XNAS:CRDN Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission File No. 000-13059
 

(Exact name of Registrant as specified in its charter)
 

 
Delaware
33-0055414
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
   
3169 Red Hill Avenue, Costa Mesa, CA
92626
(Address of principal executive)
(Zip Code)
   
 
Registrant’s telephone number, including area code (714) 549-0421
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

            Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
 
Yes  ¨    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of July 19, 2012
Common Stock, $0.01 par value
 
  24,200,145 Shares
 
Exhibit Index on Page 32
 
 

 
 
CERADYNE, INC.
 
INDEX
 
     
PAGE NO.
 
PART I.
FINANCIAL INFORMATION
     
         
Item 1.
Unaudited Consolidated Financial Statements
    3  
           
 
Consolidated Balance Sheets – June 30, 2012 and December 31, 2011
    3  
           
 
Consolidated Statements of Income – Three and Six Months Ended June 30, 2012 and 2011
    4  
           
 
Consolidated Statements of Comprehensive Income – Six Months Ended June 30, 2012 and 2011
    5  
           
 
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011
    6  
           
 
Notes to Consolidated Financial Statements
    7-17  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    18-29  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    30-31  
           
Item 4.
Controls and Procedures
    31  
           
PART II.
OTHER INFORMATION
       
           
Item 1.
Legal Proceedings
    32  
           
Item 1A.
Risk Factors
    32  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    32  
           
Item 3.
Defaults Upon Senior Securities
    32  
           
Item 4.
Mine Safety Disclosures
    32  
           
Item 5.
Other Information
    32  
           
Item 6.
Exhibits
    32  
         
SIGNATURE
    33  

 
 
2

 

CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
June 30, 2012
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Unaudited Consolidated Financial Statements
 
CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
 

 
June 30,
2012
   
December 31,
2011
 
(Unaudited)
CURRENT ASSETS
   
Cash and cash equivalents
$ 35,261     $ 50,275  
Short-term investments
  232,821       224,772  
Accounts receivable, net of allowances for doubtful accounts of $2,789
             
and $1,547 at June 30, 2012 and December 31, 2011, respectively
  73,834       73,646  
Other receivables
  5,084       6,040  
Inventories
  130,130       117,273  
Production tooling, net
  10,833       11,792  
Prepaid expenses and other
  35,300       43,860  
Deferred tax asset
  5,191       5,782  
TOTAL CURRENT ASSETS
  528,454       533,440  
PROPERTY, PLANT AND EQUIPMENT, net
  235,525       243,376  
LONG TERM INVESTMENTS
  21,785       15,026  
INTANGIBLE ASSETS, net
  98,136       100,690  
GOODWILL
  42,720       42,926  
OTHER ASSETS
  13,520       12,673  
TOTAL ASSETS
$ 940,140     $ 948,131  
               
CURRENT LIABILITIES
             
Accounts payable
$ 22,999     $ 29,191  
Accrued expenses
  26,340       30,470  
Income taxes payable
  7,082       5,331  
Short-term debt
  91,241       89,294  
         TOTAL CURRENT LIABILITIES
  147,662       154,286  
EMPLOYEE BENEFITS
  24,078       24,462  
OTHER LONG TERM LIABILITIES
  37,569       37,224  
DEFERRED TAX LIABILITY
  23,429       23,461  
TOTAL LIABILITIES
  232,738       239,433  
COMMITMENTS AND CONTINGENCIES (Note 13)
             
SHAREHOLDERS’ EQUITY
             
Common stock, $0.01 par value, 100,000,000 authorized, 24,179,414 and 24,175,051 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
  242       242  
Additional paid-in capital
  121,263       121,940  
Retained earnings
  586,793       583,420  
Accumulated other comprehensive income (loss)
  (896 )     3,096  
TOTAL SHAREHOLDERS’ EQUITY
  707,402       708,698  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 940,140     $ 948,131  
 
See accompanying condensed notes to Consolidated Financial Statements

 
3

 

CERADYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 
   
Three Months Ended
 June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
NET SALES
  $ 130,643     $ 145,376     $ 236,952     $ 295,478  
COST OF GOODS SOLD
    93,941       92,419       171,106       184,433  
Gross profit
    36,702       52,957       65,846       111,045  
OPERATING EXPENSES
                               
Selling, general and administrative
    18,839       19,456       36,349       38,292  
Research and development
    4,717       3,214       8,347       6,281  
Restructuring - plant closure and severance
    -       -       673       -  
Acquisition related charges
    231       838       231       1,422  
      23,787       23,508       45,600       45,995  
INCOME FROM OPERATIONS
    12,915       29,449       20,246       65,050  
OTHER INCOME (EXPENSE):
                               
Interest income
    1,128       877       2,194       1,675  
Interest expense
    (1,825 )     (1,669 )     (3,568 )     (3,117 )
Miscellaneous
    (791 )     677       (1,449 )     590  
      (1,488 )     (115 )     (2,823 )     (852 )
                                 
