Ceradyne, Inc.

3169 Red Hill Avenue
Costa Mesa, California 92626
U.S.A.
Telephone: (714) 549-0421
Fax: (714) 549-5787
Web site: http://www.ceradyne.com

Public Company
Incorporated: 1967
Employees: 500
Sales: $101.47 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: CRDN
NAIC: 327112 Vitreous China, Fine Earthenware and Other Pottery Product Manufacturing; Porcelain Electrical Supply Manufacturing; 334411 Electron Tube Manufacturing; 334419 Other Electronic Component Manufacturing

Ceradyne, Inc. develops and manufactures advanced ceramic products and components for defense, industrial, automotive, and commercial applications. The company's ceramic products possess a number of attractive characteristics, including the ability to withstand extremely high temperatures, resistance to corrosion and wear, and hardness coupled with light weight. Ceradyne relies heavily on defense spending, producing ceramic armor for military personnel and attack helicopters. The company also manufactures ceramic diesel engine components, and aesthetic ceramic orthodontic brackets through a partnership with 3M. Ceradyne operates five manufacturing facilities in California, Kentucky, and Georgia.

Origins

Joel Moskowitz was 28 years old when he started his entrepreneurial career, a venture that began at his kitchen table in 1967. In the years leading up to the formation of Ceradyne, Moskowitz gained the experience he needed to launch his own company. After earning a degree in ceramics engineering from Alfred University in 1961, he spent five years at Interpace working in ceramics research. At night, he worked toward an M.B.A. degree at the University of Southern California; he received his degree in 1966. Moskowitz's faith in the potential of ceramics drove him to start his own company, a conviction that shaped Ceradyne's strategic focus and positioned it on the leading edge of technology related to technical ceramics. "I have always felt that advanced technical ceramics would be the pacing material that would allow other technologies to advance," he recalled in a June 2002 interview with Ceramic Industry. "I believed, even early on," he added, "that Ceradyne should focus in the area of non-oxide structural ceramics where, even as a small company, its technology focus would allow it to excel."

Moskowitz teamed with another Interpace ceramics researcher to start Ceradyne, an enterprise founded with $5,000 of Moskowitz's wife's savings. At the kitchen table, Moskowitz and his colleague discussed the intricacies of their idea: to create a single crystal of potassium tantalate niobate for use as an electro-optic modulator—a device that modified light passing through material. The initial project was a success, eventually giving Ceradyne its first federal government contract and spawning the development of proprietary technology. With its own technology, Ceradyne could focus on developing more advanced technical ceramics, which enabled the company to focus on defense applications, a market of extreme importance to Ceradyne's growth.

Moskowitz was able to leverage Ceradyne's initial success into physical expansion. During the early 1970s, he moved the company to a larger facility in Costa Mesa, California, and installed hot presses for the production of hot pressed boron carbide, a material used to produce Kevlar systems for U.S. and allied military attack helicopters. Ceradyne's ability to produce hot pressed boron carbide anchored the company to a vast, lucrative market, positioning it as a leading supplier of ceramic armor. In the years to come, ceramic armor would be incorporated into a variety of defense applications, including its use for personnel protection and military ground-based vehicles.

For Moskowitz, the start was positive, but Ceradyne's business volume was not sufficient to sustain a capital-intensive operation. The company was barely surviving on small research projects. Advanced ceramics was a forward-looking business, one that required continual and extensive research and development efforts to produce products for anticipated needs. Ceradyne, in relation to other massive defense contractors, was small, dwarfed by the likes of Martin Marietta and McDonnell Douglas. Moskowitz, trying to compete against industry behemoths, was struggling. He was forced to take another job to help keep Ceradyne in business. "We were going after markets that didn't exist," he recalled in a July 14, 1986 interview with Forbes, "and developing technology that had no products."

Strategic Alliances: 1970s–80s

What Moskowitz needed was a financial partner, a company able to give Ceradyne the resources to compete in a capital-intensive business. During the mid-1970s, Moskowitz's salvation arrived. TRE Corporation, a $70 million-in-sales construction supplies conglomerate, approached Moskowitz, offering to buy his company. TRE executives gave Moskowitz the opportunity he wanted, promising to provide Ceradyne with the capital that would enable the company to move into higherprofit-margin manufacturing. Further, TRE officials promised to let Moskowitz manage Ceradyne without interference. Moskowitz agreed to the proposal, leading to the merger between TRE and Ceradyne in 1974.

