<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 June 30, 1999
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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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, 1999
- -------------------------------- ------------------------------
Common Stock, $.01 par value 8,058,814 Shares
Page 1 of 18 Pages
<PAGE>
CERADYNE, INC.
INDEX PAGE NO.
- ------- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information....................... 3
Consolidated Balance Sheets - June 30, 1999
and December 31, 1998......................................... 4-5
Consolidated Statements of Income -
Three and Six months ended June 30, 1999 and 1998............... 6
Consolidated Statements of Cash Flow -
Three and Six months ended June 30, 1999 and 1998............... 7
Condensed Notes to Consolidated Financial Statements......... 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
& Results of Operations..................................... 12-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Items 2, N/A............................................................ 17
3 and 5
Item 4. Submission of Matters to Vote of Security Holders.............. 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
SIGNATURE................................................................ 18
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 1999
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 generally accepted accounting principles has been
omitted pursuant to such rules and regulations. However, the Company
believes the disclosures are adequate to make the information
presented not misleading. It is suggested 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, 1998, as filed with the Securities and
Exchange Commission on March 31, 1999.
3
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------
6-30-1999 12-31-1998
(Unaudited) (audited)
================================================================================================
<S> <C> <C>
CURRENT ASSETS
- ------------------------------------------------------------------------------------------------
Cash & cash equivalents $ 2,149 $ 2,870
- ------------------------------------------------------------------------------------------------
Accounts receivable, net of allowances for 4,671 4,381
doubtful accounts of approximately $33 and $92
at 6-30-1999 and 12-31-1998
- ------------------------------------------------------------------------------------------------
Other Receivables 85 167
- ------------------------------------------------------------------------------------------------
Inventories 8,240 7,520
- ------------------------------------------------------------------------------------------------
Production Tooling 1,113 1,104
- ------------------------------------------------------------------------------------------------
Prepaid expenses and other 1,086 880
---------- -----------
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 17,344 16,922
---------- -----------
- ------------------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, at cost
- ------------------------------------------------------------------------------------------------
Land 422 422
- ------------------------------------------------------------------------------------------------
Buildings & improvements 1,825 1,825
- ------------------------------------------------------------------------------------------------
Machinery & equipment 21,804 20,664
- ------------------------------------------------------------------------------------------------
Leasehold improvements 1,732 1,723
- ------------------------------------------------------------------------------------------------
Office equipment 2,333 2,210
- ------------------------------------------------------------------------------------------------
Construction in progress 649 103
---------- -----------
- ------------------------------------------------------------------------------------------------
28,765 26,947
- ------------------------------------------------------------------------------------------------
Less accumulated depreciation & amortization (18,866) (18,090)
---------- -----------
- ------------------------------------------------------------------------------------------------
9,899 8,857
---------- -----------
- ------------------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,926 2,009
net of accumulated amortization of $1,991 & $1,908 at
6-30-1999 & 12-31-1998, respectively
- ------------------------------------------------------------------------------------------------
OTHER ASSETS, net of accumulated amortization 1,775 1,705
of $631 and $618 at 6-30-1999 & 12-31-1998, ---------- -----------
respectively
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 30,944 $ 29,493
========== ===========
================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------
6-30-1999 12-31-1998
(Unaudited) (Audited)
==============================================================================================================
<S> <C> <C>
CURRENT LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Accounts payable $ 2,081 $ 1,084
- --------------------------------------------------------------------------------------------------------------
Accrued expenses
- --------------------------------------------------------------------------------------------------------------
Payroll and payroll related 617 553
- --------------------------------------------------------------------------------------------------------------
Other 296 234
---------- -----------
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 2,994 1,871
---------- -----------
- --------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE 135 270
---------- -----------
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value,
Authorized - 12,000,000 shares,
Outstanding - 8,058,814 shares
and 8,054,838 shares at 6-30-1999
& 12-31-1998, respectively. 37,732 37,718
- --------------------------------------------------------------------------------------------------------------
Accumulated deficit (9,917) (10,366)
---------- -----------
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 27,815 27,352
---------- -----------
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 30,944 $ 29,493
========== ===========
==============================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED June 30, 1999 & 1998
AND SIX MONTHS ENDED June 30,1999 AND 1998
(Amounts in thousands, except per share data)
==========================================================================================================================
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
