<PAGE>
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 March 31, 1998
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. 0-13059
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 March 31, 1998
- --------------------------------- ---------------------------------
Common Stock, $.01 par value 7,965,759 Shares
Page 1 of 13 Pages
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CERADYNE, INC.
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information............... 3
Consolidated Balance Sheets - March 31, 1998............ 4-5
and December 31, 1997
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997............. 6
Consolidated Statements of Cash Flow -
Three months ended March 31, 1998 and 1997............. 7
Condensed Notes to Consolidated Financial
Statements............................................. 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition & Results of Operations............ 10-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 11-13
Item 6. Exhibits and Reports on Form 8-K........................ 13
SIGNATURE........................................................ 13
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
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. These financial statements include all
adjustments which are, in the opinion of management, necessary for a fair
presentation. All such adjustments are of a normal recurring nature. Certain
information normally included in the Financial Statements prepared in accordance
with generally accepted accounting principles has been omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
the Financial Statements 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, 1997, as filed with the Securities and Exchange Commission on
March 31, 1998.
3
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION>
3-31-1998 12-31-1997
(Unaudited) (Audited)
================================================================================
CURRENT ASSETS:
<S> <C> <C>
Cash & cash equivalents $ 3,399 $ 3,569
Accounts receivable, net of allowances of 5,476 4,685
approximately $180 & $179 for doubtful accts
at 3-31-1998 & 12-31-1997
Other Receivables 20 96
Inventories 7,490 7,366
Production Tooling 835 882
Prepaid expenses and other 781 716
--- ---
TOTAL CURRENT ASSETS 18,001 17,314
-------- --------
PROPERTY, PLANT & EQUIPMENT, at cost:
Land 422 422
Buildings & improvements 1,825 1,825
Lease rights --- 2,659
Machinery & equipment 18,996 18,456
Leasehold improvements 1,658 1,629
Office equipment 2050 2,001
Construction in progress 224 401
--- ---
25,175 27,393
Less accumulated depreciation & amortization (17,093) (19,427)
-------- --------
8,082 7,966
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,884 1,923
net of accumulated amortization of $1,790 &
$1,751 at 3-31-1998 & 12-31-1997
OTHER ASSETS, net of accumulated amortization 1,808 1,814
----- -----
of $598 and $592 at 3-31-1998 & 12-31-1997
TOTAL ASSETS $ 29,775 $ 29,017
======== ========
===============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
4
<PAGE>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
3-31-1998 12-31-1997
(Unaudited) (Audited)
===============================================================================
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ --- $ ---
Accounts payable 1,508 1,197
Accrued expenses:
Payroll and payroll related 641 622
Other 177 168
--- ---
Total current liabilities 2,326 1,987
-------- --------
LONG-TERM DEBT --- ---
-------- --------
DEFERRED REVENUE 201 270
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized - 12,000,000 shares;
Outstanding - 7,965,759 shares &
7,963,459 shares at 3-31-1998 &
12-31-1997, respectively 37,414 37,408
Accumulated deficit (10,166) (10,648)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 27,248 26,760
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 29,775 $ 29,017
======== ========
===============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
5
<PAGE>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED 3-31-1998 & 1997
(Amounts in thousands, except per share data)
===============================================================================
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
- -------------------------------------------------------------------------------
1998 1997
------------------------
Unaudited
===============================================================================
<S> <C> <C>
NET SALES $7,341 $6,621
COST OF PRODUCT SALES 5,580 5,230
------ ------
Gross Profit 1,761 1,391
------ ------
OPERATING EXPENSES:
R&D 67 ---
Selling 358 419
General & Administration 934 735
------ ------
1,359 1,154
------ ------
Income from operations 402 237
------ ------
OTHER (INCOME) EXPENSE:
Other (income) (91) (93)
Interest expense --- 37
------ ------
(91) (56)
------ ------
Income before provision 493 293
for income taxes
PROVISION FOR INCOME TAXES 10 9
------ ------
NET INCOME 483 284
------ ------
BASIC & DILUTED INCOME PER SHARE $ .06 $ .04
====== ======
==============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED
FOR THE THREE MONTHS ENDED 3-31-1998 & 1997 MARCH 31
(Amounts in thousands)
- -------------------------------------------------------------------------------
1998 1997
Unaudited Unaudited
===============================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 483 $ 284
