions to SOCOM and on July 20, 2012, SOCOM issued a show cause notice questioning our proposed solutions. SOCOM provided us an opportunity to present an acceptable corrective action plan (“CAP") by August 20, 2012. Ceradyne provided a CAP for line items SPEAR BALCS GEN III and for TSA Swimmer GEN III on August 17, 2012 and was notified on October 30, 2012 that SOCOM would accept the recommendations for the SPEAR line item but determined not to accept the CAP for the TSA line item. Ceradyne will incorporate the CAP for the SPEAR line item in November and submit the new design for First Article Testing in the first quarter of 2013.
For 2012 and for the next several years, we expect that our sales of body armor will continue in a range of approximately $50.0 to $150.0 million per year. We will continue to bid on Foreign Military Sales (FMS) for the first generation of SAPI body armor through our existing ID/IQ contract with Aberdeen Proving Grounds.
Although we believe that demand for ceramic body armor will continue for many years, the quantity and timing of government orders depends on a number of factors outside of our control, such as the amount of U.S. defense budget appropriations, positions and strategies of the current U.S. government, the level of international conflicts and the deployment of armed forces. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process and may be cancelled by the government at any time without penalty. Therefore, our future level of sales of ceramic body armor will depend on our ability to successfully compete for and retain this business.
In June 2009, we acquired substantially all of the business, assets, technology and intellectual property related to ballistic combat and non-combat helmets of Diaphorm Technologies, LLC, based in Salem, New Hampshire. Based on this technology, we submitted a proposal to the U.S. Marine Corps Systems Command in June 2009 in response to a solicitation for the procurement of Enhanced Combat Helmets (ECH), which are intended to provide substantially increased levels of protection compared to combat helmets now in use. In response to our proposal, the U.S. Marine Corps Systems Command in July 2009 awarded us a contract for up to a maximum of 246,840 helmets. After an extended period of First Article Testing, our helmets have been approved by the U.S. Government. In March 2012, we received the first of two low rate initial production ECH Helmet orders. The initial release has a value of approximately $3.0 million. The second low rate initial production order was received in May 2012 with a value of approximately $3.9 million. The full multi-year production order has been delayed pending resolution of technical issues related to production and testing. If these issues are successfully resolved,the total of the initial orders plus full production orders could exceed $170.0 million. Our strategy regarding this acquisition is to combine our successful track record in body armor programs with the proprietary helmet-forming technologies acquired from Diaphorm to create a world class manufacturer of Enhanced Combat Helmets.
New orders for the three and nine months ended September 30, 2012 were $76.1 million and $236.2 million, respectively, compared to $272.0 million and $612.5 million, respectively, for the same periods last year. Orders for ceramic body armor for the three and nine months ended September 30, 2012 were $15.8 million and $15.5 million compared to $174.7 million and $282.8 million, for the three and nine months ended September 30, 2011, respectively.
Our order backlog was $179.0 million as of September 30, 2012 and $354.9 million as of September 30, 2011. The backlog for ceramic body armor represented approximately $75.7 million, or 42.3%, of the total backlog as of September 30, 2012 and $208.7 million, or 58.8%, of the total backlog as of September 30, 2011. We expect that substantially all of our order backlog as of September 30, 2012 will be shipped during the next 12 months.
For the next several quarters, demand for ceramic body armor is likely to be the most significant factor affecting our sales. We expect sales of body armor will be lower in 2012 than in 2011.
Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011
Net Sales
Our total net sales for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
$
|
106.2
|
|
|
$
|
148.0
|
|
|
$
|
343.2
|
|
|
$
|
443.5
|
|
Increase (decrease) in net sales
|
|
$
|
(41.8
|
)
|
|
$
|
56.2
|
|
|
$
|
(100.3
|
)
|
|
$
|
141.3
|
|
Percentage change in net sales
|
|
|
(28.2
|
%)
|
|
|
61.3
|
%
|
|
|
(22.6
|
%)
|
|
|
46.7
|
%
|
Sales declined in the nine month period ended September 30, 2012 as shipments of ceramic body armor, and ceramic crucibles and solar paste to the solar industry were lower by $43.9 million and $55.3 million, respectively, when compared to the same period last year. We continued to experience lower sales in our ESK Ceramics subsidiary during the nine month period ended September 30, 2012 compared to the same period last year due to continued weakness in the European economy especially in the industrial and automotive segments of the economy.
