<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 September 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)
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 October 15, 1999
- ---------------------------- -------------------------------
Common Stock, $.01 par value 8,088,348 Shares
Page 1 of 17 Pages
<PAGE>
CERADYNE, INC.
<TABLE>
<CAPTION>
INDEX PAGE NO.
----- --------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement Regarding Financial Information............................................. 3
Consolidated Balance Sheets -September 30, 1999
and December 31, 1998................................................................. 4-5
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999 and 1998 .............................. 6
Consolidated Statements of Cash Flow -
Nine Months Ended September 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, 4 and 5
Item 6. Exhibits and Reports on Form 8-K...................................................... 17
SIGNATURE............................................................................................ 17
</TABLE>
2
<PAGE>
CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
September 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>
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Amounts in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
======================================================================================================================
<S> <C> <C>
CURRENT ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents $ 1,539 $ 2,870
- ----------------------------------------------------------------------------------------------------------------------
Accounts receivable, net of allowances for 5,251 4,381
doubtful accounts of approximately $50 and $92
at September 30, 1999 and December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------
Other receivables 112 167
- ----------------------------------------------------------------------------------------------------------------------
Inventories 8,341 7,520
- ----------------------------------------------------------------------------------------------------------------------
Production tooling 1,423 1,104
- ----------------------------------------------------------------------------------------------------------------------
Prepaid expenses and other 1,035 880
------- -------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 17,701 16,922
-------- -------
- ----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT, at cost
- ----------------------------------------------------------------------------------------------------------------------
Land 422 422
- ----------------------------------------------------------------------------------------------------------------------
Buildings & improvements 1,825 1,825
- ----------------------------------------------------------------------------------------------------------------------
Machinery & equipment 22,388 20,664
- ----------------------------------------------------------------------------------------------------------------------
Leasehold improvements 1,835 1,723
- ----------------------------------------------------------------------------------------------------------------------
Office equipment 2,379 2,210
- ----------------------------------------------------------------------------------------------------------------------
Construction in progress 705 103
-------- -------
- ----------------------------------------------------------------------------------------------------------------------
29,554 26,947
- ----------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation & amortization (19,289) (18,090)
-------- -------
- ----------------------------------------------------------------------------------------------------------------------
10,265 8,857
-------- -------
- ----------------------------------------------------------------------------------------------------------------------
COSTS IN EXCESS OF NET ASSETS ACQUIRED, 1,884 2,009
net of accumulated amortization of $2,033 and $1,908 at
September 30, 1999 and December 31, 1998, respectively
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS, net of accumulated amortization 1,768 1,705
-------- -------
of $638 and $618 at September 30, 1999 and December 31,
1998, respectively
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 31,618 $ 29,493
======== ========
======================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Current portion of long-term debt $ 100 $ ---
- --------------------------------------------------------------------------------------------------------------
Accounts payable 1,791 1,084
- --------------------------------------------------------------------------------------------------------------
Accrued expenses:
- --------------------------------------------------------------------------------------------------------------
Payroll and payroll related 569 553
- --------------------------------------------------------------------------------------------------------------
Other 286 234
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,746 1,871
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT PORTION 383 ---
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE 67 270
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value,
Authorized - 12,000,000
shares, Outstanding - 8,088,048 shares
and 8,054,838 shares at September 30, 1999
and December 31, 1998, respectively. 37,843 37,718
- --------------------------------------------------------------------------------------------------------------
Accumulated deficit (9,421) (10,366)
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 28,422 27,352
------------------ -----------------
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 31,618 $ 29,493
================== =================
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 7,810 $ 6,290 $ 21,446 $ 19,975
- --------------------------------------------------------------------------------------------------------------
COST OF PRODUCT SALES 6,034 5,129 16,803 15,888
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
Gross Profit 1,776 1,161 4,643 4,087
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
- --------------------------------------------------------------------------------------------------------------
General & Administration 866 776 2,531 2,141
- --------------------------------------------------------------------------------------------------------------
Selling 395 350 1,075 1,128
