Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Joel Moskowitz - Chairman, President and CEO

Jerry Pellizzon - CFO and Corporate Secretary

David Reed - VP and President of North American Operations

Marc King - VP of Armor Operations

Analysts

Tim Quillin - Stephens Incorporated

Al Kaschalk - Wedbush Morgan

Pierre Maccagno - Needham

Jiwon Lee - Sidoti & Company

Gary Liebowitz - Wachovia

Josephine Millward - Stanford Group

Avinash Kant - Broadpoint Capital

Jason Simon - JMP Securities

Michael French - Morgan Joseph

Brian Butler - FBR

Alex Blanton - Ingalls & Snyder

Don Littlewood - Littlewood Burke

David Kaizer - Robotti & Company

Dan Berkery - O'Connor

Ceradyne Inc. (CRDN) Q1 2008 Earnings Call April 25, 2008 11:00 AM ET

Operator

Welcome to Ceradyne 2008 first quarter results conference call. This conference is being recorded today April 25, 2008 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 Ceradyne's call today is Joel Moskowitz, the company's Chairman and Chief Executive Officer, who is accompanied by Jerry Pellizzon, Chief Financial Officer; David Reed, President of North America Operations; Marc King, President of Vehicle Armor Systems; and Michael Kraft, Vice President of Nuclear and Semiconductor Business Unit.

Before I turn the call to Mr. Moskowitz, the company has requested that I read the following statements. 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 Moskowitz

Thank you, Kara, and good morning, everyone. We're pleased to be here on another beautiful Southern California day to report on our first quarter 2008 financial results. In addition to the forward-looking-statement that Kara read, I'd like to also advice you that a recording is being made of this conference call. Earlier today, Ceradyne issued a press release including our financial results for the quarter ending March 31, 2008. I'll briefly review that with you for some of you who may not have seen the total release.

Our sales for the first quarter were slightly ahead of the prior year. We shipped $188.5 million versus $188.4 million last year. Our net income, however, decreased 13.6% to $32.9 million or $1.20 per fully diluted share, and that compared to last year of $38.1 million or $1.38 per fully diluted shares.

The average number of shares outstanding in Q1 '08 were 27.407 million, and that compared to 27.528 million last year for the same period. Our gross margin this year, Q1 2008, was 37.9% of net sales. That compares to last year in the same quarter 2007 of 40.9%. The provision for income taxes was 36.3% in Q1 '08. That compares to 36.1% last year in the same quarter.

New orders in '08 for the first quarter were $211.8 million, and that compared to last year $176.5 million. Our ending backlog as of March 31, 2008 was $262.7 million, and that compared to $332.3 million last year March 31, 2007.

During the first quarter of '08 we cited a few brief highlights. The first was the appointment of Tom Cole as a Vice President of Business Development. Tom is a long time semantic engineer and senior management. He was the President of Minco, the company that we bought on July 10, 2007. And we are very pleased to have Tom on board in this very important position as we go forward with several acquisitions, or at least the investigation of these opportunities. And I think that Tom will be a catalyst in moving the company forward this year on several acquisition opportunities.

The second item that we mentioned was the continued strength for our high purity ceramics crucibles, which are used in the manufacture of polycrystalline silicon for photovoltaic solar cells. We had stated earlier that we're in the process and we are purchasing 12 additional acres pretty close to our current facility in Tianjin, and we shortly will begin constructing a new 200,000 square foot ceramic crucible manufacturing facility, which we anticipate will be open sometime early next year. I'd like to point out that that's in addition to the 98,000 square foot facility that we opened on June 20, 2007, and that will give us about 300,000 square feet in China in manufacturing.

On March 4, 2008 we did announce the Ceradyne stock repurchase plan, and we've bought slightly over 1 million shares on that repurchase plan with an average price of about $30 a share. We went on to remind everyone that we had provided guidance on February 26 with a wide sales range from $715 million to $836 million for the total year and earnings also from $4.55 to $5.05 for fully diluted share. Based on our current new order rates, which I just cited above, and the backlog and the results that we reported today, we are pleased to reiterate the above guidance.

I want to point out also that the guidance, which has a fairly large spread, is due to the potential magnitude of the BULL combat vehicle, as well as the five-year XSAPI/ESAPI proposal, neither of which has been awarded. We have provided the 2008 guidance, therefore, with an unusually wide range. The lower range reflects all of our current business units even though the multiyear XSAPI/ESAPI orders will not be issued before Q3 of 2008 but does not include any production orders for the BULL combat vehicle, while the higher end of the range includes the lower end, plus some production of the BULL combat vehicle in the second half of 2008.

That effectively concludes my comments, which I have reiterated on the press release that we had put out before the market open. And I'm now going to ask Jerry Pellizzon, Ceradyne's Chief Financial Officer, to review some of the highlights of the financial statements, and perhaps give some further clarification before we go into the question-and-answer period.

Jerry?

Jerry Pellizzon

Thank you, Joel. Good morning, everyone. I'll give you some numbers first of all, and then some information about the activity of some different business lines. First of all, we did file our 10-Q this morning with the SEC, so that you can also refer to that document by going to sec.gov.

Our free cash flow, as defined as net income plus depreciation and amortization less capital expenditures, and including the impact of changes in working capital, for the quarter ended March 31, 2008 was $40.9 million compared to $48.9 million of the previous corresponding quarter.

EBITDA or earnings before interest, taxes, depreciation and amortization for the quarter ended March 31, 2008 was $61.5 million compared to $65.9 million during the same period of last year. Depreciation and amortization for the current quarter was $8.8 million compared to $5.3 for the same period last year and CapEx this quarter amounted to $18.6 million compared to $7.2 million in a comparable period last year. A big part of that was our expansion and acquisition of additional property, land and buildings at our Kempten site in Germany or ESK in the support of continuing expansion in boron nitrite, silicon and other ceramic powders.

DSOs were 42 days this year compared with 32 days last year, actually in April came back down. What's important to note that in terms of sales by market application, our defense sales were only 62.8% of the total sales this quarter compared to 77.4% the same quarter last year. So our strategic plan of getting a little more balance between defense and non-defense is working out very well.