==========================================================================================================================
Unaudited Unaudited
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $7,331 $6,342 $13,636 $13,685
- --------------------------------------------------------------------------------------------------------------------------
COST OF PRODUCT SALES 5,643 5,176 10,769 10,759
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
Gross Profit 1,688 1,166 2,867 2,926
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
- --------------------------------------------------------------------------------------------------------------------------
Selling 334 419 680 778
- --------------------------------------------------------------------------------------------------------------------------
General & Administration 841 429 1,665 1,361
- --------------------------------------------------------------------------------------------------------------------------
Research & Development 181 89 316 157
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
1,356 937 2,661 2,296
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
Income from operations 332 229 206 630
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
OTHER INCOME 78 97 169 189
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
Income before provision
(benefit) for income taxes 410 326 375 819
- --------------------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES 9 --- (74) 10
------ ------ ------- -------
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 401 $ 326 $ 449 $ 809
====== ====== ======= =======
- --------------------------------------------------------------------------------------------------------------------------
BASIC & DILUTED INCOME
PER SHARE $ .05 $ .04 $ .06 $ .10
====== ====== ======= =======
==========================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED June 30, 1999 & 1998 SIX MONTHS ENDED
(Amounts in thousands) JUNE 30
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
Unaudited Unaudited
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 449 $ 809
- ---------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 872 706
- ---------------------------------------------------------------------------------------------------------------------
(Increase) decrease in accounts receivable, net (290) 93
- ---------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other receivables 82 (410)
- ---------------------------------------------------------------------------------------------------------------------
Increase in inventories (720) (361)
- ---------------------------------------------------------------------------------------------------------------------
Increase in production tooling (9) (37)
- ---------------------------------------------------------------------------------------------------------------------
Increase in prepaid expenses & other assets (289) (110)
- ---------------------------------------------------------------------------------------------------------------------
Increase in accounts payable 997 88
- ---------------------------------------------------------------------------------------------------------------------
Increase in accrued expenses 126 141
- ---------------------------------------------------------------------------------------------------------------------
Decrease in deferred revenue (135) (127)
------- ------
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,083 792
------- ------
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Purchases of property, plant & equipment (1,818) (860)
------- ------
- ---------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,818) (860)
------- ------
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net 14 45
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14 45
------- ------
- ---------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (721) (23)
- ---------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, beginning of period 2,870 3,569
- ---------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, end of period $ 2,149 $3,546
======= ======
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
Income taxes paid $ --- $ 2
======= ======
=====================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the financial statements of
Ceradyne, Inc. (the Company) and its divisions. 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 June 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
====================================================================
JUNE 30, 1999 DECEMBER 31, 1998
====================================================================
<S> <C> <C>
Raw Materials $4,457 $4,098
--------------------------------------------------------------------
Work-in-Process 3,064 2,413
--------------------------------------------------------------------
Finished Goods 719 1,009
--------------------------------------------------------------------
Total Inventories $8,240 $7,520
====== ======
====================================================================
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 8,056,149 7,979,986 8,055,494 7,971,917
---------------------------------------------------------------------------
Dilutive stock options and
common stock warrants 88,126 90,022 75,740 91,173
--------- --------- --------- ---------
---------------------------------------------------------------------------
Number of shares used in
diluted computations 8,144,275 8,070,008 8,131,234 8,063,090
========= ========= ========= =========
===========================================================================
</TABLE>
8
<PAGE>
4. 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 adopted No. 131 in fiscal
1998, as required.
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, California, primarily produces armor and
orthodontic products, components for semiconductor equipment, and houses
the Company's 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:
<TABLE>
<CAPTION>
=============================================================================================
FACILITY LOCATION PRODUCTS
---------------------------------------------------------------------------------------------
<S> <C>
Advanced Ceramic Operations . Semiconductor Equipment Components
Costa Mesa, California . Lightweight ceramic armor
Approximately 74,000 square feet . Orthodontic ceramic brackets
. Ceralloy(R) 147 SRBSN wear parts
. Precision ceramics
. Ceralloy(R) 147 SRBSN diesel/automotive engine parts
---------------------------------------------------------------------------------------------
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
=============================================================================================
</TABLE>
9
<PAGE>
Ceradyne, Inc.