Moskowitz's hopes for salvation were dashed not long after he agreed to TRE's proposal. TRE's construction supplies business faltered soon after the merger, causing the company's earnings to plunge. TRE reorganized its business and the company was forced to divest some of its assets to raise cash. Ceradyne was put up for sale in the wake of TRE's financial debacle, fueling Moskowitz's apprehension about his future and about the future of Ceradyne. A corporate suitor, Kyoto Ceramics, a company based in Japan, inquired about Ceradyne, expressing an interest in purchasing the small company. Moskowitz's position was precarious, but he was able to negotiate a deal with the Japanese buyers that calmed his fears. Kyoto executives agreed that Ceradyne would maintain its own facilities and keep its management after the deal was completed, which renewed Moskowitz's hope that salvation had arrived in the guise of another partnership. The transaction was completed in 1978, when Ceradyne generated $1.5 million in sales. The company was allowed to establish its own performance goals and its identity as a Kyoto subsidiary was shrouded.

Not long after the acquisition of Ceradyne by Kyoto, the prospects for the use of advanced ceramics in defense applications brightened considerably. The use of ceramics in military applications had supported Ceradyne for years before its corporate marriage to Kyoto, but during the early 1980s the Pentagon's attraction to ceramics intensified, its interest piqued by the material's light weight, strength, and high melting point. When the immense financial resources at the Pentagon's disposal were focused on advanced ceramics, a slew of federal contracts followed, invigorating Ceradyne's business significantly. There was a problem, however. The Pentagon disliked foreign companies having any equity interest in defense contractors, a posture that worked against the Kyoto-owned Ceradyne. In response to the federal government's stance, the Japanese company was forced to sell Ceradyne to American interests, leading to the leveraged buyout of Ceradyne by Moskowitz and his business associates for $2.3 million in cash and an agreement for a 3 percent royalty on sales.

After a couple of failed partnerships, Moskowitz found himself in charge of his company in the purest sense for the first time in a decade. Pentagon-sponsored contracts flowed after he severed ties with Kyoto, but the debt incurred from the leveraged buyout weighed on Ceradyne's ability to function effectively. Moskowitz led his company through an initial public offering (IPO) of stock in July 1984, but the capital raised from the offering was not enough to vanquish Ceradyne's weakness as an under-capitalized company competing in a research-anddevelopment-intensive industry. As before, Moskowitz needed a partner. "We're small," he said in his July 14, 1986 interview with Forbes. "We can't spend 15 years researching something before we market it."

Moskowitz's need for a partner was answered not long after he completed Ceradyne's IPO. In mid-1985, he was approached by Ford Motor Company, a company whose involvement in ceramics research began in the early 1970s, when the automobile manufacturer sponsored an extensive exploration into advanced uses for ceramics. Ford was interested in forging a joint venture partnership with Ceradyne, a proposal that Moskowitz accepted. In March 1986, the two companies consummated the deal, forming a joint product development program with the long-term objective of developing ceramic components for automobiles. Under the terms of the agreement, Ford invested $10 million in Ceradyne, which eventually gave the automobile manufacturer a 16 percent stake in Moskowitz's company. Ford also gave Ceradyne technology it had developed, which included roughly 80 ceramic patents. The partnership with Ford promised great things, giving Ceradyne much needed financial support and the opportunity to diversify. In the year before its partnership with Ford, Ceradyne generated $16.8 million in sales, 90 percent of which was derived from defense-related work. Although ceramic automobile engine parts were not commercially viable in the mid-1980s, the prospect of a new, nonmilitary source of revenue boded well for Ceradyne's future.

Company Perspectives:

"Ceradyne's objective is to meet customer requirements for advanced state-of-the-art technical ceramics. We believe that the pacing factor in many technologies is the limitation of conventional materials. Ceradyne strives to produce cost-effective, technical ceramic solutions in order to allow our customers to reach higher levels of performance."

—Joel Moskowitz, president and CEO

The partnership with Ford occurred at roughly the same time Moskowitz completed another important move toward diversifying his product line. In 1986, Ceradyne forged a relationship with 3M's Unitek Division. The two companies joined forces to develop and manufacture ceramic orthodontic brackets. The brackets, marketed under the brand name Clarity, became an important part of Ceradyne's business, eventually accounting for nearly one-fifth of the company's annual sales. Moskowitz also completed two acquisitions in 1986, purchasing Lexington, Kentucky-based Semicon Associates and Scottdale, Georgia-based Thermo Materials. Semicon manufactured cathodes that were used in satellite communications and microwave applications. Thermo Materials produced fused silica ceramic products used by the glass and metal fabrication industries.

