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Executives

Joel Moskowitz - Chairman and CEO

Jerry Pellizzon - CFO

David Reed - President of North American Operations

Marc King - President of Ceradyne Armor System

Michael Kraft - VP of Nuclear and Semiconductor Business Units

Analysts

Gary Liebowitz - Wells Fargo Securities

Josephine Millward - Dougherty

Avinash Kant - D.A. Davidson

Tim Quillin - Stephens Incorporate

Michael Lewitt - ThinkEquity

Michael French - Morgan Joseph

Jim Ricchiuti - Needham & Company

Ceradyne Inc. (CRDN) Q3 2009 Earnings Call October 28, 2009 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Ceradyne’s Third Quarter 2009 Conference Call. This conference is being recorded today, October 27, 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 on the call an opportunity to participate.

Hosting the call today is Joel Moskowitz, Ceradyne’s Chairman and Chief Executive Officer; with him are David Reed, President of North American Operations; Jerry Pellizzon, Chief Financial Officer; Marc King, President of Ceradyne Armor System and Michael Kraft, Vice President of Nuclear and Semiconductor Business Units.

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, 2008 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 Moskowitz

Thank you, Rachael and good morning everyone and now we appreciate you dialing in for our third quarter Ceradyne earnings conference and there will be a bit different today I'm not at the office with the executives. I'm at home. I had some successful surgery on my left hip on last Tuesday. It was very similar to what I did in March on my right hip and I expect that I'll be back in the office sometime by late next week but I'm kind of walk my feet for a little while but things are going fine.

And I wanted to continue with our routine of these conference calls in an orderly manner since Jerry and his staff always works so hard to get the numbers together and file the 10-Q.

Our shipments for the quarter or sales were a $108 million that compared to about a $168 million a year ago and the net income was $4.9 million or $0.19 per fully diluted share. And that compared to $1.8 million which it compared to $0.07 a year ago. And we announced that we're adjusting our guidance for the full year 2009 from $0.70 per fully diluted share to about $0.60 per fully diluted shares that's for 2009 from sales of $420 million that will now be $410 million to $415 million. And the forward-looking estimate that we are providing for fully diluted earnings per share does not include the impact of the total restructured and impairment pre-tax charges for all of 2009, which are estimated to be above $0.55 per fully diluted share.

We then describe the gross profit margin at 26.5% in the third quarter of ’09 that compares to 39.7% in the same period in ’'08, and the provision for income taxes was 22.4% which compares to a provision for income taxes of 36.1% in the same period in ’08. For the nine months, our shipments were $303 million that compared to $541.3 million last year with a loss for the nine months ending September 30, 2009 of $5.6 million or $0.22 per fully diluted share.

The loss included charges for restructuring and impairment that had a negative impact by reducing fully diluted earnings per share, by approximately $0.51, for the nine months ended September 30, 2009. The charges for restructuring and impairment totaled $17.3 million during the nine months ended September 30, 2009, which included a pre-tax $11.9 million restructuring charge, due to the closure of our plant in France and other severance expenses, a non-cash pre-tax impairment charge of $3.8 million to write down the value of goodwill, of our Ceradyne Canada reporting structure, and to reflect the current industry and economic environment as well as accelerated depreciation of $1.6 million resulting from a revision of the estimated useful wise of certain assets.

The gross profit margin for the nine months was 24.8% of net sales that compared to 39.5% last year. The provision for income taxes was 9.7% in the nine months and that compared to 36.2% in ’''08.

New orders for the three months ended September 30th, ‘09 were $100.5 million that compared to $119.4 million for the same period last year. For the nine months ending September 30th new orders were $330.6 million that compared to $476.6 million for the comparable period last year.

Our backlog, as of September 30th, ’09, was $156.3 million compared to a totaled backlog in ‘08 at September 30th of $174.9 million. Now, that describes the third quarter and the nine months. I went on to explain that the company continues to move in a direction that we’ve discussed multiple times, that is, a balanced company right now.

