Ladies and gentlemen, thank you for standing by. Welcome to Ceradyne's Second Quarter 2012 Conference Call. This conference is being recorded today, July 24, 2012, at the request of Ceradyne. [Operator Instructions] Hosting the call today is Joel Moskowitz, Ceradyne's Chairman and Chief Executive Officer. With him are David Reed, President North American Operations; Jerry Pellizzon, Chief Financial Officer; Marc King, President, Ceradyne Armor Systems; and Cary Okawa, Corporate Controller. Before I turn the call over to Mr. Moskowitz, the company has requested that I read the following statement. The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of Ceradyne that involve risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties are described in the company's annual report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission. I would now like to turn the conference over to Mr. Moskowitz. Please go ahead, sir.

Thank you very much, Nancy. This morning, before the opening of the stock market, we released our second quarter 2012 financial results. And now, as we've done for a number of years now, we'll follow a pattern of reviewing that release, having Jerry Pellizon, our CFO, give you some additional information and then open it to Q&A. The sales for the second quarter were $130.6 million, and that compared to last year in the same period of $145.4 million. Our net income for Q2 was $6.8 million or $0.28 per fully diluted share, and that compared to a net income in 2011 of $19.1 million or $0.76 per fully diluted share. In Q2, our fully diluted average shares outstanding were 24,307,290. A year ago, they were somewhat more in the same period, they were 25,223,757. Our gross profit margin was 28.1% of net sales, and that compared to last year of 36.4% in the same comparable quarter, that is the second quarter. The provision for income taxes, which Jerry will comment on, was 40.1% in Q2 this year, and that compared to a provision for income taxes last year in the same quarter of 34.8%. For the 6 months, our sales were $237 million, and that compared to $295.5 million in the same period last year, with our net income for the 6 months ending June 30, 2012, at $10.6 million or $0.44 per fully diluted share. And that was on 24,300,045 shares. Now that compares to a year ago of $42.7 million or $1.70 per fully diluted share, and that was on a higher number of shares, 25,171,897. Our gross margin for the 6 months ending June 30 was 27.8%. Now that compared to last year of 37.6%. The provision for income taxes in the 6 months ending June…

Thank you very much, Joel. Good morning, everybody. Thanks for joining us on the call. As a note, we filed our 10-Q for the quarter ended June 30, 2012, with the SEC at sec.gov earlier today. As Joel stated, our sales declined sharply in the first half of the year in the second quarter of 2012, compared to the similar period last year, especially in shipments of body armor and crucibles. Overall, we had a decline in -- for the second quarter of 2012 versus the second quarter of 2011 of $15.9 million in crucibles, and we had lower shipments by our ESK subsidiary of $8.4 million, reflecting the softness in the European economy, particularly started during the second quarter for us. Sales of crucibles for the 3 months were just $3.5 million compared to $19.4 million in the corresponding period a year ago. So that was an 82% reduction. However, offsetting these declines, we had increased shipments in the nuclear industry by our Boron segment of $5.2 million. We had increased shipments of non-ECH combat helmets of $2.8 million over the same quarter last year, and we had increases of $1.1 million of our bio-glass product for use as an ingredient in toothpaste. So we're seeing favorable trends that way. Net sales for the 3 months ended June 30, 2012, of body armor products were nearly unchanged, at $47.2 million compared to $48.1 million in the prior year. And as I mentioned, sales of our energy products amounted to $21 million, including solar pastes and other products besides the crucibles. And that was a decrease of $13 million or 38% from the $34 million in the prior year, as solar continued, obviously, to be pretty weak. Our sales of industrial products were down $2 million compared to the same…

Okay. Jerry, thank you very much. I think the best way to proceed is to immediately go into question-and-answer, Nancy, because usually that will bring out the information that is of most interest to other people who have dialed in. So why don't you go into Q&A, Nancy?

[Operator Instructions] We'll take the first question from Josephine Millward from The Benchmark Company.

Jerry, you went over the numbers very quickly. Are you reducing your EPS outlook for the year by about $0.50? Did I hear that correctly?