Segment Disclosures
for the Three Months Ended June 30, 1999 & 1998
and Six Months Ended June 30, 1999 and 1998
(Amounts in thousands)
Three Months Ended June 30,
<TABLE>
<CAPTION>
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- --------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
External
Customers $ 4,307 $ 3,528 $1,643 $1,422 $1,381 $1,392 $ 7,331 $ 6,342
------- ------- ------ ------ ------ ------ ------- -------
Depreciation
and
Amortization $ 309 $ 211 $ 83 $ 70 $ 63 $ 54 $ 455 $ 335
------- ------- ------ ------ ------ ------ ------- -------
Segment Income
(loss) before
provision
(benefit) for
income taxes $ 247 $ 448 $ 152 $ (74) $ 2 $ (48) $ 401 $ 326
------- ------- ------ ------ ------ ------ ------- -------
Segment Assets $20,820 $20,055 $6,457 $6,474 $3,667 $3,443 $30,944 $29,972
------- ------- ------ ------ ------ ------ ------- -------
Expenditures
for PP&E $ 614 $ 299 $ 117 $ 71 $ 206 $ 49 $ 937 $ 419
------- ------- ------ ------ ------ ------ ------- -------
----------------------------------------------------------------------------------
</TABLE>
Six Months Ended June 30,
<TABLE>
<CAPTION>
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- --------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
External
Customers $7,553 $7,604 $3,205 $2,948 $2,878 $3,133 $13,636 $13,685
------ ------ ------ ------ ------ ------ ------- -------
Depreciation
and
Amortization $ 585 $ 452 $ 164 $ 144 $ 123 $ 110 $ 872 $ 706
------ ------ ------ ------ ------ ------ ------- -------
Segment Income
(loss) before
provision
(benefit) for
income taxes $ 81 $ 695 $ 233 $ (24) $ 135 $ 138 $ 449 $ 809
------ ------ ------ ------ ------ ------ ------- -------
Expenditures
for PP&E $1,270 $ 697 $ 224 $ 165 $ 324 $ (2) $ 1,818 $ 860
------ ------ ------ ------ ------ ------ ------- -------
----------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Segment Statement for Net Sales by Area
for the Three Months Ended June 30, 1999 & 1998
and Six Months Ended June 30, 1999 & 1998
<TABLE>
<CAPTION>
Three Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- ------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Net 54% 47% 19% 18% 16% 16% 89% 81%
Sales
Western Europe 2% 6% 2% 2% 2% 3% 6% 11%
Net Sales
Asia Net 1% 2% 1% 1% 1% 3% 3% 6%
Sales
Israel Net -- 1% -- -- -- -- --- 1%
Sales
Canada Net -- -- 1% -- 1% 1% 2% 1%
Sales
Other -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total Net
Sales 57% 56% 23% 21% 20% 23% 100% 100%
==== ==== ==== ==== ==== ==== ==== ====
-----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
Advanced Ceramic Ops Semicon Associates Thermo Materials TOTAL
- ------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Net 51% 45% 20% 17% 17% 18% 88% 80%
Sales
Western 3% 4% 2% 3% 2% 1% 7% 8%
Europe Net Sales
Asia Net 1% 6% 1% 2% 1% 1% 3% 9%
Sales
Israel Net -- 1% -- -- -- -- -- 1%
Sales
Canada Net -- -- 1% -- -- 1% 1% 1%
Sales
Other -- -- -- -- 1% 1% 1% 1%
---- ---- ---- ---- ---- ---- ---- ----
Total Net
Sales 55% 56% 24% 22% 21% 22% 100% 100%
==== ==== ==== ==== ==== ==== ==== ====
-----------------------------------------------------------------------------------
</TABLE>
11
<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, 1998, as
filed 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 and Six Months Ended June 30, 1999
--------------------------------------------------------------------
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, 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 June 30, 1999 were $7.3
---------
million, which represents a 15.6% or a $989,000 increase over the
corresponding quarter of the prior year. For the six months ended June
30, 1999, net sales were $13.6 million, and this represents a decrease
of $49,000 from the prior year's six months.
