##### 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 June 30, 2008
 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
    
    92626(Address of principal executive)
    
    (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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ
  Class
    
    Outstanding as of July 16, 2008Common Stock, $0.01 par value
    
    26,270,321 Shares




---



##### 



INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income  Three and Six Months Ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-21Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22-31Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32-33PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33-34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Not applicable
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Not applicable
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURE
    
    
    36Exhibit 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
JUNE 30, 2008
 
 PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 CERADYNE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands,
except share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT ASSETSCash and cash equivalents
    
    $
    194,979
    
    
    $
    155,103Restricted cash
    
    
    2,688
    
    
    
    2,660Short-term investments
    
    
    8,390
    
    
    
    29,582Accounts receivable, net of allowances for doubtful accounts of $1,505
and $792 at June 30, 2008 and December 31, 2007, respectively
    
    
    77,006
    
    
    
    85,346Other receivables
    
    
    8,351
    
    
    
    5,704Inventories, net
    
    
    100,499
    
    
    
    92,781Production tooling, net
    
    
    12,474
    
    
    
    16,632Prepaid expenses and other
    
    
    20,950
    
    
    
    12,391Deferred tax asset
    
    
    12,672
    
    
    
    12,455TOTAL CURRENT ASSETS
    
    
    438,009
    
    
    
    412,654PROPERTY, PLANT AND EQUIPMENT, net
    
    
    267,640
    
    
    
    243,892LONG TERM INVESTMENTS
    
    
    35,041
    
    
    
    38,089INTANGIBLE ASSETS, net
    
    
    38,777
    
    
    
    37,578GOODWILL
    
    
    47,645
    
    
    
    46,848OTHER ASSETS
    
    
    4,084
    
    
    
    4,225TOTAL ASSETS
    
    $
    831,196
    
    
    $
    783,286CURRENT LIABILITIESAccounts payable
    
    $
    29,318
    
    
    $
    35,990Accrued expenses
    
    
    25,273
    
    
    
    22,483Income taxes payable
    
    
    850
    
    
    
    258TOTAL CURRENT LIABILITIES
    
    
    55,441
    
    
    
    58,731LONG-TERM DEBT
    
    
    121,000
    
    
    
    121,000EMPLOYEE BENEFITS
    
    
    15,424
    
    
    
    13,650OTHER LONG TERM LIABILITY
    
    
    5,462
    
    
    
    4,985DEFERRED TAX LIABILITY
    
    
    6,079
    
    
    
    6,291TOTAL LIABILITIES
    
    
    203,406
    
    
    
    204,657COMMITMENTS AND CONTINGENCIES (Note 15)SHAREHOLDERS EQUITYCommon stock, $0.01 par value,
100,000,000 authorized, 26,270,321
and 27,318,530 shares issued and
outstanding at June 30, 2008 and
December 31, 2007, respectively
    
    
    263
    
    
    
    272Additional paid-in capital
    
    
    153,644
    
    
    
    185,702Retained earnings
    
    
    427,399
    
    
    
    361,301Accumulated other comprehensive income
    
    
    46,484
    
    
    
    31,354TOTAL SHAREHOLDERS EQUITY
    
    
    627,790
    
    
    
    578,629TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    831,196
    
    
    $
    783,286
   3




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##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Amounts in thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Unaudited)
    
    
    (Unaudited)NET SALES
    
    $
    184,975
    
    
    $
    185,359
    
    
    $
    373,512
    
    
    $
    373,802COST OF GOODS SOLD
    
    
    109,414
    
    
    
    107,975
    
    
    
    226,422
    
    
    
    219,306Gross profit
    
    
    75,561
    
    
    
    77,384
    
    
    
    147,090
    
    
    
    154,496OPERATING EXPENSESSelling
    
    
    8,668
    
    
    
    6,447
    
    
    
    16,523
    
    
    
    12,745General and administrative
    
    
    11,690
    
    
    
    9,161
    
    
    
    23,505
    
    
    
    18,938Research and development
    
    
    3,445
    
    
    
    4,395
    
    
    
    6,452
    
    
    
    7,88123,803
    
    
    
    20,003
    
    
    
    46,480
    
    
    
    39,564Income from operations
    
    
    51,758
    
    
    
    57,381
    
    
    
    100,610
    
    
    
    114,932OTHER INCOME (EXPENSE):Royalty income
    
    
    29
    
    
    