INCOME BEFORE PROVISION FOR INCOME TAXES
    11,427       29,334       17,423       64,198  
PROVISION FOR INCOME TAXES
    4,581       10,203       6,795       21,472  
NET INCOME
  $ 6,846     $ 19,131     $ 10,628     $ 42,726  
BASIC INCOME PER SHARE
  $ 0.28     $ 0.77     $ 0.44     $ 1.72  
DILUTED INCOME PER SHARE
  $ 0.28     $ 0.76     $ 0.44     $ 1.70  
WEIGHTED AVERAGE SHARES OUTSTANDING:
                               
BASIC
    24,204       24,898       24,207       24,869  
DILUTED
    24,307       25,224       24,300       25,172  
 

See accompanying condensed notes to Consolidated Financial Statements

 
4

 

CERADYNE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
 

   
Three Months Ended
 June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
NET INCOME
  $ 6,846     $ 19,131     $ 10,628     $ 42,726  
FOREIGN CURRENCY TRANSLATION
    (10,850 )     5,684       (5,285 )     16,620  
UNREALIZED GAIN (LOSS) ON INVESTMENTS
    (376 )     (116 )     1,294       5  
COMPREHENSIVE INCOME (LOSS)
  $ (4,380 )   $ 24,699     $ 6,637     $ 59,351  
 

See accompanying condensed notes to Consolidated Financial Statements

 
5

 

CERADYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 10,628     $ 42,726  
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
               
Depreciation and amortization
    18,215       19,678  
Amortization of bond premium
    223       661  
Non cash interest expense on convertible debt
    1,952       1,795  
Deferred income taxes
    (266 )     249  
Stock compensation
    2,266       2,026  
(Gain) loss on marketable securities
    (54 )     103  
(Gain) loss on equipment disposal
    (12 )     178  
Change in operating assets and liabilities (net of effect of businesses acquired):
               
Accounts receivable, net
    (647 )     914  
Other receivables
    904       1,638  
Inventories
    (13,908 )     (11,287 )
Production tooling, net
    946       (2,866 )
Prepaid expenses and other assets
    8,494       (9,600 )
Accounts payable and accrued expenses
    (10,386 )     6,001  
Income taxes payable
    1,919       3,384  
Other long term liability
    373       2,762  
Employee benefits
    645       422  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    21,292       58,784  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
    (10,524 )     (17,055 )
Purchases of marketable securities
    (29,354 )     (63,053 )
Proceeds from sales and maturities of marketable securities
    16,499       35,757  
Cash paid for acquisitions
    -       (27,673 )
       Cash paid for other investments     (939 )     -  
Proceeds from sale of equipment
    42       1,442  
NET CASH USED IN INVESTING ACTIVITIES:
    (24,276 )     (70,582 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of stock due to exercise of options
    317       991  
Excess tax benefit due to exercise of stock options
    618       1,827  
Common stock cash dividends paid
    (7,255 )     -  
Shares repurchased
    (4,027 )     (3,889 )
NET CASH USED IN FINANCING ACTIVITIES
    (10,347 )     (1,071 )
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    (1,683 )     3,896  
DECREASE IN CASH AND CASH EQUIVALENTS
    (15,014 )     (8,973 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    50,275       53,436  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 35,261     $ 44,463  
 
See accompanying condensed notes to Consolidated Financial Statements

 
6

 

CERADYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(Unaudited)
 
1.  
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in Ceradyne’s annual report on Form 10-K for the year ended December 31, 2011.
 
2.  
Share-Based Compensation
 
Share-based compensation expense for the three and six months ended June 30, 2012 was $1.0 million and $2.3 million, respectively, which was related to restricted stock units only as the Company did not have any share-based compensation expense for stock options. This compared to $1.1 million and $2.0 million for the three and six months ended June 30, 2011, respectively.
 
Share-based compensation expense is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Forfeitures are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company’s Consolidated Statements of Income for the three and six month periods ended June 30, 2012 includes compensation expense for share-based payment awards based on the estimated grant-date fair value. Since share-based compensation expense recognized in the Consolidated Statements of Income for the three and six month periods ended June 30, 2012 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
 
The Company maintains the 1994 Stock Incentive Plan and 2003 Stock Incentive Plan.
 
The Company was authorized to grant options for up to 2,362,500 shares under its 1994 Stock Incentive Plan. The Company has granted options for 2,691,225 shares and has had cancellations of 397,811 shares through June 30, 2012. There are no remaining stock options available to grant under this plan. The options granted under this plan generally became exercisable over a five-year period for incentive stock options and six months for nonqualified stock options and have a maximum term of ten years.
 
The 2003 Stock Incentive Plan was amended in 2005 to allow the issuance of Restricted Stock Units (the “Units”) to eligible employees and non-employee directors. The Units are payable in shares of the Company’s common stock upon vesting. For directors, the Units typically vest annually over three years following the date of their issuance. For officers and employees, Units typically vest annually over five years following the date of their issuance.
 
The Company may grant options and Units for up to 1,875,000 shares under the 2003 Stock Incentive Plan. The Company has granted options for 475,125 shares and Units for 1,003,869 shares under this plan through June 30, 2012. There have been cancellations of 135,393 shares associated with this plan through June 30, 2012. The options under this plan have a life of ten years.

During the three and six months ended June 30, 2012 and 2011, the Company issued Units to certain directors, officers and employees with weighted average grant date fair values and Units issued as indicated in the table below. The Company records compensation expense for the amount of the grant date fair value on a straight line basis over the vesting period.
 
