F.Y.I. CRDN 10Q filing 10/25/11
Sales of ceramic body armor represented the majority, and most volatile, portion of our defense business, rising from approximately $26.2 million, or 42.8% of our total sales in 2002, to a peak of approximately $535.3 million, or 70.7% of our total sales in 2007, and then declining to approximately $70.4 million, or 17.5% of our total sales in 2010. Shipments of the first generation of ceramic body armor, known as small armed protective inserts, or SAPI, began before 2002 and accelerated rapidly with the onset of the war in Afghanistan in 2002 and thereafter the war in Iraq. Shipments of the second generation of ceramic body armor, known as enhanced small armed protective inserts, or ESAPI, began in 2005. The military’s subsequent decision to deploy ESAPI body armor “full fleet,” that is, to replace all SAPI body armor with the new ESAPI body armor, and the introduction in 2006 of enhanced side ballistic inserts, known as ESBI, which protect the sides of the soldier’s torso, resulted in continued growth in our sales of ceramic body armor, ultimately reaching our peak sales of body armor in 2007. Once “full fleet” was achieved, our sales of body armor began a steady decline.
In October 2008, we were awarded an Indefinite Delivery/Indefinite Quantity, or ID/IQ, contract by the U.S. Army for the next ballistic threat generation of ceramic body armor plates, called XSAPI, as well as for the current generation ESAPI plates. This five-year contract has a maximum value of $2.37 billion and allows the U.S. Army to order either XSAPI or ESAPI body armor from us.
In March 2011, we announced the receipt of a delivery order for approximately $56.6 million for ESAPI ceramic body armor plates and the receipt of a delivery order for approximately $36.0 million for XSAPI ceramic body armor plates. In July 2011, we announced the receipt of a delivery order for approximately $36.2 million for ESAPI ceramic body armor plates. All three of these delivery orders were issued under the October 2008 ID/IQ contract. Through September 30, 2011, we have received delivery orders under the October 2008 ID/IQ contract totaling $278.4 million. Of this amount, we have shipped $223.9 million of body armor through September 30, 2011; we expect to ship an additional $43.1 million during 2011, and we expect to ship the balance of approximately $11.3 million in 2012. With less than three years remaining under this ID/IQ contract and the wars in Iraq and Afghanistan winding down, we expect that the total amount of body armor that we ultimately ship under this contract will be substantially less than the maximum amount.
n September 2011, we were awarded a three-year ID/IQ contract for ESAPI ceramic armor plates from Defense Logistics Agency Troop Support group. This purchasing group services the United States Army, Navy, Air Force and Marine Corps. This award was in response to our bid to the Defense Supply Center Philadelphia (DSCP) in response to their requirement for a three-year sustainment order for the replacement of body armor inserts. Simultaneously with the receipt of this award, we received an initial delivery order for $127.3 million for ESAPI ceramic body armor plates with the initial delivery in the first quarter of 2012, continuing through the remainder of 2012 with estimated completion by March 31, 2013. This ID/IQ contract includes options for additional deliveries of up to $127.3 million in each of the second and third years.
In October 2011, we announced the receipt of a delivery order for approximately $6.9 million for ceramic body armor plates from the United States Special Operations Command. We expect to ship this order during 2012 and complete the delivery of it during the third quarter of 2012.
For 2012 and for the next several years, we expect that our sales of body armor will continue, but generally at more moderate levels than in the past. We will continue to bid on Foreign Military Sales (FMS) for the first generation of SAPI body armor through our existing ID/IQ contract with Aberdeen Proving Grounds.
Although we believe that demand for ceramic body armor will continue for many years, the quantity and timing of government orders depends on a number of factors outside of our control, such as the amount of U.S. defense budget appropriations, positions and strategies of the current U.S. government, the level of international conflicts and the deployment of armed forces. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process and may be cancelled by the government at any time without penalty. Therefore, our future level of sales of ceramic body armor will depend on our ability to successfully compete for and retain this business.
New orders for the three and nine months ended September 30, 2011 were $272.0 million and $612.5 million, respectively, compared to $110.8 million and $304.0 million, respectively, for the same periods last year. Orders for ceramic body armor for the three and nine months ended September 30, 2011 were approximately $174.7 million and $282.8 million, respectively, compared to $18.9 million and $32.0 million, respectively, for the same periods last year.
Our order backlog was $354.9 million as of September 30, 2011 and $136.3 million as of September 30, 2010. The backlog for ceramic body armor represented approximately $208.7 million, or 58.8%, of the total backlog as of September 30, 2011 and $26.1 million, or 19.2%, of the total backlog as of September 30, 2010. We expect that substantially all of our order backlog as of September 30, 2011 will be shipped during the next 12 months.
For the next several quarters, demand for ceramic body armor is likely to be the most significant factor affecting our sales. We expect sales of body armor will be slightly lower in 2012 than in 2011.
Results of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
Net Sales
Our total net sales for the three and nine months ended September 30, 2011 and 2010 were as follows (dollars in millions):
Three Months Ended
September 30, Nine Months Ended
September 30,
2011 2010 2011 2010
Net Sales $ 148.0 $ 91.8 $ 443.5 $ 302.2
Increase (decrease) in net sales $ 56.2 $ (16.2 ) $ 141.3 $ (0.8 )
Percentage change in net sales 61.3 % (15.0 %) 46.7 % (0.3 %)
Sales continued their strong rebound in the nine months ended September 30, 2011, especially in our products for defense, industrial and energy applications, although sales and orders of ceramic crucibles to the solar industry slowed in the later part of the second quarter of 2011 and continued that trend during the third quarter of 2011. The principal factors contributing to this growth included renewed purchasing of ceramic body armor by the U.S. military, continued growth in sales of our ESK Ceramics operating segment, the sales contribution from VIOX Corporation which we began to consolidate and report the results of their operations with ours as of January 3, 2011, and the continued rebound of the economy in general.
Advanced Ceramic Operations Segment
Our Advanced Ceramic Operations segment had net sales for the three and nine months ended September 30, 2011 and 2010 as follows (dollars in millions):
Three Months Ended
September 30, Nine Months Ended
September 30,
2011 2010 2011 2010
Net Sales $ 74.0 $ 28.3 $ 217.3 $ 123.7
Increase (decrease) in net sales $ 45.7 $ (34.1 ) $ 93.6 $ (51.6 )
Percentage change in net sales 161.8 % (54.7 %) 75.6 % (29.4 %)
Contributing to the increase of $45.7 million in sales during the three months ended September 30, 2011 were higher shipments of ceramic body armor that totaled $50.2 million, an increase of $43.0 million, or 601.2%, from $7.2 million in the same period last year. For the nine months ended September 30, 2011, shipments of ceramic body armor amounted to $152.2 million, an increase of $95.8 million, or 170.1%, from $56.4 million in the same period last year. The primary reasons for the increase in shipments of ceramic body armor were an increase in demand for shipments of ESAPI armor plates. This increase in body armor sales during the three and nine month periods ended September 30, 2011 was partially offset by a decrease in sales of vehicle armor. We shipped $0.7 million of vehicle armor for the three months ended September 30, 2011, a decrease of $3.8 million, or 85.4%, from $4.5 million for the same period last year and $2.0 million of vehicle armor for the nine months ended September 30, 2011, a decrease of $20.0 million, or 90.8%, from $22.0 million for the nine months ended September 30, 2010. The decline was caused by a lack of orders of armor for the MRAP All Terrain Vehicle (M-ATV) and the High Mobility Multipurpose Wheeled Vehicle ( HMMWV or Humvee ) during the nine months ended September 30, 2011 compared to the same period last year.