It's in the range of about $0.40 -- or actually, $0.30 to $0.50. We, as I said, took some armor out of the back half of the year because some of the programs looked like they may be pushed. But we do have some upside to bring them back, and we have some -- we have a program that may -- that we may be awarded a win on a bid. But we did reduce them, and because of, as I mentioned, that stop notice pushed our body armor out. We had a push out of an order that we had in our forecast for another tranche, the remaining tranche of the sustainment order. And then, we had some foreign military sales that we had in the forecast that are being pushed out a little bit also.

Okay. On body armor, you can you talk about what you think sustainment will look like next year, whether we would see body armor at the same run rate?

Yes, I think we'll let Dave Reed, and maybe Mark, chime in on that, since that's what they live with?

We don't have a clear picture. We heard from DLA that the first 3 months of sustainment will be at the same rate that we currently are. And then, they're going to review after that what their sustainment rate will be. It will be somewhat lower, but they have not given us any firm numbers yet. So that would be a production that we'll run from -- our current contract ends in February of next year. And so we'll have 3 continuing months of the same 25,000 unit run rate that we're currently at. And then after that, hopefully, we'll hear something later this fall on what their sustainment rate looks like.

Final question, if solar continues at the current pace, can you talk about what your -- whether you would consider exiting the business? Or how do you plan to reduce losses there?

Yes, I'll address that. We don't plan to exit the business, and we don't plan to do that because of what clearly is a continued demand, the numbers are something like, this is worldwide installations, 22 gigawatts in 2010, 26.7 gigawatts in 2011 and probably 30 gigawatts this year. The problem, clearly, is the overcapacity in China and the terrific levels of inventory that they have. Now the anticipation is that they'll work off those inventories, but there's no guarantee of that. So what we're doing, to directly answer your question, is we are reducing costs. We have 2 major facilities there. We are in active discussions about selling one of them, the smaller one that we opened in -- about 5 years ago. We've reduced our staff by -- significantly, I don't have the exact number, but it's probably close to 250 people. We have done a lot of things to batten down the hatches, so to speak. We are also involved in a research program to decrease our costs, the automation of a major process there, that looks very promising. And we have -- we're working together on an academia, with even another coating improvement. But the answer to your question is we are reducing costs, and we will continue to do it. We have no plans of exiting the business. We also are looking to make some agreements, which may or may not materialize, with several of our biggest accounts, for very long-term supply.

We'll move to the next question, it comes from Avinash Kant from D.A. Davidson & Co. Avinash Kant - D.A. Davidson & Co., Research Division: A few questions. So I think, Jerry, you were talking a little bit about the EPS impact, roughly $0.30 to $0.50 is what you're saying, in 2012. And I think you walked through some of the revenue impacts. So what kind of revenue impact, overall, are we thinking about, I didn't get all the line items?

Well, we're looking at an impact, possibly, to bring our guidance down to the $475 million to $485 million level, primarily those are the reduction in body armor of about $30 million. This is over our last guidance of the low end of $540 million, and then a reduction or a pushout of the ECH helmets, because of a delay in securing that order, of about $19 million. And those were the core components. And then of course, I mentioned that ESK, overall, is going to come in about $17 million lower than we had forecast when we gave the $540 million number. And that's primarily again because of softness in the European economy. They have about 56% of their sales into Europe, and they're seeing some softness there. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. So now that the business seems to be tracking at a lower level, what -- are you thinking about initiatives of cost cutting, and what could you do there?

Yes, I'll address that. We are always reviewing our costs and relationship to our shipments, and the numbers that Jerry is giving you are the most recent numbers, which change all the time. That's why the indication of where we are is in the -- in my comment, where I say that if we don't see improvement in the solar, particularly in defense, that we'll be in the -- roughly the same area that we were in, in the first half. And we've already reduced some costs. There is no plan right now internally, except for normal -- some directs that go up and down, we're very comfortable with the current structure that we have. We're always looking at some areas. But there's no cost cutting continued. Remember, the tone of this press release is to indicate that we're not happy with the solar and some difficulties on getting the final go-ahead on the helmet and other things that Jerry and Dave discussed. On the other hand, the basic underlying strategy that we have, which is the diversification, which includes, eventually, large inputs from new products, continues to be on track. Avinash Kant - D.A. Davidson & Co., Research Division: Okay. And another question I had was, Jerry, maybe could you give us an updated amount of how much do you have left in the share buyback program? And did you buy any shares in the quarter?