Share-based compensation expense reduced the Company’s results of operations as follows (dollars in thousands):
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Share-based compensation expense recognized:
                       
General and administrative, options
  $ -     $ -     $ -     $ -  
General and administrative, restricted stock units
    1,041       1,058       2,266       2,026  
Related deferred income tax benefit
    (415 )     (422 )     (904 )     (807 )
Decrease in net income
  $ 626     $ 636     $ 1,362     $ 1,219  
Decrease in basic earnings per share
  $ 0.03     $ 0.03     $ 0.06     $ 0.05  
Decrease in diluted earnings per share
  $ 0.03     $ 0.03     $ 0.06     $ 0.05  
 
 
7

 
As of June 30, 2012, all stock options were vested, consequently there was no unrecognized compensation cost related to them. The aggregate intrinsic value of stock options exercised was $1.1 million and $4.0 million for the six months ended June 30, 2012 and 2011, respectively.
 
As of June 30, 2012, there was approximately $9.6 million of total unrecognized compensation cost related to non-vested Units granted under the 2003 Stock Incentive Plan. That cost is expected to be recognized over a weighted average period of 3.3 years.
 
The following is a summary of stock option activity:
 
   
Six Months Ended
June 30, 2012
 
   
Number of
Options
   
Weighted Average
Exercise
Price
 
Outstanding, December 31, 2011
    259,150     $ 15.80  
Options exercised
    (57,275 )   $ 5.51  
Outstanding, June 30, 2012
    201,875     $ 18.71  
Exercisable, June 30, 2012
    201,875     $ 18.71  

The following is a summary of Unit activity:

   
Six Months Ended
June 30, 2012
 
   
Number of
Units
   
Weighted Average
Grant Date Fair Value
 
Non-vested Units at December 31, 2011
    362,727     $ 31.43  
Granted
    134,004     $ 29.13  
Forfeited
    (12,984 )   $ 31.97  
Vested
    (97,883 )   $ 33.33  
Non-vested Units at June 30, 2012
    385,864     $ 30.13  

The following table summarizes information regarding options outstanding and options exercisable at June 30, 2012:

     
Outstanding and Exercisable
 
Range of Grant Prices
   
Number of
Options
   
Average Remaining
Contractual Life (Years)
   
Weighted Average
Exercise Price
   
Aggregate Intrinsic
Value (000s)
 
  $2.98 - $4.58       6,075       0.40     $ 3.69     $ 133  
  $16.89 - $18.80       109,450       1.35     $ 17.06     $ 938  
  $21.46 - $22.67       86,350       2.12     $ 21.86     $ 325  
          201,875       1.65     $ 18.71     $ 1,396  


 
8

 

The following table summarizes information regarding Units outstanding at June 30, 2012:

     
Outstanding
 
Range of Grant Prices
   
Number of
Units
   
Average
Remaining
Contractual
Life (Years)
   
Weighted
Average
Grant Date
Fair Value
 
  $16.53 - $28.10       191,569       2.27     $ 21.87  
  $30.99 - $39.43       114,075       3.86     $ 33.42  
  $40.73 - $45.70       79,000       2.72     $ 44.66  
  $66.35 - $81.18       1,220       0.10     $ 77.26  
          385,864       2.83     $ 30.13  
 
 
3.  
Net Income Per Share
 
Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and Units using the treasury stock method and the net share settlement method for the convertible debt. During the three and six months ended June 30, 2012 and 2011, the average trading price of the Company’s stock did not exceed the conversion price of the convertible debt, therefore there was no impact to the calculation of diluted shares.
 
The following is a summary of the number of shares entering into the computation of net income per common and potential common shares (in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011 
 
Weighted average number of shares outstanding
    24,204       24,898       24,207       24,869  
Dilutive stock options
    79       228       85       224  
Dilutive restricted stock units
    24       98       8       79  
Dilutive contingent convertible debt common shares
    -       -       -       -  
Number of shares used in fully diluted computations
    24,307       25,224       24,300       25,172  
 
The following are the number of shares not included in the fully diluted computation pertaining to restricted stock units as their impact would be anti-dilutive.
 
   
Three Months Ended June 30,
   
Six Months Ended June 30, 
 
   
2012
   
2011
   
2012
   
2011
 
Anti-dilutive restricted stock units
    194       107       194       108  
 
 
9

 
 
4.  
Composition of Certain Financial Statement Captions
 
Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs include the cost of material, labor and manufacturing overhead. The following is a summary of the inventory components as of June 30, 2012 and December 31, 2011 (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
Raw materials
  $ 12,829     $ 8,533  
Work-in-process
    78,426       65,645  
Finished goods
    38,875       43,095  
    $ 130,130     $ 117,273  
 
Property, plant and equipment are recorded at cost and consist of the following (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
Land
  $ 18,314     $ 18,550  
Buildings and improvements
    116,477       117,961  
Machinery and equipment
    235,185       233,702  
Leasehold improvements
    8,685       8,482  
Office equipment
    40,013       37,906  
Construction in progress
    14,136       11,961  
      432,810       428,562  
Less accumulated depreciation and amortization
    (197,285 )     (185,186 )
    $ 235,525     $ 243,376  
 