    45
    
    
    
    60
    
    
    
    75Interest income
    
    
    1,824
    
    
    
    3,483
    
    
    
    4,501
    
    
    
    6,261Interest expense
    
    
    (1,024
    )
    
    
    (1,035
    )
    
    
    (2,104
    )
    
    
    (2,060
    )Miscellaneous
    
    
    (459
    )
    
    
    (117
    )
    
    
    673
    
    
    
    157370
    
    
    
    2,376
    
    
    
    3,130
    
    
    
    4,433Income before provision for income taxes
    
    
    52,128
    
    
    
    59,757
    
    
    
    103,740
    
    
    
    119,365PROVISION FOR INCOME TAXES
    
    
    18,932
    
    
    
    21,454
    
    
    
    37,642
    
    
    
    42,973NET INCOME
    
    $
    33,196
    
    
    $
    38,303
    
    
    $
    66,098
    
    
    $
    76,392BASIC INCOME PER SHARE
    
    $
    1.26
    
    
    $
    1.41
    
    
    $
    2.47
    
    
    $
    2.81DILUTED INCOME PER SHARE
    
    $
    1.25
    
    
    $
    1.38
    
    
    $
    2.45
    
    
    $
    2.77WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    26,285
    
    
    
    27,237
    
    
    
    26,718
    
    
    
    27,194DILUTED
    
    
    26,539
    
    
    
    27,786
    
    
    
    26,984
    
    
    
    27,585
   4




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##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Six Months Ended June 30,2008
    
    
    2007(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    66,098
    
    
    $
    76,392ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:Depreciation and amortization
    
    
    18,063
    
    
    
    10,706Deferred income taxes
    
    
    257
    
    
    
    (1,459
    )Stock compensation
    
    
    1,392
    
    
    
    1,184Loss on marketable securities
    
    
    587
    
    
    
    Loss on equipment disposal
    
    
    29
    
    
    
    220Change in operating assets and liabilities:Accounts receivable, net
    
    
    9,701
    
    
    
    5,816Other receivables
    
    
    (2,117
    )
    
    
    (515
    )Inventories, net
    
    
    (4,480
    )
    
    
    (17,466
    )Production tooling, net
    
    
    4,252
    
    
    
    (22
    )Prepaid expenses and other assets
    
    
    (8,237
    )
    
    
    (4,724
    )Accounts payable and accrued expenses
    
    
    (4,500
    )
    
    
    1,499Income taxes payable
    
    
    550
    
    
    
    (13,039
    )Other long term liability
    
    
    477
    
    
    
    7,093Employee benefits
    
    
    685
    
    
    
    808NET CASH
PROVIDED BY OPERATING ACTIVITIES
    
    
    82,757
    
    
    
    63,495CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (27,608
    )
    
    
    (15,503
    )Changes in restricted cash
    
    
    (28
    )
    
    
    (2,603
    )Purchases of marketable securities
    
    
    
    
    
    
    (352,718
    )Proceeds from sales and maturities of marketable securities
    
    
    21,191
    
    
    
    326,852Cash paid for acquisition
    
    
    (3,896
    )
    
    
    Proceeds from sale of equipment
    
    
    1
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (10,340
    )
    
    
    (43,972
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock due to exercise of options
    
    
    298
    
    
    
    500Proceeds
from issuance of stock for stock plans
    
    
    
    
    
    
    1,078Excess tax benefit due to exercise of stock options
    
    
    280
    
    
    
    3,702Shares repurchased
    
    
    (34,919
    )
    
    
    Other
    
    
    
    
    
    
    6NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (34,341
    )
    
    
    5,286EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
    
    
    1,800
    
    
    
    624INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    39,876
    
    
    
    25,433CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    155,103
    
    
    
    13,547CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    194,979
    
    
    $
    38,980SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:Interest paid
    
    $
    1,742
    
    
    $
    1,751Income taxes paid
    
    $
    43,774
    
    
    $
    49,180
   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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Share-based compensation expense recognized:General and administrative, options
    
    $
    118
    
    
    $
    187
    
    
    $
    233
    
    
    $
    376General and administrative, restricted stock units
    
    
    644
    
    
    
    521
    
    
    
    1,159
    
    
    
    808Related deferred income tax benefit
    
    
    (277
    )
    
    
    (255
    )
    