Sure. We have $96 million left. We purchased 4 million during the quarter, and we've purchased 161,000 shares.

We'll take the next question from Jim Ricchiuti from Needham & Company. James Ricchiuti - Needham & Company, LLC, Research Division: I was wondering if you could comment a little bit more about the ECH. It sounds like you're only assuming somewhere in the neighborhood of $9 million to $10 million of shipments this year. Is there much risk to that? Are these issues that have surfaced -- is there a potential that, that could slip further?

Dave?

Yes, let me talk about that. We have orders for low rate initial production of about $7.5 million. We hope to be in production on that part of the order later this quarter. Until we begin performing on the low rate initial order, they will not release the full order. The problems we've had have been really related to bringing the full factory up. We did pass our First Article Testing with limited equipment. And now, we've been bringing in all of our further equipment, and we have to get all of that equipment running at the same level. So there's multiple pieces of tooling, multiple presses, and all of our technology has to be verified and certified in place before we can bring that production. And we're just finalizing those steps now with the help of the government. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. And Jerry, I wonder if you can comment a little bit more about ESK and what they're seeing in Europe? How did business fall off as the quarter unfolded? Can you say what business -- what the decline was in Europe at ESK? And what's the downside, do you think, going forward?

Well, they experienced decline, first of all, in our automotive business, and particularly in Southern Europe, because they went to 4-day work weeks from 5-day work weeks, so there was a reduction in overall production. And we have some unique products for the automobile industry that have a good margin for us. So the mix -- that mix, that reduction in math, plus they had an increase in armor shipments, was a negative mix for the quarter. And so that really hurt the quarter. And we're continuing to forecast the same types of quarters for the next 2 quarters. It just doesn't seem like the crisis in Europe is going to go away anytime quickly. And the order flow was a little light, and so we took the number down overall. They'll end up doing about $150 million this year, we had them in there for $167 million. And their -- the impact on our EPS meant that we had to take our overall EPS down by $0.16 because of those declines. And so I mean, it's -- they're still a great business, they got some great niche products, good margin products. But as we saw in 2009 with that recession, they are, in Europe, quite susceptible to some volatility in their earnings and their sales. James Ricchiuti - Needham & Company, LLC, Research Division: Got it. And one final question, if I may. Your sales into the nuclear industry are, roughly, I guess, about $11 million in the quarter, that was particularly strong. What kind of visibility do you have in that? How does the rest of that business -- how does the business look for the rest of the year in that area?

Well, it's going to mirror last year's sales. But you have to remember that last year, we benefited by having $8 million of sales because 2 new nuclear power plants, one in Finland and one in France, came online. And so we, in the fourth quarter, were positively benefited by $8 million. We don't have any -- right now we don't have any visibility there for the rest of the year of any shipments like that. So the sales will be comparable to the nuclear industry as they were last year.

Yes, I'll make a comment on nuclear in general. As you know, I'm very supportive of our efforts coming out of Quapaw, Oklahoma, which is called Ceradyne Boron Products. We make this isotope Boron 10, which absorbs thermal neutrons 5x greater than what they call normal non-isotopic material. And because of that, we believe, which is one of the reasons we bought that company, that the future will include those materials in new reactors. What I want to make the point of, our big opportunity is in 2 areas for the future: one is China, where they talk about 200 reactors over a 25-year period. That could be $1 billion worth of business for Ceradyne, and we're working very hard on that with relationships with some of the major designer and fabricators of nuclear power plants. And the other opportunity is here in the United States, working with the Department of Energy on the next generation of small reactors, which are called SNRs, small nuclear reactors, and that's also a very exciting opportunity. So the short run, as Jerry said, will probably mirror last year. But we're doing a lot there, and I will just repeat Jerry's comment. This report we're putting in a lot of CapEx in Oklahoma in order to increase our capacity, particularly on the separation of the isotope Boron 10.

