##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 Or
 o
    
    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
 CERADYNE, INC.
 (Exact name of Registrant as specified in its charter)
 Delaware
(State or other jurisdiction 
of incorporation or organization)
    
    33-0055414
(I.R.S. Employer
Identification No.)
 3169 Red Hill Avenue, Costa Mesa, CA
(Address of principal executive)
    
    92626
(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)
  þ o
  þ o o
  o þ
  Class
    
    Outstanding as of October 18, 2007Common Stock, $0.01 par value
    
    27,315,905 Shares




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##### 



INDEX
 PAGE
NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.

    
    Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income Nine Months Ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-19Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20-29Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29-30PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Not applicable
    
    
    30Item 3.
    
    Not applicable
    
    
    30Item 4.
    
    Not applicable
    
    
    31Item 5.
    
    Not applicable
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURE
    
    
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2007
 
 PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 
 CERADYNE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)CURRENT ASSETSCash and cash equivalents
    
    $
    15,146
    
    
    $
    13,547Restricted cash
    
    
    2,633
    
    
    
    Short-term investments
    
    
    155,970
    
    
    
    190,565Accounts receivable, net of allowances for doubtful accounts of approximately
$893 and $1,158 at September 30, 2007 and December 31, 2006, respectively
    
    
    96,569
    
    
    
    77,162Other receivables
    
    
    5,236
    
    
    
    3,289Inventories, net
    
    
    102,552
    
    
    
    73,109Production tooling, net
    
    
    19,604
    
    
    
    20,975Prepaid expenses and other
    
    
    15,408
    
    
    
    11,859Deferred tax asset
    
    
    12,019
    
    
    
    11,469TOTAL CURRENT ASSETS
    
    
    425,137
    
    
    
    401,975PROPERTY, PLANT AND EQUIPMENT, net
    
    
    232,529
    
    
    
    183,011INTANGIBLE ASSETS, net
    
    
    38,221
    
    
    
    8,389GOODWILL
    
    
    45,813
    
    
    
    16,518OTHER ASSETS
    
    
    4,122
    
    
    
    3,922TOTAL ASSETS
    
    $
    745,822
    
    
    $
    613,815CURRENT LIABILITIESAccounts payable
    
    $
    34,103
    
    
    $
    35,470Accrued expenses
    
    
    22,908
    
    
    
    21,821Income taxes payable
    
    
    2,047
    
    
    
    12,621TOTAL CURRENT LIABILITIES
    
    
    59,058
    
    
    
    69,912LONG-TERM DEBT
    
    
    121,000
    
    
    
    121,000EMPLOYEE BENEFITS
    
    
    15,609
    
    
    
    13,274OTHER LONG TERM LIABILITY
    
    
    6,964
    
    
    
    DEFERRED TAX LIABILITY
    
    
    6,237
    
    
    
    3,018TOTAL LIABILITIES
    
    
    208,868
    
    
    
    207,204COMMITMENTS AND CONTINGENCIES (Note 12)SHAREHOLDERS EQUITYCommon stock, $0.01 par value,
100,000,000 authorized, 27,314,780
and 27,119,012 shares issued and
outstanding at September 30, 2007 and
December 31, 2006, respectively
    
    
    272
    
    
    
    272Additional paid in capital
    
    
    185,915
    
    
    
    178,252Retained earnings
    
    
    326,078
    
    
    
    217,036Accumulated other comprehensive income
    
    
    24,689
    
    
    
    11,051TOTAL SHAREHOLDERS EQUITY
    
    
    536,954
    
    
    
    406,611TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    745,822
    
    
    $
    613,815
  3




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##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Amounts in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)NET SALES
    
    $
    191,606
    
    
    $
    185,796
    
    
    $
    565,408
    
    
    $
    484,159COST OF GOODS SOLD
    
    
    115,819
    
    
    
    115,265
    
    
    
    335,125
    
    
    
    295,962Gross profit
    
    
    75,787
    
    
    
    70,531
    
    
    
    230,283
    
    
    
    188,197OPERATING EXPENSESSelling
    
    
    6,872
    
    
    
    5,678
    
    
    
    19,617
    
    
    
    17,368General and administrative
    
    
    11,280
    
    
    
