As usual, there's a lot to like in today's Ceradyne (NASDAQ:CRDN) earnings report (check out the numbers here). Revenues continued to soar, growing more than 80%. Backlog is at a record $256 million as order bookings for the quarter set another record, at $123.5 million. As the firm has leveraged existing infrastructure to meet continued demand for armor plating materials, margins have expanded once again, and at an incredible rate. Gross margin jumped 3 percentage points, while the net moved up nearly 6 percentage points.
Moreover, in addition to the oilfield opportunites I've discussed in the past, Ceradyne is expanding on its partnership with Alcan (NYSE:AL) and planning to use its newly acquired subsidiary, Boral, to make composite radiation shielding materials, as well as aluminum-ceramic composites for armoring vehicles. Finally, the firm says it will break ground on a Chinese plant in the coming quarter, one that will initially supply materials for the fast-growing solar-energy industry, but which could provide other products and materials as opportunities arise.
But all is not entirely well. Let's start with a little thing that irks this shareholder a tad: the information, or lack thereof, in the earnings release. It can only charitably be described as "thin." Yes, those of us with the time and inclination to listen to the conference call are usually rewarded with more details. There, management is usually able to provide a lot more detail on inventory, receivables, payables, and cash flow items, so why not include it in the release? Come on Joel, Jerry. Help a shareholder out.
By my reckoning, this is the least you can do to atone for the nonsense you just revealed. For those out there who didn't read all the way through the press release, this quarter raises the specter of foul play regarding stock option timing. Ceradyne notes that it has engaged independent directors and outside counsel to investigate the timing of stock options granted between 1997 and 2003, and that a preliminary result is a $1.5 million charge to account for irregularities.
That's bad.
How bad, we don't know yet, but unless this is cleared up and someone issues a convincing apology (or maybe even returns any ill-gotten gains, huh?), I consider it a black mark on management credibility. And no, I take no solace in the fact that everyone was doing it, including big names like United Health (NYSE:UNH), Openwave (NASDAQ:OPWV), Monster Worldwide (NASDAQ:MNST), and even Apple (NASDAQ:AAPL), which slipped a release out after market-close yesterday.
Ceradyne has accomplished some great things over the past few years. I believe it will accomplish greater things in the future. But how much we little people stand to gain depends on just how honest and fair management has been, and will be, with those of us who own the company on the outside.
Keep showing us the money, guys, but show us the integrity, too.
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Seth Jayson likes to get his money the honest way and wishes everyone else did the same. At the time of publication, he had shares of Ceradyne but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.