And we'll go to Colin Rusch from ThinkEquity next.

Can you talk a little bit about the leverage that you're getting out of the VIOX platform at this point? It sounds like you've made some good progress for those products, so I'd love to get a quick update there.

Yes. VIOX is -- they're really doing quite well, considering that when we bought them, a high percentage of their market was focused on the conducting pace that go into manufacturing of the photovoltaic solar cell modules. And the reason they're holding their own and doing a little bit better, actually, is because of the expansion of what's called bio-glass, which is a sodium phosphosilicate material that's being added by GlaxoSmithKline in their toothpaste. So we're going to put more CapEx in there if we get a commitment, which we think we will, for a fourfold increase of our bio-glass for toothpaste. We love that opportunity because that's really steady eddie. People are going to brush their teeth even in bad economic times.

Great. And then, as you guys look at gross margin performance through the balance of this year and to next year, I mean, are there some things that we should be paying attention to in terms of drags or some benefit that we may not be seeing at this point in the model?

Well, I'll make a comment then I'll let Jerry chime in on it. First, of course, we're paying higher taxes because we don't have that benefit of higher sales and profits in China. So you're going to see that. Now that's not the gross margins. Second, even though earlier, to Jim Ricchuiti's question, I said we're really not doing anything significant in our operations on cost reduction except as it relates to solar because of our confidence in the future. In reality, we always bring our workforce in line with our actual shipment level. So I would think that we would see some improvement throughout the company and gross margins as we go forward. Jerry, did you want to comment...

Yes, I think a couple of other factors that underlie our gross margin are -- our gross profit percentage is that, remember you have to consider that we're -- we have a gross margin loss in our Crucible business, amounting to about $4 million. We have about $1 million gross margin loss in our Canadian operations. So right there, you've got $5 million that's negative, let alone contributing anything. So that's something to be considered. If you were to pull those 2 operations out, we have a pretty decent-looking gross margin percentage line item and operating income line item. The other thing to consider is that at this level that we've adjusted our sales level to, to reflect some armor pushout, the margins are very elastic so that they're very sensitive towards any increase that we pick up. So if we can pick up any additional business, we've got our fixed cost covered, and they would contribute to an increase in our margin drastically. And if we can get our Chinese operation or our crucible operation in 2013 to level out and get back to some type of normal [indiscernible] business, we're going to see a substantial improvement also.

And we'll move next to Sam Dubinsky from Wells Fargo.

How should we think about ESK gross margins in the back half of the year on the lower revenue run rate?

Yes. On the back half of the year, you're going to be -- they're going to be probably in the low 30 range. And so that's kind of what we're thinking right now. They were -- that's just gross margins. They were in the mid-30s in the first quarter, and they were, last year, they were nearly at 20% EBIT margin as a percentage of net sales. So we're taking them down to 30 points overall on the gross margin level.

Okay. Great. And can you also discuss the tone from ESK customers and what they're saying? And how does it compare to the prior downcycle in 2008, 2009? Are there, anecdotally, any evidence it's a little better or it's shaping up sort of following a similar pattern? Can you just, sort of, discuss what your customers are saying in Europe? And I have a -- and one last follow-up question.

Well I could be handle that a little bit since I just came back from there. The fact is our customers seem to be confused. They're not sure of their own businesses. Recently, there's been some surprises on the upside where they didn't have inventories and they've been placing emergency expedited orders. So I would say that because of the reduction in auto business, where we sell the EKagrip, I don't know that we can -- I can give you a very definitive answer on what Audi and Mercedes think, except that our product works very well and we're in all these automobiles. I can tell you that the general tenor internally is very positive in ESK. And that's because of the acceptance of these newer products. This reduction is a little bit in the fluid handling, they're just not selling our customers, the biggies are growing for us [indiscernible], they've slowed down a bit. I'm not sure that they anticipated that. And so our customers themselves are having difficulty managing their own inventory level, which is usually a sign of what they think the future will be. So I don't think I gave you a particularly good answer, but it's the only answer I have.