- --------------------------------------------------------------------------------------------------------------
Research & Development 113 87 429 243
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
1,374 1,213 4,035 3,512
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
Income (loss) from
operations 402 (52) 608 575
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE:
- --------------------------------------------------------------------------------------------------------------
Other (income) (110) (96) (279) (286)
- --------------------------------------------------------------------------------------------------------------
Interest expense 6 --- 6 ----
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
(104) (96) (273) (286)
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
Income before provision
(benefit) for income taxes 506 44 881 861
- --------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR
INCOME TAXES 10 --- (64) 10
------- ------- ------- --------
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 496 $ 44 $ 945 $ 851
======= ======= ======== ========
- --------------------------------------------------------------------------------------------------------------
BASIC & DILUTED INCOME
PER SHARE $ .06 $ .01 $ .12 $ .11
======= ======= ======== ========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
(Amounts in thousands) SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------
1999 1998
(Unaudited) (Unaudited)
==================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 945 $ 851
- ------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 1,344 1,093
- ------------------------------------------------------------------------------------------------------------------
(Increase) decrease in accounts receivable, net (870) 286
- ------------------------------------------------------------------------------------------------------------------
(Increase) decrease in other receivables 55 (129)
- ------------------------------------------------------------------------------------------------------------------
Increase in inventories (821) (533)
- ------------------------------------------------------------------------------------------------------------------
Increase in production tooling (319) (128)
- ------------------------------------------------------------------------------------------------------------------
Increase in prepaid expenses & other assets (238) (279)
- ------------------------------------------------------------------------------------------------------------------
Increase in accounts payable 707 110
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in accrued expenses 68 (135)
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in deferred revenue (203) 75
------- -------
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 668 1,211
------- -------
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------
Purchases of property, plant & equipment (2,607) (1,300)
------- -------
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,607) (1,300)
------- -------
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------------------------------------------------------------------------------------
Issuance of common stock 125 276
- ------------------------------------------------------------------------------------------------------------------
Net borrowings on long-term debt 483 --
------- -------
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 608 276
------- -------
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,331) 187
------- -------
- ------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, beginning of period 2,870 3,569
------- -------
- ------------------------------------------------------------------------------------------------------------------
Cash & cash equivalents, end of period $ 1,539 $ 3,756
======= =======
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- ------------------------------------------------------------------------------------------------------------------
Interest paid $ 6 $ --
- ------------------------------------------------------------------------------------------------------------------
Income taxes paid $ 2 $ --
------- -------
==================================================================================================================
</TABLE>
See accompanying condensed notes to
Consolidated Financial Statements.
7
<PAGE>
CERADYNE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1999 and December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
====================================================================================================
SEPTEMBER 30, 1999 DECEMBER 31, 1998
====================================================================================================
<S> <C> <C>
Raw Materials $4,169 $4,098
----------------------------------------------------------------------------------------------------
Work-in-Process 3,691 2,413
----------------------------------------------------------------------------------------------------
Finished Goods 481 1,009
----------------------------------------------------------------------------------------------------
Total Inventories $8,341 $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 table below reconciles the weighted
shares outstanding in the computation of basic net income per share to
diluted net income per share.
<TABLE>
<CAPTION>
========================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
========================================================================================================================
<S> <C> <C> <C> <C>
Weighted average number of 8,080,000 8,029,000 8,064,000 7,991,000
shares outstanding
------------------------------------------------------------------------------------------------------------------------
Dilutive stock options and 147,000 48,000 99,000 77,000
common stock warrants --------- --------- --------- ---------
------------------------------------------------------------------------------------------------------------------------
Number of shares used in 8,227,000 8,077,000 8,163,000 8,068,000
diluted computations ========= ========= ========= =========
========================================================================================================================
</TABLE>
8
<PAGE>
4. Long Term Debt
--------------
-----------------------------------------------------------
Capital Equipment loan bearing $483,000
interest at 8.18% APR. Payable in
monthly installments of $8,333,
expiring August 2004.
-----------------------------------------------------------
