Ceradyne, Inc. Q4 2008 Earnings Call Transcript

Feb.24.09 | About: 3M Company (MMM)

Ceradyne, Inc. (CRDN) Q4 2008 Earnings Call February 24, 2009 11:15 AM ET

Executives

Joel P. Moskowitz – Chairman & Chief Executive Officer

Jerrold J. Pellizzon – Chief Financial Officer & Corporate Secretary

David P. Reed – Vice President & President of North American Operations

Marc King – Vice President & President of Ceradyne Armor Systems, Inc.

Analysts

Michael Lu – ThinkEquity Partners LLC

Al Kaschalk – Wedbush Morgan

Gary Liebowitz – Wachovia Securities

Timothy Quillin – Stephens Inc.

Josephine Millward – Stanford Group Company

Michael French – Morgan Joseph & Co.

David Kaizer – Robotti & Company

Alan Robinson – RBC Capital Markets

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Ceradyne fourth quarter 2008 conference call. This conference is being recorded today, February 24, 2009 at the request of Ceradyne. All participants are currently in a listen-only mode. Later we will conduct a question-and-answer session. We request that participants limit themselves to one question and one follow-up to allow others to call the opportunity to participate.

Hosting the call today is Joel Moskowitz, Ceradyne’s Chairman and Chief Executive Officer; who is accompanied by David Reed, President of North American operations; Jerry Pellizzon, Chief Financial Officer and Marc King, Vice President of Armor Operations. Before I turn the call over to Mr. Moskowitz, the company has requested that I read the following statement.

The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of Ceradyne that 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, 2007 as filed with the Securities and Exchange Commission.

I would now like to turn the conference over to Mr. Moskowitz. Please go ahead sir.

Joel P. Moskowitz

Thank you, Kristy. And in addition to the Safe Harbor statement, I would like to remind everyone that this is being taped and you can get a copy of it should you desire. We are very pleased to have you on the conference call today, which is to report the fourth quarter 2008 and the total year 2008 financial results.

What we will do is what we have been doing as a matter of record is I will review briefly the press release that was issued prior to the open this morning. And then I will turn it over to Jerry Pellizzon for a few comments on our financial performance and the balance sheet. And then we will open it to questions and answers.

This morning we announced that the sales for the fourth quarter of 2008 were $138.9 million that compared to $191.4 million a year ago in 2007. Net income decreased also in the fourth quarter of 2008 they decreased by about $13.9 million or 39.7% to $21.3 million or $0.81 per fully diluted shares that compared to last year of $35.2 million or a $1.28 per fully diluted share in the fourth quarter of 2007. Net income for the fourth quarter of 2008 included a pre-tax charge of $2.3 million from and other than temporary reductions in the value of our investments in auction rate securities. This charge had a negative impact on net income of approximately $0.06 per fully diluted share in the fourth quarter of ’08.

Our gross margin was 37.1% of net sales in the fourth quarter of '08 and that compared to 39.6% in the same period of '07. The provision for income tax is however was 30.3% in Q4 '08, compared to 33.7% in the same period last year. Our sales for the 12 months ending December 31, 2008 were $680.2 million that compared to $756.8 million for the 12 months ended December 31, 2007. And net income for the 12 months ended December 31, 2008 was $106.8 million, or $4 per fully diluted share on 26.7 million shares that was down from a $144.3 million, or $5.20 per fully diluted share last year on 27.7 million shares.

Net income for the 12 months ended December 31, 2008 included a pre-tax acquisition related compensation charge of $9.8 million that was associated with a pre-closing commitment by SemEquip Incorporated, which we acquired in August 2008, to pay incentive compensation to certain employees and advisors, and a pre-tax charge of $5.9 million from an other-than-temporary reduction in the value of our investments in auction rate securities.

These charges had a combined negative effect on net income for the total year ending December 31, 2008 of $0.38. New bookings for the fourth quarter in 2008 were $90.2 million and that compared to $258 million in the same period last year. For the 12 months ending December 31, '08 new bookings were $566.8 million that compared to $651.3 million for the 12 months ended December 31, 2007. Our backlog at the end of last year was at $126.4 million that compared to a year ago December 31, 2007 of $238.9 million.