Okay. And then, you've also mentioned in past, you're going to be a little bit more acquisitive. Has the recent softness across your business segments changed your strategy, either accelerating it or paring it back?

No. No. We're really pleased with the Chemtrix deal. It's a small one, and we own about, I think, 30%. And we have an option to buy the rest over the next 2 years, which we most likely will. And that is involving the fluid reactors primarily for pharmaceuticals. That's going to work out very, very well, and we're working on other acquisitions right now. Again, they've tend to be smaller, not as small as the Chemtrix deal, where they are involving state-of-the-art technologies for making light emitting diodes where they need special tooling in what's called the MOCVD process. So no, we're not stopping. In fact, Bob Miller, who was our -- is our Vice President in charge of our corporate acquisitions and business development, has really got his hands full now, we'll be doing some relationships that won't be strictly acquisitions, we're going to do a joint venture in Europe on making the diamond wire for slicing, we'll do that with people who make this deal and who have other expertise. We'll do all that. We'll be in the German or Austria area. And we're also looking at some other opportunities. So the answer is no, Sam. When we seal deals that are -- meet our criteria, we're going to do them, and we're in a position to do them because of our cash position.

Good. And actually, I have one last question. Just on -- in terms of the Boron business, I know it's pretty lumpy. Can you separate out what percentage is nuclear versus semiconductors? And how should we think about the linearity of that business through the rest of the year?

Well, the nuclear will run about $25 million to $27 million of the total, and the semiconductor will be around $11 million.

[Operator Instructions] We'll go next to Jiwon Lee from Sidoti & Company. Jiwon Lee - Sidoti & Company, LLC: Jerry, just wanted to get back on the crucible side, if I can, with the cost reduction steps that you're taking, what would have to be, sort of, kind of the quarterly run rate to at least breakeven on an operating margin side?

Well, we're -- it's kind of improved substantially. What's happened is that the average selling prices have declined nearly between 25% and 30% on most of our parts from the same -- from the first half of 2011. So we're going to have to see an increase of probably to the $10 million level in sales, and that's just where we need to be to break it even. Jiwon Lee - Sidoti & Company, LLC: Okay, that's very clear. And Joel, you highlighted several small, but nonetheless, interesting product opportunities. And I wonder what you are most excited about mid to long-term in terms of the revenue opportunities among these products?

Yes. I am excited about it because -- I'm going to -- in my closing comments, I'm going to make a remark about the whole strategy that we'll continue to move forward in. But clearly, the most short-term excitement is in PetroCeram. This is a market that is about a $1 billion market. It exists right now, and the existing products, which come from 13 major players, are all metal, they're all stainless steel. And they tend to be kind of similar, and they work in some areas and in other areas where you have a lot of prop ins from frac-ing or high velocity oil or gas. They just wear out, and they're always going to wear out. Our product is more expensive, but it won't wear out, at least it won't wear out for years, and years, and years, and years. The facts are, we never had a failure, and the longest product went into January of 2010. So it's 2.5 years ago. We did about $1 million or so last year in shipments, dollars. This year, we'll do $45 million in shipments. And the future looks very bright. So that's number one. Number two, you have the flow reactors. That's a product that's been in the development stage since we acquired ESK. And that market -- we have 2 studies, one is a $100-million market, the other is a $500-million market. And we have been in this situation until we did the acquisition of Chemtrix, where we could only sell the ceramic portion. That means that we didn't have the capability of selling the entire system, which includes precision pumps and heaters and coolers and valves, et cetera. We would just sell what's called the chip, the ceramic part. Now we're going to be a total integrated company with Chemtrix. And you'll see in the next 12 months probably a low-million dollar kind of prototypes, but we expect that will also continue to increase. The numbers are that using this technology you can increase the ability to make pharmaceutical drugs between 40 and a hundredfold because of the nature of the reactions. And the other product that I mentioned, where we have really no sales right now, but we're in a consortium with BMW and Samsung and the German government to develop these next-generation casings for batteries for cars. And when I was in Germany, recently, they've actually set up a prototype facility now, where we're making the product, we make the boron nitride. We buy the organic plastics, if you will. But then, we have a mixing system, and we're making product right now. And that's more speculative. It's also a huge, huge market. But first will be the PetroCeram ceramic sand screens.