    8,744
    
    
    
    30,218
    
    
    
    26,117Research and development
    
    
    5,680
    
    
    
    2,532
    
    
    
    13,561
    
    
    
    7,73123,832
    
    
    
    16,954
    
    
    
    63,396
    
    
    
    51,216Income from operations
    
    
    51,955
    
    
    
    53,577
    
    
    
    166,887
    
    
    
    136,981OTHER INCOME (EXPENSE):Royalty income
    
    
    30
    
    
    
    30
    
    
    
    105
    
    
    
    90Interest income
    
    
    3,291
    
    
    
    1,753
    
    
    
    9,542
    
    
    
    4,355Interest expense
    
    
    (1,104
    )
    
    
    (1,023
    )
    
    
    (3,154
    )
    
    
    (3,081
    )Miscellaneous
    
    
    (103
    )
    
    
    (257
    )
    
    
    54
    
    
    
    (377
    )2,114
    
    
    
    503
    
    
    
    6,547
    
    
    
    987Income before provision for income taxes
    
    
    54,069
    
    
    
    54,080
    
    
    
    173,434
    
    
    
    137,968PROVISION FOR INCOME TAXES
    
    
    21,419
    
    
    
    17,158
    
    
    
    64,392
    
    
    
    47,304NET INCOME
    
    $
    32,650
    
    
    $
    36,922
    
    
    $
    109,042
    
    
    $
    90,664BASIC INCOME PER SHARE
    
    $
    1.20
    
    
    $
    1.37
    
    
    $
    4.00
    
    
    $
    3.37DILUTED INCOME PER SHARE
    
    $
    1.16
    
    
    $
    1.34
    
    
    $
    3.93
    
    
    $
    3.31WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    27,304
    
    
    
    27,000
    
    
    
    27,231
    
    
    
    26,887DILUTED
    
    
    28,052
    
    
    
    27,461
    
    
    
    27,766
    
    
    
    27,372
  4




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##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    109,042
    
    
    $
    90,664ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:Depreciation and amortization
    
    
    17,948
    
    
    
    13,165Deferred income taxes
    
    
    (2,014
    )
    
    
    135Stock compensation
    
    
    1,842
    
    
    
    3,346Loss on equipment disposal
    
    
    794
    
    
    
    158Change in operating assets and liabilities:Accounts receivable, net
    
    
    (12,995
    )
    
    
    (8,742
    )Other receivables
    
    
    (1,735
    )
    
    
    (444
    )Inventories
    
    
    (16,927
    )
    
    
    (3,770
    )Production tooling
    
    
    1,480
    
    
    
    (6,751
    )Prepaid expenses and other assets
    
    
    (1,167
    )
    
    
    (2,376
    )Accounts payable and accrued expenses
    
    
    (4,418
    )
    
    
    22,826Income taxes payable
    
    
    (11,042
    )
    
    
    (2,489
    )Other long term liability
    
    
    6,964
    
    
    
    Employee benefits
    
    
    1,237
    
    
    
    878NET CASH PROVIDED BY OPERATING ACTIVITES
    
    
    89,009
    
    
    
    106,600CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (28,343
    )
    
    
    (27,597
    )Changes in restricted cash
    
    
    (2,633
    )
    
    
    Sales and purchases of short-term investments
    
    
    34,595
    
    
    
    (107,685
    )Acquisition of businesses, net of cash acquired
    
    
    (98,606
    )
    
    
    (6,605
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (94,987
    )
    
    
    (141,887
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock due to exercise of
options and vesting of
restricted stock units
    
    
    603
    
    
    
    871Proceeds from issuance of stock for stock plans
    
    
    1,085
    
    
    
    828Excess tax benefit due to exercise of stock options
    
    
    4,133
    
    
    
    1,129Other
    
    
    48
    
    
    
    (125
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    5,869
    
    
    
    2,703EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS
    
    
    1,708
    
    
    
    1,025INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,599
    
    
    
    (31,559
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    13,547
    
    
    