And in fact, the acquisitions that we made during 2007 performed very well. Minco that reports up through Thermo and supports our strategy with our expanding presence in the solar industry with these crucibles had an excellent quarter, performed as we planned. And our Ceradyne Boron Products division also performed well. Those two units contributed about $12.4 million of total sales in the quarter. Of course, we did not own them as of this point in the quarter of last year.

Additionally, we did have a decline at ACO of 14.4% in sales. Our sales were $130 million compared to $152 million in the corresponding prior year. Of course, the primary reason was the decline in the shipments of ceramic body armor and other armor components. Those declines were actually $28.3 million to $115.6 million from $143.9 million of the previous year's quarter.

We did have growth in other lines. Our engineered product line and functional coating line in Germany did well. We had growth in that particular segment. Overall, the margins this quarter as a percentage were less and that reflects a couple of major factors. One, our sales mix, of course, shifted towards more of our industrial components, which have lower margins than our defense business, and additionally, because of the reduced throughput in our plants for the production of body armor, we absorbed less fixed expenses than we had in the quarter ended March 31 of '07.

So, the color on this quarter is that we've had a shift in mix. We don't expect the margins to really decline much further this year. We're optimistic that we've got programs in place to gain those margins back, and our acquisitions continue to perform well. So, we're very pleased with their contributions towards our strategy and also towards our financial performance.

Joe?

Joel Moskowitz

Thanks a lot, Jerry. Just a comment and then we'll go right into Q&A. This quarter, I think, which we're very pleased with, is a directly fulfills or at least beginning to fulfill our long-term diversification and strategic plans, which are to acquire companies in defense and non-defense. In this case, Jerry cited EaglePicher which is now Ceradyne Boron Products, the Minco acquisitions, which are completely non-defense, and to move in that direction and to expand internally, which we did both in crucibles, China which didn't exist last year. Remember that a plant only opened in June and probably didn't shipped much till the end of last year in Tianjin, as well as expansions in Germany where the product lines are almost all non-defense, expect for 20% or so that they shift to us for our boron carbide.

So, so far, so good. So, thanks a lot, Jerry. And I think what we'll do now, Kara, is go right into the Q&A mode.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Tim Quillin - Stephens Incorporated

Hi, good morning.

Joel Moskowitz

Good morning, Tim.

Tim Quillin - Stephens Incorporated

First question is how should we think about the quarterly distribution of armor revenue for the rest of the year? Should we plan for it to be a little bit lower in 2Q and 3Q, and then higher in 4Q when presumably the XSAPI is awarded?

Joel Moskowitz

That's a very good question. I think that I'll have Dave Reed response to it. Remember, Dave is responsible for all North American operations and he is very knowledgeable about armor programs. Dave?

Dave Reed

Hi, Tim. Yeah, I think the best way to look at that is in the first quarter we still were running at a fairly accelerated rate with our army business in January and the first half of February. So, we only saw our spread out of the business in the second half of the quarter. So, I think in second and third quarter we'll be down a little bit, maybe about $8 million to $10 million in sales of our body armor. In the fourth quarter we should be maybe a slight uptick from there and that will definitely depend on the XSAPI award and what level of that award we win, Tim?

Tim Quillin - Stephens Incorporated

Okay, which brings up the second question, what is your thinking in terms of the timing of the XSAPI award, and in terms of the latest military expectations on how many service members would actually be issued the XSAPI? Thank you.

Dave Reed

We don't have that final information on what the army is going to decide, whether they are going to rollout just initially with theater staging, which is typically in the 230,000 to 260,000 sets range, or whether they will announce early to go all the way to pure fleet. They have not made that decision or announcement to anyone at this point.

What we've heard about the solicitation is that everything is going well. The testing is probably about half over now. As you know, they had multiple product demonstration samples from all of the vendors. So they have a lot of product to test and we expect the testing to be completed in early June now. So everything seems on line for awards to take place sometime mid to late Q3.

Tim Quillin - Stephens Incorporated

Okay. Thank you.

Operator

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

Al Kaschalk - Wedbush Morgan

Good morning, guys.

Joel Moskowitz

Good morning, Al.

Jerry Pellizzon

Good morning, Al.

Al Kaschalk - Wedbush Morgan

I want to focus on the new business opportunities, if I may. And I think the question is driven more at how do we see, maybe the ramp, and exclude solar, if we may, or ceramics, solar ceramics, but how do we see that business being perhaps ramping in particular? Is it contract-oriented, project-oriented or is it displacing existing competitors?

Joel Moskowitz

Well, that's a very wide ranging question and I'll try to give you as best in the answer.

Al Kaschalk - Wedbush Morgan

You only allow me one question now, Joel.

Joel Moskowitz

Okay. Yeah, I know. We don't want to run out of time like this, let everybody else sit. So, anyway, my personal focus is very much on these new areas. As you said, we don't have to talk about solar, except for the fact that solar is really continuing do very well, as we said in the press release.

Well, let's just look at a few things. First of all, the reason that Minco, this little acquisition that we did is doing so well, it's the same model as the ESK acquisition in '04, where we suddenly started buying tens of millions of dollars of boron carbide powder. In this case, we're not buying tens of millions, but we're buying millions of dollars of fused silica powder. So that program, that company will continue to be quite profitable and we'll be expanding. We're putting in millions of dollars in additional crushing at and refining equipment almost exclusively to service our own internal business.

Before we bought it, Minco was only shipping about 8% to 9% of their product line to Ceradyne. So that's one business that is tied into solar and will continue. Some of the other businesses are very exciting. In Germany particularly, this coming quarter I was going over some of the projections, and they are looking at 10 million euros, as they put it because they report in euros. Jerry has got to figure out what the exchange rate is. But they're going to have three 10 million euro quarters back to back to back in 9 months.