Sales declined for the three months ended September 30, 2012 compared to the same period last year, primarily from decreases in shipments of body armor of $16.5 million, lower shipments of ceramic crucibles and solar paste to the solar industry of $16.2 million, lower shipments of metal matrix composite products to the nuclear industry by our Ceradyne Canada business unit of $4.7 million and lower shipments of $6.7 million by our ESK Ceramics subsidiary, reflecting softness in the European economy. Offsetting these declines, were increased shipments to the semiconductor industry by our Boron segment of $1.3 million, increased shipments of non-ECH Helmets of $1.8 million and ceramic missile radomes of $1.9 million, and increased shipments of $1.3 million of our bio-glass product for use as an ingredient in tooth paste.
Sales for the three months ended September 30, 2012 of energy products amounted to $11.9 million, a decrease of $21.3 million, or 64.2%, from $33.2 million in the prior year as sales of ceramic crucibles to the solar industry continued their decline due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels.
Sales of industrial products for the three months ended September 30, 2012 decreased $3.3 million compared to the prior year due to weakness in the European economy.
Sales of automotive/diesel products for the three months ended September 30, 2012 decreased $2.4 million compared to the same period last year due to lower sales to our European customers.
Our net sales of commercial products for the three months ended September 30, 2012 were $4.1 million, an increase of $1.0 million, or 37.3%, from $3.1 million in the prior year. This increase was caused by increased demand for our bio-glass product for use as an ingredient in tooth paste and increased sales of our orthodontic brackets.
Advanced Ceramic Operations Segment
Our Advanced Ceramic Operations segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
$
|
53.4
|
|
|
$
|
74.0
|
|
|
$
|
172.5
|
|
|
$
|
217.3
|
|
Increase (decrease) in net sales
|
|
$
|
(20.6
|
)
|
|
$
|
45.7
|
|
|
$
|
(44.8
|
)
|
|
$
|
93.6
|
|
Percentage change in net sales
|
|
|
(27.9
|
%)
|
|
|
161.8
|
%
|
|
|
(20.6
|
%)
|
|
|
75.6
|
%
|
Contributing to the decrease of $20.6 million in sales during the three months ended September 30, 2012 were lower shipments of body armor and solar paste of $16.5 million and $4.9 million, respectively. For the nine months ended September 30, 2012, shipments of ceramic body armor amounted to $108.3 million, a decrease of $43.9 million, or 28.8%, from $152.2 million in the same period last year. The primary reasons for the decrease in shipments of ceramic body armor were a decrease in demand for ESAPI body armor plates.
ESK Ceramics Segment
Our ESK Ceramics segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
$
|
33.2
|
|
|
$
|
39.9
|
|
|
$
|
113.1
|
|
|
$
|
125.9
|
|
Increase (decrease) in net sales
|
|
$
|
(6.7
|
)
|
|
$
|
7.8
|
|
|
$
|
(12.8
|
)
|
|
$
|
31.1
|
|
Percentage change in net sales
|
|
|
(16.8
|
%)
|
|
|
24.2
|
%
|
|
|
(10.2
|
%)
|
|
|
32.8
|
%
|
On a constant currency basis, sales for the three months ended September 30, 2012 were $36.5 million, a decrease of $3.4 million, or 8.6%, from the corresponding quarter of the prior year. The major factor causing the decrease in sales was weakness in the European economy which impacted all product lines except the PetroCeram
®
ceramic sand screens whose sales increased by $0.2 million. Sales of industrial products for the three months ended September 30, 2012 were $18.7 million, a decrease of $3.8 million, or 16.8%, from $22.5 million in the corresponding quarter of the prior year. Sales of defense products for the three months ended September 30, 2012 were $5.4 million, a decrease of $0.8 million, or 12.7%, from $6.2 million in the corresponding quarter of the prior year. Included in sales of defense products for the three months ended September 30, 2012 were inter-segment sales of $3.8 million compared to $2.9 million in the prior year. Sales of automotive/diesel products for the three months ended September 30, 2012 were $6.5 million, a decrease of $1.2 million, or 15.5%, from $7.7 million in the corresponding quarter of the prior year.