The additions to Ceradyne's operations in 1986 caused the company's revenue to soar. After posting $16.8 million in sales in 1985, the company recorded $25.6 million in sales in 1987. The surge in sales was fleeting, however. The total recorded in 1987 would not be eclipsed for nine years. The company's sales volume steadily shrank during the late 1980s and early 1990s, reaching a low point of $15.9 million in 1993. The cause for the extended decline stemmed from the company's reliance on defense spending, which had been reduced somewhat after the diversification of 1986 but not enough to compensate for the end of the "Cold War." The collapse of the Soviet Union left the Pentagon without its greatest perceived threat, leading to a decline in defense spending. Ceradyne lost one of its principal defense contracts and suffered cutbacks in several other defense contracts. Sales of Ceradyne's translucent ceramic orthodontic brackets also declined, dropping from a peak of $6.2 million in 1988 to $400,000 in 1994, a consequence of excess inventory levels accumulated by Unitek and technical problems experienced by orthodontists. As revenues sagged, the company's profitability suffered, resulting in annual net losses that dragged on into the mid-1990s.

Ceradyne suffered through years of disappointing financial results before prosperous times returned. The company posted a loss every year between 1987 and 1994, racking up more than $20 million in losses. Ceradyne returned to profitability in 1995, when the company recorded $2 million in net income. The company remained profitable for the remainder of the decade, but it demonstrated only modest revenue growth. The $23.4 million generated in 1995—a total less than the amount recorded in 1987—increased to only $30.3 million by the end of the decade. The company was helped somewhat during this period by an improved ceramic orthodontic bracket it developed and by the market introduction of ceramic diesel engine parts, but the lack of escalating defense spending held its growth in check.

Rapid Growth in the 21st Century

The early years of the 21st century were years of dynamic growth for Ceradyne. Military spending increased dramatically, as the United States launched attacks against Afghanistan and Iraq, creating a wealth of business for defense contractors. Ceradyne's defense-related business thrived, particularly the company's bullet-resistant vests, which accounted for one-quarter of sales in 2001. In the fall of 2001, the U.S. military distributed Ceradyne's vests to special forces in Afghanistan, where the performance of the ceramic garments convinced the U.S. Defense Department to seek bids for a lighter vest to be worn by infantry troops. The military also used Ceradyne's ceramic pads for other uses, including providing a defensive layer on helicopter seat bottoms. Ceradyne's business flourished as the military campaigns intensified. In 2001, the company's sales reached $45 million and its net income swelled to $4 million, more than three times the total registered two years earlier.

The invasion of Iraq in 2003 helped Ceradyne record the most impressive financial year in its history. Driven by the demand for ceramic body armor, the company's sales soared, eclipsing $100 million for the first time. The company's net income reached $11.2 million in 2003, more than quadruple the total recorded in 2002. Flush with cash, the company was able to complete an acquisition in May 2004, when it purchased San Diego, California-based Quest Technology LP, a privately held company that molded ceramic shapes for medical applications. The acquisition of Quest represented an important step toward diversifying away from defense-related business, but as the company prepared for its future much of its financial vitality depended on a robust defense budget and its ability to bid competitively for military work.

Principal Divisions

Ceradyne Advanced Ceramic Operations; Ceradyne Thermo Materials; Semicon Associates.

Key Dates:

1967:

Joel Moskowitz cofounds Ceradyne.

1974:

TRE Corp. acquires Ceradyne.

1978:

Kyoto Ceramics acquires Ceradyne.

1984:

Ceradyne completes its initial public offering of stock.

1986:

Ceradyne begins developing ceramic orthodontic brackets and forms a joint venture with Ford Motor Co.

1995:

After losing more than $20 million during a seven-year period, Ceradyne posts a profit of $2 million.

2001:

The use of Ceradyne's ceramic body armor by U.S. military forces in Afghanistan fuels the company's growth.

2003:

Ceradyne's sales reach $100 million for the first time.

Principal Competitors

Cookson Group PLC; CoorsTek, Inc.; Kyocera Corporation.

Further Reading

"Ceradyne Gets Its Acquisition," Performance Materials, May 24, 2004, p. 2.

"Ceradyne Reaches New Record," Performance Materials, May 10, 2004, p. 6.

"Ceradyne Revenues Soar, Profits Sag," Performance Materials, March 17, 2003, p. 3.

"Ceradyne Sees Rising Sales, Buys Factory," Performance Materials, October 27, 2003, p. 3.

Chafee, John H., "The Hug of the Bear," Forbes, July 14, 1986, p. 56.

Cole, Benjamin Mark, "Small-Cap Ceradyne Finds Niche in Equipping Troops," Los Angeles Business Journal, October 29, 2001, p. 52.

"Military Buildup May Boost Ceradyne Fortunes," Performance Materials, November 12, 2001, p. 3.

Payne, Susan, "Advancing Technical Ceramics," Ceramic Industry, June 2002, p. 12.

—Jeffrey L. Covell