In Q2, that's the first time they'll have ever shipped 30 million euros and less and less of that. In fact, they revised downwards a year ago when we told them that the armor business we wouldn't be buying as much boron carbide, so almost all of that growth is in the silicon carbide seals for industrial pumps, in the surface engineered products where we coat medals with diamond and other ceramics for adhesion, and it's in the BORONEIGE, boron nitrite for cosmetics.

You know one of my favorite subjects is aluminum smelting, and even though last year we received somewhere between a $0.5 million and $1 million for the whole year in R&D kind of orders, we've already received $1 million to $1.50 million in Q1, which will be shipped in Q2 for additional (inaudible), who are incorporating what's known as a drain cathode. That program, which I still think will be a small part of the company in 2008 this year, continues to grow from very little to low millions of dollars projected this year. And I have no reason to believe that that will not be in the next five years a major element.

I've said in our annual report, which you don't have yet, that it is one of two billion dollar opportunities. One is aluminum and the other is combat vehicles. So, two years ago, if you had said, well, as Dave said, while we reduced our boron carbide armor significantly, yet our sales were about the same and our margins were 3 points lower, I would say, tell me where that's coming from? Well, it's coming from our acquisitions and it's coming from these other areas that I just mentioned.

Al Kaschalk - Wedbush Morgan

Okay. So is it fair to say that the mix of revenue of 60%, 65% being defense, which I applauded the diversification there, that some could come from more acquisitions later this year than perhaps a project or two that you are bidding on that needs to be awarded?

Joel Moskowitz

Yeah. I think that's a fair statement. We have nothing in that sales range I gave that assumes we do no acquisitions. In fact, we probably will do acquisitions.

Al Kaschalk - Wedbush Morgan

And I'm sorry, that's included in there?

Joel Moskowitz

No. There is zero acquisitions in the 715 to the 836.

Al Kaschalk - Wedbush Morgan

Okay. I'll hop back in queue. Thank you.

Joel Moskowitz

Okay.

Operator

Your next question comes from the line of Pierre Maccagno with Needham.

Pierre Maccagno - Needham

On the quarter, I'm a little bit late here, but I wanted to ask you if you could talk a little bit more about the solar…

Jerry Pellizzon

Pierre, could you just speak up, because we didn't get the first part of the question, please?

Pierre Maccagno - Needham

Yeah. If you could expand a little bit more on the solar opportunities and your expansion plans?

Joel Moskowitz

Yeah, maybe I'll handle that. Bruce Lockhart is our President of that operation. He is in Atlanta and not on the call. Let me repeat, our product is this very high purity fused silica ceramic crucibles that are used in the manufacturing. These are single-use products, and therefore, the market is of a continuous nature. We could sell more if we could make more right now. And so, we are expanding both in Atlanta and in China.

Last year, our shipments were about $10.7 million of this product. This year, in our budget, it's about $53 million and I think it could be slightly higher. If there is some upside surprises later in the year this is where it will be. It will be closer and maybe closer to 60 than 50.

And in '09, assuming that our plant is on stream we'll double that and we're looking at $100 million to $135 million in '09. I recently had a briefing on this, both of internally as well as some solar shows that our people attended, and I believe that this market will increase at an increasing rate, primarily because of new sources of silicon. That's a bottleneck right now as many people know in both semiconductor as well as in solar.

But companies like Volker and Hemlock and others are putting on their own silicon manufacturing. And as that comes on stream, two things will happen. One, there will be more product and they will have to melt more and they will use more of our crucibles, which is our whole model, and the second thing is that price will come down. The pricing has been quite high on silicon, which acts as an inhibitor for our photovoltaic solar.

And as the price comes down of silicon, which is nothing to do with us, but does drive the total market, I think we're going to see more and more business. And our task at Ceradyne is to make sure that we can make these make them to the quality. We do have a secret that allows us to make what we believe is the highest purity crucible currently in the market.

Pierre Maccagno - Needham

And two more follow-ups here. The industries…

Joel Moskowitz

We're supposed to have one question, Pierre.

Pierre Maccagno - Needham

Just one?

Joel Moskowitz

Yeah. Okay, you've got one more. But Al is going to be upset, because he stayed with one. Go ahead.

Pierre Maccagno - Needham

The industries migrating to the jumbo type of crucible, and that has higher ASP. So do you believe that you're going to be selling mostly jumbo?

Joel Moskowitz

Yeah, the question that Pierre asked -- he is very knowledgeable on the specifics of the solar industry -- is for long time the standard size was able to make 225 kilograms per run. And that's effectively most of the business we're doing, crucibles that handle 225 kilograms of silicon, about $50,000 worth of silicon every time the customer makes a run.

The next generation, which is actually in the field right now, is to double that. They call it the 450, because it makes 450 kilograms. And we believe that will be a good part of the future. So we've done two things. One, we have a facility in Atlanta that we had actually mothballed years ago with a huge tunnel kill. So we've reactivated that and we're making jumbo crucibles here in Atlanta. And also the new facility will be sized, all the slip casting molds, drying and firing, to make both standards in jumbos. We think the future will be jumbo because of the obvious economics to our customers. And it's very good business for Ceradyne because, as you said, the pricing, the average selling price is significantly higher than the 225s.

Pierre Maccagno - Needham

And finally, there could be a short supply of these crucibles, do you think the ASPs are going to go up or do you see any of that happening right now?

Joel Moskowitz

Well, we don't know. Right now, we're able to maintain the pricing. There are people who are trying to get into business. We are not the major supplier. The major supplier is a division of Cookson. We would represent that our product is quite good because of what I said earlier. There could be price pressures later on, not right now. Right now, the industry just wants to get as many as they can.

Pierre Maccagno - Needham

Great.

Operator

Your next question comes from the line of Jiwon Lee with Sidoti & Company. Mr. Lee your line is open.

Jiwon Lee - Sidoti & Company

Hello.

Joel Moskowitz

Mrs. Lee.

Operator

I do apologize, Ms. Lee

Jiwon Lee - Sidoti & Company

Okay. Let me ask quick questions on MRAP II. One more quarter has progressed, how should we look at that business potential from where we are now?