    91,542CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    15,146
    
    
    $
    59,983SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:Interest paid
    
    $
    1,756
    
    
    $
    1,712Income taxes paid
    
    $
    67,286
    
    
    $
    49,774
  5




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##### Table of Contents



Basis of Presentation
   Share Based Compensation
         6




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Share-based compensation expense recognized:General and administrative, options
    
    $
    176
    
    
    $
    199
    
    
    $
    552
    
    
    $
    2,779General and administrative, restricted stock units
    
    
    479
    
    
    
    234
    
    
    
    1,290
    
    
    
    567Related deferred income tax benefit
    
    
    (259
    )
    
    
    (137
    )
    
    
    (683
    )
    
    
    (1,167
    )Decrease in net income
    
    $
    396
    
    
    $
    296
    
    
    $
    1,159
    
    
    $
    2,179Decrease in basic earnings per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.08Decrease in diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.08
     Nine Months EndedSeptember 30, 2007WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding, December 31, 2006
    
    
    677,370
    
    
    $
    11.41Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (156,420
    )
    
    $
    8.14Options cancelled
    
    
    (5,625
    )
    
    $
    21.51Outstanding, September 30, 2007
    
    
    515,325
    
    
    $
    12.30Exercisable, September 30, 2007
    
    
    387,900
    
    
    $
    11.66
  Nine Months EndedSeptember 30, 2007WeightedAverage GrantUnits
    
    Fair ValueNon-vested Units at December 31, 2006
    
    
    137,100
    
    
    $
    41.13Granted
    
    
    72,850
    
    
    $
    66.06Vested
    
    
    (30,791
    )
    
    $
    41.11Forfeited
    
    
    (24,300
    )
    
    $
    42.37Non-vested Units at September 30, 2007
    
    
    154,859
    
    
    $
    52.67
 7




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##### Table of Contents



Outstanding
    
    
    ExercisableAverage
    
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    Intrinsic
    
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Value
    
    
    Number of
    
    
    Contractual
    
    
    Exercise
    
    
    ValueRange of Exercise Prices
    
    Options
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)
    
    
    Options
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)$1.44  $2.81
    
    
    5,400
    
    
    
    1.46
    
    
    $
    1.68
    
    
    $
    400
    
    
    
    5,400
    
    
    
    1.46
    
    
    $
    1.68
    
    
    $
    400$2.98  $4.58
    
    
    232,450
    
    
    
    4.32
    
    
    $
    4.09
    
    
    $
    16,656
    
    
    
    187,225
    
    
    
    4.13
    
    
    $
    4.25
    
    
    $
    13,386$10.53  $16.89
    
    
    132,825
    
    
    
    5.94
    
    
    $
    16.89
    
    
    $
    7,817
    
    
    
    110,775
    
    
    
    5.94
    
    
    $
    16.89
    
    
    $
    6,519$18.80  $24.07
    
    
    144,650
    
    
    
    6.93
    
    
    $
    21.66
    
    
    $
    7,822
    
    
    
    84,500
    
    
    
    6.87
    
    
    $
    21.88
    
    
    $
    4,551515,325
    
    
    
    5.44
    
    
    $
    12.30
    
    
    $
    32,695
    
    
    
    387,900
    
    
    
    5.21
    
    
    $
    11.66
    
    
    $
    24,856
  OutstandingAverage
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Grant
    
    
    ValueRange of Grant Prices
    
    Units
    
    
    Life (Years)
    
    
    Fair Value
    
    
    (000s)$21.46  $22.68
    
    
    36,200
    
    
    
    2.54
    
    
    $
    22.38
    
    
    $
    1,857$42.28  $45.67
    
    
    13,469
    
    
    
    3.08
    
    
    $
    44.26
    
    
    $
    396$52.46  $62.07
    
    
    58,340
    
    
    
    3.89
    
    
    $
    59.11
    
    
    $
    850$66.35  $81.18
    
    
    46,850
    
    
    
    4.56
    
    
    $
    69.42
    
    
    $
    255154,859
    
    
    