Less Current Portion (100,000)
-------
-----------------------------------------------------------
Long Term Debt $383,000
-----------------------------------------------------------
5. 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 September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998
(Amounts in thousands)
Three Months Ended September 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 $ 4,519 $ 3,313 $ 1,650 $ 1,384 $ 1,641 $ 1,593 $ 7,810 $ 6,290
-------- -------- ------- ------ ------- ------- -------- --------
External
Customers
Depreciation $ 334 $ 259 $ 89 $ 73 $ 49 $ 55 $ 472 $ 387
-------- -------- ------- ------- --------- ------- -------- --------
and
Amortization
Segment $ 266 $ (51) $ 136 $ (181) $ 104 $ 276 $ 506 $ 44
-------- -------- ------- ------- ------- ------- -------- --------
Income (loss)
before
Provision
(benefit) for
Income
Taxes
Segment $ 21,630 $ 20,746 $ 6,160 $ 6,443 $ 3,828 $ 3,274 $ 31,618 $ 30,463
-------- -------- ------- ------- ------- ------- -------- --------
Assets
Expenditures $ 630 $ 332 $ 60 $ 100 $ 98 $ 8 $ 788 $ 440
-------- -------- ------- ------- ------- ------- -------- --------
for PP&E
--------------------------------------------------------------------------------------------
</TABLE>
Nine Months Ended September 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 $12,072 $ 10,917 $ 4,855 $ 4,332 $ 4,519 $4,726 $21,446 $ 19,975
------- -------- ------- -------- ------- ------ ------- --------
External
Customers
Depreciation $ 919 $ 711 $ 253 $ 217 $ 172 $ 165 $ 1,344 $ 1,093
------- -------- ------- -------- ------- ------ ------- --------
and
Amortization
Segment Income $ 272 $ 653 $ 368 $ (204) $ 241 $ 412 $ 881 $ 861
------- -------- ------- -------- ------- ------ ------- --------
(loss) before
Provision
(benefit) for
Income Taxes
Expenditures $ 1,901 $ 1,029 $ 284 $ 265 $ 422 $ 6 $ 2,607 $ 1,300
------- -------- ------- -------- ------- ------ ------- --------
for PP&E
----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Segment Disclosures for Net Sales by Area
for the Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998
Three Months Ended September 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>
U.S. Net Sales 54% 42% 18% 19% 16% 21% 88% 82%
Western 3% 5% 1% - 1% 4% 5% 9%
Europe Net
Sales
Asia Net Sales 1% 1% 1% 2% 3% - 5% 3%
Israel Net - 5% - - - - 5%
Sales
Canada Net - - 1% - 1% 1% 2% 1%
---- ---- ---- ---- ---- ---- ---- ----
Sales
Total Net 58% 53% 21% 21% 21% 26% 100% 100%
==== ==== ==== ==== ==== ==== ==== ====
Sales
---------------------------------------------------------------------------------------------
</TABLE>
Nine Months Ended September 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>
U.S. Net Sales 52% 48% 19% 17% 17% 19% 88% 84%
Western 3% 4% 2% 3% 2% 2% 7% 9%
Europe Net
Sales
Asia Net Sales 1% 1% 1% 2% 2% 1% 4% 4%
Israel Net - 2% - - - 2%
Sales - -
Canada Net - - 1% - - 1% 1%
---- ---- ---- ---- ---- ---- ---- ----
Sales
Total Net 56% 55% 23% 22% 21% 23% 100% 100%
===== ===== ====== ====== ===== ====== ====== ========
Sales
--------------------------------------------------------------------------------------------
</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 the Three and Nine Months Ended September 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 three months ended September 30, 1999 were
---------
$7.8 million, which represents a 24% or a $1.5 million increase over
the corresponding quarter of the prior year. For the nine months ended
September 30, 1999, net sales were $21.4 million, and this represents
an increase of $1.5 million from the prior year's nine months.
The increase in sales was primarily attributable to the Company's
Advanced Ceramic Operations in Costa Mesa, California. This increase
was approximately $1.2 million over the corresponding third quarter and
nine month periods of the prior year. Contributing to the increase was
the increased demand by orthodontists for the "Clarity" orthodontic
brackets. Armor products also contributed to the increases over the
prior periods due to increasing demand for helicopter wing panels and
armor vests. Additionally, sale of structural ceramics for
semiconductor equipment increased over both prior year periods because
of the continued improvement in the semiconductor industry from the
prior year. However, the above sales increases were slightly offset in
both the quarter and nine months periods of the prior year due to
reduced demand for wear resistant components used on capital equipment
machinery and oil exploration ceramic components.
Additionally, the Company's Semicon Associates Division in Lexington,
Kentucky, posted a sales increase for the quarter of $.3 million, and a
nine month increase of $.5 million as compared to the prior year
periods. The increases were mainly due to price increases and, to a
lesser degree, the introduction of extended cathode assemblies.
12
<PAGE>
The Company's Thermo Materials Division in Scottdale, Georgia posted no
change in sales for the quarter-to-quarter comparison, and a $.2
million decrease for the nine month comparison. The decrease was due to
a major customer's delay of placing orders for the glass making
industry during the current nine months period.
International sales have been, and are expected to continue to be, an
important part of the Company's business, representing 12% of total
sales for the third quarter of 1999, down from 18% for the comparable
period of the prior year. For the nine months of 1999, international
sales were 12% of total sales versus 16% 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
nine 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 $1.8 million or 23% of
------------
sales for the third quarter ended September 30, 1999, compared to $1.2
million or 18% of sales for the prior year's third quarter. For the
nine months ended September 30, 1999, gross profit was $4.6 million or
22% of sales, compared to $4.1 million or 20% of sales in the first
nine months of 1998.
All of the major product lines at the Company's Advanced Ceramic
Operations in Costa Mesa, California, except for wear resistant
components, had an increase in gross profit for the quarter and nine
months periods as compared to the prior year periods. This result was
due to higher volume and higher capacity utilization resulting in
favorable cost absorption. Hence, the favorable variances for the third
quarter and nine month periods as compared to the prior year periods
were $.6 million and $.2 million, respectively, for Advanced Ceramic
Operations.