Joel Moskowitz

I think I'd let Mark and Dave handle that. Mr. MRAP, Marc came in from Washington and he was with the BULL. So, Marc?

Marc King

Thank you, Good morning, Jiwon.

Joel Moskowitz

I didn't mean to make any reference to your wife when I said you live with the BULL.

Marc King

Good morning, Jiwon. The MRAP II program continues on. The department says there is a MRAP II in our case, our vehicles are on the test site. They continue to test, they continue to test well. The team BULL, as you know, consisting of Ceradyne, Oshkosh Truck and Ideal Innovations has received some additional inspections by the department to check on our ability to manufacture product. Those inspections have been completed. Report outs have been made, everything is green. And so, we continue to test program and we will see where the department wants to go. At this point in time, the only information that we can provide is that testing is ongoing and that we are waiting to see where the department wants to go with the program.

Jiwon Lee - Sidoti & Company

Okay. I'm going to step aside for now. Thank you.

Operator

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

Gary Liebowitz - Wachovia

I think, Jerry, you talked about you had some cost savings initiatives that you believe will offset some of the overhead absorption issues as production rates come down on ESAPI. Can you quantify or maybe discuss what some of those cost savings are beyond the deal they also already announced?

Jerry Pellizzon

Sure. I'll start. We have an aggressive lean manufacturing program here. We have different methodologies of producing armor that we are constantly upgrading. And we are always looking for cost savings. We produced many hundreds of thousands of body armor plates and we continue to lower our cost based on the knowledge of continuing efforts and knowledge of what we've done in the past and how we're going to lower those costs in the future. The programs are ongoing. They are everyday. The best way I can put it are a small incremental improvements as frequently as we can make them. And that's really where we are.

Gary Liebowitz - Wachovia

Okay. But is there like an annualized cost savings run rate that you are targeting and any sense of where you stand relative to that target?

Jerry Pellizzon

Well, we have an annual plan for margin and we try to stick to that. That's hard to quantify right now, Gary, because of the sales mix of products. But believe me, as you know, there aren't many manufacturing companies that have the type of gross margins and operating margins that we do. And we gain that through a lot of expertise, through a lot of leverage, and paying attention to details. And those programs that I suggested that we have lean manufacturing programs, we have different material that we're using and it's a consortium of many different aspects of efforts to reduce cost. I don't have a firm numbers as to what it is for the year because we have a certain plan based on a sales mix and it will be hard to quantify right now.

Gary Liebowitz - Wachovia

Okay. Fair enough. And my follow-up question relates to LTAS, I think you guys mentioned that you're going to have a consultant review of the market opportunity with you and how that might play out. Could you share with us the findings?

Joel Moskowitz

Yeah. I think I'll again ask Marc and Dave to chime in on this.

Marc King

Yeah, we did have that study done. There are significant opportunities for LTAS armor going forward. It's important to understand from Ceradyne's perspective that the LTAS opportunity that we presented to the government has been certified by the government. What's been certified are essentially targets. Those targets are now in discussion to be turned into product with various customers.

We are, in fact, unfortunately nondisclosure agreements prevent me from giving specifics on customer opportunity that are being worked. What I can tell you is that there are customer opportunities being worked right now where those materials are now being turned into product applications for specific vehicles for ongoing testing and use going forward.

So we're very pleased with the results that we're getting. It will be an ongoing opportunity for us as we go forward. And applications are being designed as we speak that should be placed on vehicles that the military will be are procuring in the near future.

Gary Liebowitz - Wachovia

But as far as a near-term opportunity goes we're not talking about something material to Ceradyne's results for at least one or two years?

Marc King

I would say that's probably accurate. It's a process that has to be gone through and turning it from test materials into product, product into further testing on the vehicle, satisfying the customers' requirements regarding overall performance, and then turning it into a production opportunity.

Gary Liebowitz - Wachovia

Thank you very much.

Joel Moskowitz

One note on that and I'll amplify because you began your question about the study we had commissioned, which is now complete. They identified 12 programs with multiple OEMs that would require armoring over the next 10 year periods. And we have those 12 and that's the heart of what we're looking at. There was also an article in the defense news that cited requirements of over 40,000 vehicles going forward.

Operator

Your next question comes from the line of Josephine Millward with Stanford Group.

Josephine Millward - Stanford Group

Good morning.

Joel Moskowitz

Good morning, Josephine

Josephine Millward - Stanford Group

Hi. I wanted to ask about the independent report, Congressional report criticizing the army for not doing enough taxing and evaluation prior to awarding body armor contracts. Do you think this might push out the timing of awards on XSAPI?

Joel Moskowitz

I'll let Dave handle that.

David Reed

Josephine, I don't think so, no. That report in many ways was more of an administrative issue. They basically said that the review of the contract file showed that they didn't think all of the first article test reports had been put in the files properly. And in some cases, a contract said they should do first article. But they didn't see in that contract it had been done, when in fact the first article of that design had been done on a prior contract.

So, in the end, the army does have first article reports for everything that's introduced. Ceradyne has first article reports on every product we've ever sent into the army and we have lot testing on everything that has left this facility. So, I believe the army briefed Congress on that two weeks ago and everybody is pretty satisfied with those results. So I see it as more of an administrative thing, and it doesn't appear to be upsetting anybody in the contract side in terms of their review of the current PDMs or the process on that solicitation. So we don't see any push out on that due to the Inspector General's report.

Josephine Millward - Stanford Group

Okay. Dave, so do you still expect XSAPI award around September with delivery starting in October?

David Reed

I believe that contracts will be let in that timeframe. Their deliveries may be out further than that. They may start asking for deliveries in November or December. But we are prepared to begin production in October and they always allow early delivery on this contract. So, they are not sure when the exact delivery dates will be. But as far as I can see right now, Josephine, the awards will be made in the time manner that would allow us to continue our operations without any shortfall.

Josephine Millward - Stanford Group

Okay. So you've accounted for a possible delivery start date in November and December in your revised guidance?

David Reed

No, we sure were going to start in October deliveries right now.