I went onto comment on the press release that frankly we were very pleased as we look at the significant global economic downturn, that our company was able to meet its revised 2008 earnings share guidance with full-year '08 financial results of $4 per fully diluted share on sales of $680 million. Perhaps as important as our income statement in this economic environment is our strong year-end balance sheet. With cash and cash equivalents and short-term investments of $221.4 million with over $8 per share in cash and cash equivalents and short-term investments, and a book value over $23 per share, we are very comfortable in our ability to continue to invest in our future, take advantage of acquisitions, which we perceived as targets of opportunity and maintain our strong liquidity position in an uncertain global economy.

I went onto say because of the interest and our dependence on body armor that although as of today, we have not received the XSAPI production armor order, we have received the draft of the amended production request for quotation, and believe the orders will be released later in Q1 or early Q2 2009. Those related XSAPI sets are expected to be delivered in full in calendar 2009. However, Ceradyne is concerned about the delays in armor orders, as well as what we view as uncertainty in our industrial markets particularly our European markets headed by ESK Ceramics in Kempten, Germany. Therefore, because the situation is unclear, we believe it is advisable to revise the 2009 guidance we provided in December of '08 of $2.30 per fully diluted share on sales of approximately $600 million.

We now feel that our guidance forward would create a range of sales of $465 million to $500 million with earnings of a $1.60 to $2 per fully diluted shares. Because of our outlook particularly for the solar industry, I pointed out that we have recently committed to the acquisition of an additional 13.7 acres in Tianjin, China, on which we plan to build a production plant of approximately 200,000 square feet for the production of our ceramic crucibles used in the manufacturing of polysilicon photovoltaic solar cells.

We anticipate that we will spend about $22 million on this state-of-the-art factory, which will include our proprietary pre-coating technology. Although, we expect a modest increase in solar demand early in 2009, we believe the combination of lower cost silicon, worldwide demand for clean alternative energy, and U.S. and other countries subsidies and stimulus investments will result in an improving 2009 picture and robust 2010 demand. Our newest factory will be located near our current Tianjin factory and is expected to be up and running later this year.

I concluded saying that we are aware of the uncertainties, the current global economy is presenting. In the short run, we intend to bring our costs and headcount into line with actual sales. However, we will continue to invest in the future while preserving our strong cash and liquidity position. You will have to excuse me, I have a very bad cold, I thought I was doing pretty well till the end.

Jerry would you like to review some of financial numbers.

Jerrold J. Pellizzon

Sure Joel. Good morning to everybody in the call. The trend that, the revenue diversification trend that started in Q3 '07 continued we saw a decline of body armor while we picked up, in our non-defense business. Body armor, overall sales for the year ended up at 680 nearly and a decline of about $76 million, most of that decline was in the ceramic body armor. We did see a growth of our non-industrial based or I am sorry, our non-defense base to $261 million of sale in 2008 versus $197 million in 2007 for a growth rate of 32.7%. So, we've been moving our concentration over to non-defense and we continued that trend and that trend will continue we believe in 2009.

We did get contributions from our acquisitions in '08, the difference there, the additive sales were $26 million, a pickup in '08 versus '07 for those acquisitions that we made in '07. Of course '07 there were partial years for Boron and partial years for Minco. We continue to see growth in our ceramic crucible business that was another area of growth during the year. Durable itself grew by $44 million in the year to $75 million overall, 16 of that was from, including Minco but about 25 of that alone was from a growth of ceramic crucibles.

Boron products had growth of $10 million and that again because it was partial year in '07, but that trend continues. The key for us in this economy is free cash flow and we are going to continue to produce that in '09, we can go over that as the questions develop, but I think that's important we've got a very, very stable balance sheet. We are continuing to liquify it via programs to reduce our inventories commensurate with the reduction in the guidance that we have given for revenues. So, I think the trends continue, we are generating as I said the free cash flows is important to our balance sheet and we are looking forward to another good year in '09. Joel?