The components of intangible assets are as follows (in thousands):
 

   
June 30, 2012
   
December 31, 2011
 
   
Gross
Amount
   
Accumulated
Amortization
   
Net
Amount
   
Gross
Amount
   
Accumulated
Amortization
   
Net
Amount
 
Amortizing Intangible Assets
                                   
Backlog
  $ 1,797     $ 1,797     $ -     $ 1,808     $ 1,808     $ -  
Developed technology
    70,474       8,072       62,402       70,590       7,233       63,357  
Tradename
    4,110       746       3,364       4,110       698       3,412  
Customer relationships
    47,604       17,688       29,916       47,604       16,212       31,392  
Non-compete agreement
    1,100       800       300       1,100       775       325  
    Non-amortizing tradename
    2,154       -       2,154       2,204       -       2,204  
Total
  $ 127,239     $ 29,103     $ 98,136     $ 127,416     $ 26,726     $ 100,690  

The estimated useful lives for intangible assets are:

Identified Intangible Asset
 
Estimated Useful Life in Years or Months
Developed technology
 
10 years – 20 years
Tradename
 
10 years
Customer relationships
 
10 years – 12.5 years
Backlog
 
1 month – 3 months
Non-compete agreement
 
15 months

Amortization of definite-lived intangible assets will be approximately (in thousands): $5,689 for the balance of fiscal year 2012, $6,014 in fiscal year 2013, $8,213 in fiscal year 2014, $10,921 in fiscal year 2015 and $13,427 in fiscal year 2016.

 
10

 
The roll forward of the goodwill balance by segment during the six months ended June 30, 2012 is as follows (in thousands):
   
ACO
   
Thermo
   
ESK
   
Boron
   
Total
 
Balance at December 31, 2011:
                             
Goodwill
  $ 13,108     $ 10,331     $ 9,033     $ 22,083     $ 54,555  
Accumulated impairment losses
    (7,797 )     -       -       (3,832 )     (11,629 )
      5,311       10,331       9,033       18,251       42,926  
Translation and other
    -       -       ( 206 )     -       (206 )
Balance at June 30, 2012:
                                       
Goodwill
    13,108       10,331       8,827       22,083       54,349  
Accumulated impairment losses
    (7,797 )     -       -       (3,832 )     (11,629 )
    $ 5,311     $ 10,331     $ 8,827     $ 18,251     $ 42,720  
 
The Company is required to test annually whether the estimated fair value of its reporting units is sufficient to support the goodwill assigned to those reporting units; the Company performs the annual test in the fourth quarter. The Company is also required to test goodwill for impairment before the annual test if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, such as a significant adverse change in the business climate. The Company determined that a test of goodwill for impairment was not required as of June 30, 2012.
 
5.  
Stock Repurchases

During the six months ended June 30, 2012, the Company repurchased and retired 161,000 shares of its common stock at an aggregate cost of $4.0 million under a stock repurchase program authorized in 2011 by the Company’s Board of Directors. From the inception of this stock purchase program, the Company has repurchased and retired 161,000 shares of its common stock at an aggregate cost of $4.0 million. The Company is authorized to repurchase an additional $96.0 million for a total of $100.0 million.
 
6.  
Fair Value Measurements
 
The Company measures fair value and provides required disclosures about fair value measurements as it relates to financial and nonfinancial assets and liabilities in accordance with a framework specified by GAAP. This framework addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. The framework also includes additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event.
 
The fair value framework requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
 
Level 1:  quoted market prices in active markets for identical assets and liabilities
 
Level 2:  observable market based inputs or unobservable inputs that are corroborated by market data
 
Level 3:  unobservable inputs that are not corroborated by market data
 
The carrying value of cash and cash equivalents, accounts receivable and trade payables approximates the fair value due to their short-term maturities.
 
For recognition purposes, on a recurring basis, the Company measures available for sale short-term and long-term investments at fair value. Approximately $2.9 million of the unrealized losses in short term investments as of June 30, 2012 have been in a loss position for more than 12 months. The fair value of the following investments is determined using quoted prices in active markets (Level 1):
   
Level 1 Investments
 at June 30, 2012
 
(In thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Short term investments:
                               
  Investment funds – debt securities
 
$
  231,959
   
$
        152
   
$
      (3,342
)  
$
     228,769
 
  Corporate bonds
   
      4,054
     
              -
     
             (2
)    
         4,052
 
    Total short term investments
 
$
  236,013
   
$
          152
   
$
      (3,344
)  
$
     232,821
 
Long term investments:
                               
  Corporate bonds
 
$
      6,302
   
$
           8
   
$
            (8
)  
$
        6,302
 
                                 
   
Level 1 Investments at
December 31, 2011
 
(In thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Short term investments:
                               
  Investment funds – debt securities
 
$
  220,778
   
$
          30
   
$
      (4,881
 
$
     215,927
 
  Corporate bonds
   
      8,851
     
              1
     
             (7
   
         8,845
 
    Total short term investments
 
$
  229,629
   
$
            31
   
$
      (4,888
 
$
     224,772
 
 
11

 
 
The fair value of long-term investments in auction rate securities is based on a Level 3 valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral, and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. The fair values of auction rate securities at June 30, 2012 and December 31, 2011 were $15.5 million and $15.0 million, respectively.
 