We have about 52% of our sales both in the quarter and for the year-to-date on a non-defense, I mean in defense areas, that’s down from well over 85% in prior periods, prior years. And that we see significant opportunities in this non-defense sectors for growth, particularly in solar energy, aluminum smelting, oil & gas drilling and certain naval entirely new applications of our materials used in the manufacturing of glass and automotive related components.

Having said that, the lightweight ceramic armor business which declined as a share we believe next year we will be approaching a sustainable rate in the various areas that we are involved in for our body armor and other armor products and that we see additional opportunities particularly in body armor for a newer design for our new shipments to our allies which have been almost non-existent until what we anticipate will be 2010 activity for vehicle armor components and potentially a new business for our recently acquired helmet operation.

We also most recently have had major discussions in China relating primarily to aluminum smelting and the Chinese market which is extremely active in this area perhaps one of the most active.

Specifically, I went on to point out that our Ceradyne bearing technologies group had just finished our first fully successful drilling through a difficult Texas formation and what that meant was that we put the bid end our customer bid and it went for a 160 hours without ever removing it until it reached its final projected depth of penetration.

And we believe that this is extremely successful and unusual based on input from our customer and it will be the beginning of a series of proprietary bearing products for oil and gas drilling.

I had mentioned before, our work on a new type of a filter or separator in the North Sea and that’s being performed by our German operation ESK Ceramics. That’s going along very well we’ve received our first orders and we expect to have [parts] in the water in the North Sea, probably early in 2010.

While we haven’t talked too much about and we won’t go into details, is that we have some new opportunities for new compositions of theoretically done [softer] ceramics in the order of real industry not for parts regards, but for machines and make parts regards. And you’ll hear more about that as we get further along in our development.

The aluminum smelting which we’ve been talking about for years now is showing a little bit signs of life, not only in the opportunities for future business which is in China and other places, but also with our work in Canada, where we’ve only recently received a multi-million dollar release on some material for the [sales].

As far as the large order that some of you are knowledgeable about that we bid on the enhanced combat helmet, the ECH with Diaphorm. The Marines have asked for additional work to be done on that and which we will do and we’re still quite optimistic on our product line. However where I think last time we saw it, an order might be placed really right now, it appears that it will be sometime early in 2010.

Now, we have a wide range of guidance. We often report by the end of the prior year like right now on what we see for the following year and we have an extensive process by which our people produce their projections by customer and product and timeline. And there’s a wide range and so we are projecting that range for next year of $380 million to $430 million in sales, and with earnings resulting from that of $0.60 to $1.05 per fully diluted shares assuming we have about $25.8 million shares outstanding in an annual tax rate of 31%.

Now that concluded the tax part of the press release which was issued a few hours before we open this morning and as we’ve done in the past, I’m going to ask Jerry Pellizzon to review the tables of the balance sheet and income statement. Jerry?

Jerry Pellizzon

Thank you Joel. Good morning everybody. There’s a note we filed our Form-10Q with the SEC earlier this morning, good history this quarter that we saw [11.5] of our business at obviously lower levels when compared to 2008, yet the order rates on a demand levels have stabilized. So basically, if you look at the difference between the two periods of the quarter of ‘09 versus the third quarter of ‘08, we had a reduction in sales of $60 million and it was really centralized in armor components being body armor and vehicle armor are been [off] by $50 million and then ESK been $10 million representing a $60 million roughly, the rest of the business is relatively flat.

So we've seen that the order book has stabilized and we are making recovery at ESK in terms of turning that operation around.

In terms of some additional color free cash flow which we define as net income plus depreciation and amortization less capital expenditures and including the impact of changes in working capital for the three months ended September 30, or the third quarter was $23 million versus $34 million in the comparable period last year.