Joel P. Moskowitz

Thanks Jerry. Kristy, I think the most effective way to use our time is to go right into the Q&A. And that will bring out some of the questions I believe the callers have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Michael Lu of ThinkEquity.

Michael Lu – ThinkEquity Partners LLC

Thank you for taking my questions here, Jerry you would, excuse me, like you all, I am also bad on the cold here. Jerry, you mentioned producing free cash flow in 2009 could you elaborate a bit more on that and what is the target level for the year?

Jerrold J. Pellizzon

We have the CapEx for the year is dominated by our expansion into China, we looked at an overall plan of [$45 million] of CapEx and about half of that is dedicated just to expanding to a new facility in China. So, we are expanding our capacity there to produce ceramic crucibles. So, we got $45 million of depreciation forecasted and our depreciation and amortization is 36 for the year. So, we got about a $10 million difference between the two and if you take the $1.65 or the $2 per share you've got free cash flow between $32 million and $42 million for the year. So, that's the free cash flow, now that's without the impact of any working capital and we do think that we are going to see reductions in inventory and receivable balances commensurate with the a slightly contracted business activity and business level.

Michael Lu – ThinkEquity Partners LLC

All right, great and also I want to switch gears thereof, you've talked about the delays in the defense orders, but assuming the current economic environment holds and the current year outlook holds.

Joel P. Moskowitz

Yeah.

Michael Lu – ThinkEquity Partners LLC

Do you see a cross over by year-end, where non-defense drives 50% of revenues?

Joel P. Moskowitz

It's a possibility, the reason that we used the [verbiance] we did in the XSAPI, the revised RFQ say that they want the product, the XSAPI all in eight months. So, even if it gets delayed a little further say into April, we will be able to put all of that out in 2009. So, I would say that right now, our projections of about a 50:50 mix for '09 most likely will stand up.

Michael Lu – ThinkEquity Partners LLC

Okay. Next I have one last question and I will hop back in queue, it seems like obviously there I the increased use of nuclear energy and there is a lot of increased discussed and, pickup in momentum, could you talk about the waste containment in Boron business, has there been a pickup in demand or increase recently given the more frequent discussions on nuclear energy use?

David P. Reed

Yeah. This is Dave Reed. Let me answer that Michael. We have continued on all of the programs on the nuclear out of our Canadian operations those are very long term plans as, and we are starting to see much more of an increase in the level of interest in the nuclear plants going forward. So, both in the U.S. and in the international scene, we see that there is a commitment to those plans and we're starting to bid on some of that longer-term business. The short-term is not that large of a market, it's starting to develop so I think we're in for about the level we had talked about recently and we see an increase in that business probably starting in about three years out, where we are going to really get much more traction out of our Canadian plant and also out of some of the chemicals that come out of Boron.

Michael Lu – ThinkEquity Partners LLC

Okay, thank you.

Operator

Your next question comes from the line of Al Kaschalk of Wedbush Morgan.

Al Kaschalk – Wedbush Morgan

Hi.

David P. Reed

Hi Al.

Al Kaschalk – Wedbush Morgan

David I wanted to maybe just for yourself and Joel. As you look at the XSAPI and the comments that you hope 2009 you can do all of the production or all of the deliveries that could be forthcoming. How do you balance the cost side of the equation what your anticipation here in the guidance that you gave, do we need a certain volume, a 120,000 sets and you're, for a share of that, how do you balance the forthcoming supply or the order and the current cost structure, which certainly sounds like maybe you're in the midst of evaluating how to reduce that a little bit. So, I am struggling a little bit with the delays you're very hopeful that you can get the share you had in years passed, but to talk a little bit about the balance between supply and your cost.

David P. Reed

Sure, Al. As Joel said we did receive a draft request for proposal and we responded to that last week that draft implies that the number one criteria for award is first going to be sustained in the industrial base and then probably the second would be pricing. Now, we feel that we are in very good position to maintain our large share and, your question about the cost structure all the numbers that Jerry has given you are based on that reduced level of participation on the XSAPI program. So, we have downscaled our operations. Last year we made significant reductions in our employees on the body armor side of the business both in the March-April time period, when the stretch out began and again in the fall, we have further plans to reduce that slightly at the beginning of the second quarter. Right now we have a fairly good level of business, we are making some foreign military sales of the XSAPI old style insert design. So, I think we are in very good shape, we have a well-run machine in both the hot press and the assembly area, Al and the cost are well under control. As Jerry said, one of the goals there we will try to reduce some of the inventory we have in our graphite tooling and in some the backing material that we have and that will be commensurate with the lower level of business going forward. So, that our gross margin should still hold up pretty well.