On a constant currency basis, sales for the nine months ended September 30, 2012 were $120.9 million, a decrease of $5.0 million, or 4.0%, from the corresponding prior year period. Sales declined for the reasons stated above. Sales of industrial products for the nine months ended September 30, 2012 were $60.7 million, a decrease of $10.4 million, or 14.5%, from $71.1 million in the corresponding prior year period. Sales of defense products for the nine months ended September 30, 2012 were $22.7 million, an increase of $1.2 million, or 5.7%, from $21.5 million in the corresponding prior year period. Included in sales of defense products for the nine months ended September 30, 2012 were inter-segment sales of $16.4 million compared to $14.5 million in the prior year period. The increase of $1.9 million in inter-segment sales was due to an increase in demand for boron carbide powder used in body armor plates manufactured by our Advanced Ceramic Operations division. Sales of automotive/diesel products for the nine months ended September 30, 2012 were $20.7 million, a decrease of $1.8 million, or 8.1%, from $22.5 million in the corresponding prior year period. Lower demand from European automotive original equipment manufacturers accounted for the decrease in sales.
Thermo Materials Segment
Our Thermo Materials segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
$
|
15.4
|
|
|
$
|
24.2
|
|
|
$
|
45.6
|
|
|
$
|
84.6
|
|
Increase (decrease) in net sales
|
|
$
|
(8.8
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(39.0
|
)
|
|
$
|
14.8
|
|
Percentage change in net sales
|
|
|
(36.3
|
%)
|
|
|
(8.4
|
%)
|
|
|
(46.1
|
%)
|
|
|
21.2
|
%
|
During the three months ended September 30, 2012, the decrease in sales at our Thermo Materials segment was due to lower shipments of crucibles to the solar energy market, partially offset by increased shipments of ceramic missile radomes to the defense industry. Sales of crucibles used in the manufacture of photovoltaic cells for the three months ended September 30, 2012 were $3.9 million, a decrease of $11.4 million, or 74.4%, from $15.3 million in the corresponding period a year ago. The decrease was due to the continuing slowdown of demand in the solar energy market due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels. Sales to the defense industry for the three months ended September 30, 2012 were $4.5 million, an increase of $1.9 million, or 74.0%, from $2.6 million when compared to the corresponding prior year period due to increased sales of ceramic missile radomes.
Sales of crucibles used in the manufacture of photovoltaic cells for the nine months ended September 30, 2012 were $10.9 million, a decrease of $46.7 million, or 81.0%, from $57.6 million in the corresponding period a year ago. Sales to the defense industry for the nine months ended September 30, 2012 were $13.3 million, an increase of $5.5 million, or 70.4%, from $7.8 million when compared to the corresponding prior year period, due to increased shipments of ceramic missile radomes. Sales of precision investment casting products for the nine months ended September 30, 2012 were $19.2 million, an increase of $1.9 million, or 11.0%, from $17.3 million in the same period last year.
Boron Segment
Our Boron segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales
|
|
$
|
8.4
|
|
|
$
|
13.4
|
|
|
$
|
29.4
|
|
|
$
|
32.7
|
|
Increase (decrease) in net sales
|
|
$
|
(5.0
|
)
|
|
$
|
4.2
|
|
|
$
|
(3.3
|
)
|
|
$
|
9.5
|
|
Percentage change in net sales
|
|
|
(37.5
|
%)
|
|
|
45.3
|
%
|
|
|
(10.2
|
%)
|
|
|
41.3
|
%
|
Our Boron business segment comprises the business units Ceradyne Boron Products, SemEquip, Inc. and Ceradyne Canada. The reason for the decrease in sales in this segment for three months ended September 30, 2012 were lower sales to the nuclear industry. Sales to the nuclear industry were $4.7 million, a decrease of $5.5 million, or 53.7%, from $10.2 million in the corresponding period last year. Of the $5.5 million decrease in sales to the nuclear industry, $4.7 million originated from our Ceradyne Canada business unit. Offsetting this was an increase in shipments by $1.3 million to the semiconductor industry.
For the nine months ended September 30, 2012, sales to the nuclear industry were $20.8 million, a decrease of $1.8 million, or 8.2%, from $22.6 million in the corresponding period last year and sales by our SemEquip business unit were $144,000, a decrease of $2.6 million, or 94.8%, from $2.8 million. Partially offsetting this decrease was an increase in sales of $1.1 million to the semiconductor industry.