    3.71
    
    
    $
    52.67
    
    
    $
    3,358
 Acquisitions
    8




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##### Table of Contents



Cash
    
    $
    27,500Transaction costs
    
    
    179Total purchase price
    
    $
    27,679Fair value of assets acquired and liabilities assumed:Cash
    
    $
    332Accounts receivable, net
    
    
    2,503Inventory
    
    
    3,301Property, plant and equipment
    
    
    6,964Other assets
    
    
    1,624Assumed liabilities
    
    
    (1,592
    )Deferred taxes
    
    
    (4,815
    )Backlog
    
    
    110Developed technology
    
    
    1,510Tradename
    
    
    650Customer relationships
    
    
    6,210Non-compete agreement
    
    
    500Goodwill
    
    
    10,382$
    27,679
   Identified Intangible Asset
    
    Estimated Useful Life in Years or MonthsDeveloped technology
    
    10 yearsTrade name
    
    10 yearsCustomer relationships
    
    10 yearsBacklog
    
    1 monthNon-compete agreement
    
    15 months
   10
  Cash
    
    $
    69,600Transaction costs
    
    
    1,659Total purchase price
    
    $
    71,259Fair value of assets acquired and liabilities assumed:Accounts receivable, net
    
    $
    2,811Inventory
    
    
    6,375Property, plant and equipment
    
    
    23,636Other assets
    
    
    61Assumed liabilities
    
    
    (1,505
    )Backlog
    
    
    1,110Developed technology
    
    
    2,280Customer relationships
    
    
    18,290Goodwill
    
    
    18,201$
    71,259
  9




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##### Table of Contents



Identified Intangible Asset
    
    Estimated Useful Life in Years or MonthsDeveloped technology
    
    12.5 yearsCustomer relationships
    
    12.5 yearsBacklog
    
    3 months
  Review of Historical Stock Option Grant Procedures Share Based Compensation
      10




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##### Table of Contents



Materiality
  Net Income Per Share
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Weighted average number of shares outstanding
    
    
    27,304,227
    
    
    
    27,000,343
    
    
    
    27,230,846
    
    
    
    26,886,873Dilutive stock options
    
    
    292,885
    
    
    
    438,618
    
    
    
    291,988
    
    
    
    433,057Dilutive restricted stock units
    
    
    27,544
    
    
    
    21,946
    
    
    
    41,626
    
    
    
    52,030Dilutive contingent convertible debt common shares
    
    
    427,201
    
    
    
    
    
    
    
    201,865
    
    
    
    Number of shares used in fully diluted computations
    
    
    28,051,857
    
    
    
    27,460,907
    
    
    
    27,766,325
    
    
    
    27,371,960
 Composition of Certain Financial Statement Captions
  11




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##### Table of Contents



September 30, 2007
    
    
    December 31, 2006Raw materials
    
    $
    23,912
    
    
    $
    16,398Work-in-process
    
    
    53,881
    
    
    
    34,265Finished goods
    
    
    24,759
    
    
    
    22,446$
    102,552
    
    
    $
    73,109
  September 30, 2007
    
    
    December 31, 2006Land
    
    $
    14,828
    
    
    $
    11,226Buildings and improvements
    
    
    77,547
    
    
    
    62,509Machinery and equipment
    
    
    177,318
    
    
    
    138,557Leasehold improvements
    
    
    16,489
    
    
    
    15,077Office equipment
    
    
    16,416
    
    
    
    13,816Construction in progress
    
    
    12,052
    
    
    
    9,020314,650
    
    
    
    250,205Less accumulated depreciation and amortization
    
    
    (82,121
    )
    
    
    (67,194
    )$
    232,529
    
    
    $
    183,011
  September 30, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizing Intangible AssetsBacklog
    
    $
    1,795
    
    
    $
    1,062
    
    
    $
    733
    
    
    $
    575
    
    
    $
    558
    
    
    $
    17Developed technology
    
    
    10,393
    
    
    
    1,301
    
    
    
    9,092
    
    
    
    6,007
    
    
    
    820
    
    
    
    5,187Tradename
    
    
    1,110
    
    
    
    72
    
    
    
    1,038
    
    
    
    460
    
    
    
    23
    
    
    
    437Customer relationships
    
    
    25,230
    
    
    
    341
    
    
    
    24,889
    
    
    
    730
    
    
    
    36
    
    
    
    694Non-compete agreement
    
    
    500
    
    
    
    85
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    Non-amortizing tradename
    
