Ceradyne (CRDN) seems to have laid a bit of an ambush for its rivals in the red-hot business of building trucks to protect U.S. soldiers overseas.
Late last year, the Costa Mesa, Calif.-based company -- best known for its ceramic-based body armor worn by troops -- quietly set out to develop the toughest military truck yet. Ceradyne had just teamed up with Ideal Innovations, a Washington, D.C.-area firm staffed by accomplished inventors with rich military backgrounds, to create a vehicle that could withstand hits from sophisticated "explosively formed penetrators," or EFPs. The idea was to give Ceradyne a leg up on rivals like Force Protection ( FRPT) in the government's huge mine-resistant, ambush-protected vehicle contract. At the time, Ladson, S.C.-based Force Protection and other defense contractors were focusing on threats posed by cruder, less powerful "improvised explosive devices," or IEDs. So when U.S. officials originally sought vehicles designed to counter IEDs, Ceradyne never even bothered to submit a bid. Instead, Ceradyne continued developing a next-generation vehicle that would prove ideal for the military's escalating needs. As a result, Ceradyne has now emerged as a surprise favorite for early awards under the greatly expanded MRAP II program. Altogether, the value of the program has soared to $20 billion. "Some might say we missed the boat" on MRAP I, says Marc King, vice president of armor operations at Ceradyne. "But others might say we were ahead of the requirements because we saw a different threat and were getting ready for something we thought Right now, Ceradyne seems to be in an enviable position. MRAP II -- which calls for vehicles with "enhanced performance" that can meet evolving threats -- is turning into a far bigger program than the original MRAP ever did. And in early government tests, Ceradyne's "Bull" has already met stringent requirements established for MRAP II vehicles. So the company's MRAP offering could charge forward and lead the pack this time around. But King -- who retired in 1988 from the Army as a lieutenant colonel -- stops short of declaring victory. "The Bull is a direct outgrowth of a project, started and paid for by the Army's Rapid Equipping Force, that would provide an armored-material solution to EFPs," King explains. "It has clearly demonstrated the ability to do that. "So when you ask how I feel about its ability to meet MRAP II requirements, I believe the answer is clearly implied in that response." Some financial experts have started offering far bolder predictions. "We believe the issuance of an RFP request for proposals for enhanced protection on MRAP vehicles could have strong implications for Ceradyne's new vehicle," JMP Securities analyst Jason Simon wrote last month. "Given that current standard-issue MRAP vehicles currently do not have storage capabilities -- nor can they protect against EFPs -- we believe that the Bull will be in the competitive position to win contract awards." Simon has an outperform rating on Ceradyne's stock, which he valued last month at $85 a share. The stock slipped 9 cents to $81.59 on Friday but remains within $1 of its all-time high.
Quick Fix
When discussing the Bull, King actually gives more credit to Ideal Innovations -- and the Army itself -- than he does to his own company. After all, those players began working on the Bull long before Ceradyne ever entered the picture. As early as 2004, Ideal Innovations had noticed the rising threat posed by EFPs. So when the Marine Corps expressed the need for a solution the following year, the firm immediately went to work. By then, Ideal Innovations already enjoyed a solid relationship with the military. Before founding the firm in 1998, President Robert Kocher had established the Army's Quick Response Office -- designed to supply cutting-edge technology to soldiers in the field -- and even helped develop the armored Humvee. "People didn't think that could be done," Kocher says, recalling his work on the popular military vehicle more than a decade ago. "But we did it -- and we did it quickly." Today, Kocher has surrounded himself with a team of accomplished military experts at Ideal Innovations. Vice President Loran Ambs previously held a key post at the Army's Rapid Equipping Force, popularly known as REF, which currently pursues new technologies for the military and quickly embraced the concept behind the Bull. The firm's chief technology officer, Craig Arndt, served as a senior scientist and prime consultant for the Army's REF as well. All told, Ideal Innovations employs 250 people -- including leaders from the government and industry alike -- and prides itself on being "100% veteran-owned." When working with the military, however, the firm has always focused on a very specific goal. "We're into fixing things really quickly," Kocher says. "That's our expertise."
Strong Partner
To help build its new MRAP vehicle, Ideal Innovations needed a fast partner as well. "Of the four companies I went to, I picked Ceradyne because the people there had the best engineering skills, they understood the threats and they had integrated vehicles before," Kocher says. Plus, "the other companies had issues with the timeline. They wanted a year, and we said it had to be five months." Ceradyne, he adds, "did a super job" of supplying the Bull on that tight schedule. By this spring, Ceradyne had delivered the vehicle for government testing. The Bull survived eight hits that were so powerful, Kocher says, traditional MRAP vehicles might have succumbed to just one. Last week, King expressed "a high level of confidence" that the Bull would also fare well in formal MRAP II testing -- if the vehicle faces additional trials at all. Some experts feel that the Bull, already tested by the Army and promising much-needed protection for U.S. forces, could skip that process altogether. Meanwhile, behind the scenes, Ceradyne continues to take steps forward. On Wednesday, the company reportedly met with Freedom Technologies -- an outfit that supplies high-tech tracking systems for MRAP vehicles
-- although it has placed no orders with the firm just yet. Still, Navistar ( NAVZ) participated in a similar meeting with Freedom Technologies before going on to surprise people with the biggest MRAP win so far. "They placed a big order for our system a week or two before they got their own order," says Shawn Baker, the Freedom Technologies representative who met with both Navistar and Ceradyne. "They weren't saying anything specific at the time. ... But they expected things to go well. "So when they won the award, it wasn't a total surprise."
-- although it has placed no orders with the firm just yet. Still, Navistar ( NAVZ) participated in a similar meeting with Freedom Technologies before going on to surprise people with the biggest MRAP win so far. "They placed a big order for our system a week or two before they got their own order," says Shawn Baker, the Freedom Technologies representative who met with both Navistar and Ceradyne. "They weren't saying anything specific at the time. ... But they expected things to go well. "So when they won the award, it wasn't a total surprise."
Power Point
Baker, for one, expects Ceradyne and Navistar -- once considered long-shot contenders at best -- to secure big orders under MRAP II. Meanwhile, other companies are scrambling to produce advanced MRAP II vehicles of their own. Yet creating vehicles that can consistently withstand hits from EFPs -- which are far less predictable than IEDs -- poses serious challenges. Protected Vehicles, a small company launched by Force Protection's founder, learned this lesson the hard way. Notably, Protected Vehicles' Golan -- considered uniquely capable of surviving EFPs -- suffered problems in formal tests that it had never encountered before. Thus, the company had to make improvements that caused it to miss delivery deadlines. Protected Vehicles now feels that its updated Golan is a superior product that should attract MRAP II orders going forward. But the company admits that recent delays could cost it some business in the meantime. "Maybe it will hurt us in the initial rounds" of MRAP II, Protected Vehicles CEO Garth Barrett says. "But it will not hurt us in the long run." Force Protection seems confident about its long-term prospects as well. Just last week, in fact, the company bought a huge new facility -- greatly expanding its manufacturing space -- in preparation for future orders. While the company clearly expects to win MRAP II contracts, however, it failed to respond to a phone call from TheStreet.com seeking information about whether it has developed an EFP-protected vehicle already. For his part, Kocher feels that even big MRAP I winners could face unexpected challenges ahead. "Nobody thought this could be done," he says of developing EFP protection. "Then we showed people that it could work. So now, all of the sudden, everyone's saying, 'That's easy, no problem.' "But it's a lot harder than what people are saying. Everything works in PowerPoint."