Gross Profit
Our total gross profit for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross profit
|
|
$
|
23.4
|
|
|
$
|
53.7
|
|
|
$
|
89.3
|
|
|
$
|
164.8
|
|
Increase (decrease) in gross profit
|
|
$
|
(30.3
|
)
|
|
$
|
30.1
|
|
|
$
|
(75.5
|
)
|
|
$
|
90.0
|
|
Gross profit percentage
|
|
|
22.1
|
%
|
|
|
36.3
|
%
|
|
|
26.0
|
%
|
|
|
37.2
|
%
|
During the three months ended September 30, 2012, the decrease in gross profits of $30.3 million was primarily due to impairment charges of $7.0 million as we reduced our China solar manufacturing capacity by closing one of our plants, lower gross profits from body armor of $8.8 million, ceramic crucibles of $17.4 million and lower gross profits from our ESK Ceramics subsidiary of $2.6 million.
For the nine months ended September 30, 2012, gross profit was lower by $75.5 million and was attributable to a decline in gross profits of body armor by $29.1 million, ceramic crucibles by $39.7 million, to the impairment charges of $7.0 million described above, and from lower gross profits from sales of industrial products by ESK Ceramics of $6.8 million.
Several factors caused the decrease in gross profit and the gross profit as a percentage of net sales during both the three and nine month periods ended September 30, 2012. The main factors were the impairment charges in connection with the reduction in our China solar crucible manufacturing capacity, lower average unit selling prices of our largest product line, body armor, substantially lower average unit selling prices of ceramic crucibles, and lower units shipped for both items when compared to both the three and nine months ended September 30, 2011. The other factor was lower shipments of industrial products by our ESK Ceramics subsidiary, all resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses during the three and nine months ended September 30, 2012.
Advanced Ceramic Operations Segment
Our Advanced Ceramic Operations segment had total gross profit for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross profit
|
|
$
|
13.1
|
|
|
$
|
24.3
|
|
|
$
|
44.4
|
|
|
$
|
74.0
|
|
Increase (decrease) in gross profit
|
|
$
|
(11.2
|
)
|
|
$
|
26.0
|
|
|
$
|
(29.6
|
)
|
|
$
|
61.0
|
|
Gross profit percentage
|
|
|
24.6
|
%
|
|
|
32.9
|
%
|
|
|
25.8
|
%
|
|
|
34.0
|
%
|
The primary reason for the decrease in gross profit and gross profit as a percentage of net sales for the three months ended September 30, 2012 was lower average unit selling prices of body armor. For the nine months ended September 30, 2012, the decrease in gross profit and gross profit as a percentage of net sales were caused by lower average unit selling prices of body armor, by lower volumes of production of body armor resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses, and by lower sales of body armor as they declined by $43.9 million, or 28.8%, from the nine months ended September 30, 2011.
ESK Ceramics Segment
Our ESK Ceramics segment had total gross profit for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross profit
|
|
$
|
10.4
|
|
|
$
|
13.0
|
|
|
$
|
34.9
|
|
|
$
|
41.7
|
|
Increase (decrease) in gross profit
|
|
$
|
(2.6
|
)
|
|
$
|
2.4
|
|
|
$
|
(6.8
|
)
|
|
$
|
13.9
|
|
Gross profit percentage
|
|
|
31.4
|
%
|
|
|
32.6
|
%
|
|
|
30.8
|
%
|
|
|
33.1
|
%
|
Gross profit and gross profit as a percentage of sales decreased during the three and nine months ended September 30, 2012 due to a decrease in manufacturing production of industrial and automotive products leading to a decrease in absorption of manufacturing overhead expenses and an unfavorable change in sales mix to sales of products with lower sales margins.
Thermo Materials Segment
Our Thermo Materials segment had total gross profit for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross profit
|
|
$
|
(4.8
|
)
|
|
$
|
10.0
|
|
|
$
|
(0.6
|
)
|
|
$
|
36.2
|
|
Increase (decrease) in gross profit
|
|
$
|
(14.8
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(36.8
|
)
|
|
$
|
6.7
|
|
Gross profit percentage
|
|
|
(31.1
|
%)
|
|
|
41.1
|
%
|
|
|
(1.3
|
%)
|
|
|
42.8
|
%
|
Gross profit decreased for the three and nine months ended September 30, 2012 because of impairment charges of $7.0 million as we reduced our China solar manufacturing capacity by closing one of our plants and reduced the carrying value of our inventory, a decrease in sales of crucibles by $11.4 million, or 74.4%, and $46.7 million, or 81.0% during those periods, respectively; a decline in unit sales prices of crucibles due to pricing pressure from customers, and because of lower volumes of production of ceramic crucibles resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses.