    
    2,054
    
    
    
    
    
    
    
    2,054
    
    
    
    2,054
    
    
    
    
    
    
    
    2,054Total
    
    $
    41,082
    
    
    $
    2,861
    
    
    $
    38,221
    
    
    $
    9,826
    
    
    $
    1,437
    
    
    $
    8,389
   ACO
    
    Semicon
    
    Thermo
    
    ESK
    
    Canada
    
    CeradyneBoronProducts
    
    TotalDecember 31, 2006
    
    $
    2,608
    
    
    $
    603
    
    
    $
    279
    
    
    $
    9,196
    
    
    $
    3,832
    
    
    
    
    
    
    $
    16,518Acquisition of Minco, Inc.
    
    
    
    
    
    
    
    
    
    
    10,382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,382Acquisition of Ceradyne BoronProducts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,201
    
    
    
    18,201Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    712
    
    
    
    
    
    
    
    
    
    
    
    712September 30, 2007
    
    $
    2,608
    
    
    $
    603
    
    
    $
    10,661
    
    
    $
    9,908
    
    
    $
    3,832
    
    
    $
    18,201
    
    
    $
    45,813
 Recent Accounting Pronouncements
    12




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##### Table of Contents



Convertible Debt and Credit Facility
          Disclosure About Segments of an Enterprise and Related Information
  13




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##### Table of Contents



10
  Operating Segment and Facility Location
    
    ProductsCeradyne Advanced Ceramic Operations
    
    Defense Applications:    Lightweight ceramic armorCosta Mesa, Irvine and San Diego, California(1)
    
    Industrial Applications:Approximately 249,000 square feet
    
        Ceralloy® 147 SRBSN wear parts
       Precision ceramicsLexington, Kentucky(2)
    
    Automotive/Diesel Applications:Approximately 115,000 square feet
    
        Ceralloy® 147 SRBSN automotive/diesel engine partsWixom, Michigan(3)
    
    Commercial Applications:Approximately 29,000 square feet
    
        Ceramic orthodontic brackets
       Components for medical devicesESK Ceramics
    
    Defense Applications:Kempten, Germany(4)
      Approximately 544,000 square feet
    
        Boron carbide powders for body armorIndustrial Applications:Bazet, France(5)
      Approximately 88,000 square feet
    
        Ceramic powders: boron carbide, boron nitride,
titanium        
diboride, calcium hexaboride and        
zirconium diboride
       Silicon carbide parts
       Evaporation boats for the packaging industry
       High performance pump sealsAutomotive/Diesel Applications:    EKagrip® functional and frictional coatingsCommercial Applications:    BORONEIGE® powder for cosmeticsCeradyne Semicon Associates
    
    Industrial Applications:Lexington, Kentucky(6)
      Approximately 35,000 square feet
    
       
Ceramic-impregnated dispenser cathodes for         microwave tubes,
lasers and cathode ray tubes
       Samarium cobalt magnets
 14




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##### Table of Contents



Operating Segment and Facility Location
    
    ProductsCeradyne Thermo Materials
    
    Defense Applications:Scottdale and Clarkston, Georgia(7)
      Approximately 132,000 square feet
     Tianjin, China(8)
    
        Missile radomes (nose cones)
       Raw material supplies for missile radomes (nose cones)Industrial Applications:Approximately 98,000 square feet
      Midway, Tennessee(9)
      Approximately 105,000 square feet
    
        Glass tempering rolls
       Metallurgical tooling
       Castable and other fused silica products
       Crucibles for photovoltaic solar cell applications
       Aerospace (turbine components)Ceradyne Canada
    
    Industrial Applications:Chicoutimi, Quebec, Canada(10)
      Approximately 86,000 square feet
    
        Boral® structural neutron absorbing materials
       Metal matrix composite structuresCeradyne Boron Products
    
    Industrial Applications:Nuclear Applications:Quapaw, Oklahoma(11)
      Approximately 128,000 square feet
    
        Nuclear chemistry products for use in pressurized water
         reactors and boiling water reactors
       Radioactive containment for use in spent fuel transport          and
storage
       Burnable poisons for coating of uranium fuel pelletsSemiconductor Applications:    P-dopants for silicon boule manufacturing
       P-dopants for ion implaning of silicon wafers
 