Joel P. Moskowitz

Al, let me just add that to clear off any confusion I mean in the numbers we focus a lot obviously on XSAPI, but we do have a, a less of the business of armor also in our numbers, XSAPI represents about 38% of total body armor numbers. So, when you go into cost structure, we've got other programs that cover our fixed expenses. So, I think that's a help also.

Al Kaschalk – Wedbush Morgan

Good point. The other part of follow-up as well as, is on the mix of business of the transition, is the 50:50 sort of a stated targeted or for '09 and if so is that a function of defense or ACO falling down a little bit because of the reduced volumes, in another words if ESK is struggling a little bit on the European side because of the global economy situation what's going to help either lift the non-defense business to get it to 50:50 or is it really just the defense is falling down that much more?

Joel P. Moskowitz

Well right now regarding our strategy we've said for several, when we talked about longer rating strategy that we anticipated and we are shooting for a company that was approximately 50:50 defense and non-defense. And as things had evolved with the market, one even with these numbers we see the market for armor reduced to its current level and of course that just reduced it in getting closer to the 50:50 and then as you just add the ESK is going to have a weak year in '09, and so that kind of brings both into line with the revised guidance that we gave. Regarding your question of the non-defense area, the area that I believe as of this minute is about as exciting as it's ever been with some of the negative press is the solar energy, a scenario that we have what we believe is a proprietary product, which is the purity of the fused silica remember we bought the company that made the raw materials Minco in Tennessee about two years ago that's been a terrific acquisition. So, we have the capacity we have the purity and now based on the German R&D efforts the real example of working together and integration they are the ones who developed this coating, so that when the melt the silicon to make the photovoltaic solar cells, the silicon adjust for that crucible as clean as the [LPAS] and that's so terribly important we also have reports recently as this week, which maybe displayed in Munich in solar convention in a few weeks that the use of our crucibles actually enhances the efficiency, which is a big deal because it doesn't cost the manufacturer any more money and they get a better product. So, how material is this, the next question I think we will have about 70 million or so in shipments of solar crucibles this year, which is up significant (Audio Disturbance). And you may have seen it out, there was a report from a research firm recently that they specifically said our type of crucibles they were projecting I think by 2013 or 2015, a market of $1.1 billion, if we maintain our market share that that product alone will be hundreds of million of dollars at good profit margins. So, that's a potential breakdown, the other one that I haven't mentioned today because its still in the very earlier stages is the use of our titanium diboride for the replacement of carbon in the wire pulled the [holder old] cells versus smelting aluminum that is very encouraging to us I think there will be some delays because the aluminium industry is struggling widely now because of the worldwide decline in commodities, but we are getting very good technical results, and we are getting orders. So, that is one of the program it's the only program that I think eventually could be a $1 billion for Ceradyne.

Al Kaschalk – Wedbush Morgan

Thanks a lot. I'll hop back in queue.

Joel P. Moskowitz

Okay.

Operator

Your next question comes from the line of Gary Liebowitz of Wachovia Securities.

Gary Liebowitz – Wachovia Securities

Good morning gentlemen.

Joel P. Moskowitz

Hi Gary.

Gary Liebowitz – Wachovia Securities

Jerry can you mentioned XSAPI would be 38% of body armor sales in '09 and Joel just mentioned the solar markets, can you just go over the other large chunks of the business namely the side plates and ESK expectations in terms revenue?

Jerrold J. Pellizzon

Well, ESK we most recently took down pre-elimination, we have it at about a $110 million post we have it at about $87 million. Our total Thermo business should be about $85 million, Boron should come in about $22 million, OPD is going to stay pretty consistent with where it is, and our commercial sector is probably flat right now. Those were the major items that we are seeing.