Boron Segment
Our Boron segment had total gross profit for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross profit
|
|
$
|
4.3
|
|
|
$
|
5.3
|
|
|
$
|
11.1
|
|
|
$
|
12.4
|
|
Increase (decrease) in gross profit
|
|
$
|
(1.0
|
)
|
|
$
|
1.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
7.1
|
|
Gross profit percentage
|
|
|
51.0
|
%
|
|
|
39.8
|
%
|
|
|
37.8
|
%
|
|
|
38.0
|
%
|
The decrease in gross profit in the three months ended September 30, 2012 was the result of lower sales to the nuclear industry, especially from our Ceradyne Canada business unit as sales were only $0.7 million, a decrease of $4.7 million, or 87.3%, from $5.4 million in the same period last year. This resulted in a reduction in gross profits of $2.3 million. This was offset by an increase in gross profit in the three months ended September 30, 2012 at our Ceradyne Boron business unit of $1.2 million.
Gross profit and gross profit as a percentage of sales decreased in the nine months ended September 30, 2012 due to an unfavorable sales mix, lower sales to the semiconductor and nuclear industries and gross margin losses of $3.0 million incurred in our Canada business unit due to much lower sales levels than the same period last year.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Selling, general and administrative expenses
|
|
$
|
17.9
|
|
|
$
|
19.3
|
|
|
$
|
54.2
|
|
|
$
|
57.5
|
|
Increase (decrease) in selling, general and administrative expenses
|
|
$
|
(1.4
|
)
|
|
$
|
4.9
|
|
|
$
|
(3.3
|
)
|
|
$
|
13.6
|
|
Percentage change in selling, general and administrative expenses
|
|
|
(7.2
|
%)
|
|
|
33.5
|
%
|
|
|
(5.8
|
%)
|
|
|
30.9
|
%
|
Selling, general and administrative expenses as a % of net sales
|
|
|
16.8
|
%
|
|
|
13.0
|
%
|
|
|
15.8
|
%
|
|
|
13.0
|
%
|
Total selling, general and administrative expenses decreased 7.2% and 5.8% during the three and nine months ended September 30, 2012, compared to the same periods in 2011, respectively. They increased as a percentage of net sales, due to the 28.2% and 22.6% year-over-year decline in the Company’s net sales during the three and nine months ended September 30, 2012, respectively.
For the three months ended September 30, 2012, the decrease of $1.4 million in selling, general and administrative expenses over the same period last year was caused by decreases in personnel expenses caused by lower employee bonuses due to the reduction in financial performance, and lower group health expenses. Slightly offsetting these decreases was an increase in bad debts expense for our China operations, and additional expenses for payroll due to cost of living increases and for legal fees incurred for the proposed acquisition of Ceradyne by 3M.
For the nine months ended September 30, 2012, the decrease of $3.3 million over the same period last year was caused by the same reasons as stated above.
Research and Development Expenses
Our research and development expenses for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Research and development expenses
|
|
$
|
4.8
|
|
|
$
|
3.0
|
|
|
$
|
13.2
|
|
|
$
|
9.3
|
|
Increase (decrease) in research and development expenses
|
|
$
|
1.8
|
|
|
$
|
0.4
|
|
|
$
|
3.9
|
|
|
$
|
0.6
|
|
Percentage change in research and development expenses
|
|
|
62.8
|
%
|
|
|
13.8
|
%
|
|
|
42.5
|
%
|
|
|
6.0
|
%
|
Research & development expenses as a percentage of net sales
|
|
|
4.6
|
%
|
|
|
2.0
|
%
|
|
|
3.8
|
%
|
|
|
2.1
|
%
|
Research and development expenses increased for both the three and nine month periods ended September 30, 2012 due to an increase in expenditures for the qualification and development of the ECH Helmet program.
Restructuring – Plant Closure and Severance.