For the nine months, our free cash flow was $35 million versus $91 million in the comparable period last year. EBITDA was $17 million in the third quarter compared to $43 million in the same period last year and for the nine months we have an EBITDA of $17 million versus a $156 million in a comparable period last year.

CapEx year-to-date has amounted to $13.6 million compared $36 million last year and our depreciation was running at about $9.4 million compared to $12.1 million during the third quarter of last year. Some additional color on the guidance, we had a wide range there and it's basically in three areas. We have a range of about $30 million in our body armor business, are for programs that on a conservative basis we didn’t get a high end into the low end or to be conservatively the low end is down by $30 million. On vehicle armor, we're anticipating about $27 million on the high end and $20 million on the low end, so a $7 million difference there.

And then on the helmet business, we are anticipated on the high end of about $23 million, $24 million and on the low end $12 million. So that is primarily the difference between the high end of the revenue and the low end of the revenue and that then of course falls into our earnings per share guidance to adjusted down to that level of $0.60 to $1.5.

We are encouraged about ’10; we continue to have available cash flow to acquire additional bonds that we own bonds that are outstanding our convert. And from time to time we still have about $50 million and authorization of purchase stock.

During the quarter we purchased about $3.4 million of our converts or about $2.8 million unfortunately the convert has gone up and valued to about $0.93, $0.94 on a dollar we were buying it in the low 80s in the second and the third quarter.

Okay, back to you Joel.

Joel Moskowitz

Okay. I think that because we are all spread out best thing would be to go right into the questions and answers. So Rachel if you could put us into Q&A mode.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Gary Liebowitz, with Wells Fargo Securities.

Gary Liebowitz - Wells Fargo Securities

Good morning Jerry. Joel, I think I missed it on the first call I think you said there’s a $30 million range for embedded in the body armor expectations for next year. Could you give the actual numbers?

Joel Moskowitz

David, David why don’t you talk about the armor?

David Reed

Well, the range is $90 million to roughly $120 million in sales for the body armor business.

Gary Liebowitz - Wells Fargo Securities

And Thomas, how much XSAPI (inaudible) is included in that and maybe you can just breakout the larger components of that $90 million to $120 million for us?

David Reed

That ranges has spread out over all of the services. The XSAPI number I think is somewhere what is that Jerry, about $15 million?

Jerry Pellizzon

Yeah. $15 million

David Reed

Around $15 million, that’s the continuation of our existing order. We will complete that order in by the end of February now and then we do not anticipate any further XSAPI pass to that point. The rest of these orders and is composed of some anticipated spare orders through [DSPT] for ESAPI anticipated orders for lighter-weight inserts that we believe will be coming out of the army and possibly the marines for the Afghan [theatre] and the campaign there.

We’ll also be composed of continuing orders from our SOCOM on our multi-year contract where the family of scalable body armor that we supplied to the Special Forces right now. So each of those is somewhere in the somewhere in the $12 million to $18 million range and we also have the opportunity to do continued FMS contracts on the existing contract that we won competitively last year. So, that’s kind of how it breaks down.

Gary Liebowitz - Wells Fargo Securities

Okay. Thanks for the color. I just want to follow-up. You’ve mentioned that you are looking to developing at present ESAPI which is 10% or 15% lighter. How would you evaluate the competitive landscape for a replacement the ESAPI?

David Reed

Well I think, Ceradyne is positioned as well as anybody to provide those lightweight products or whether or not the army decides that they are going to go with a lightweight ESAPI or something lighter at a lesser protective level is uncertain at this point really. But certainly we have as much experience and more than anybody in the ESAPI regiment and I think we can supply a lighter weight ESAPI by at least 10%. So, that’s kind of our goal and that’s what we’ll be offering up for the army.

Operator

Your next question comes from Josephine Millward with Dougherty.

Josephine Millward - Dougherty

Can you give us an update on how much XSAPI you actually shifted during the quarter?

Joel Moskowitz

Sure. Dave, you want to handle that?

