Costa Mesa-based Ceradyne Inc. plans to issue up to $200 million in debt in a move some say could help the company grow as questions arise over how long the military boom will last.
Ceradyne, known for its ceramic body armor that protects soldiers, filed a plan in late October with regulators to issue convertible warrants.
The company could use the proceeds to pay off about $110 million in bank debt, which requires higher interest payments than a debt offering, according to analysts.
A big part of the debt offering’s balance could go toward acquisitions in a bid to keep up Ceradyne’s eye-popping growth rates.
Military body armor is the growth engine for Ceradyne. But investors are starting to wonder what Ceradyne will do once the military has its fill of armor.
It’s unclear what kind of acquisition the company might make. In 2004, it bought Germany’s ESK Ceramics for a steady stream of materials used to make the armor and for sales in new markets.
For now, Ceradyne hopes to take existing products into new markets, including armor for military and commercial vehicles.
Defense spending that’s fueled armor buying may taper off by mid-2007, said Al Kaschalk, an analyst with Wedbush Morgan Securities Inc. in Los Angeles.
“That’s why having dry powder with the registration filing is something helpful,” he said.
Lightweight armor to protect soldiers makes up about 60% of Ceradyne’s nearly $450 million in yearly sales. Bullets shatter upon hitting the armor, which absorbs the energy of the shot.
The rest of Ceradyne’s business is ceramics for the automotive industry, dentistry and mineral and paper processing.
For the past few years, Ceradyne’s growth has been off the charts amid fighting in Iraq and Afghanistan. Last year, revenue more than doubled to $215.6 million.
In the third quarter, sales rose 67% from a year earlier to $94 million. Net income rose 82% to $13 million.
For 2006, the company expects sales of $440 million to $465 million,growth of 20% to 30%,and earnings of about $60 million, up roughly 30%.
Chief Executive Joel Moskowitz credited the healthy outlook to armor sales, saying in a conference call they were giving the “pop” to the outlook.
Cerdayne had to tap a credit line to finance last year’s ESK buy. Meanwhile, the company has been taking cash from profits to pay down debt. The company had $108 million in long-term debt as of Sept. 30.
At the time of the ESK buy, the company telegraphed to Wall Street that it planned to seek public debt to pay down its credit line.
The company needs a second act to military armor, analysts say.
For now, the Pentagon looks like it’s going to be buying up to a million units of armor, regardless of how long the war in Iraq lasts. About 100,000 units have been shipped so far.
It’s not clear how fast the military could order more. It could be 2007 or 2008 before a serious slowdown in orders is seen.
“Certainly that is the long-term story,” Kaschalk said.
If Ceradyne pursues an acquisition after a debt offering, it could be for a commercial product to help balance out government sales, he said.
Moskowitz declined to comment on the registration during the third-quarter conference call. He did talk about Ceradyne’s efforts to find new areas of growth.
An obvious one: armor for vehicles.
“The vehicle armor market is many times the size of the (personal) body armor market,” said Michael French, an analyst with Kaufman Brothers LLP in New York.
Ceradyne could have some sales of armor for military vehicles in 2006. But rival Armor Holdings Inc. of Jacksonville, Fla., leads. It recently landed a contract worth up to $110 million from the Marines.
Ceradyne also could put armor in vehicles used by government officials and other VIPs in dangerous areas of the world, analyst Kaschalk said.
The size of that market is hard to pin down, Kaschalk said.
The company also has touted its products for use in aluminum processing and forming. Its ceramics are especially heat resistant and can speed up the smelting process.
Another possibility is oil extraction. There’s believed to be untold amount of oil in the ground that is hard to get to. If the oil is heated underground, it could be lifted to the surface.
But heating underground oil requires temperatures that would melt steel. Ceradyne’s ceramics have a higher heat tolerance and could coat a drill to extract the oil.