Gary Liebowitz – Wachovia Securities

Okay. And what about the side plates' expectations did that make up the bulk of the balance of the body armor sales?

Jerrold J. Pellizzon

Well that's really the difference between the somewhat the difference between the high end and low end of guidance.

Gary Liebowitz – Wachovia Securities

So, okay, I understand. And then also another follow-up question on XSAPI, Joe you mentioned that you were specifically concerned about the delays in that contract if the GAO does sustain the protest that its currently reviewing what is that due to the timeline?

Jerrold J. Pellizzon

Let me answer that Gary. So far the GAO has not put any stop work based on that protest and we believe that protest is so kind of out of left wheel that they will not they have had a chance to look at that for almost two weeks now and have not. So, we don’t think that’s going to occur, we suspect that the request for quote will come out the former one very soon, and we feel that we are in very good position, as you know we passed all of our first article testing, and recently we have passed with flying colors all of our lock testing on that first delivery order that we had with the government. So, we feel that we are in very good position to respond to that request for quote.

Gary Liebowitz – Wachovia Securities

I understand but do you think the, the Inspector Generals report that came out in January supports some of the assertions that the, this protesting is putting forth?

David P. Reed

Not at all Gary because the protest talks about a period that was just incurred and all of that testing was done at a government certified laboratory that has a phenomenal set of equipment on-site unlike anywhere I have ever seen and the Inspector General report talked about testing that was done two and three years ago so the two don’t match at all and that's really why there has been no stop work as far as I can see.

Gary Liebowitz – Wachovia Securities

Okay. Thank you.

Operator

Your next question comes from the line of Tim Quillin of Stephens Incorporated.

Timothy Quillin – Stephens Inc.

Good morning.

Joel P. Moskowitz

Good morning, Tim.

Timothy Quillin – Stephens Inc.

You've given us a lot of numbers and I can probably go thorough the transcripts and piece this together, but I am just trying to figure out exactly about how you are thinking about body armor in the guidance presumably, if defense is roughly half of revenue then maybe body armor is a little bit lower than that I mean are you thinking body armor comes in about 200 million in revenue?

Joel P. Moskowitz

Well remember we've given a pretty wide spread there, and its between 230 and 260.

Timothy Quillin – Stephens Inc.

230 and 260 and the delta between 230 and 260 is primarily side plates and…

Jerrold J. Pellizzon

Let's say that the body armor more is inline of 200 to possibly the 230 out that number I think Joel included vehicle and flat armor so to just to keep it clear U.S. body armor and that's I think where the confusion is so we are talking about body armor.

Timothy Quillin – Stephens Inc.

Okay so body armor is 200 and 230?

Jerrold J. Pellizzon

Right.

Timothy Quillin – Stephens Inc.

Okay. And the delta between 200 and 230 is side plates?

Jerrold J. Pellizzon

Pretty much.

Timothy Quillin – Stephens Inc.

So, is the higher number presumed that there is an X version of side plates and where are we in that process?

Jerrold J. Pellizzon

Well we're working with the government they're working on their specs for that plate as the prior question brought to everybody's attention the government has been very preoccupied with the Inspector General reports and having to testify and defend themselves against that so some of these other programs have gone a little slower than we had anticipated, but it seems like that fear is over now and that they getting back to really doing every day task. So, we expect to see something late this quarter early next quarter.

Timothy Quillin – Stephens Inc.

Okay fair. And then just last question with regards to XSAPI so I understand that this initial order will be delivered all in 2009, and then what's next for 2010. Do you have to get the weight lower before you get additional orders or how are you thinking about 2010 at this point? Thank you.

Jerrold J. Pellizzon

Yeah. We're probably thinking in 2010 that the weight probably has to be lower as everyone's heard there has been real concern with total weight that (Audio Disturbance) occurring. I think most people are familiar they took about 3 pounds out of, improved out of factory [consensus] the increase in weight is about a little under two pounds for the XSAPI suite of chest protectors and side protectors. So, it still be a net lessening of weight, but they don't really want to take on any more weight after getting rid of sound. So, we think that's the challenging for going forward is to take some more weight out of that system and that's where the bulk of our R&D money will be spent in body armor this year.