David Reed

Yeah, it’s in the queue just give me, you can go on to the next question, I will try and get it out of the queue. We have it in the queue right? I don’t remember at the top of my head the exact number, I will get it….

Josephine Millward - Dougherty

Okay, maybe the other way. Do you feel like, let me rephrase the question. Do you feel I expected our $200 million for body armor for the year?

David Reed

We’re looking at about $180 million.

Josephine Millward - Dougherty

$180 million, okay.

David Reed

Right.

Josephine Millward – Dougherty

So, maybe you can talk about the rest of your business. If your body armor is going from roughly $180 million down to $90 million to a $120 million, can you talk about what other areas you expect to drive growth next year?

David Reed

Jerry, why don’t you a kind of in rough terms review the projections that you sent me yesterday that come up with the sales numbers that we gave, where that comes from.

Jerry Pellizzon

Sure, we’re going to where some of the line items are in terms of the upside we had armor and helmets up from about $3 million this year up to either between the range of $12 million and $24 million next year. And for vehicle armor we planned to do about $14 million this year, we’ll do about anywhere from $20 million to $27 million next year. Additionally in the crucible business, this year we’ll do about $34 million overall on both sides meaning Atlanta and Tianjin and we anticipate next year we’ll do $49 million, so that we are seeing some good growth there.

We see some growth bearing technology business. Basically we’ve got bout, we’ll do about a million this year. Josephine, we should come in around $7 million to $7.4 million next year, so, we are seeing some growth there. And additionally on our police helmet business, we’ll do about $2.5 million this year. We’ll do about $7 million next year. So, that’s primarily the most of the deltas to the sales items.

Josephine Millward – Dougherty

Okay. And then.

Jerry Pellizzon

Overall.

Josephine Millward – Dougherty

I’m sorry, the bearing business. Does that fall under thermal materials, or it is…?

Jerry Pellizzon

Bearing is under the ACL segment.

Josephine Millward – Dougherty

Okay. Also same thing with police helmets then.

Jerry Pellizzon

Correct.

Josephine Millward – Dougherty

Okay. What about your outlook for ESK next year? Can you talk a little bit about what you are seeing out of industrial customers.

Jerry Pellizzon

What we’re seeing, a slight pick up overall our forecast next year is $92 million for ESK. We’re using right now we’re using an FX rate of $140 million on that so we’re little shy on that, might be a little more growth because the FX rates are between the Euro and the Dollar, higher than that. This year we’ll closing in at $85 million. Next year, we’re looking at an EBIT for them of just about break-even and we’re going to continue to work on that throughout the year but that’s the big turnaround from this year of course.

Operator

Your next question comes from Avinash Kant with D.A. Davidson.

Avinash Kant - D.A. Davidson

Questions on the industrial side, of course you’ve been trying to cut cost in Europe. Could you talk a little bit about what has taken longer than what you thought earlier and how would that go from here on?

Jerry Pellizzon

Well, I think that the European operation this year was dominated by the write offs that we had on the French operation. We were losing up to a 150,000 Euros a month earlier this year. So that’s the biggest thing we did and it’s not complete yet. It will be finished in a next few months and then what we plan to do is to move much of that operation to Germany and also we have plans now to incorporate at least a part of that in our new Tianjin, China operation. We’re going to build whenever we give the actual go which probably won’t be till early 2010.

About a 200 to 250,000 square foot facility of which we’re going to put industrial products related to ESK and to about 20% of that, so that will help us be more competitive in the competitive market. In the fluid handling department anecdotally these companies are not bouncing back but they are coming back and their inventories are down so far that we have seen at least a leveling of actually a few up ticks on our fluid handling products and we anticipate that there will be these new product lines anything from the ceramic filters for filtering the oil that I mentioned earlier to chemical reactors and heat exchangers.

