Ceradyne Battles Shrinking Profits
By CHRIS CZIBORR
More business usually means more profits. Not for Costa Mesa industrial ceramics maker Ceradyne Inc.
The company said last week it expects third-quarter sales to rise 40% to $14.3 million but will miss Wall Street profit expectations.
Ceradyne, a maker of military, engine and dental products, said it sees net income coming in at 7 cents to 9 cents a share, below analysts’ expectations of 10 cents a share.
The forecast is part of a trend of falling profits at Ceradyne, even as the company rides a wave of defense work.
“The bottom line hasn’t kept pace,” Ceradyne Chief Executive Joel Moskowitz said.
Ceradyne’s stock has felt the fallout: it hit a 52-week low last week. The company’s shares were trading at about 5 last week, down from a high of 12 in late February. Ceradyne counted a recent market value of $42 million.
“In terms of bottom-line results, they’ve had some weak quarters recently,” said Steven Gish, an analyst at Newport Beach-based Roth Capital Partners LLC. “We need to see some additional contracts and better earnings quality.”
So far this year, Ceradyne has seen revenue rise briskly and profits fall even faster.
For the six months ended June 30, Ceradyne saw sales rise 26% to $29.3 million. But the company’s six-month profit of $1.1 million was less than half of the $2.4 million earned in the year-ago period.
Moskowitz blames the divergent results on a “learning curve” in ramping up production of bullet-proof vests for soldiers and components for diesel engines.
To bolster profits and production, Ceradyne said it hired Englewood, Colo.-based JCIT International Inc. to train its workers in what’s known as demand flow technology, which uses mathematical models to improve production.
JCIT is expected to help Ceradyne develop an inventory and workflow control system aimed at lowering production costs and boosting output.
The company also is looking to a new chief financial officer, Jerrold Pellizzon, to help get a handle on expenses. Last month, Pellizzon replaced Howard George, the company’s financial chief since 1995.
“They want to put in more controls and more infrastructure to grow earnings,” analyst Gish said. “They’ve been able to grow the top line, and they have a lot of opportunities in the defense market for their armored products and in diesel engines. But this hasn’t translated into bottom line results yet.”
Earlier this year, Ceradyne voluntarily stopped production on its small-arms protective inserts after a shipment failed an independent test on Pentagon contract specifications. Soldiers wear the ceramic armor plates inside their flak jackets.
The testing impacted Ceradyne’s profits. The company set aside $650,000 from earnings in the second quarter to resolve the testing issues.
“To date we believe that should be sufficient to cover any of the costs of reworking those plates that were in question,” Moskowitz said.
Ceradyne resolved the testing issue using something called “trauma dissipation” technology, which the company had been developing for a while, Moskowitz said.
After the redesign, Ceradyne received government approval of the new armor plates and was awarded a supply contract valued at $5.3 million. Production went up to 6,000 units per month from 4,000, Moskowitz said.
A patent is pending on the new technology, he said.
Ceradyne projects fourth-quarter sales of $14 million to $16 million, in line with one analyst’s estimate and up from $12 million in the year-ago period. Moskowitz said he sees body armor driving sales.
U.S. ground troops used Ceradyne’s vests in Afghanistan and with favorable results, according to Moskowitz.
“A soldier was shot in Operation Anaconda with a Russian round,” he said. “It hit right at the edge of our plate a quarter inch in and two inches from his spine. We have an e-mail from that soldier’s sergeant asking us to thank Ceradyne’s employees for saving the soldier’s life.”
About a quarter of Ceradyne’s sales come from defense.
Moskowitz said a war in Iraq could boost Ceradyne’s defense work.
“Clearly if there are a lot of ground troops in Iraq, they will need lightweight ceramic armor,” he said. “We’re not running at near capacity right now. But we could ramp up within a matter of 60 days to another 50% to 100% of our productive level in the defense arena.”
A suit of armor or batch of suits can be made in about a week, Moskowitz said.
Ceradyne earlier this year leased a 40,000-square-foot facility in Irvine. The company has moved its ceramic dental bracket operation there. The Unitek division of 3M Co. is Ceradyne’s marketing partner in that operation.
The company also is gearing up work making ceramic diesel engine components at the Irvine facility.
“We’re now in the process of using our first robots there to increase throughput and decrease costs of that work there,” Moskowitz said.
The company also has 85,000 square feet of space attached to its Costa Mesa headquarters.
Ceradyne has 380 Orange County employees here and plans to add staff to its armor production.
The company also has plants in Atlanta and Lexington, Ky., along with a sales office in Beijing.