Timothy Quillin – Stephens Inc.

Okay. And how achievable is that?

David P. Reed

Well it’s a difficult task, but we have been working on it for the past year and half and we are encouraged that we will be able to move in that direction.

Timothy Quillin – Stephens Inc.

Thank you.

Operator

Your next question comes from the line of Josephine Millward.

Josephine Millward – Stanford Group Company

Good morning.

Joel P. Moskowitz

Good morning, Josephine.

Josephine Millward – Stanford Group Company

Good morning, Joel. I just have a follow-up question on XSAPI, if you receive the XSAPI awarding in late Q1 or early Q2, will you be able to start delivery in April?

David P. Reed

Yes. Absolutely, as I said earlier we have already built a 1000 sets of that very successfully had no issues in manufacturing. We actually have an inventory of ceramic plates ready to go and we have been running at low rate production right now to keep that process tuned up for us. So, don't see any problem, have all the raw material in place to go and as soon as we get the order we are going straight ahead.

Josephine Millward – Stanford Group Company

That's great. And in your guidance, what type of market share are you assuming in the first 120,000 sets of XSAPI?

David P. Reed

Well we are hopeful that we will maintain at least what we had in the past, there is an opportunity to do a little may be based on industrial based sustainment level that you are talking about. So, we are hopeful that we will be somewhere in that 60% to 70% range.

Jerrold J. Pellizzon

And Josephine since you asked the question about, when we could start body armor, I think its appropriate to point out that the first quarter of 2009 as part of our earnings goal, we would only estimate that we are going to come in at the $0.25 to $0.30 and then we will make up the rest of if we get to our guidance with the balance of three quarters. So, first quarter probably $0.25 to $0.30 is a respectable guidance number at this point.

Josephine Millward – Stanford Group Company

That's very helpful thank you.

Jerrold J. Pellizzon

You're welcome.

Operator

Your next question comes from the line of Michael French of Morgan Joseph.

Michael French – Morgan Joseph & Co.

Good morning gentlemen.

Jerrold J. Pellizzon

Good morning.

Michael French – Morgan Joseph & Co.

Another follow-up there on XSAPI, getting any better sense from the customer, what they're thinking longer term since, whether they would go peer fully like they did in previous versions or whether, they will think their latency in try to get some thing lighter and then maybe do it peer fully or and then the second part is it, there is a delta here or a drop off with body armor here in the U.S., you mentioned foreign military sales of the older [SAPI] products and if could discuss what opportunities might be out there under FMS?

Jerrold J. Pellizzon

Well the FMS let me address that first Michael that one is very difficult to predict there is an open line of communication now between the U.S. government and most of our allies this product has been made available to them and all these independent countries have to make the decision how they're going to spend the money. So, it's very hard for us to see that going forward, we check with the contracting officer and right now the second quarter to third quarter, we don't seen any large further releases, but that could change. So, that was a little hard to recall, if you get back to the long-term for the U.S. Military, no matter how you look at it Michael, you can't change the fact there. We as a nation have bought over 20 million rounds of the extract, we use it everyday in our automatic machine guns, there isn't finally fire issue in theatre and it's only a matter of time before the enemy starts using that as a sniper round. It's available now worldwide, its in naval forces right now, but when you have millions of rounds in the theatre, it's going to find its way into the bad guys hands. So, we see long-term that the army will have to more some kind of X protection or else we'll have friendly fire casualties and eventually we'll have sniper round issues. So, we think that the government as a minimum at some point will begin transitioning all replacement plates to be an X version so that they can pickup that protection going forward and long-term that will result in a transition of the fleet from the ESAPI protection to an X level of protection. Now, weight is the big issue and that's the challenge for this year we need to get at least some of the weight out of that system and get it down closer to the ESAPI weight and that's going to be the goal.

Michael French – Morgan Joseph & Co.

Okay, thank you. And to follow-up, I would like to ask about vehicle side, have there been any developments in the last quarter you care to discuss?

Joel P. Moskowitz

Marc.