In addition we’ve just cut a lot of costs. I mean there are a lot of people who aren’t here right now to right size the company. So, I think that the drive that the last question that Josephine had asked, which was a good one. If you are looking at reducing your shipments by over $80 million yet the truth is that the sales are going to be ball parked the same in the earnings, they are going to be slightly greater, where is it coming from? And it’s coming from the reduction in our costs and some new product lines that have higher margins inherently because they smack of being a proprietary product line.

Avinash Kant - D.A. Davidson

Now also your assumptions at crucibles are going up from ’09 to ’10 roughly some $34 million to $49 million.

Jerry Pellizzon

Right.

Avinash Kant - D.A. Davidson

What kind of ASP assumptions are in there?

Jerry Pellizzon

Well we are assuming that the current pricing structure which had come down by over 30% in China is going remain firm. We have recent information as the market place is beginning to identify that our product is a superior product. That won’t be enough to get us more money but it will be enough to keep what we have and not subject us to continued price reduction.

So, on both these two basic price structures for a jumbo and for the standard we expect them to remain where hey are now, which is not great news because they were much higher a year ago at this time.

Avinash Kant - D.A. Davidson

All right, is the competitor is still cutting pricing?

Jerry Pellizzon

Not that we see right now. This real issues on quality, remember Avinash, if you have a part that doesn’t work accusable, you can lose up to a thousand pounds of silicon and even at the reduced prices, that’s unacceptable.

Operator

Your next question comes from Tim Quillin with Stephens Incorporate.

Tim Quillin - Stephens Incorporate

I just have three quick detailed questions, probably for Jerry. But one is, what tax rate do you expect in fourth quarter and then I think you have taken $0.51in charges to the first nine months, I guess the guidance presumes that you take another $0.04 charge in 4Q, I’m wondering, what is that for? And then just lastly what were your revised CapEx plans for this year and next? Thanks.

Joel Moskowitz

Jerry, why don’t you handle all that question?

Jerry Pellizzon

Sure. On the tax rate for the fourth quarter, we have a little bit of an anomaly, in that we have a release from, according to the provisions the FIN 48 for a tax reserve that we’ve had, it’s a recurring situation every year that’s going to come in with $3 million credit, and now I think overall we are looking at about if you factor that out, you’re looking at about an 18% rate before the $3 million credit. So, that’s the situation with that number in terms of the depreciation and amortization, Tim, next year we’re looking at depreciation and amortization of about $46 million of which $10 million of that is allocated to ACO, $13 million to ESK, $12 million to Thermo and the balance to our Boron segment.

Additionally, the CapEx next year is $48 million and the big pieces of that really is China, where we are going to spend a budget amount of $25.7 million. We’ll close the year out with about $16 million to $17 million to CapEx in 2009 and I think you asked to one other question?

Tim Quillin - Stephens Incorporate

Regarding the 4Q, plan 4Q charge and what that relates to?

Unidentified Company Representative

Oh, sure. The plan Q4 plan charge is the leftover budget amounts from the closure of (inaudible). So, we got about budget amount leftover of about $0.04 per share to round that as a total of $0.55 for the year from the $0.51 we spent so far through the nine months that is September 30th.

Operator

Your next question comes from Michael Lewitt, ThinkEquity.

Michael Lewitt - ThinkEquity

If you could talk about any progress being made like aluminum smelting or drilling in like other cosmetic business?

Unidentified Company Representative

Well. I’ll handle that. On the aluminum smelting, this a program Ceradyne has been working on for quite a long time. Primarily, through it’s ESK operation and the whole essence is to effectively revolutionize the way that you convert bauxite the aluminum oxide portion thereof into aluminum metal which is really a very, very mature process that been done the same way probably about a 100 years and use carbon electrodes and the one on the bottom is called the cathode and our idea is to convert that from carbon to our electrically conductive ceramic called Titanium Diboride and now that would save electricity.