During the three months ended June 30, 2012 and 2011 there were no charges due to other-than-temporary reductions in the value of investments in auction rate securities. The Company also recognized pre-tax credits of $4,000 and $111,000 in other comprehensive income during the three months ended June 30, 2012 and 2011, respectively, due to temporary increases in the value of its investments in auction rate securities.
 
During the six months ended June 30, 2012 and 2011, there were no charges due to other-than-temporary reductions in the value of investments in auction rate securities. The Company also recognized a pre-tax credit of $457,000 and pre-tax reduction of $53,000 in other comprehensive income during the six months ended June 30, 2012 and 2011, respectively, due to temporary changes in the value of its investments in auction rate securities.

Cumulatively to date, the Company has incurred $4.7 million in pre-tax charges due to other-than-temporary reductions in the value of its investments in auction rate securities, realized losses of $8.8 million from sales of auction rate securities and pre-tax temporary impairment charges of $2.6 million reflected in other comprehensive income. As of June 30, 2012, the fair value of the Company’s investments in auction rate securities was below cost by approximately $7.3 million. The fair value of the auction rate securities has been below cost for more than one year.
 
For disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of outstanding debt is determined using quoted prices in active markets. The fair value of short-term debt, based on quoted market prices, was $93.5 million at both June 30, 2012 and December 31, 2011.

7.  
Recent Accounting Pronouncements
 
In May 2011, the FASB issued new guidance which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The Company adopted this standard in the first quarter of 2012 which did not materially expand its consolidated financial statement footnote disclosures.
 
In June 2011, the FASB issued new guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in equity. This new guidance requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this standard in the first quarter of 2012 which changed the presentation of its consolidated financial statements with the inclusion of a new separate statement labeled “Consolidated Statements of Comprehensive Income”.
 
 
12

 
 
8.  
Convertible Debt and Credit Facility

During December 2005, the Company issued $121.0 million of 2.875% senior subordinated convertible notes (“Notes”) due December 15, 2035. The Company subsequently repurchased $27.9 million of the Notes during 2009 which reduced the outstanding principal amount to $93.1 million. Since the Notes are convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separately accounts for the liability and equity components of the Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate as interest cost is recognized.

As of June 30, 2012 and December 31, 2011, short-term debt and the equity component (recorded in additional paid in capital, net of income tax benefit), determined in accordance with the accounting guidance for convertible debt, comprised the following (in thousands):

   
June 30, 2012
   
December 31, 2011
 
Outstanding debt
           
Principal amount
  $ 93,100     $ 93,100  
Unamortized discount
    (1,859 )     (3,806 )
Net carrying amount
    91,241       89,294  
Current portion of outstanding debt
    91,241       89,294  
Noncurrent portion of outstanding debt
  $ -     $ -  
Equity component, net of income tax benefit
  $ 16,399     $ 16,399  

The discount on the liability component of short-term debt is being amortized using the effective interest method based on an annual effective rate of 7.5%, which represented the market interest rate for similar debt without a conversion option on the issuance date, through December 2012, which coincides with the first date that holders of the Notes can exercise their put option as discussed below.

Interest expense on the Notes, excluding capitalized interest, for the three and six months ended June 30, 2012 and 2011 included the following (in thousands):

   
Three Months Ended
 June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Contractual interest coupon
  $ 665     $ 669     $ 1,331     $ 1,330  
Non-cash amortization of discount on the liability component
    977       905       1,952       1,795  
Non-cash amortization of debt issuance costs
    98       94       195       187  
    $ 1,740     $ 1,668     $ 3,478     $ 3,312  
 
The Notes contain put options, which may require the Company to repurchase in cash all or a portion of the Notes on December 15, 2012, December 15, 2015, December 15, 2020, December 15, 2025, and December 15, 2030 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest, if any, up to but excluding the repurchase date.
 
In December 2005, the Company established an unsecured $10.0 million line of credit (“2005 LOC”) which was closed in April 2012. In June 2011, the Company established an unsecured $5.0 million line of credit (“2011 LOC”) that was increased to $7.0 million on December 19, 2011 and will mature on April 1, 2013. The Company expects to renew the 2011 LOC at that time for multiple years. As of June 30, 2012, there were no outstanding amounts on the 2011 LOC. However, the available line of credit at June 30, 2012 has been reduced by outstanding letters of credit in the aggregate amount of $5.7 million. The interest rate on the 2011 LOC was 1.2% as of June 30, 2012 which was based on the LIBOR rate for a period of one month, plus a margin of 1.0% percent.
 
Pursuant to the bank line of credit, the Company is subject to certain covenants, which include, among other things, the maintenance of specified minimum amounts of net income and liquidity. The Company was in compliance with all covenants at June 30, 2012.
 
 
13

 
 
9.  
Disclosure About Segments of an Enterprise and Related Information
 
The Company serves its markets and manages its business through four operating segments, each of which has its own manufacturing facilities and administrative and selling functions.
 