Marc King

Hi, Michael.

Michael French – Morgan Joseph & Co.

Hi Marc.

Marc King

There have been a number of things going on. I have to again, you have to allow me to calculate and comment in somewhat in generalities because of the agreements that we have with the companies that we work with and their competitive position in these opportunities, but we have been very, very active recently you might have noticed for example just this morning was an announcement on the release of the MA TV, two awards made, we are very active with one of those awardees as a major subcontractor, as one of those awardees for some of the component that will go into that vehicle. So, we are anxious to see how they do in there it's Aberdeen, to their vehicles were delivered to Aberdeen for ongoing testing. We have other opportunities with another light weight system that was shown here recently publicly that's of interest to Cercom, this is an old ceramic system, I am pleased to say very light weight armor application that now is going to move to the next level, we hope to see the vehicle deploy into our rack in the coming months for further valuation and hopefully move from there to production. We are, our LPAS have successfully been evaluated in a long-term durability study with the OEM, completed 20,000 miles of testing it did very well and we moved onto the next level with additional orders for that system and it's moving into the next phase of testing with the government and the OEM. But, like I said the number of things going on most of them are long-term opportunities we have several additional closed out with programs with Marine Corp. for the other things for the army. So, we are very optimistic that that 2009 is looking pretty good for vehicle armor opportunities.

Michael French – Morgan Joseph & Co.

Okay. Thank you and good luck.

Operator:

Your next question comes from the line of [David Kaizer] of Robotti & Company.

David Kaizer – Robotti & Company

Hi. Good morning guys.

Joel P. Moskowitz

Good morning.

David Kaizer – Robotti & Company

Excuse me, Joel. I have a little bit of the cold also, I am sorry not feeling well. On the solar side of the business, are you seeing starting to see pricing pressures or margin pressures at all and if so how are you handling that.

Joel P. Moskowitz

In December, we saw a significant pressure on pricing in China and we met the competition because we don’t want to loose market share. Outside of China we have been able to maintain our pricing, it seems the Europeans particularly are more launch recognized with differential between our products and our competitors. We still do not have a majority of that business, although our market share have been increasing. As far as the margins go, they're quite good even with the price reduction, we are very efficient and everything we have done particularly in China and more recently in the Atlanta, Georgia is the most modern automated equipment.

David Kaizer – Robotti & Company

And what's the difference in market share in Europe and China. Where do you sell most of your products?

Joel P. Moskowitz

I can't answer that directly, I just don't know those numbers. And I don't have the documents in front of me.

David Kaizer – Robotti & Company

Okay.

Joel P. Moskowitz

I know that everything we make in China, we are selling into China right now with a new factory it will be big enough that I would expect that we will exporting at least into Southeast Asia. In the United States, we probably have a very high percentage.

David Kaizer – Robotti & Company

Okay. Thank you guys.

Operator

Your next question comes from the line of Alan Robinson of RBC.

Alan Robinson – RBC Capital Markets

Good morning and thank you for taking my question. Just to follow on from the previous question slightly could you give us an idea of the approximate capacity utilization of your current solar crucible manufacturing operations in China and elsewhere?

Joel P. Moskowitz

Yeah. I can give you some generalizations on that we are expecting to ship probably about $70 million this year of crucibles of which it would be kind of half-and-half we are currently putting in even without this internal expansions because we need special handling equipment for our new proprietary coding. And so it changes all the time, right now there, it's about a 50% split. As far as capacity utilization right now we're probably well in excess of 90%, while that continues in order to a question mark it seems to, the solar industry if you read all of the analysts and the reports has a lot of difficulties, but they don't really affect Ceradyne, the fact that the price of silicon has come down from $400 to say $150 a kilo, it can affect people who make silicon, the prior the fact that there are so many smaller players some of whom probably won’t survive does not affect Ceradyne. What affects Ceradyne is the number of solar cells, which you can interpret as the number of gigawatts being produced and right now we're seeing a pretty good demand.

Alan Robinson – RBC Capital Markets

I understand that's an useful perspective. Thank you. And then just as I say my second question could you discuss any opportunities you have to expand your armor sales beyond the U.S. military customers you currently have?