We'll take the next question from Rand Gesing from Neuberger Berman.

On the ECH, it sounds sort of -- it doesn't sound like it's a big issue you're having, it sounds, sort of, like a normal ramp issue. Is that correct?

Well, we take the issue very seriously because it's a difficult technology, it's the cutting-edge of helmet manufacturing. The specification is very rigorous with the rifle fire thread. So although we believe that we'll have a positive outcome there, I can't say that it's not of concern, but we have very good technical people working on it, and we expect, as I said, to be in production later in this quarter on the EKagrip order.

Okay. And then, Joel, can you just characterize for us, within the solar food chain, I guess maybe there's inventory everywhere, but when you're speaking of inventory, are you talking about panels, are you talking about crucibles? I just would like to just get a better sense.

We're talking about wafers. If -- there's high level of wafers at our customers. And in addition, if there's high level of wafers at their customers who are assembling the modules, then they don't -- they just don't have to melt this much silicon.

Right. And did they give you any sort of visibility on that at all, or are you just going to have to just see them start pooling crucibles at some point for you now?

We don't -- we really don't believe that. So what we do is really -- it's very hard to get a handle on it. But we just go by what they're buying. And right now, they're buying about 6,000 crucibles a quarter compared to a year ago, almost 30,000. Okay. I think that we'll call it a day, Nancy. And I do want to wrap this up. Are you there?

Yes, sir.

Okay. So we won't take any more calls. But I do want to remind everyone of Ceradyne. Look, many of you, all of you, actually, who were asking questions and write reports, understand our company pretty well. And in 2007, we shipped $535 million of armor to our American soldiers. And we made a great deal of money on that. And at that time, and even before that, with the acquisition in '04 of ESK, we had adopted this idea that we had to be diversified away from the defense. The defense is very important to us. Most likely, it will continue at a pretty good rate, both the helmets and the armor. And we are moving in that direction, and then, we had effectively a windfall in the Solar business. We always can make -- we're -- in my opinion, we're the very best. The technology starts at Georgia Tech in the '70s in order to make nose cones for missiles, which as Jerry said earlier, is a pretty good business right now since we're the only ones left in the United States really that are making these types of ceramic nose cones. So we were in that business, and that absolutely exploded to where it raised our earnings -- I mean, even last year, where it was already tapering off, as everyone knows, we did well over $3 a share. But the basic underlying ideas of ESK and technology acquisitions that we'll add to the -- nothing has changed, nothing has changed in that. What has changed our short-term aspects of what turned out to be a very volatile business in solar that rather than making a lot of money, is losing some money. And we're moving in that direction, I told you that we're going to reduce one facility in Tianjin, and we're reducing staff. And on the other side of it, we're increasing a very clever idea about our mold making and automation, and we're working on a fairly exciting new coating on that product. But the basic idea of the company, the idea of we're in advanced materials, primarily structural non-oxides, if you will, and that's as sound as the day we started the company or a lot more so. And I'm very enthused about it. I'm sorry, my voice is a little hoarse, but that's what happens when you fly around all the time. So we're okay, and we're going to continue to move in these directions. And hopefully -- solar will get a little bit better, we certainly can count on it. And with Jerry and Dave and Mark in the defense area, I'm pretty comfortable about that. But don't lose sight of the total picture. We're pretty much on target. Thanks a lot for everyone's continued interest. I appreciate the analysts staying on top of things. It's a good crowd. That will conclude our call, Nancy.

Thank you, sir. Again, that does conclude today's presentation. Thank you for your participation.