The financial information for all segments is presented below (in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue from External Customers
                       
Advanced Ceramic Operations
  $ 70,395     $ 66,637     $ 119,100     $ 143,267  
ESK Ceramics
    37,524       45,880       79,932       86,003  
Thermo Materials
    15,290       29,295       30,156       60,406  
Boron
    13,820       11,420       21,023       19,360  
Inter-segment elimination
    (6,386 )     (7,856 )     (13,259 )     (13,558 )
Total
  $ 130,643     $ 145,376     $ 236,952     $ 295,478  
                                 
Depreciation and Amortization
                               
Advanced Ceramic Operations
  $ 2,358     $ 2,514     $ 4,651     $ 5,385  
ESK Ceramics
    2,925       3,276       5,900       6,415  
Thermo Materials
    1,934       2,094       3,954       3,778  
Boron
    1,855       2,047       3,710       4,100  
Total
  $ 9,072     $ 9,931     $ 18,215     $ 19,678  
                                 
Segment Income (Loss) from Operations and Income Before Provision for Income Taxes
                               
Advanced Ceramic Operations
  $ 9,749     $ 14,041     $ 13,144     $ 31,055  
ESK Ceramics
    4,066       9,201       11,243       17,006  
Thermo Materials
    (2,474 )     6,066       (4,257 )     16,920  
Boron
    1,930       726       1,054       726  
Inter-segment elimination
    (356 )     (585 )     (938 )     (657 )
Income from Operations
    12,915       29,449       20,246       65,050  
Other Income (Expense)
    (1,488 )     (115 )     (2,823 )     (852 )
Income before Provision for Income Taxes
  $ 11,427     $ 29,334     $ 17,423     $ 64,198  
                                 
Segment Assets
                               
Advanced Ceramic Operations
  $ 486,404     $ 468,385     $ 486,404     $ 468,385  
ESK Ceramics
    162,998       190,440       162,998       190,440  
Thermo Materials
    164,637       169,420       164,637       169,420  
Boron
    126,101       127,670       126,101       127,670  
Total
  $ 940,140     $ 955,915     $ 940,140     $ 955,915  
                                 
Expenditures for Property, Plant & Equipment
                               
Advanced Ceramic Operations
  $ 911     $ 2,076     $ 2,724     $ 3,475  
ESK Ceramics
    1,501       1,322       3,675       1,984  
Thermo Materials
    351       4,672       911       9,622  
Boron
    1,855       1,324       3,214       1,974  
Total
  $ 4,618     $ 9,394     $ 10,524     $ 17,055  

 
14

 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Percentage of U.S. net sales from external customers
                       
Advanced Ceramic Operations
    48 %     39 %     44 %     42 %
ESK Ceramics
    4 %     3 %     4 %     3 %
Thermo Materials
    7 %     6 %     8 %     6 %
Boron
    5 %     4 %     5 %     4 %
Total percentage of U.S. net sales from external customers
    64 %     52 %     61 %     55 %
                                 
Percentage of foreign net sales from external customers
                               
Advanced Ceramic Operations
    6 %     5 %     6 %     5 %
ESK Ceramics
    20 %     24 %     24 %     22 %
Thermo Materials
    4 %     15 %     5 %     15 %
Boron
    6 %     4 %     4 %     3 %
Total percentage of foreign net sales from external customers
    36 %     48 %     39 %     45 %
                                 
Percentage of total net sales from external customers
                               
Advanced Ceramic Operations
    54 %     44 %     50 %     47 %
ESK Ceramics
    24 %     27 %     28 %     25 %
Thermo Materials
    11 %     21 %     13 %     21 %
Boron
    11 %     8 %     9 %     7 %
Total percentage of total net sales from external customers
    100 %     100 %     100 %     100 %
 
Foreign sales are determined by the country to which the shipment is delivered.
 
The following is revenue by market application for the Advanced Ceramic Operations segment (in thousands):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Defense
  $ 49,289     $ 49,949     $ 78,675     $ 106,376  
Industrial
    10,421       7,623       19,694       14,827  
Energy
    4,473       4,702       8,793       13,125  
Automotive/Diesel
     1,896       2,647       3,724       5,149  
Commercial
    4,316       1,716       8,214       3,790  
    $ 70,395     $ 66,637     $ 119,100     $ 143,267  
 
10.  
Pension and Other Post-retirement Benefit Plans
 
The Company provides pension benefits to its employees in Germany. These pension benefits are rendered for the time after the retirement of the employees by payments into legally independent pension and relief facilities. They are generally based on length of service, wage level and position in the company. The direct and indirect obligations comprise obligations for pensions that are already paid currently and expectations for those pensions payable in the future. The Company has four separate plans in Germany: a) Pensionskasse - Old; b) Pensionskasse - New; c) Additional Compensation Plan; and d) Deferred Compensation Plan. For financial accounting purposes, the Additional and Deferred Compensation Plans are accounted for as single-employer defined benefit plans, Pensionskasse - Old is a multiemployer defined benefit plan and the Pensionskasse - New is a defined contribution plan. The Company also provides pension benefits to its employees of Ceradyne Boron Products located in Quapaw, Oklahoma. There are two defined benefit retirement plans, one for eligible salaried employees and one for hourly employees. The benefits for the salaried employee plan are based on years of credited service and compensation. The benefits for the hourly employee plan are based on stated amounts per year of service.
 