Gross profit for Semicon Associates in Lexington, Kentucky had a
favorable variance over the comparable prior year periods of $.2
million and $.5 million for the third quarter and nine 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 posted an
unfavorable variance of $.2 million for the third quarter and nine
months periods as compared to the prior year periods. The primary
reason for the decrease was the inefficiencies in producing a greater
mix of components with smaller quantities than the prior year periods.
Research and Development Expenses. Expenses for the third quarters
---------------------------------
ended September 30, 1999 and 1998 for the Research and Development
Department were $113,000 and $87,000 respectively, and for the nine
months period ended September 30, 1999 and 1998 were $429,000 and
$243,000 respectively. This was
13
<PAGE>
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.
In addition, the Company historically has and continues to engage in
application engineering to improve and reduce the cost of production
and to develop new products. The costs associated with application
engineering are generally expensed as incurred and are included in cost
of product sales. Expenses for the third quarters ended September 30,
1999 and 1998 for the Application Engineering Department were $62,000
and $208,000 respectively and for the nine months period ended
September 30, 1999 and 1998 were $208,000 and $279,000 respectively.
The decreases for both current year periods were attributable to
organizational changes.
Selling Expenses. Selling expenses were $395,000 for the quarter, and
----------------
$1,075,000 for the nine months ended September 30, 1999. The above
compares to prior year amounts of $350,000 for the quarter, and
$1,128,000 for the nine months ended September 30, 1998. Recruiting,
travel and product literature expense contributed to the $45,000
increase over the prior year third quarter. The nine months decrease of
$53,000 over the prior year period was caused by lower commissions and
reclassification of personnel.
General and Administrative Expenses. General Administrative expenses
-----------------------------------
were $866,000 for the quarter, and $2,531,000 for the nine months ended
September 30, 1999. The above compares to prior year amounts of
$776,000 for the quarter and $2,141,000 for the nine months ended
September 30, 1998.
The increase of $90,000 for the third quarter of 1999 as compared to
the prior year third quarter was primarily caused by reimbursement of
legal expenses last year due to a legal matter. The increase of
$390,000 for the nine months period over the same prior year period was
primarily caused by last year's payment of $354,000 resulting from the
settlement of a customer dispute relating to the sale/purchase of
cathode pellets and spider cathodes.
Other Income. Other income for the quarters ended September 30, 1999
------------
and 1998 was $110,000 and $96,000 respectively. For the nine months
ended September 30, 1999 and 1998, other income was $273,000 and
$286,000 respectively. The increase of $14,000 was caused by
miscellaneous income offset by a decrease of interest income due to
lower cash balances in the current quarter. The decrease of $13,000 for
the nine month comparison was primarily the result of a reduction of
interest income due to lower cash balances in the current year.
Interest Expense. Interest expense was $6,000 for the quarter and nine
----------------
month periods as compared to none in the prior year periods. The
increase was caused by entering into a capital equipment loan in the
current quarter.
Income Taxes. The Company recorded a $10,000 provision for taxes for
------------
the quarter ended September 30, 1999. For the nine months period, the
Company has recorded
14
<PAGE>
a net benefit due to a refund of Federal and State taxes. The Company
has available net operating loss carry forwards of approximately $11.1
million as of September 30, 1999 for Federal income tax purposes.
Net Income. Reflecting all of the matters discussed above, net income
----------
was $496,000 (or $.06 per share basic and diluted) for the quarter
ended September 30, 1999, and $945,000 (or $.12 per share basic and
diluted) for the nine months ended September 30, 1999.
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 21st century dates from 20th 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 December 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 20th
and 21st 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's contingency plan to minimize the risks associated with non
Year 2000 readiness is to be manually prepared to complete transactions
that may not be Year 2000 compliant.
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.
15
<PAGE>
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 September 30, 1999 and no collateral is required of
the Company. As of September 30, 1999 there had been no borrowing under
this credit facility. Under a separate credit facility with Comerica
Bank, the Company entered into a $500,000 capital equipment loan
agreement during the third quarter of 1999. The term of the loan is for
60 months with no prepayment penalty.
Management believes that its current cash and cash equivalents on hand,
as well as cash generated from operations and the ability to borrow
under the existing credit facilities, will be sufficient to finance
anticipated capital and operating requirements for at least the next 12
months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
SEC Regulation S-K, Rule 3-05 requires expanded disclosure related to
market risk. The Company does have assets in cash and cash equivalents,
and changes in interest rates would affect earnings on these assets. As
of September 30, 1999, the Company had $1.5 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 nine months ended September 30,
1999, and this interest has been recorded in the Company's financial
statements as part of other income in the amount of $24,000 for the
quarter and $81,000 for the nine months ended September 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
$2,000 for the quarter and $3,000 for the nine 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,
16
<PAGE>
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.
Items 2, 3, 4 and 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: November 12, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q -
QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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