It would probably enhance the life of the cell by years and it may also increase productivity. So, we have been working on that I referred earlier too an order that we recently had multi-million dollar order which was for additional low level production of a customer for that product and I continue to feel particularly now in China as to our staff is that the opportunities in China are quite significant because they are so concerned about electricity not only because it causes pollution but because they don’t have very much.

Even though they are putting on a new coal-fired plant a week and then a new oil-fired plant almost as readily and nuclear power plants but they take a long time up to 10 years. So, if you can save electricity and our cathode for sure saves electricity and has to be looked on very favorably.

If that works out to put it in dollars and cents it could mean 100s of millions or $1 billion to Ceradyne because of the need for this particularly ceramic. So, although it’s taking an extremely long time and our patients (inaudible). I also think is the rationale for going forward is stronger not weaker as time goes on because of the need to reduce electricity reduce cost. The terrific increase in demand for aluminum metal, as well as reducing the cost of electricity which is the major cost by the way in making aluminum.

So that looks very good and on the other areas that you mentioned the cosmetics that’s a very small part of Ceradyne, and the answer is I really don’t know the exact sales numbers. But it’s a very small part of the company it’s less than the percent or so. And we anticipate, it’s kind of a 60% because we’re one of the very few companies who make the material which is called boron nitride. Which is has the same feeling as talc.

Operator

Your next question comes from Michael French with Morgan Joseph.

Michael French - Morgan Joseph

First question on the helmet side the redesign work here. Does this effect the competitive situation at all, you referred anecdotally as everybody has had some issue is that accurate or.

Joel Moskowitz

Why don’t I let Dave, or Mark handle that. Dave why don’t you take it.

Dave Reed

Yeah. I’d be glad, yeah Michael I think you are correct in your assessment, everybody has had some issues that Marines and the Army feel that they should address so we’re actually meeting with them today, to get our final reading on what they would like to see a little different from the first testing of the initial helmets we sent in. And then we anticipate getting them new helmets within the next 45 days or so. And we feel that what we’ve been told and what we’ve seen in the day is not so difficult to correct so we think we’ll be in a very position to give them exactly what they are looking for.

Michael French - Morgan Joseph

Okay, good, and the follow up is on utilization rates that are based on the assumption here your press release mentions body armor had a sustainable level. Just wondering what the rate should be at Costa Mesa and Lexington?

Joel Moskovitz

Dave?

David Reed

Michael, are you referring to the rates of half pricing or just the total?

Michael French - Morgan Joseph

Yes, in half prices.

David Reed

We will probably be doing the majority of our half pricing at Lexington going forward is only minimal support out of the Costa Mesa facility. We continue to make semiconductor materials and (inaudible) materials here and a lot of R&D perk but obviously, going down to a $100 million to $120 million roughly compared to 500. We have five lines so we don’t have to utilize all of those lines to get there. It gives us great surge capability but that’s kind of our plan going forward is to concentrate our efforts out of the Lexington facility and minimize them here to help save some money.

Michael French - Morgan Joseph

All right. Can you give us a ballpark on how much that would save you?

David Reed

I don’t think we rolled that total number but it’s probably several million dollars in total savings when you look at the decreased cost of the inventory that you have to carry and the management team that’s duplicated out here.

Operator

Your next question comes from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti - Needham & Company

Good to hear you Joel. Question regarding new products in 2010, if you put aside ECH for a minute and just is there a way to aggregate some of the new products for instance in the oil and gas market and just give us an idea what that might represent in revenue next year?

Unidentified Company Representative

Well we can do it in a real time basis eliminating what you said the ECH, if we look at the bearings remember Dave told you we did or Jerry did. About it we will do $1 million in change this year and we are looking at $7 million in 2010. Now that market can be a much larger than that, the market for bearing is much larger and it’s somewhere between a $30 million and a $100 million.