Joel P. Moskowitz

Yes, I'll take that even though, but Dave could answer it probably better. Compared to the United States, foreign military sales generally have to be looked on as more or less first thing on the K, the number pay out and also the United States always at least in the armor has been way ahead of everybody else. We see the market advancing it's not insignificant, we will ship right now, we have about $41 million of orders on the books, order that we got not from outside of the United States, but from the U.S. that will be shipped to our friends and that's not insignificant, most of it is of the early SAPI, on the other hand because of our presence in Germany and because some of their soldiers had been killed in Iraq not so long ago there seems to be a significant movement to increase or not, even to begin to use our XSAPI design, we would make that in Germany, but to keep it in perspective. if we got the business they're projecting, which we anticipate it would be less than one month production for us.

Alan Robinson – RBC Capital Markets

Okay. Thank you. I will step back in line.

Operator

Your next question comes from the line of Gary Liebowitz of Wachovia Securities.

Gary Liebowitz – Wachovia Securities

Thanks. Dave you can remind us the side plate production, how long does the current contract take you out through and when would you need to receive in order to keep that line hot?

David P. Reed

The current contract has ended, we completed all of the deliverables on that contract, in the end of December and so our line is actually continuing to be hot, because we are making the FMS products at this point. So, we are looking to transition into that hopefully in the late second quarter after we down the FMS orders.

Gary Liebowitz – Wachovia Securities

Okay. And then the other question I have for Jerry, ESK you gave a number of a $110 million, when we think about the fixed cost in that business, I mean how profitable can that business be at that level of volume?

Jerrold J. Pellizzon

Well, I think, in this economy Gary, we are working hard to make sure that they sustain a profit, we are getting close to break-even on that. We really are thinking free cash flow, but we are working hard to reduce cost there, it's going to take a little longer than it would I think in the United States but nevertheless we are in a mode to reduce costs there to make it commensurate with the level of business. So, we'll be working hard to reduce cost there I think that's the order of the day, but we are looking at free cash flow and it will produce free cash flow there this year.

Gary Liebowitz – Wachovia Securities

And if you plan on bringing headcount down consistent with sales volume I mean that would imply rather significant number of lay-offs so I mean is there were severance assumption built into the guidance?

Jerrold J. Pellizzon

There is a slight amount of severance that we have included in the guidance, yes.

Gary Liebowitz – Wachovia Securities

Can you quantify that?

Joel P. Moskowitz

We're working on a number of programs now we've already reduced headcount here, we may go further we've gone through the process. In Europe we're taking advantage of what they call reduced hours with the German government actually subsidizes up to 18 months for reductions and pays about 67% or so for that period. The real question will be depending on what we do with certain facilities.

Gary Liebowitz – Wachovia Securities

In Europe?

Joel P. Moskowitz

In Europe, to answer your question little more forward I'd be very happy if they broke it even this year.

Gary Liebowitz – Wachovia Securities

Thanks Joe.

Joel P. Moskowitz

Okay.

Operator

There are no further questions at this time.

Joel P. Moskowitz

Okay I think we'll, now that I can talk again. We'll end this conference call. I appreciate everybody's good questions, the people on the phone are quite knowledgeable, it's a moving target some of these things we try to do our best and bring it in a timely manner Jerry and I are actually going to Europe in March, and we're going to take a real hard look at headcounts and certain operations. On the other hand as they developed a series of new products and we are not going to do anything until less than that. We are going to continue to look at preserving our cash, we are not going to be afraid to spend as we've announced in China. We are going to continue some stock buyback nobody ask that question, but it still, how much left Jerry on that?

Jerrold J. Pellizzon

$55 million

Joel P. Moskowitz

We still have $55 million that's been authorized, and we are going to take a look at that after we get out of our quiet period. So, listen thanks a lot, we are working hard on this, we are not looking at into the Pollyanna and our position particularly in Europe is to assume whatever you think we are now assume it's going to get better for at least three quarters, and we are going to go on that move. So, thanks again and we will talk to you in about 90-days. Thanks.

Operator

This concludes today's conference call. You may now disconnect.

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