Josephine Millward - Stanford Group

Right. Okay. I just have one final question. In your body armor backlog, have you included the two recently announced awards, the contracts that were announced in April?

David Reed

Yes, we have. The only surprise there for us, on the positive side was on the Defense Supply Center Philadelphia order. That was a little bit higher than what was in our plan for the year. So that's given us, right now, about extra $10 million cushion in the plan.

Josephine Millward - Stanford Group

I'm sorry, Dave. I'm talking about your body armor backlog. Wouldn't that be at the end of March, because your side plate order was announced in April, so you've included that in your backlog?

David Reed

Yes, we have.

Josephine Millward - Stanford Group

Okay. So, you haven't included the DLA order in your backlog, just the side plate order?

David Reed

Yeah, we did get that on March. Both of those orders are included in Q1.

Josephine Millward - Stanford Group

They're both included. Okay, thank you.

David Reed

Yes, they are.

Operator

Your next question comes from the line of Avinash Kant with Broadpoint Capital.

Avinash Kant - Broadpoint Capital

A quick question going back on the solar side, I wanted to find out would you be able to comment on your market share that you have on the solar crucible side and what is the differentiation here? Is that the technology or the materials know-how that you have or is more about volume and pricing in that business?

Joel Moskowitz

Well, right now, as I said earlier, it really is driven by this terrific demand, and pricing is always a subject near and dear to our hearts. But it's basically driven by getting those crucibles into the field immediately. We make them, we ship them, they use then. I mean, it's just that simple. We hardly have any inventories.

Regarding our market share, we were late in this game. If it wasn't for some of the difficulties that our competitor had, we might not be in the game. But about seven, eight years ago, we were alerted BP Solar about these issues in the States. So, that was our first major thrust. And a year or two ago, I would have said we had about 15% of the market. I think that we probably have about 30% of the market right now. But the data has skimpy on that, but I would use that kind of number.

Avinash Kant - Broadpoint Capital

But Joel, what I'm trying to understand is that, given the opportunity in this business, how easy or how hard it is for new players to come in and start to be a competitor here.

Joel Moskowitz

Okay. Well, I think that since Dave is involved in beefing up Minco silica, and as I said, we do have a proprietary, I referred to it as secret technology; I'll let Dave address new people who might want to come into the market.

David Reed

Well, we do view that there are some exceptional barriers to entry in this business. It's a very expensive process to melt this high purity silicon. And when you come in with your first crucible, if that crucible cracks or fails, then they leak molten metal into the furnace, ruin in the furnace, take it out of the line for several weeks to repair it. So, it's very difficult to get into the business and when you get into the business, to be successful, you have to have enough technology to not have real problems with your yields, the cracking and the drying and the firing of these products.

So, it's not easy. Our customers are very loyal and their margins are dependent on very high throughput and high yield on their end. So, they are not very likely to risk this product in their production capacity on some new players entering. So, we see it as very difficult for the new players to get into this market.

Avinash Kant - Broadpoint Capital

Thank you so much.

Operator

Your next question comes from the line of Jason Simon with JMP Securities.

Jason Simon - JMP Securities

Good morning. I just had a quick question. Did you guys made any progress on maybe leasing a new facility in the Wixom area, in the Michigan area with respect to the MRAP II programs?

Jerry Pellizzon

Good morning, Jason. This is Jerry. We have made substantial progress. We are probably about 95% complete with our lease on our negotiations, and I think we're just waiting really on for information from the government relative to timing and we would be prepared to sign that lease for that facility.

Jason Simon - JMP Securities

Okay. And have you guys locked up any supply agreements for any type of pending orders?

David Reed

Jason, on the supply side, for the BULL, the materials that we need which is based on the design that we've given the government are fairly, readily available and they do not compete with many of the advanced materials that are being used on the MRAP I. So, we got actually glowing reports from the government on that side of our proposal that we would not force them to do any kind of delegation of the materials and they won't have to manage that event. So, we feel pretty good about that. As Marc said earlier and Joel said, the review of our facilitization by the government two weeks ago went very well, and they are very confident that the facility plan and the production plan will be successful.

Jason Simon - JMP Securities

Good stuff. Marc, you talked earlier about, obviously, the testing going well for the BULL. Have you heard anything about the [Cayman]?

Marc King

We have no information about what's going on with the Cayman?

Jason Simon - JMP Securities

Okay. And if you were to expect any type of award announcement out of the military when you think that would be?

Joel Moskowitz

Right now, it's anticipated that probably towards the end of May, early June there may be another announcement. But again, at this point that's based on speculation based on the military's timing. It could go longer than that. We're not really sure. The majority of our testing will be wrapped up towards the end of May. And the only testing that will go one will be some of the durability testing, which is ongoing at Yuma, Arizona they have the log 15,000 miles on to the test vehicles there. Currently, as of last night, the test vehicles have 1,700 test miles logged on to them. They are logging about on average 200 miles a day.

So, it's going to take them a little bit of time. That's based on government timing on how long they want to keep you guys out on the test track. They've been having some weather condition problems out there. They go to Yuma because it's dry and dusty. Unfortunately, the wind has being blowing a lot, so it affects the testing out there. So that's going to affect the test schedules just a little bit.

But it's our understanding that the durability testing is not have to be complete before the government moves forward with other decisions once the rest of the testing environmentals. And I should add that, just this past week some of the ballistic testing was done. Again, we've got a green light on everything regarding ballistic testing with the vehicle that went forward. So, once all of that has complied and presented to the contract decision authorities, decision will go forward at that time.

Jason Simon - JMP Securities

Great. Thanks very much, everybody.

Joel Moskowitz

You're welcome.

Operator

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

Michael French - Morgan Joseph

Good morning gentlemen.

Jerry Pellizzon

Good morning.

Joel Moskowitz

Good morning, Michael.

Michael French - Morgan Joseph

Joel, I was intrigued by your comment that you will probably do an acquisition and so this year. And I've known you long enough to know that you're pretty conservative and wouldn't like to make a comment like that unless there was thing or two in the works. I'd just like to ask about the number of potential deals, the timing, strategy, whether you are looking to do more vertical deals or go horizontal into other markets and pricing, if you want to talk about that.