So that’s not insignificant, the $1 million certainly was and the $7 million is good and not such a good year but when you get to $30 million or more that becomes a material to Ceradyne Inc. because we should make pretty good margins on that and it uses our proprietary. Remember this is a patented product that uses our silicon carbide, a completely different way of going down haul particularly for slant drilling because when you make the turn not to get too technical you can use a shorter bearing stack and that allows you to make a tighter turn and a lot of good things happen when you do that. So we are working on that, on the filter that I mentioned earlier those are fairly expensive products 100s of 1000s dollars per each line.

There are 100s of lines already installed and they will coming on stream. It’s too early to predict a high number for that because we are not going into the water until probably January but that also would be a very significant opportunity for Ceradyne

A very significant opportunity for Ceradyne. The single largest of course break out will be solar. Solar generally which we’ve done very well in and our plant in China probably has some of the best margins in the company. And it was doing terrific and this year even in not a good year it grew but the margins were down because of reduction in pricing. I mean that could easily increase if you go by the projections on the requirements in megawatts. Over the next four years that could increase five fold and more.

So instead of a $40 million in change we could be looking at during several hundreds of millions. So it’s all the new product lines and of course the out wire is the aluminum smelting. We’ll view in the low millions of dollars this year again in prototypes it will be probably higher than ’09 ’10 because they just need some more prototypes. But this 37,000 all sales in the world and the average replace them every five years and that doesn’t include any growth and there is growth particularly in China. So that just stands by itself that becomes the company if that were successful.

Jim Ricchiuti - Needham & Company

Okay that’s helpful, Joel. And Jerry if I may just question for you as we think about a couple of the expense items going forward, G&A expense and R&D should we assume these kind of levels over the next couple of quarters. Do you anticipate much of a change there?

Jerry Pellizzon

No we don’t anticipate much of a change at all. There maybe some additional follow through dollars on the closure of that, but those are special one time charges of restructuring. But the G&A and R&D should be fairly consistent.

Operator

And your final question comes from Gary Liebowitz with Wells Fargo Security.

Gary Liebowitz - Wells Fargo Security

Jerry, just for next year’s cash flow a follow-up, working capital do you expect that to be a source or a use of cash?

Jerry Pellizzon

Actually, we expect it to be a source but minimally speaking we still have to do some investing in terms of inventory levels at different locations, so we see a slight source only of about $5 million, Gary.

Gary Liebowitz - Wells Fargo Security

And just to be clear even with the lower expectations for body armor sales next year, you’ve essentially completed your restructuring activities, going into the 23?

Jerry Pellizzon

No. We’re still working on them. We’re still working through restructuring activities for ‘10 relative to body armor. We haven’t made any definite conclusions, we got some ideas but we’ll be working through some things later on this quarter and next quarter. And then formulating plans this quarter and implementing them next year.

Gary Liebowitz - Wells Fargo Security

And plus those costs are not included in the outlook because of EPS guys?

Jerry Pellizzon

Well, I think it’s a few things you are talking about. I mean if you’re talking about the cost reduction, they are. If you are talking about anything else with regard to impairment, they’re not. We haven’t decided what to do with certain lines so we haven’t established any impairment yet, and we haven’t determined that, that’s necessary at this point, because we don’t have a definite plan going forward.

Operator

And our next question comes from Josephine Millward with Dougherty.

Josephine Millward - Dougherty

On your last earnings call you talked about maybe roughly $40 million to $45 million for solar crucible in ’09 and I think Jerry just gave us $34 million for the year. Can you talk about what’s changed in your outlook?

Joel Moskowitz

For the year Jerry you said we are going to ship 39 ’09?

Jerry Pellizzon

Yeah. Approximate.

Joel Moskowitz

And what do you have for in ’10 its what 49?

Jerry Pellizzon

Yeah 49.

Josephine Millward - Dougherty

Also Joel you said 39 for some reason I wrote doubt 34. Okay so that’s pretty close enough.

Jerry Pellizzon

Yeah it’s close enough to this discussion.