Components of net periodic benefit costs under these defined benefit plans were as follows (in thousands):
 
 
15

 
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Service cost
  $ 188     $ 201     $ 381     $ 393  
Interest cost
    317       343       639       675  
Expected return on plan assets
    (144 )     (139 )     (288 )     (278 )
Amortization of unrecognized (gain) loss
    2       (12 )     2       (22 )
Net periodic benefit cost
  $ 363     $ 393     $ 734     $ 768  
 
11.  
Financial Instruments
 
The Company occasionally enters into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business operations. Accordingly, the Company enters into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges. The Company had outstanding foreign exchange forward contracts with a notional value of 55.0 million Euros at June 30, 2012.

The Company measures the financial statements of its foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders’ equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.
 
12.  
Income Taxes
 
The Company classifies accrued interest and penalties as part of the accrued liability for uncertain tax positions and records the corresponding expense in the provision for income taxes.

Components of the required reserve at June 30, 2012 and December 31, 2011 are as follows (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
Federal, state and foreign unrecognized tax benefits (“UTBs”)
  $ 1,897     $ 1,791  
Interest
    130       80  
Federal/State Benefit of Interest
    (51 )     (31 )
Total reserve for UTBs
  $ 1,976     $ 1,840  

It is anticipated that any change in the above UTBs will impact the effective tax rate. At June 30, 2012, the 2007 through 2011 years are open and subject to potential examination in one or more local jurisdictions and 2009 through 2011 years are open for federal income tax purposes. The Company does not anticipate any significant release of UTBs within the next twelve months.

Effective January 1, 2008, the Company was granted an income tax holiday for a manufacturing facility in China. The tax holiday allows for tax-free operations through December 31, 2009, followed by operations at a reduced income tax rate of 12.5% on the profits generated in 2010 through 2012, with a return to the full statutory rate of 25% for periods thereafter. This manufacturing facility in China incurred a pre-tax loss for the three and six months ended June 30, 2012, accordingly, there was no benefit from the tax holiday for this period. Income tax expense for the three and six months ended June 30, 2011 was reduced by $0.4 million and $1.3 million, respectively, from the tax holiday in China.

Income taxes are determined using an annual effective tax rate, which generally differs from the United States federal statutory rate, primarily because of state taxes, research and development tax credits and the income tax holiday in China. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial and tax reporting of the Company's assets and liabilities, along with net operating loss and credit carry forwards.

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The factors used to assess the likelihood of realization of the deferred tax assets are the reversal of deferred tax liabilities, the Company’s forecast of future taxable income, and available tax planning strategies that are prudent and feasible. The Company evaluated positive and negative evidence and, although realization is not assured, management determined that it is more likely than not that the net deferred tax asset will be realized through future taxable income and tax planning strategies.  Failure to achieve the forecasted taxable income and successful implementation of tax planning strategies in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.
 
 
16

 
 
13.  
Commitments and Contingencies
 
The Company leases certain of its manufacturing facilities under noncancelable operating leases expiring at various dates through 2015. The Company incurred rental expense under these leases of $2.2 million and $1.8 million for the six months ended June 30, 2012 and 2011, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of June 30, 2012 are as follows (in thousands):
 
2012
  $ 2,148  
2013
    2,942  
2014
    949  
2015
    198  
2016
    18  
Thereafter
    5  
    $ 6,260  
 
 
17

 

Item 2.                 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Preliminary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. One generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof, or variations thereon, or similar terminology. Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. Reference is made to the risks and uncertainties which are described in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Part II, Item 1A under the caption “Risk Factors.” Reference is also made to the risks and uncertainties described in the Company’s Annual Report on Form 10-K for the year ended  December 31, 2011, as filed with the Securities and Exchange Commission, in Item 1A under the caption “Risk Factors,” and in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview
 
We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, energy, automotive/diesel and commercial applications. Our products include:
 
 
lightweight ceramic armor for soldiers and other military applications;
 
 
ceramic industrial components for erosion and corrosion resistant applications;
 
 
ceramic powders, including boron carbide, boron nitride, titanium diboride, calcium hexaboride, zirconium diboride and fused silica, which are used in manufacturing armor and a broad range of industrial products and  consumer products;
 
 
evaporation boats for metallization of materials for food packaging and other products;
 
 
durable, reduced friction, ceramic diesel engine components;
 
 
functional and frictional coatings primarily for automotive applications;
 
 
translucent ceramic orthodontic brackets;
 
 
bio-glass compounds as a key ingredient in tooth paste to rejuvenate the growth of enamel;
 
 
ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes;
 
 
ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing process;
 
 
specialty glass compositions for solar, electronic, industrial and health care markets;
 
 
ceramic missile radomes (nose cones) for the defense industry;
 
 
fused silica powders for precision investment casting (PIC);
 
 
neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composite that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;
 
 
nuclear chemistry products for use in pressurized water reactors and boiling water reactors;
 
 
boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers;
 
 
ceramic bearings and bushings for oil drilling and fluid handling pumps;
 
 
ceramic micro-reactors used to process chemicals and pharmaceuticals;
 
 
PetroCeram® ceramic sand screens for oil and gas recovery and exploration; and
 
 
enhanced combat helmets for soldiers.
 