The increase in sales for the quarter to quarter comparison, as stated
above, was attributable primarily to increased sales of $.8 million at
the Company's Advanced Ceramic Operations in Costa Mesa, California. A
major contributor ($.4 million) to the increase was from the
orthodontic product line stemming from increased demand by
orthodontists for the "Clarity" orthodontic brackets. Another major
contributor was from the armor product line for armor vests ($.3
million). This armor vest shipment is not part of the large U.S.
military armor contract that the Company received in 1998, but for
another U.S. military contract with a different branch of service.
Also, sales of the semiconductor product line increased by $.1 million
due to improvement in the worldwide semiconductor industry. For the six
months' comparison, the current year sales were slightly lower due to
reduced demand for wear resistant components used on capital equipment
machinery, and oil exploration ceramic components.
The Company's Semicon Associates Division in Lexington, Kentucky posted
a sales increase for the quarter of $.2 million, and a six month
increase of $.3 million as compared to the prior year periods. The
increases were mainly due to price increase.
12
<PAGE>
The Company's Thermo Materials Division in Scottdale, Georgia posted a
slight sales decrease for the quarter of $11,000, and a six months
decrease of $.3 million. This decrease was due to a major customer's
timing of placing orders for the glass making industry.
International sales have been, and are expected to continue to be, an
important part of the Company's business, representing 11.0% of total
sales for the second quarter of 1999, down from 19.0% for the
comparable period of the prior year. For the six months of 1999,
international sales were 12.0% of total sales versus 20.0% for the
prior year. The decrease for the quarter was attributable to lower
demand for wear resistant components. The decrease in international
sales in the first six months of 1999 reflects a combination of lower
demand for wear resistant components during 1999 and a one-time
shipment of ceramic components for the microwave tube business in last
year's first quarter.
Gross Profit. The Company's gross profit was $1.7 million or 23.0% of
------------
sales for the second quarter ended June 30, 1999, compared to $1.2
million or 18.4% of sales for the prior year's second quarter. For the
six months ended June 30, 1999, gross profit was $2.9 million or 21.0%
of sales, compared to $2.9 million or 21.4% of sales in the fist six
months of 1998.
All of the major product lines at the Company's Advanced Ceramics
Operations in Costa Mesa, California, except one, had an increase in
gross profit for the current quarter as compared to the prior year
period due to higher volume and higher capacity utilization resulting
in favorable cost absorption. One particular note, the semiconductor
product line improved its gross margin considerably due to product
mix, and to meeting or exceeding the cost standards. This has resulted
in a favorable quarterly variance of $.3 million over the prior year
period. However, for the six month period as compared to the prior
year, the gross profit has decreased due to the low volume and
capacity utilization that resulted in the first quarter of 1999. This
has resulted in an unfavorable variance of $.3 million over the prior
year period.
Gross profit for Semicon Associates in Lexington, Kentucky had a
favorable variance over the comparable prior year periods of $.2
million and $.3 million for the second quarter and six months
respectively. The increase in the gross margin can be attributed to
slightly higher production yields, and price increases.
Gross profit for Thermo Materials in Scottdale, Georgia has recorded a
slightly favorable variance of $17,000 for the second quarter over the
prior year period. However, for the six months comparison the current
year variance is unfavorable by $51,000. This was caused by the lower
volume and lower capacity utilization that resulted in unfavorable
cost absorption.
Research and Development Expenses. Ceradyne's engineering and research
---------------------------------
efforts consist primarily of ongoing Application Engineering in
response to customer requirements, and to the Research and Development
Department's focus on new materials technology. All of these efforts
are directed to the creation of new products, the modification of
existing products to fit specific customer needs, or the development
of enhanced ceramic process technology.