 (1)
    
    We have leases on our facilities in Costa Mesa, California, aggregating approximately 99,000
square feet, all of which expire in October 2010. We own our 40,000 square foot facility in
Irvine, California. We lease in Irvine, California, a 24,000 square foot facility that expires
in April 2009 and a 76,000 square foot facility that expires in April 2011. We lease a 10,000
square foot facility in San Diego, California that expires on December 31, 2007.(2)
    
    We own our facility in Lexington, Kentucky.(3)
    
    We have a lease on our Wixom, Michigan facility which expires in April 2010.(4)
    
    We own our facility in Kempten, Germany, as well as the 22-acre property on which our
facility is located.(5)
    
    We own our facility in Bazet, France, as well as the four-acre property on which our facility
is located.(6)
    
    We own our facility in Lexington, Kentucky, as well as the five-acre property on which our
facility is located.(7)
    
    We own an 85,000 square foot facility in Scottdale, Georgia, as well as the five-acre
property on which our facility is located. We have a lease on our 47,000 square foot facility
in Clarkson, Georgia which expires in May 2009.(8)
    
    We own our facility in Tianjin, China, as well as the four-acre property on which our facility is located.(9)
    
    We own our facility in Midway, Tennessee as well as the 40-acre property on which our facility is located.(10)
    
    We own our facility in Chicoutimi, Quebec, Canada, as well as the seven-acre property on which our facility is located.(11)
    
    We own our facility in Quapaw, Oklahoma as well as the 155-acre property on which our
facility is located. 15




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from External CustomersACO
    
    $
    145,881
    
    
    $
    152,482
    
    
    $
    447,069
    
    
    $
    383,368ESK Ceramics
    
    
    39,009
    
    
    
    36,956
    
    
    
    121,463
    
    
    
    110,381Semicon Associates
    
    
    1,640
    
    
    
    2,150
    
    
    
    6,021
    
    
    
    6,838Thermo Materials
    
    
    10,250
    
    
    
    4,175
    
    
    
    18,534
    
    
    
    11,006Ceradyne Canada
    
    
    1,389
    
    
    
    485
    
    
    
    3,172
    
    
    
    485Ceradyne Boron Products
    
    
    2,114
    
    
    
    
    
    
    
    2,114
    
    
    
    Inter-segment elimination
    
    
    (8,677
    )
    
    
    (10,452
    )
    
    
    (32,965
    )
    
    
    (27,919
    )Total
    
    $
    191,606
    
    
    $
    185,796
    
    
    $
    565,408
    
    
    $
    484,159Depreciation and AmortizationACO
    
    $
    2,303
    
    
    $
    1,975
    
    
    $
    6,880
    
    
    $
    5,494ESK Ceramics
    
    
    2,843
    
    
    
    2,276
    
    
    
    7,801
    
    
    
    6,558Semicon Associates
    
    
    92
    
    
    
    90
    
    
    
    261
    
    
    
    272Thermo Materials
    
    
    1,087
    
    
    
    103
    
    
    
    1,732
    
    
    
    626Ceradyne Canada
    
    
    177
    
    
    
    215
    
    
    
    529
    
    
    
    215Ceradyne Boron Products
    
    
    745
    
    
    
    
    
    
    
    745
    
    
    
    Total
    
    $
    7,247
    
    
    $
    4,659
    
    
    $
    17,948
    
    
    $
    13,165Segment Income (Loss) before Provision for Income TaxesACO
    
    $
    52,332
    
    
    $
    47,746
    
    
    $
    165,611
    
    
    $
    123,194ESK Ceramics
    
    
    2,103
    
    
    
    5,771
    
    
    
    10,446
    
    
    
    14,005Semicon Associates
    
    
    78
    
    
    
    337
    
    
    
    577
    
    
    
    1,246Thermo Materials
    
    
    (30
    )
    
    
    293
    
    
    
    492
    
    
    
    694Ceradyne Canada
    
    
    (342
    )
    
    
    (297
    )
    
    
    (2,430
    )
    
    
    (321
    )Ceradyne Boron Products
    
    
    (84
    )
    