Joel Moskowitz

Well, I'll just say that we are looking at acquisitions and inferred that I expected that will do some this year. We don't make specific comments on acquisitions until we usually have an SPA, a sales and purchase agreement. But in general, we're looking at four acquisitions. One is defense, the other three are non-defense. They are in a very broad array of opportunities from effectively a start-up with a genius patent that is using our ceramics right now to a very mature company that's providing materials into the molten metal industry.

The range is anywhere on this small side less than $10 million to possibly hundreds of millions of dollars. So it's a very broad range. And we are working on this right now. I would expect, hopefully, within the next quarter that we'll announce at least one of the small ones and maybe one not so small both in non-defense.

Michael French - Morgan Joseph

Okay, great. Thank you. That's good. I appreciate that. And Jerry, I have a quick one for you on the share count. Press release says that you purchased 1 million shares I suppose today, it sounds like, just wondering if you could give a share count as of today?

Jerry Pellizzon

Sure. We purchased 1 million shares through the end of the first quarter through March 31 at an average cost of approximately $30 a share and the share count is $26.6 million right now. And as I said or as I insinuated at least, we've got about $70 million left on our authorization. And the impact of that will be felt really on the second quarter earnings because of the weighted average component and computation. It really wasn't much impact at all in the first quarter because we purchased beginning in the first week of March. So, the weighted average impact was negligible or very, very limited.

Michael French - Morgan Joseph

Got you. And could you address the desire to continue with this program? I mean, what are the odds of you spending the other 70?

Joel Moskowitz

I think that's an area of, I'll just chime in, that we'd rather not discuss. We have our own strategies. We're getting inputs from the people who are actually doing the purchasing in the field. So far we've done pretty good job. And we said that we would repurchase up to $100 million. That's our plan. Exactly what our strategy is, whether we're going to start buying after we get off this call or not, for example, we're not going to discuss.

Jerry Pellizzon

Let me just shed one other thing to be clear. We are in a blackout period. Our blackout policy is such that we go dark the last day of each quarter. We stay dark until the second full day after an earnings announcement. So, we wouldn't be out in the marketplace until next Tuesday. And that's our policy and that's what we work with. So, we are, by the way, limited now by the number of shares through a program, and actually a security regulation, 10P18.

And if we were to be purchasing today, we would be limited to 120,000 shares per day for this week. It's a weekly calculation. You take the average of the trading over the last four weeks and then divide that by the number of trading days, which is usually 20, and then multiply that by 25%. And that's your limitation.

Michael French - Morgan Joseph

Okay, great. Thank you and good luck.

Joel Moskowitz

Thanks.

Operator

Your next question comes from the line of Brian Butler with FBR.

Brian Butler - FBR

Can you hear me?

Joel Moskowitz

Yeah, we can hear you.

Brian Butler - FBR

Okay. Good morning. Thanks. A question just on the guidance that you gave, you reaffirmed the $4.55 to the $5.05, is it possible to break that down into what it might look like, excluding the BULL completely?

Joel Moskowitz

Well, the BULL is excluded completely. There is no BULL in that $4.55.

Brian Butler - FBR

Right. But I guess, is there a range above the $4.55 or that's your guidance for the rest of that business, there's really no range for the rest of the business?

Joel Moskowitz

Of course, there is a range. If we get the order late in the year, we don't ship that many BULLs.

Brian Butler - FBR

No, not really specific to the BULLs. I meant to the rest of your business. I mean it sounds like you have some opportunities such in the solar cell doing 60, instead of 50. So it seems like that $4.55 there seems to be arranged somewhere above that that excludes the BULL, and I am just trying to figure out what that is?

Joel Moskowitz

It could be. We usually don't refine projections to that level. I mean Dave told you we got extra business out of Philadelphia that add about $10 million and I inferred that if we get our shipments really rolling out in Tianjin, we might pick up another $7 million. But there are other areas that maybe we won't quite make the projections. So you are right, there is a whole spread without the BULL. But we're not prepared to adjust our guidance in that manner, unless we see our way clear, which we might after Q2.

Jerry Pellizzon

And just to reiterate, that $10 million from Philadelphia was shipments for sales.

Brian Butler - FBR

Okay. Thank you.

Operator

Your next question comes from the line of Alex Blanton with Ingalls & Snyder.

Alex Blanton - Ingalls & Snyder

Hi, Good Morning. Most of my questions have been answered. But on the BULL, and they were all about the BULL program, just to clarify what you said about the durability testing going on in Yuma, you said 200 miles a day and how many miles have yet to be done?

Joel Moskowitz

There is a requirement to do 15,000 miles.

Alex Blanton - Ingalls & Snyder

And you've done 1,500 or something

Joel Moskowitz

Right now, they've accumulated 17,000 miles on vehicles.

Alex Blanton - Ingalls & Snyder

Okay.

Joel Moskowitz

At the rate that they are going. That definitely didn't start until about eight days ago.

Alex Blanton - Ingalls & Snyder

Okay.

Joel Moskowitz

So they average about 200 miles a day, sometime they do more, sometime they do less, depends on weather conditions and other factors, assuming the vehicle operates normally, they may accumulate more miles on a given day. It has to do with the availability of army personnel, testing personnel. It's driven by schedule leads, that's done by the army and not by us. They are on the site 24 hours a day, 7 days a week ready to test.

Alex Blanton - Ingalls & Snyder

Yeah. If they went ahead 200 miles day, they are 2.5 months. And did you say it would have to be completed before the order is issued or not.

Joel Moskowitz

No. The durability testing does have to be completed before an order would be issued. They have sufficient data accumulated, that gives them an idea. Remember we are dealing with the mobility platform that over 10,000 of them currently reside in United States Marine Corps. So they have plethora of data that already exists on the durability of the platform itself.

Alex Blanton - Ingalls & Snyder

Sure.