    
    (505
    )
    
    
    (426
    )Decrease in net income
    
    $
    485
    
    
    $
    453
    
    
    $
    887
    
    
    $
    758Decrease in basic earnings per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.03Decrease in diluted earnings per share
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    0.03
     Six Months Ended June 30, 2008WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding, December 31, 2007
    
    
    497,325
    
    
    $
    12.04Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (24,175
    )
    
    $
    8.69Options cancelled
    
    
    (3,750
    )
    
    $
    15.05Outstanding, June 30, 2008
    
    
    469,400
    
    
    $
    12.19Exercisable, June 30, 2008
    
    
    413,675
    
    
    $
    11.19
  Six Months Ended June 30, 2008Number
    
    
    Weightedof
    
    
    Average GrantUnits
    
    
    Fair ValueNon-vested Units at December 31, 2007
    
    
    149,759
    
    
    $
    52.94Granted
    
    
    122,826
    
    
    $
    40.09Vested
    
    
    (35,191
    )
    
    $
    46.94Forfeited
    
    
    (400
    )
    
    $
    62.07Non-vested Units at June 30, 2008
    
    
    236,994
    
    
    $
    47.14
  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
    
    
    3,150
    
    
    
    1.22
    
    
    $
    1.61
    
    
    $
    103
    
    
    
    3,150
    
    
    
    1.22
    
    
    $
    1.61
    
    
    $
    103$2.98 - $4.58
    
    
    214,625
    
    
    
    4.09
    
    
    $
    4.12
    
    
    $
    6,477
    
    
    
    214,625
    
    
    
    4.09
    
    
    $
    4.12
    
    
    $
    6,477$10.53 - $16.89
    
    
    125,625
    
    
    
    5.69
    
    
    $
    16.89
    
    
    $
    2,187
    
    
    
    106,275
    
    
    
    5.69
    
    
    $
    16.89
    
    
    $
    1,850$18.80 - $24.07
    
    
    126,000
    
    
    
    6.72
    
    
    $
    21.51
    
    
    $
    1,611
    
    
    
    89,625
    
    
    
    6.67
    
    
    $
    21.70
    
    
    $
    1,130469,400
    
    
    
    5.20
    
    
    $
    12.19
    
    
    $
    10,378
    
    
    
    413,675
    
    
    
    5.04
    
    
    $
    11.19
    
    
    $
    9,560
  Average
    
    
    WeightedRemaining
    
    
    AverageNumber of
    
    
    Contractual
    
    
    GrantRange of Grant Prices
    
    Units
    
    
    Life (Years)
    
    
    Fair Value$21.46  $22.68
    
    
    21,800
    
    
    
    1.90
    
    
    $
    22.34$38.60  $39.43
    
    
    94,326
    
    
    
    4.63
    
    
    $
    38.77$42.28  $45.70
    
    
    38,238
    
    
    
    3.79
    
    
    $
    44.28$52.47  $62.07
    
    
    43,630
    
    
    
    3.17
    
    
    $
    58.90$66.35  $81.18
    
    
    39,000
    
    
    
    3.53
    
    
    $
    70.89236,994
    
    
    
    3.79
    
    
    $
    47.14
 Acquisitions
   Cash
    
    $
    3,750Transaction costs
    
    
    146Total purchase price
    
    $
    3,896Fair value of assets acquired:Fixed assets
    
    $
    29Developed technology
    
    
    3,867Total fair value of assets acquired
    
    $
    3,896
 Subsequent Event
   8




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##### Table of Contents



Review of Historical Stock Option Grant Procedures Share Based Compensation
       Materiality
  9




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##### Table of Contents



Net Income Per Share
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of shares outstanding
    
    
    26,285,484
    
    
    
    27,236,784
    
    
    
    26,717,733
    
    
    
    27,193,551Dilutive stock options
    
    
    251,580
    
    
    
    303,709
    
    
    
    251,599
    
    
    
    297,796Dilutive restricted stock units
    
    
    1,811
    
    
    
    30,152
    
    
    
    14,624
    
    
    
    32,723Dilutive contingent convertible debt common
shares
    
    
    
    
    
    
    215,599
    
    
    
    
    
    
    
    60,805Number of shares used in fully diluted computations
    
    
    26,538,875
    
    
    
    27,786,244
    
    
    
    26,983,956
    
    
    