    
    
    
    
    
    (84
    )
    
    
    Inter-segment elimination
    
    
    12
    
    
    
    230
    
    
    
    (1,178
    )
    
    
    (850
    )Total
    
    $
    54,069
    
    
    $
    54,080
    
    
    $
    173,434
    
    
    $
    137,968Segment AssetsACO
    
    $
    382,112
    
    
    $
    350,028
    
    
    $
    382,112
    
    
    $
    350,028ESK Ceramics
    
    
    202,587
    
    
    
    172,313
    
    
    
    202,587
    
    
    
    172,313Semicon Associates
    
    
    5,458
    
    
    
    6,220
    
    
    
    5,458
    
    
    
    6,220Thermo Materials
    
    
    62,999
    
    
    
    17,395
    
    
    
    62,999
    
    
    
    17,395Ceradyne Canada
    
    
    19,568
    
    
    
    15,914
    
    
    
    19,568
    
    
    
    15,914Ceradyne Boron Products
    
    
    73,098
    
    
    
    
    
    
    
    73,098
    
    
    
    Total
    
    $
    745,822
    
    
    $
    561,870
    
    
    $
    745,822
    
    
    $
    561,870Expenditures for PP&EACO
    
    $
    2,071
    
    
    $
    3,039
    
    
    $
    6,658
    
    
    $
    13,127ESK Ceramics
    
    
    4,502
    
    
    
    2,079
    
    
    
    9,510
    
    
    
    4,495Semicon Associates
    
    
    134
    
    
    
    69
    
    
    
    312
    
    
    
    228Thermo Materials
    
    
    5,763
    
    
    
    888
    
    
    
    10,863
    
    
    
    1,741Ceradyne Canada
    
    
    412
    
    
    
    6
    
    
    
    1,000
    
    
    
    8,006Ceradyne Boron Products
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,882
    
    
    $
    6,081
    
    
    $
    28,343
    
    
    $
    27,597
 16




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Percentage of U.S. net sales from external customersACO
    
    
    74
    %
    
    
    80
    %
    
    
    77
    %
    
    
    78
    %ESK Ceramics
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %
    
    
    4
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    3
    %
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %Ceradyne Canada
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total percentage of U.S. net sales from external customers
    
    
    82
    %
    
    
    86
    %
    
    
    83
    %
    
    
    84
    %Percentage of foreign net sales from external customersACO
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %ESK Ceramics
    
    
    14
    %
    
    
    12
    %
    
    
    14
    %
    
    
    13
    %Semicon Associates
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Thermo Materials
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total percentage of foreign net sales from external customers
    
    
    18
    %
    
    
    14
    %
    
    
    17
    %
    
    
    16
    %Percentage of total net sales from external customersACO
    
    
    76
    %
    
    
    82
    %
    
    
    79
    %
    
    
    80
    %ESK Ceramics
    
    
    16
    %
    
    
    15
    %
    
    
    16
    %
    
    
    17
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    5
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Ceradyne Canada
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total percentage of total net sales from external customers
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Armor
    
    $
    136,658
    
    
    $
    141,899
    
    
    $
    421,062
    
    
    $
    353,501Automotive
    
    
    2,806
    
    
    
    4,277
    
    
    
    7,069
    
    
    
    13,077Orthodontics
    
    
    2,547
    
    
    
    2,738
    
    
    
    8,042
    
    
    
    7,685Industrial
    
    
    3,870
    
    
    
    3,568
    
    
    
    10,896
    
    
    
    9,105$
    145,881
    
    
    $
    152,482
    
    
    $
    447,069
    
    
    $
    383,368
 Pension and Other Post-retirement Benefit Plans
  17




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##### Table of Contents



Three Months EndedSeptember 30,
    
    
    Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    126
    
    
    $
    553
    
    
    $
    351
    
    
    $
    1,617Interest cost
    
    
    146
    
    
    
    464
    
    
    
    340
    
    
    
    1,354Expected return on plan assets
    
    
    (59
    )
    
    
    (558
    )
    
    
    (59
    )
    
    
    (1,616
    )Amortization of unrecognized gain
    
    
    15
    
    
    