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 371 398
Increase in accounts receivable, net (710) (144)
(Increase) decrease in other receivables (7) 1,373
Increase in inventories (127) (525)
(Increase) decrease in production tooling 47 (122)
Increase in prepaid expenses & other assets (63) (32)
Increase (decrease) in accounts payable 312 (231)
Increase in accrued expenses 28 18
Decrease in deferred revenue (69) (65)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 265 954
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant & equipment (441) (617)
------ ------
NET CASH USED IN INVESTING ACTIVITIES (441) (617)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net 6 22
Net payments on long-term debt --- ---
------ ------
Net cash provided by (used in) financing activities 6 22
--- ---
Increase (decrease) in cash and cash equivalents (170) 359
Cash & cash equivalents, beginning of period 3,569 4,643
Cash & cash equivalents, end of period 3,399 5,002
=====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid --- 37
Income taxes paid $ 2 $ 64
------ ======
==============================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the financial statements of
Ceradyne, Inc. (the Company) and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
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 March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
==============================================================================
<S> <C> <C>
Raw Materials $3,726,000 $3,338,000
Finished Goods $ 405,000 $ 411,000
Work-in-Process $3,359,000 $3,617,000
Total Inventories $7,490,000 $7,366,000
========== ==========
==============================================================================
</TABLE>
3. Net Income Per Share
--------------------
The Company accounts for net income per share in accordance with SFAS No. 128
"Earnings Per Share". Basic net income per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding plus the effect of any dilutive stock options and 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
==============================================================================
<S> <C> <C>
Weighted average number of shares outstanding 7,963,847 7,905,570
Dilutive stock options and common stock warrants 92,324 135,628
--------- ---------
Number of shares used in diluted computations 8,056,171 8,041,198
========= =========
==============================================================================
</TABLE>
8
<PAGE>
Warrants to purchase 60,000 shares of common stock at an exercise price of $6.00
per share were outstanding during the quarter, but were not included in the
computation of diluted EPS because the warrants' exercise price was greater than
the average market price of the common shares.
4. Debt and Bank Borrowing Arrangements
------------------------------------
In November, 1997 the Company terminated its revolving credit agreement with an
asset based lender, and entered into a revolving credit agreement with Comerica
Bank. The new credit facility amount remains at $4,000,000 and no collateral
will be required of the Company. During the transition of changing financial
institutions, the Company paid off its short-term minimum borrowing requirement
debt of $1,000,000. As of March 31, 1998 there had been no borrowing under the
new credit facility
5. Income Tax
----------
The Company, in conformance with its adopted Statement of Financial Accounting
Standard (SFAS) No. 109, "Accounting for Income Taxes", has reversed a portion
of the valuation allowance previously established applicable to the net deferred
tax asset. The income tax benefit resulting from the reversal results from the
Company's recent history of profitable operations. The Company has available
net operating loss carryforwards of approximately $11.1 million as of March 31,
1998 for federal income tax purposes.
6. Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires that all items which meet the
definition of components of comprehensive income be reported in a financial
statement for the period in which they are recognized. Components of
comprehensive income include all changes in net assets, in addition to net
income, which occur during the period. There are no items of comprehensive
income that are not reported on the consolidated statement of income and
therefore comprehensive income equals net income.
7. Disclosure About Segments of Enterprise and Related Information
---------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. The company will adopt SFAS No. 131 in fiscal 1998, as required.
This statement will affect disclosure and presentation in the financial
statements, but will not have a material impact on the Company's consolidated
financial position, liquidity cash flows or results of operations.
8. Reclass
-------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
9
<PAGE>
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.
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 the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as
filled with the Securities and Exchange Commission, under "Item 1-Business,"
including the section therein entitled "Certain Factors That May Affect the
Company's Business and Future Results," and "Item 7-Management's Discussion and
Analysis of Financial Condition and Result of Operations."