Joel Moskowitz

All they're doing here is verifying additional data on how the platform performs with changes that have been made to accommodate the armored solution that's on the platform. So they take some of that data and extrapolate it based on previous data accumulated for the MTVR mobility platform. A combined data, they do some analysis and they say we have enough information to tell us what we need going forward in terms of durability, reliability and maintainability in order to make a decision going forward.

Alex Blanton - Ingalls & Snyder

Okay. So the difference between your - the low-end of the range that includes the bull and the one that doesn't is a $121 million. It appears that that would be your sales contribution in roughly the fourth quarter is that correct, for this year?

Joel Moskowitz

The original plan that this came up would assume more than just the fourth quarter.

Alex Blanton - Ingalls & Snyder

Yeah. I know the original plan did, but the original called for $287 million of sales for this year. So…

Joel Moskowitz

The February numbers included shipping something late in the third and in the fourth quarter.

Alex Blanton - Ingalls & Snyder

Yeah, late in the third and in the fourth, that's a $121 million differences that you've got there, right.

David Reed

Alex it's a ramp up production, assuming that we would have gotten an order sometime late in Q2.

Alex Blanton - Ingalls & Snyder

Okay.

David Reed

So we'll start our production ramp in Q3, and we'd be at a full scale production pretty much at the beginning of Q4.

Alex Blanton - Ingalls & Snyder

Got it. Thank you.

Operator

Your next question comes from the line of [Don Littlewood with Littlewood Burke].

Don Littlewood - Littlewood Burke

I don't want to beat a dead bull but, what are your partners' ideal innovations, signed a partnership agreement with the US Army Joint Manufacturing Center regarding armor for the BULL. Now they are your partner also in a BULL. How did that work?

David Reed

Don, that's a good question. They provide some of the outer layers, so that's part of their proprietary developments and why they are on the team. They are a specialist in the EFP protection, and they've always been providing that material. They are working with Rock Island Arsenal to have that part made for them and then supplied to Ceradyne, where we will incorporate it on to the armored cab that we've always being responsible for; then that armored cab is shift over to Oshkosh for incorporation on to the platform. So it's just really - they are our answer to how to get their component of the teaming agreement produced.

Don Littlewood - Littlewood Burke

Sounds to me like there's some kind of an implication there about the chances of Ceradyne being involved in this. The other question I have has to do with Oshkosh and your lightweight HEMTT crew cab. You had an initial order back in February I believe. What's happen with that?

David Reed

But let me address your first question. There is a no concern about the armor to start one. Ideal has always been supplying these outer components for the solution, and they were going to be make them themselves originally, now they're working with one of the depots and they feel that actually give us a leg up with the government by involving the government's facilities in the production of the BULL. So we view that as a positive.

Don Littlewood - Littlewood Burke

That's what I mean.

David Reed

Okay.

Don Littlewood - Littlewood Burke

That's what I mean.

David Reed

Second one I'll let Marc to answer on the A4 cab.

Marc King

That's actually the A3 cab, the lightweight A3 cab is a design, the engineering teams are in close and continuing discussion on design of the specific armor application for that A3 cab. Please recall that the A3 cab itself is in all-composite cab that's used on the HEMTT mobility chassis. All of that work is ongoing and it's scheduled for our scheduled delivery in the third quarter this year for prototype application and then some testing to be done by Oshkosh at the army test center in Aberdeen, Maryland. So that's on track, everything seems to be going well, and testing of the materials in a product form is also going well.

Don Littlewood - Littlewood Burke

Okay, very good thank you.

Joel Moskowitz

And Kara we have four in the queue, we'll take those four.

Operator

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

David Kaizer - Robotti & Company

Hi. Good morning guys.

David Reed

Good morning.

David Kaizer - Robotti & Company

Quick question, two parts but very quick. What is the production capacity for the BULL in the given year let's say, and I think you released not too long ago but if you could repeat what ex number of BULLs would add to EPS and also clarify if that EPS number was prior to buyback or post buyback?

David Reed

Well, let me answer the production capacity issue. We gave the government a plan with the original solicitation to be able to make 4,000 vehicles per year, and so we have a plan to go everywhere from 500 vehicles per year all the way to 4000 vehicles per year. So, we have our various facilitization plans to perform that, and it depends on the level of the order on how large that facility is. Jerry said earlier he has a couple of options for us available in Michigan to expand out of our Wixom prototyping facility to meet the requirements of that production. The earnings-per-share obviously is very much dependent on the level of that order, and I'll let Jerry say how much was in the guidance.

Jerry Pellizzon

Sure. First of all, the original guidance was pre-buyback, so that doesn't include any of the impact of the buyback. And then the range that we had was 715 to 836, and that was the range that included basically some provision for the BULL. But what's difficult to really say is when we're going to start shipping and what the ramp is so………

David Kaizer - Robotti & Company

I think my question is actually more general and a little more specific at the same time. I thought there was a release that said something like 300 BULLs adds $0.50 of…

David Reed

No.

Jerry Pellizzon

But that was, we never have gone to that specificity at all.

David Kaizer - Robotti & Company

Okay. That's it. So we…

Jerry Pellizzon

Just to reiterate, we gave guidance of 715 to 836 on February 26th of this year. The earnings range was $4.55 to $5.05, and that's the range that we gave.

David Kaizer - Robotti & Company

Okay. Thank you for the clarification.

Jerry Pellizzon

You're very welcome.

Operator

Your next question is a follow up from the line of Tim Quillin with Stephens Incorporated.

Tim Quillin - Stephens Incorporated

Thank you for taking my question. I was just wondering, if you could tell us what kind of interest rates you're getting on your cash investments right now; and also just some kind of status on the auction rate securities in your portfolio? Thank you.

Jerry Pellizzon

Sure. Well, there are two components to that. On pure overnights, we are probably in the low 2s. Generally when we go out further on institutional money markets and other programs like that, we're in the 3.25 range to 3.50. And the auction rate securities, there hasn't been a whole lot of development in that, the market is still extremely ill liquid. I think the good news is that we took the permanent write down at the end of 2007.