Our restructuring – plant closure and severance expenses for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Restructuring – plant closure and severance
|
|
$
|
0.3
|
|
|
$
|
0.0
|
|
|
$
|
1.0
|
|
|
$
|
0.0
|
|
Increase (decrease) in restructuring – plant closure and severance
|
|
$
|
0.3
|
|
|
$
|
0.0
|
|
|
$
|
1.0
|
|
|
$
|
(7.0
|
)
|
Percentage change in restructuring – plant closure and severance
|
|
|
n/m
|
|
|
|
0.0
|
%
|
|
|
n/m
|
|
|
|
n/m
|
|
Restructuring –as a percentage of net sales
|
|
|
0.3
|
%
|
|
|
0.0
|
%
|
|
|
0.3
|
%
|
|
|
0.0
|
%
|
During the three months ended September 30, 2012, we recorded pre-tax restructuring and severance charges of $0.3 million for the reduction in workforce in connection with our plan to consolidate operations in China by selling one of our manufacturing facilities.
During the nine months ended September 30, 2012, we recorded pre-tax restructuring and severance charges of $0.6 million, $0.1 million and $0.3 million for the closure of our manufacturing facilities in India, Utah and China, respectively. We closed the India facilities and moved the equipment associated with that facility to the United States because the cost of manufacturing orthodontic products was lower in the United States than in India. In order to gain synergies and reduce costs in our police helmet operation, we closed our Utah facility and combined its operations with our Diaphorm business unit in Salem, New Hampshire.
Acquisition Related Charge (Credit)
Our acquisition related charges and credits for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Acquisition related charges and credits
|
|
$
|
2.0
|
|
|
$
|
0.7
|
|
|
$
|
2.3
|
|
|
$
|
2.1
|
|
Increase (decrease) in acquisition related charges and credits
|
|
$
|
1.3
|
|
|
$
|
0.7
|
|
|
$
|
0.2
|
|
|
$
|
2.2
|
|
Percentage change in acquisition related charges and credits
|
|
|
188.2
|
%
|
|
|
n/m
|
|
|
|
6.1
|
%
|
|
|
n/m
|
|
Acquisition charges and credits as a percentage of net sales
|
|
|
1.9
|
%
|
|
|
0.5
|
%
|
|
|
0.7
|
%
|
|
|
0.5
|
%
|
During the three months ended September 30, 2012, we recorded acquisition-related charges of $2.0 million to reflect the fair value of contingent purchase price consideration for Diaphorm Technologies, acquired in 2009. During the three and nine months ended September 30, 2011, we recorded acquisition-related charges of $0.7 million and $2.1 million, respectively, to reflect the fair value of contingent purchase price consideration for SemEquip, Inc., acquired in 2008, Diaphorm Technologies, acquired in 2009 and VIOX Corporation, acquired on January 3, 2011.
Impairment charges
Our impairment charges for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September
30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Impairment related charges
|
|
$
|
13.8
|
|
|
$
|
0.0
|
|
|
$
|
13.8
|
|
|
$
|
0.0
|
|
Increase (decrease) in impairment related charges
|
|
$
|
13.8
|
|
|
$
|
0.0
|
|
|
$
|
13.8
|
|
|
$
|
0.0
|
|
Percentage change in impairment related charges
|
|
|
n/m
|
|
|
|
n/m
|
|
|
|
n/m
|
|
|
$
|
0.0
|
|
Impairment charges as a percentage of net sales
|
|
|
13.0
|
%
|
|
|
0.0
|
%
|
|
|
4.0
|
%
|
|
|
0.0
|
%
|
Due to the continuing decrease in demand in the solar energy market due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels, during the third quarter of 2012, we made a strategic decision to reduce our solar manufacturing capacity by closing one of our plants. We initiated a restructuring plan to consolidate our solar crucible manufacturing operations in China and to reduce our workforce. In connection with the consolidation of its manufacturing operations in China, we recognized non-cash impairment charges totaling $20.8 million. Of this amount, $13.8 million was recognized as an operating expense and the balance of $7.0 million was for inventory write-downs included in cost of goods sold. The composition of the total non-cash impairment charges of $20.8 million were $6.4 million for long-lived assets, an increase of $7.4 million in the allowance for bad debt, and a charge of $7.0 million for pricing pressures and to reflect the lower of cost or market. This plan includes the future sale of a manufacturing facility in Tianjin, China with a net carrying value of $6.8 million, which approximates the expected sales price, less disposal costs. This asset has been reclassified to other current assets. We also incurred severance costs of $0.3 million for the reduction in workforce.