Results of Operations for Quarter Ended March 31, 1998
- ------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, 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 quarter ended March 31, 1998 were $7.3 million,
- ---------
which represents a 10.9% or a $720,000 increase in net sales over the
corresponding period of the prior year. Highlighting the increase in sales was
primarily from the Company's Thermo Materials Division in Scottdale, Georgia.
Contributing to this amount were defense products, and fused silica ceramic
components for the tempered glass market (see explanations under Gross Profit
below for these increases).
International sales have and are expected to continue to be an important part of
the Company's business, representing 22.7% of the Company's net sales for the
quarter ending March 31, 1998, up from 22.5% for the comparable period of the
prior year.
Gross Profit. The Company's gross profit was $1.8 million or 24.0% of net sales
- ------------
for the first quarter ended March 31, 1998, compared to $1.4 million or 21.0% of
the prior year first quarter. The key element of this increase was from the
Company's Thermo Materials Division in Scottdale, Georgia. This increase in
Gross Profit is due to volume increases in defense products (ceramic missile
nose cones), and fused silica ceramic components in the tempered glass market.
The volume in defense products has risen largely from the prior year pilot
production now increasing, and the increase in fused silica ceramic components
is the result of a worldwide aggressive sales effort.
Research and Development Expenses. R&D expenses were $67,000 for the quarter
- ----------------------------------
ended March 31, 1997, compared to none for the same period one year ago. This
is a new department set up for the current year to focus on new materials
technology. For the first quarter this year, the expenses were salaries,
travel, and small tools related.
Selling Expenses. Selling expenses were $358,000 for the quarter ended March
- ----------------
31, 1998, and this compares to $419,000 for the same period one year ago.
Commission sales have decreased over the same period from one year ago because
of direct sales increases, and is the primary reason for the decrease.
10
<PAGE>
General and Administrative Expenses. General and administrative expenses were
- -----------------------------------
$934,000 for the quarter ended March 31, 1998, and this compares to $735,000 for
the corresponding quarter of last year. The increase was primarily due to legal
and temporary personnel expenses.
Other Income/Expense. Other income was $91,000 for the quarter ended March 31,
- --------------------
1998 compared to $93,000 for the quarter ended March 31, 1997.
Interest Expense. For the quarter ended March 31, 1998, there was no interest
- ----------------
expense as compared to $37,000 one year ago. The reason for the decrease is the
reduction of debt.
Income Taxes. The Company recorded a $10,000 provision for income taxes for the
- ------------
quarter ended March 31, 1998. The Company is utilizing net operating losses
from prior years to offset normal tax provisions. The Company has approximately
$11.1 million remaining in net operating loss carryforward for utilization in
offsetting normal tax provisions.
Net Income. Reflecting all of the matters discussed above, net income was
- ----------
$483,000 (or $.06 per share) for the quarter ended March 31, 1998 compared to
net income of $284,000 (or $.04 per share) for the comparable period of the
prior year.
Liquidity and Capital Resources
- -------------------------------
The Company meets its operating and capital requirements for cash flow from
operating activities and borrowings under its credit facilities.
In November, 1997 the Company terminated its revolving credit agreement with an
asset based lender, and entered into a revolving credit agreement with Comerica
Bank. The new credit facility amount remains at $4,000,000 and no collateral
will be required of the Company. During the transition of changing financial
institutions, the Company paid off its short term minimum borrowing requirement
debt of $1,000,000. As of March 31, 1998 there had been no borrowing under the
new credit facility.
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 facility, will be sufficient to finance anticipated capital and operating
requirements for at least the next 12 months.
New Accounting Pronouncements
- -----------------------------
Statement of Position (SOP 98-5) "Reporting on the Cost of Start-up Activities"
was issued in April 1998, and is effective for periods ending after December 15,
1998. The Company will adopt SOP 98-5 for the period beginning January 1, 1999
and anticipates that such adoption will not materially impact the Company's
financial statements.
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,
11
<PAGE>
employment-related actions and workers' compensation claims.