Josephine Millward – Dougherty

What about this expansion in China. I think the last time we spoke you said you haven’t decided whether to move forward with this expansion yet.

Joel Moskowitz

Right. China is really an interesting situation. The answer to your question is we own the 13.7 acres and we had the plans as recently as last week we had a meeting an international meeting and we approved the plans which now includes like I said earlier about 40 to 50,000 square feet for ESK ceramics and a beautiful entry way so that their customers will feel they are going into a prime European high tech company as well as the solar people who already I believe have that imagine which is the correct image. So the question is when do we go forward? Right now we are planning to break around in January. So, that can change, the industry has been – it’s got a lot of good words for 2010 and years and the real world is right now.

People are worried about 2009, 2009 our customers are, because of the drop up in silicon all a lot of that helps us actually. So I would say right now we going to a break ground early next year, that’s our plan that will only be changed if we see a turn down.

Josephine Millward – Dougherty

That’s good Joel. Can you talk about your largest solar crucible customers is it LDK is the mostly the Asian solar panel makers?

Joel Moskowitz

Well, in China LDK is by far the largest but we have we are dealing with all of them now including (Inaudible) and the other Chinese companies as well as almost every one in the West. Our competitors receive (Inaudible) who actually have more of the business than we do but a lot of that has been in the West. So we are gaining market share in China now, and our customers in general aren’t doing so well because of the drop in pricing and other issues yet. They are expanding very rapidly and the market has been kind to them in my opinion and will continue to be kind meaning they can go to the equity markets. They are expanding there facilities. The government of China is clearly connected to solar energy particularly internally and that’s a lot of Chinese houses that could use solar on their roof and hopefully we would be the ones that will go use the ceramic to melt the silicon

Josephine Millward – Dougherty

Joel I am sure aware LDK has ownership in a Chinese silver crucible company – I mean how does that play into your relationship without LDK and are you concerned about additional pricing competition?

Joel Moskowitz

I am not so concerned about pricing but I am always concerned when our customer has a piece of the action of the competitor which they do. This has been the case by the way for probably two and half years and without mentioning names I stated earlier that quality is very, very important on these products. You just cannot have a failure and we don’t have failures. There is two ways you have failures.

One is a leaker where you have a molten silicon just leaks out of the microcrack and molten silicon has the viscosity of water so its catastrophic when that happens and the other is you don’t have the purity and remember we are a vertically integrated company, not only in armor but in the solar. We bought Minco a few years ago in Tennessee and we started with glass quality sand, SiO2 and we make this very, very high purity material that we ship to China because of our quality and reputation on purity. So of course it’s an issue but that’s what this is, an issue. It’s not so easy to make these parts. They are very big. They have very high purity and we’re very good at it. I was more concerned if you would ask that question a year a half ago than I am today.

Josephine Millward – Dougherty

One final question, Joel. When do you plan on going back to the office?

Joel Moskowitz

Wednesday.

Josephine Millward – Dougherty

Well, I hope you get better soon and…

Joel Moskowitz

Actually I feel pretty good. I told Dave that I better not take one of these pain pills. So I’ll be too high on the phone call.

Josephine Millward – Dougherty

Well, you sound great.

Joel Moskowitz

Yeah, I’m feeling really fine now and it’s a very mechanical thing. It was 16 years ago that I had the hip put in and they don’t touch the major structure. They just put on a ceramic pole by the way so I’m really the ceramic man now.

Josephine Millward – Dougherty

I know it’s made by Ceradyne.

Joel Moskowitz

It’s not. I asked Reed to make it but he said I had to sign some kind of a release. That was more owner risk and all this stuff you sign when you go into the hospital but it’s not made by Ceradyne but it’s a very good one.

Operator

Thank you ladies and gentlemen. This concludes our Q&A session. You may now disconnect.

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Source: Ceradyne Inc. Q3 2009 Earnings Call Transcript
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