    20
    
    
    
    44
    
    
    
    62Net periodic benefit cost
    
    $
    228
    
    
    $
    479
    
    
    $
    676
    
    
    $
    1,417
 Financial Instruments
   Income Taxes
   September 30, 2007
    
    
    January 1, 2007Federal, state and foreign UTBs
    
    $
    6,363
    
    
    $
    6,178Interest
    
    
    942
    
    
    
    554Federal/State Benefit of Interest
    
    
    (341
    )
    
    
    (202
    )Total reserve for UTBs
    
    $
    6,964
    
    
    $
    6,530
    18




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##### Table of Contents



Commitments and Contingencies
  2007
    
    $
    6512008
    
    
    2,2802009
    
    
    2,0332010
    
    
    1,5962011
    
    
    208Thereafter
    
    
    9$
    6,777
        Comprehensive Income
   Three Months EndedSeptember 30,
    
    
    Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    32,650
    
    
    $
    36,922
    
    
    $
    109,042
    
    
    $
    90,664Foreign currency translation
    
    
    9,260
    
    
    
    (1,169
    )
    
    
    13,590
    
    
    
    10,418Unrealized gain (loss) on investments
    
    
    42
    
    
    
    (54
    )
    
    
    48
    
    
    
    (126
    )Comprehensive income
    
    $
    41,952
    
    
    $
    35,699
    
    
    $
    122,680
    
    
    $
    100,956
 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Preliminary Note Regarding Forward-Looking Statements
  Overview
  
    
    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, and zirconium diboride, which are used in manufacturing armor and a broad
range of industrial products; and BORONEIGE® boron nitride powder for cosmetic 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;
    
    ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray
tubes;
    
    ceramic crucibles for melting silicon in the photovoltaic solar cell manufacturing
process;
    
    ceramic missile radomes (nose cones) for the defense industry;
    
    structural neutron absorbing materials for use in the storage of spent nuclear rods;
    
    metal matrix composite structures;
    
    fused silica powders for industrial applications and ceramic crucibles;
    
    nuclear chemistry products for use in pressurized water reactors and boiling water reactors;
    
    radioactive containment products for spent fuel transport, storage and encapsulation of
hazardous wastes; and
    
    p-dopants for silicon boule manufacturing and for ion implanting of silicon wafers.
  20




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Defense
    
    
    72.6
    %
    
    
    78.2
    %
    
    
    75.8
    %
    
    
    76.1
    %Industrial
    
    
    21.6
    
    
    
    15.5
    
    
    
    18.6
    
    
    
    16.9Automotive/Diesel
    
    
    4.2
    
    
    
    4.8
    
    
    
    3.9
    
    
    
    5.4Commercial
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.7
    
    
    
    1.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
     
  21




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Review of Historical Stock Option Grant Procedures
      22




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##### Table of Contents



Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
 Net Sales.
    23




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##### Table of Contents



Gross Profit.
 24




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##### Table of Contents



25




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##### Table of Contents



Selling Expenses.
 General and Administrative Expenses.
 Research and Development Expenses. 
 Other Income (Expense).
 Income before Provision for Income Taxes.
  26




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##### Table of Contents



Income Taxes.
 Liquidity and Capital Resources
   27




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##### Table of Contents



28




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
       
 Item 4. Controls and Procedures
 Review of Historical Stock Option Grant Procedures
  29




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##### Table of Contents



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
  
 Item 1. Legal Proceedings
       Daniel
Vargas, Jr. v. Ceradyne, Inc., Orange County Superior Court, Civil
Action No. 07CC01232:
  
 Item 1A. Risk Factors
  
 Item 2. Not applicable
 
 Item 3. Not applicable
 30




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##### Table of Contents



Item 4. Not applicable
 
 Item 5. Not applicable
 
 Item 6. Exhibits
 (a)
    
    Exhibits:
 31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 31




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##### Table of Contents



CERADYNE, INC.Date: October 30, 2007
    By:
    /s/ JERROLD J. PELLIZZONJerrold J. PellizzonVice President
Chief Financial Officer
(Principal Financial and Accounting Officer) 32




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##### Table of Contents



Index to Exhibits
 Exhibit
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 33