And the only additional permanent that we've had to that, we reflected in the first quarter was a $147,000. So, I think that that is just a function of the credit markets working that out over time. We're patient with it. We presently have $216 million of cash. So there's no impact to our operation at all with regard to that ill liquid, ill liquidity portion of that investment, and we're just going to be patient and go forward with that.

Tim Quillin - Stephens Incorporated

Thank you.

Jerry Pellizzon

You're welcome.

Operator

Your next question comes from [Dan Berkery with O'Connor].

Dan Berkery - O'Connor

Hi. Are you there?

David Reed

Yeah, hi Dan.

Dan Berkery - O'Connor

Hello?

Operator

Mr. Berkery, your line is open.

Dan Berkery - O'Connor

I'll follow up on those cash question. The 185 that you have in cash and cash equivalents, is any auction rate in there or is all the auction rate in the long term investment?

Jerry Pellizzon

All the auction rate is in the long-term investment. All the 185 is daily cash, that's at par of course, and it earns interest as I stated it earlier. But the auction rate is in long term investment side of the business, balance sheet rather.

Dan Berkery - O'Connor

Okay. And that's all in treasuries in very liquid thing. Correct.

Jerry Pellizzon

Yeah. The short-term securities are institutional money market, component out of treasuries and other things.

Dan Berkery - O'Connor

The second question on that 185 is, for tax and domicile purposes. Is that usable for some of the acquisitions that you talked about or is any of it sort of tied up overseas and you have to pay taxes on it to bring it back to make an acquisitions.

Joel Moskowitz

No. we have always been consistent with the fact that we raised those funds for the purpose. One of the purposes was for acquisitions. All of those funds could be used for acquisitions, we have no tax impact to use those funds for acquisitions.

Dan Berkery - O'Connor

Okay. And how do we weigh the, you usually talked about small acquisitions but you also talked about one that could be hundreds of millions in terms, I assume that was in terms of revenue, not the actual acquisition price, but if any clarifications on that. And then, how should we weigh the stock buyback versus the acquisitions and the use of that 185 of cash?

Joel Moskowitz

Well, as I discussed in prior releases and we stated consistently that we felt because Jerry reported earlier, we had a $40 million free cash flow in Q1. That we are going to be generating cash all year at something along that rate. It could be a little bit less as we go forward, a little bit more.

So, we are very comfortable that the buyback will not affect our abilities to do the acquisitions that we are looking at, except, as you pointed out, I did mention there could be one large one, I didn't say whether it would be sales or earnings. I mean sales or the purchase price would be 100s of millions. It would be both actually, and that would be something that would probably not be a 100% cash.

It could have some stock component, depending on how we feel the price of the stock is. Obviously, we are doing a buyback right now, because we feel it's an attractive price of the stock So, the buyback will not affect our ability to pay cash for any of the acquisitions, except if we go forward with this very major one. That depends on a lot of things, including that we might want to put some debt on the books or we might want to complete our cash and we might want to do a cash and stock deal, but it's too early to even speculate on that.

Dan Berkery - O'Connor

Okay. The follow up is sort of aside, but in the Minco business do you supply any raw materials similar to the armor model to your potential competitors, and at either Vesuvius, in terms crucibles?

Joel Moskowitz

No, we don't. We are not supplying any of our materials, because we are using everything we can make right now.

Dan Berkery - O'Connor

Right, but if other people entered the markets, would you ever envision it being like the armor model or no, it's a more of a vertically integrated, you are not going to supply

David Reed

No we could do that. We have the capacity, and we would look at the numbers, and if we could do that we would do it.

Dan Berkery - O'Connor

Okay. Thank you very much. Good luck.

David Reed

Okay.

Jerry Pellizzon

Thank you.

Operator

Your final question comes from the line of Gary Liebowitz with Wachovia.

Gary Liebowitz - Wachovia.

Well Jerry CapEx spending for the year, seems like it was a little bit heavy than I saw in the first quarter. Are you still looking for about $50 million.

Jerry Pellizzon

We are. The first quarter was impacted by the acquisition of property in Germany; that was a one time event. We are on par for about 50 million or approximately 50 million for the total of 2008.

Gary Liebowitz - Wachovia.

Okay. And is that changing while in '09 for any reason that we see already.

Jerry Pellizzon

Well, no. as of now we don't have any major changes that would depend on where we are with some of our new programs, but I would say it's not going to change too much.

Gary Liebowitz - Wachovia.

Okay. Thanks again.

Jerry Pellizzon

You're welcome.

Operator

I would like to turn the call back to management for any presentation or any closing remarks.

Joel Moskowitz

Well thank you, Kara. And I would like to thank everyone who asked quite good questions actually. And I know many of you were sort of been on these calls for so long. We're very comfortable that you're knowledgeable about what you were asking and that your interest in Ceradyne continues. And I just want to express management's thank you for that.

I also want to reiterate that as sort of the old timer, the crowd here and the founder at 67, it's exiting for me to see these developments. And it's particularly exiting when Jerry says at reports of 62 and changed percent of our shipments. We have nothing to do with defense. It means that what we said and have been saying for quite a while, that we're an advanced technical ceramic company and we make boron carbide which is a lightest, hardest material for a certain applications. It stops bullet and we save the American lives. That is not the whole company. The whole company is the whole company which includes all of these areas.

Alternative energy now is becoming more and more important not only solar, but unconventional oil recovery in Canada and Colorado, windmill, ceramic bearings. We actually have some small opportunities now in tidal generation of electricity where the pipes require ceramic linings. So they don't ware out. And we are presuming all of these.

One of the interesting things that I'll make a point, because you do follow our company so closely is that we've made our first major a move in integrating from the German operation and the United States. Our non-defense our sales group will now be headed by a senior person in Kempton, Germany, Ms. Barbara Shoff, and we are very pleased about that. Barbara is very experienced person in industrial and consumer applications of technical ceramics, and this is an exciting thing for us to do what we had planned to do when we did the acquisition.

So, thanks again and we are looking forward to our call after Q2. That concludes my comments Kara.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ceradyne Inc. Q1 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts