Ceradyne Stock Gains Ground With Army Deal
So much for plowshares.
After working for much of the last decade to reduce its dependence on military business, Costa Mesa-based Ceradyne Inc. has seen the price of its shares shoot up more than 55% since the September terrorist attacks.
The reason: Wall Street is bullish on the company’s niche making ceramic body armor for elite special operations troops and, soon, rank-and-file infantry units.
Ceradyne landed a contract in October from the Defense Logistics Agency to manufacture armor plates to be worn by army infantry soldiers inside their flak jackets.
The $12.5-million order to provide as many as 28,000 plates is contingent upon Ceradyne meeting government quality specifications. But if its armor proves up to snuff, company management figures, there’s a lot more where that came from.
“We’re talking about 400,000 soldiers,” said Joel Moskowitz, Ceradyne founder, chairman and chief executive. “That’s a lot of armor and a huge potential market for us.”
Moskowitz figures defense contracts, which accounted for about one-third of Ceradyne’s 2000 revenue of $46 million, could approach 40% to 45% of sales over the next few years, given the government’s strong interest in outfitting soldiers for the new war on terrorism.
That’s a hefty chunk of business for a company that paid dearly for its heavy reliance on military customers during the last defense downturn. But company watchers say Ceradyne has come a long way in the last decade, developing advanced ceramic components used in everything from diesel engines to orthodontics. With sales of these non-defense products showing strong growth, analysts say the company is well positioned to reap the benefits of both swords and plowshares.
Shares of Ceradyne rose 15cents Friday to $10.05 on Nasdaq.
“When your commercial business is growing in excess of 20% [a year] and the military is growing even faster, that’s a problem most companies would like to have,” said Mike Crawford, equity analyst for B. Riley & Co.
Founded in 1967, Ceradyne learned the hard way about putting all its eggs in the defense basket.
The company produced advanced ceramic components for the nation’s nuclear arsenal that at one time accounted for 80% of sales. But the crumbling iron curtain and cuts in U.S. military spending sent sales, profit and the stock price into a nearly decade-long tailspin that began in the mid-1980s.
Ceradyne abandoned its core product and scrambled to find civilian markets for its technology. But the company never gave up on another specialty--producing ceramic armor for the military. Over the years, Ceradyne has supplied armored seats, cockpits and flooring systems for combat helicopters such as the Apache and Blackhawk, as well as protective tiles for fixed-wing aircraft, including the C-130 transport plane.
Trouble is, there was insufficient volume in those products to sustain the company. Far more promising, Moskowitz reasoned, was protecting individual soldiers in the field, especially with post-Cold War military strategy relying less on warheads and more on high mobility, rapid strikes and peacekeeping missions.
The 1993 ambush in Somalia that resulted in the deaths of 18 U.S. soldiers, most of them elite Army Rangers, convinced Moskowitz and others of the military’s need for better protective gear. Some of those soldiers had opted not to wear their body armor, which was heavy and cumbersome.
“Our best troops were killed not by sophisticated technology but by guys in tennis shoes carrying machine guns,” said Moskowitz, 62. “There was a realization that we needed a better class of body armor to defeat these kinds of threats.”
What followed was several years of research and development to create a product that was light enough to allow easy mobility but still strong enough to protect soldiers from large-caliber rounds that can’t be stopped by conventional flak jackets.
Plates Able to Stop .50-Caliber Rounds
Ceradyne’s process begins with boron carbide, a fine, black powder that is “hot-pressed” or molded into torso-shaped plates, then fired at temperatures that can reach 4,000 degrees Fahrenheit. The resulting product is relatively light--weighing 4.5 pounds to 5.5 pounds, depending on the size of the plate--but so hard that it can be cut or sanded only with diamond grinders.
Fitted with Kevlar or a similar strong polymer backing, then encased in ballistic nylon, the plates are designed to be slipped inside front and back inner pockets of a flak jacket, or “outer tactical vest,” in Army speak.
Moskowitz said Ceradyne’s most advanced plates are capable of stopping .50-caliber rounds, the large bullets used in some machine guns and sniper rifles.
The company has an in-house firing range where an employee blasts as many as 50 armor plates a day using a specially designed, stationary gun to ensure they can stop the lethal payload.