13
<PAGE>
Cost associated with Application Engineering and the Research and
Development Departments are generally expensed as incurred. Expenses
for the second quarters ended June 30, 1999 and 1998 for the Research
and Development Department were $181,000 and $89,000 respectively, and
for the six months period ended June 30, 1999 and 1998 were $316,000
and $157,000 respectively. This was a new department set up in 1998,
and the increases for the current year periods related to salaries,
travel, outside services, materials and small tools. Expenses for the
second quarters ended June 30, 1999 and 1998 for the Application
Engineering Department were $62,000 and $89,000 respectively and for
the six months period ended June 30, 1999 and 1998 were $147,000 and
$183,000 respectively. The decreases for both current year periods
were attributable to organizational changes.
Selling Expenses. Selling expenses were $334,000 for the quarter, and
----------------
$680,000 for the six months ended June 30, 1999. The above compares to
prior year amounts of $419,000 for the quarter, and $778,000 for the
six months ended June 30, 1998. The primary reason for the decrease
for the quarter and six months was a reclassification of personnel
from selling to General and Administrative and Engineering at the
Semicon Associates Division. Also, Thermo Materials division denoted
decreases in the current periods due to lower commissions, and to a
decrease of product freight cost.
General and Administrative Expenses. General Administrative expenses
-----------------------------------
were $841,000 for the quarter, and $1,665,000 for the six months ended
June 30, 1999. The above compares to prior year amounts of $429,000
for the quarter and $1,361,000 for the six months ended June 30, 1998.
The increase between the comparable quarters and six months periods is
due primarily to a payment of $354,000 received in the second quarter
of 1998 resulting from the settlement of a dispute with a customer
relating to the sale/purchase of cathode pellets and "spider
cathodes".
Other Income. Other income for the quarters ended June 30, 1999 and
------------
1998 was $78,000 and $97,000 respectively. For the six months ended
June 30, 1999 and 1998, other income was $169,000 and $189,000
respectively. The decrease in quarterly and six months totals reflects
a decrease of interest income due to cash expended on capital
equipment in the current year.
Income Taxes. The Company recorded a $9,000 provision for taxes for
------------
the quarter ended June 30, 1999. In the first quarter of 1999, the
Company recorded an $83,000 benefit for income taxes. The benefit was
due to a refund of Federal and State taxes. The Company has available
net operating loss carry forwards of approximately $12.0 million as of
June 30, 1999 for federal income tax purposes.
Net Income. Reflecting all of the matters discussed above, net income
----------
was $401,000 (or $.05 per share basic and diluted) for the quarter
ended June 30, 1999, and $449,000 (or $.06 per share basic and
diluted) for the six months ended June 30, 1999.
14
<PAGE>
Year 2000 Disclosure. Many currently installed computer systems and
--------------------
software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit
entries to distinguish 21/st/ century dates from 20/th/ century dates.
This inability to recognize or properly treat the Year 2000 may cause
the Company's systems and applications to process critical financial
and operational information incorrectly. The Company continues to
assess the impact of the Year 2000 issue on its reporting systems and
operations.
A new software system which is Year 2000 compliant was installed at
the Corporate Headquarters and its Advanced Ceramic Operations located
in Costa Mesa, California in 1996. The Company expects to complete the
conversion of its internal accounting system at its Kentucky and
Georgia divisions to such upgraded software in 1999. The costs
associated with these conversions are approximately $150,000. As of
June 30, 1999, the conversion plan was complete at the Kentucky
location. The conversion plan at the Georgia location is estimated to
be complete by October 1, 1999. The Company is taking steps to ensure
that all of its customers, suppliers, associates and affiliates will
be in compliance with the Year 2000 issue. This process includes a
questionnaire confirming the status of compliance with the Year 2000
criteria set forth by the Company. The criteria that the Company will
use to determine compliance with the Year 2000 is the accurate
processing of date/time information from, into, and between the 20/th/
and 21/st/ centuries, and the years 1999 and 2000, including leap year
calculations that will affect the processing of information,
scheduling, manufacturing, and the quality of all products. Also, the
Company is in the process of developing a contingency plan to minimize
the risks associated with non Year 2000 readiness. This plan is to be
completed by the end of the 3/rd/ Quarter 1999.