Other Income (Expense)
Our net other income (expense) for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Other income (expense)
|
|
$
|
(2.0
|
)
|
|
$
|
0.4
|
|
|
$
|
(4.8
|
)
|
|
$
|
(0.4
|
)
|
Increase (decrease) in other income (expense)
|
|
$
|
(2.4
|
)
|
|
$
|
1.9
|
|
|
$
|
(4.4
|
)
|
|
$
|
2.2
|
|
Percentage change in other income (expense)
|
|
|
n/m
|
|
|
|
n/m
|
|
|
|
1,035.0
|
%
|
|
|
(84.0
|
%)
|
Other income (expense) as percentage of net sales
|
|
|
(1.9
|
%)
|
|
|
0.3
|
%
|
|
|
(1.4
|
%)
|
|
|
(0.1
|
%)
|
Other income (expense) decreased by $2.4 million during the three months ended September 30, 2012 because we recognized a loss from foreign currency transactions of $1.3 million compared to a gain of $0.7 million during the same period last year.
Other income (expense) decreased by $4.4 million during the nine months ended September 30, 2012 because we recognized a loss from foreign currency transactions of $2.9 million compared to a gain of $0.7 million during the same period last year, and we were reimbursed $0.8 million for legal fees during the six months ended June 30, 2011 concerning a workers compensation matter.
Income Taxes
Our provision for income taxes for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Provision for income taxes
|
|
$
|
5.7
|
|
|
$
|
10.8
|
|
|
$
|
12.5
|
|
|
$
|
32.3
|
|
Increase (decrease) in provision for income taxes
|
|
$
|
(5.1
|
)
|
|
$
|
10.3
|
|
|
$
|
(19.8
|
)
|
|
$
|
28.8
|
|
Percentage change in provision for income taxes
|
|
|
(47.4
|
%)
|
|
|
n/m
|
|
|
|
(61.3
|
%)
|
|
|
821.5
|
%
|
Provision for income taxes as a percentage of net sales
|
|
|
5.4
|
%
|
|
|
7.3
|
%
|
|
|
3.6
|
%
|
|
|
7.3
|
%
|
Effective tax rate
|
|
|
(16.6
|
%)
|
|
|
34.6
|
%
|
|
|
(73.8
|
%)
|
|
|
33.8
|
%
|
The effective tax rate for both the three and nine month periods ended September 30, 2012 was higher compared to the same periods last year because we recorded a valuation allowance of $8.3 million against the deferred tax assets from our China operations in the third quarter of 2012. These deferred tax assets most likely will not be realizable due to our estimates that financial losses from our China operations will continue indefinitely.
Liquidity and Capital Resources
|
We generally have met our operating and capital requirements with cash flow from operating activities and borrowings under our credit facility.
The following tables present selected financial information and statistics as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 (in millions):
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Cash, cash equivalents and short term investments
|
|
$
|
281.3
|
|
|
$
|
275.0
|
|
Accounts receivable, net
|
|
$
|
54.5
|
|
|
$
|
73.7
|
|
Inventories
|
|
$
|
129.1
|
|
|
$
|
117.3
|
|
Working capital
|
|
$
|
366.4
|
|
|
$
|
379.2
|
|
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Operating cash flow
|
|
$
|
28.6
|
|
|
$
|
24.7
|
|
|
$
|
50.1
|
|
|
$
|
83.1
|
|
Increase (decrease) in cash, cash equivalents and short term investments
|
|
$
|
13.3
|
|
|
$
|
(14.2
|
)
|
|
$
|
6.3
|
|
|
$
|
12.7
|
|
During the nine months ended September 30, 2012, we generated $50.1 million of cash from operations compared to $83.1 million for the nine months ended September 30, 2011. The $50.1 million of cash flow from operations during 2012 is comprised of net income before impairment charges of $8.4 million, with $70.1 million of non-cash charges which included $20.8 million of non-cash impairment charges therein, offset by an increase in working capital of $9.4 million. We also invested $18.2 million in capital expenditures. Of this amount, $15.6 million was spent to replace manufacturing equipment in selected product lines and the balance, $2.6 million, was spent to expand manufacturing capacity at our Ceradyne Boron Products facility. We plan to spend a total of $9.3 million during this fiscal year for this expansion. We invested $1.0 million in connection with our purchase of a minority interest in Chemtrix, Ltd. Chemtrix develops and sells equipment and services based on the concept of executing research and development, and process development in revolutionary micro reactors with a direct scale to larger quantity production in mid-size reactors. Our ESK Ceramics subsidiary is a supplier of flow-chemistry reactors suitable for production on an industrial scale. We also invested $3.8 million in connection with our purchase of a minority interest in GMSI, LLC. GMSI develops and sells a proprietary method of applying a chemical vapor deposited silicon carbide ceramic coating on precision machined graphite shapes. We purchased $46.1 million of marketable securities while we received $83.8 million from proceeds and maturities of marketable securities. During the first three quarters of 2012, we disbursed a total of $10.9 million for cash dividends to holders of our common stock. During the nine months ended September 30, 2012, we repurchased and retired 326,900 shares of our common stock at an aggregate cost of $7.8 million under a stock repurchase program authorized in 2011 by our Board of Directors. Our net cash at September 30, 2012 increased by $46.7 million as compared to a $21.9 million decrease during the nine months ended September 30, 2011.