On a recent afternoon, Moskowitz showed a visitor the quarter-sized holes left in the armor by .30-caliber bullets during testing. The mini-craters were still warm to the touch, but the rounds had not penetrated the armor’s polymer backing--the last line of defense before a bullet reaches a soldier’s body.
“We don’t want any screw-ups,” said Moskowitz, pointing to a malevolent-looking bucket of spent shells.
Ceradyne won its first major contract to supply bullet-stopping body armor to U.S. special operations units in 1998, which so far has resulted in nearly $20 million in sales. Moskowitz was so encouraged by the prospects for future orders that he gambled on a $4-million expansion of the company’s facility in Costa Mesa. That bet appears to have paid off after Sept. 11, when the Pentagon speeded up its timetable for upgrading Army infantry flak jackets with bullet-stopping ceramic panels known as “small arms protective inserts.”
Ceradyne was one of three U.S. contractors selected to provide plates for the Army contract, though its armor still must win final approval for that contract. Moskowitz is confident that approval is imminent and that bigger contracts lie ahead.
But at least one competitor said Ceradyne caught a lucky break. Until last month, Phoenix-based Simula Inc. had been the lone contractor for the protective-insert business. Brad Forst, Simula’s chief executive, figured it would have stayed that way if not for the terrorist attacks, which he said motivated the Defense Logistics Agency to secure other sources of supply. Simula was awarded 45%, or $15 million, of the latest contract, the largest share, bringing its military orders for ceramic body armor to $70 million since 1998.
“We’ve dominated that market ... and I believe we would have continued to do so if not for Sept.11,” Forst said. “The good news is that there is plenty of business to go around.”
Firm’s Future May Be in Non-Defense Sectors
How long this windfall lasts is anyone’s guess. Lt. Col. Cindy Bedell, product manager for soldier equipment at Ft. Belvoir in Virginia, said the Army is researching a variety of advanced armor materials in hopes of someday producing a full-body exoskeleton to protect combat troops. But she said that’s years in the future. In the meantime, “ceramic plates will be it for a while,” she said.
That’s good news for Ceradyne, which employs 300 at its Costa Mesa headquarters, where it is looking to hire an additional 20 workers to meet increased demand for its ceramic armor.
The company also manufactures dispenser cathodes used in radar systems and satellites at a facility in Lexington, Ky., while its Scottdale, Ga., factory makes nose cones for next-generation defense missiles.
But stock analyst Crawford said the company’s best long-range opportunities could lie with its non-defense businesses, particularly automotive. Engine designers for years have been experimenting with ceramic engine parts, which are lighter and more durable than their metal counterparts but much more expensive. Ford Motor Co. in 1986 bought 15% of Ceradyne, transferring a slew of technology in the hopes of jointly developing cost-effective engine components to be used in passenger cars.
To date, no product from that venture has ended up in a Ford vehicle. But Ceradyne has managed to get some of its ceramic valve-train parts into production with a major diesel engine manufacturer, which Ceradyne declined to name but industry sources said is Michigan-based Detroit Diesel.
At present, Ceradyne is shipping 3,000 cam rollers a week out of the Costa Mesa plant, which Moskowitz said will increase to 17,000 weekly by early next year. Industry watchers said that kind of volume is a promising sign, given the technical and cost challenges.
“If this were easy, everyone would have been doing it a long time ago,” said Bob Larsen, director of the Center for Transportation Research at the Illinois-based Argonne National Laboratory. “It’s really good to see them moving ahead and getting things to market. That is really a success story.”
Orthodontics has turned out to be another strong business for Ceradyne. Through an agreement with Monrovia-based 3M Unitek, a division of Minnesota-based conglomerate 3M Co., Ceradyne manufactures the clear ceramic brackets found in Clarity brand translucent braces.
Since the brand was introduced in 1996, Moskowitz figured, Ceradyne has produced enough brackets to improve the smiles of more than 1 million people.
After years of struggle, Moskowitz’s goal is to propel Ceradyne past the $100-million sales mark by 2005 and keep the long-suffering stock price on an upward trajectory.
“This is the most exciting time of my life,” Moskowitz said. “We’ve always had the technology. Now there is plenty of business, and we’re going to get our share.”