The Company is exposed to the following worst case Year 2000 scenario:
That several of the Company's customers and suppliers may experience
Year 2000 non-compliance issues that affect the Company. However, as
the Company does have a wide customer base, and no sole source
suppliers, it believes the non-compliance issue to be minimal.
However, there can be no assurance that certain of the Company's
internal computer systems or networks or those of its key vendors and
customers will not be adversely affected by such Year 2000 issues,
which could have a material adverse effect on the Company's business,
operating results or financial condition.
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.
In November, 1997 the Company entered into a revolving credit
agreement with Comerica Bank. The credit facility amount remains at
$4,000,000 as of quarter ended June 30, 1999 and no collateral is
required of the Company. As of June 30, 1999 there had been no
borrowing under the credit facility.
15
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
SEC Regulation S-K, Rule 3-05 requires expanded disclosure related to
market risk. The Company as of quarter ended June 30, 1999 has no debt
borrowing but may borrow in the next twelve months for new capital
equipment purchases. However, the Company does have assets in cash and
cash equivalents, and changes in interest rates would affect earnings
on these assets. As of June 30, 1999, the Company had $2.0 million in
a money market account based upon U.S. Treasury Bonds. The interest on
this amount has earned 5.40% APR for the quarter and six months ended
June 30, 1999, and this interest has been recorded in the Company's
financial statements as part of other income in the amount of $25,000
for the quarter and $57,000 for the six months ended June 30, 1999. If
the interest rate were to decrease by 10% to 4.86% APR, the effect on
other income and cash flow would result in decreases of approximately
$2,500 for the quarter and $5,700 for the six month period.
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.
In October 1995, February 1997, August 1997 and February 1999, the
Company, along with others, was served with four different complaints
that were filed by seven former employees of one of the Company's
customers, and their spouses. The complaints, filed in the United
States District Court, Eastern District of Tennessee, allege that the
husbands contracted chronic beryllium disease as a result of their
exposure to beryllium-containing products sold by Ceradyne. One
complaint seeks compensatory damages in the amount of $3.0 million for
the husbands, $1.0 million for the spouses, and punitive damages in
the amount of $5.0 million. The other three complaints each seek
compensatory damages in the amount of $5.0 million for the husbands,
$1.0 million for the spouses, 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 these matters will not have a
material adverse effect on the financial condition or operations of
the Company. Defense of these cases 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 these
claims will be covered by insurance, or that, if covered, the amount
of insurance will be sufficient to cover any potential judgments.
16
<PAGE>
Item 2. N/A
Item 3. N/A
Item 4. Submission of Matter to Vote of Security Holders
------------------------------------------------
The following matter was voted upon at the Annual Meeting of
Stockholders held on July 26, 1999.
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------
NUMBER OF SHARES
---------------------------------------------------------------
FOR AUTHORITY WITHHELD
---------------------------------------------------------------
<S> <C> <C>
J.P. Moskowitz 7,283,368 136,545
---------------------------------------------------------------
L.M. Allenstein 7,283,513 136,400
---------------------------------------------------------------
R.A. Alliegro 7,283,513 136,400
---------------------------------------------------------------
P. Beardmore 7,283,513 136,400
---------------------------------------------------------------
F. Edelstein 7,283,513 136,400
---------------------------------------------------------------
M.A. Shader 7,277,513 142,400
---------------------------------------------------------------
M.L. Lohr 7,283,513 136,400
---------------------------------------------------------------
</TABLE>
Item 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
17
<PAGE>
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 12, 1999
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10Q QUARTER
ENDED MARCH 31, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,149
<SECURITIES> 0
<RECEIVABLES> 4,789
<ALLOWANCES> 33
<INVENTORY> 8,240
<CURRENT-ASSETS> 17,344
<PP&E> 28,765
<DEPRECIATION> 18,866
<TOTAL-ASSETS> 30,944
<CURRENT-LIABILITIES> 2,994
<BONDS> 0
0
0
<COMMON> 37,732
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,944
<SALES> 13,636
<TOTAL-REVENUES> 13,636
<CGS> 10,769
<TOTAL-COSTS> 13,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (375)
<INCOME-TAX> (74)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