During December 2005, we issued $121.0 million principal amount of 2.875% senior subordinated convertible notes due December 15, 2035. During 2009, we purchased and retired an aggregate of $27.9 million principal amount of our convertible debt for $23.2 million, which reduced the outstanding balance of the notes to $93.1 million. We have not purchased any of the notes since 2009. Since the notes are convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), we separately account for the liability and equity components of the notes in a manner that reflects the nonconvertible debt borrowing rate as interest cost is recognized.
As of September 30, 2012 and December 31, 2011, short-term debt and the equity component (recorded in additional paid in capital, net of income tax benefit) associated with the adoption in 2009 of the accounting guidance for convertible debt comprised the following (in thousands):
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Outstanding debt
|
|
|
|
|
|
|
|
Principal amount
|
|
|
$
|
93,100
|
|
|
$
|
93,100
|
|
Unamortized discount
|
|
|
|
(841
|
)
|
|
|
(3,806
|
)
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
92,259
|
|
|
|
89,294
|
|
Current portion of outstanding debt
|
|
|
|
92,259
|
|
|
|
89,294
|
|
Noncurrent portion of outstanding debt
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Equity component, net of income tax benefit
|
|
|
$
|
16,399
|
|
|
$
|
16,399
|
|
The discount on the liability component of short-term debt is being amortized using the effective interest method based on an annual effective rate of 7.5%, which represented the market interest rate for similar debt without a conversion option on the issuance date, through December 2012, which coincides with the first date that holders of the notes can exercise their put option as discussed below.
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 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, if any, up to but excluding the repurchase date. For further information regarding the notes, refer to Note 8 of Notes to Consolidated Financial Statements included in this Form 10-Q.
In December 2005, the Company established an unsecured $10.0 million line of credit (“2005 LOC”) which was closed in April 2012. In June 2011, the Company established an unsecured $5.0 million line of credit (“2011 LOC”) that was increased to $7.0 million on December 19, 2011 and will mature on April 1, 2013. The Company expects to renew the 2011 LOC at that time for multiple years. As of September 30, 2012, there were no outstanding amounts on the 2011 LOC. However, the available line of credit at September 30, 2012 has been reduced by outstanding letters of credit in the aggregate amount of $6.4 million. The interest rate on the 2011 LOC was 1.2% as of September 30, 2012 which was based on the LIBOR rate for a period of one month, plus a margin of 1.0% percent. We use this line of credit for letters of credits for insurance purposes.
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 liquidity and profitability and annual net income. At September 30, 2012, we were in compliance with these covenants.
Our cash, cash equivalents, and short-term investments totaled $281.3 million at September 30, 2012, compared to $275.0 million at December 31, 2011. At September 30, 2012, we had working capital of $366.4 million, compared to $379.2 million at December 31, 2011. Our cash position includes amounts denominated in foreign currencies. The repatriation of cash balances from our ESK Ceramics subsidiary will 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, 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 normal replacement and some expansion of our manufacturing facilities at ESK Ceramics and Ceradyne Boron Products. 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. From time to time, we may utilize cash to repurchase our common stock or our convertible debt.
Our material contractual obligations and commitments as of September 30, 2012 include a $1.9 million reserve for unrecognized tax benefits. The reserve is classified in Other Long Term Liabilities on our Consolidated Balance Sheet as of September 30, 2012.
We anticipate that in December 2012, holders of our convertible notes will exercise their put rights and require us to repurchase the entire outstanding principal amount of $93.1 million. To fund this obligation, we intend to use proceeds from sales of our short-term investments.