In October 1995 the Company was served with a complaint that was filed by four
persons and the spouses of those persons, who are/were employed by one of the
Company's customers. The complaint, filed in the United States District Court,
Eastern District of Tennessee, alleges that the employees contracted chronic
beryllium disease as a result of their exposure, during the course of their
employment with the Company's customer, to beryllium-containing products sold by
Ceradyne. The complaint seeks compensatory damages in the amount of $3.0
million for each of the four plaintiffs who were employed by the Company's
customer, compensatory damages of $1.0 million each for the two spouses, and
punitive damages in the amount of $5.0 million. The case is in the early stages
of discovery. Based upon information currently available, the Company believes
that the plaintiffs' claims are without merit and that the resolution of this
matter will not have a material adverse effect on the financial condition or
operations of the Company. Defense of this case has been tendered to the
Company's insurance carriers, some of whom are providing a defense subject to a
reservation of rights. There can be no assurance, however, that this claim or
any of the claims related to exposure to beryllium oxide will be covered by
insurance, or that, if covered, the amount of insurance will be sufficient to
cover any potential judgment.
In February 1997 the Company was served with a complaint that was filed by a
former employee of one of the Company's customers and his wife. The complaint,
filed in the United States District Court, Eastern District of Tennessee,
alleges that the husband contracted chronic beryllium disease as a result of his
exposure to beryllium-containing products sold by Ceradyne. The complaint seeks
compensatory damages in the amount of $5.0 million for the husband, $1.0 million
for the wife, and punitive damages in the amount of $10.0 million. The Company
believes that the plaintiffs' claims are without merit and that the resolution
of this matter will not have a material adverse effect on the financial
condition or operations of the Company. Defense of this case has been tendered
to the Company's insurance carriers, some of which are providing a defense
subject to a reservation of rights. There can be no assurances, however, that
this claim will be covered by insurance, or that, if covered, the amount of
insurance will be sufficient to cover any potential judgment.
In July 1997 the Company was served with a complaint filed by an employee of one
of the Company's former parent companies and landlords. The complaint, filed in
the Los Angeles County Superior Court on behalf of the employee by his wife,
alleges that the husband contracted chronic beryllium disease as a result of his
exposure to beryllium through Ceradyne's products, equipment and premises. The
complaint seeks unspecified damages against the Company, its officers and its
directors. The Company believes that the plaintiff's claims are without merit
and that the resolution of this matter will not have a material adverse effect
on the financial condition or operations of the Company. Defense of this case
has been tendered to the Company's insurance carriers, some of which are
providing defense and indemnification subject to a reservation of rights. There
can be no assurances, however, that this claim will be covered by insurance, or
that, if covered, the amount of insurance will be sufficient to cover any
potential judgment.
In August 1997 the Company was served with a complaint filed by a former
employee of one of the Company's customers and his wife. The complaint, filed
in the United States District Court, Eastern District of Tennessee, alleges that
the husband contracted chronic berylliium disease as a result of his exposure to
beryllium-containing products sold by Ceradyne. The complaint seeks
compensatory damages in the amount of $5.0 million for the husband, $1.0 million
for the wife, and punitive damages in the amount of $10.0 million.
12
<PAGE>
The Company believes that the plaintiffs' claims are without merit and that the
resolution of this matter will not have a material adverse effect on the
financial condition or operations of the Company. Defense of this case has been
tendered to the Company's insurance carriers, some of which are providing
defense and indemnification subject to a reservation of rights. There can be no
assurances, however, that this claim will be covered by insurance, or that, if
covered, the amount of insurance will be sufficient to cover any potential
judgment.
Items 2-5. N/A
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
27 Financial Data Schedule
(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: May 12, 1998
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q -
QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,399
<SECURITIES> 0
<RECEIVABLES> 5,676
<ALLOWANCES> 180
<INVENTORY> 7,490
<CURRENT-ASSETS> 18,001
<PP&E> 25,175
<DEPRECIATION> 17,093
<TOTAL-ASSETS> 29,775
<CURRENT-LIABILITIES> 2,326
<BONDS> 0
0
0
<COMMON> 37,414
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,775
<SALES> 7,341
<TOTAL-REVENUES> 7,341
<CGS> 5,580
<TOTAL-COSTS> 6,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 493
<INCOME-TAX> 10
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 483
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