Our customers include the U.S. government, prime government contractors, companies engaged in solar energy, oil and natural gas exploration and nuclear energy, and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

 
18

 
 
The tables below show, for each of our four operating segments, revenues and income (loss) from operations in the periods indicated.

  Segment revenues (in millions):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
Advanced Ceramic Operations
  $ 70.4     $ 66.6       5.6 %   $ 119.1     $ 143.3       (16.9 %)
ESK Ceramics
    37.5       45.9       (18.2 %)     79.9       86.0       (7.1 %)
Thermo Materials
    15.3       29.3       (47.8 %)     30.2       60.4       (50.1 %)
Boron
    13.8       11.4       21.0 %     21.0       19.4       8.6 %
Inter-segment elimination
    (6.4 )     (7.8 )     (18.7 %)     (13.2 )     (13.6 )     (2.2 %)
Total
  $ 130.6     $ 145.4       (10.1 %)   $ 237.0     $ 295.5       (19.8 %)
 
Segment operating income (loss) (in millions):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
Advanced Ceramic Operations
  $ 9.7     $ 14.0       (30.6 %)   $ 13.1     $ 31.1       (57.7 %)
ESK Ceramics
    4.1       9.2       (55.8 %)     11.3       17.0       (33.9 %)
Thermo Materials
    (2.4 )     6.1       n/m *     (4.3 )     16.9       n/m  
Boron
    1.9       0.7       165.8 %     1.1       0.7       45.2 %
Inter-segment elimination
    (0.4 )     (0.6 )     39.1 %     (1.0 )     (0.7 )     42.8 %
Total
  $ 12.9     $ 29.4       (56.1 %)   $ 20.2     $ 65.0       (68.9 %)
* Not meaningful

We categorize our products into five market applications. The tables below show our sales by market application and the percentage contribution to our total sales of each market application in the different time periods.

Sales by Market Application (in millions):
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
 Defense
  $ 55.6     $ 55.9       (0.5 %)   $ 92.2     $ 120.6       (23.6 %)
 Industrial
    40.8       42.8       (4.8 %)     81.0       82.3       (1.6 %)
 Energy
    21.0       34.0       (38.3 %)     35.8       67.2       (46.6 %)
 Automotive/Diesel
    8.0       10.3       (21.3 %)     17.9       20.0       (10.3 %)
 Commercial
    5.2       2.4       115.8 %     10.1       5.4       85.9 %
 Total
  $ 130.6     $ 145.4       (10.1 %)   $ 237.0     $ 295.5       (19.8 %)
 
Percentage Contribution:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Defense
    42.6 %     38.5 %     38.9 %     40.9 %
Industrial
    31.2       29.4       34.1       27.8  
Energy
    16.0       23.3       15.1       22.7  
Automotive/Diesel
    6.2       7.1       7.6       6.8  
Commercial     4.0       1.7       4.3       1.8  
Total     100.0 %     100.0 %     100.0 %     100.0 %
 
The principal factor contributing to our growth in sales from 2002 through 2007 was increased demand by the U.S. military for ceramic body armor that protects soldiers, which was driven primarily by military conflicts such as those in Iraq and Afghanistan. This demand was driven by recognition of the performance and life saving benefits of utilizing advanced technical ceramics in lightweight body armor. Our sales declined in 2008 primarily because of a reduction in shipments of body armor. Our sales declined in 2009 primarily because of a continued reduction in shipments of body armor and also due to a decline in sales of our industrial, automotive/diesel and commercial market product lines due to the severe economic recession. In 2010, sales of body armor continued to decline. However, sales from energy related products grew by 61.6% in 2010 when compared to 2009. Most of this growth in energy sales was generated by sales of our ceramic crucibles used in the production of photovoltaic cells for solar panels. Additionally, sales of industrial and automotive/diesel products rebounded sharply in 2010, particularly at our ESK Ceramics subsidiary. In 2011, our sales increased due to higher shipments of body armor due to the increased demand for ESAPI body armor, an increase of sales to the nuclear industry, and continuing growth of sales at our ESK Ceramics subsidiary.
 
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Commencing in 2004, several strategic acquisitions also have contributed to our sales growth. These include our acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we renamed Boron Products, LLC and our acquisition of VIOX Corporation in January 2011.
 
To illustrate the impact of body armor, energy-related products, and our acquisitions, the following table shows our sales from body armor, energy-related products, from our acquisitions, and from all other sources for each of the years 2002 through 2011 (in millions).
 
   
2011
   
2010
   
2009
   
2008
   
2007
   
2006
   
2005
   
2004
   
2003
   
2002
 
Sales from body armor
  $ 193.8     $ 70.4     $ 170.0     $ 385.0     $ 535.3     $ 479.4     $ 199.5     $ 120.3     $ 58.2     $ 26.2  
Sales from energy products:
                                                                               
    Gross sales from energy products
    129.0       99.9       62.2       57.7       20.9       11.9       9.8       5.3       2.5