    27,584,875
 Composition of Certain Financial Statement Captions
  
 June 30, 2008
    
    
    December 31, 2007Raw materials
    
    $
    16,563
    
    
    $
    22,772Work-in-process
    
    
    52,196
    
    
    
    46,853Finished goods
    
    
    31,740
    
    
    
    23,156$
    100,499
    
    
    $
    92,781
 
 June 30, 2008
    
    
    December 31, 2007Land
    
    $
    18,900
    
    
    $
    15,086Buildings and improvements
    
    
    94,286
    
    
    
    81,965Machinery and equipment
    
    
    200,595
    
    
    
    179,727Leasehold improvements
    
    
    16,300
    
    
    
    16,572Office equipment
    
    
    22,130
    
    
    
    19,512Construction in progress
    
    
    17,976
    
    
    
    16,880370,187
    
    
    
    329,742Less accumulated depreciation and amortization
    
    
    (102,547
    )
    
    
    (85,850
    )$
    267,640
    
    
    $
    243,892
  10




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizing Intangible AssetsBacklog
    
    $
    1,795
    
    
    $
    1,795
    
    
    $
    
    
    
    $
    1,795
    
    
    $
    1,795
    
    
    $
    Developed technology
    
    
    16,151
    
    
    
    2,373
    
    
    
    13,778
    
    
    
    11,617
    
    
    
    1,666
    
    
    
    9,951Tradename
    
    
    1,110
    
    
    
    221
    
    
    
    889
    
    
    
    1,110
    
    
    
    142
    
    
    
    968Customer relationships
    
    
    25,230
    
    
    
    3,308
    
    
    
    21,922
    
    
    
    25,230
    
    
    
    947
    
    
    
    24,283Non-compete agreement
    
    
    500
    
    
    
    366
    
    
    
    134
    
    
    
    500
    
    
    
    178
    
    
    
    322Non-amortizing tradename
    
    
    2,054
    
    
    
    
    
    
    
    2,054
    
    
    
    2,054
    
    
    
    
    
    
    
    2,054Total
    
    $
    46,840
    
    
    $
    8,063
    
    
    $
    38,777
    
    
    $
    42,306
    
    
    $
    4,728
    
    
    $
    37,578
  Identified Intangible Asset
    
    Estimated Useful Life in Years or MonthsDeveloped technology
    
    10 years  12.5 yearsTradename
    
    10 yearsCustomer relationships
    
    10 years  12.5 yearsBacklog
    
    1 month  3 monthsNon-compete agreement
    
    15 months
   CeradyneBoronACO
    
    
    Semicon
    
    
    Thermo
    
    
    ESK
    
    
    Canada
    
    
    Products
    
    
    TotalDecember 31, 2007
    
    $
    2,608
    
    
    $
    603
    
    
    $
    11,378
    
    
    $
    10,176
    
    
    $
    3,832
    
    
    $
    18,251
    
    
    $
    46,848Foreign Currency Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797
    
    
    
    
    
    
    
    
    
    
    
    797June 30, 2008
    
    $
    2,608
    
    
    $
    603
    
    
    $
    11,378
    
    
    $
    10,973
    
    
    $
    3,832
    
    
    $
    18,251
    
    
    $
    47,645
 Stock Repurchases
  Fair Value Measurements
    11




---



##### Table of Contents



Fair Value Measurements at June 30, 2008UsingSignificantQuoted Prices
    
    
    Other
    
    
    Significantin Active
    
    
    Observable
    
    
    Unobservable
    
    
    Total CarryingMarkets
    
    
    Inputs
    
    
    Inputs
    
    
    Value at(In thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2008Cash and cash equivalents (including restricted cash)
    
    $
    197,667
    
    
    $
    
    
    
    $
    
    
    
    $
    197,667Short term investments
    
    
    8,390
    
    
    
    
    
    
    
    
    
    
    
    8,390Derivatives
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    273Long term investments
    
    $
    
    
    
    $
    35,041
    
    
    $
    
    
    
    $
    35,041
     12




---



##### Table of Contents



Recent Accounting Pronouncements
 
     Convertible Debt and Credit Facility
     13




---



##### Table of Contents



Disclosure About Segments of an Enterprise and Related Information
 10
  14




---



##### Table of Contents



Operating Segment and Facility Location
    
    ProductsCeradyne Advanced Ceramic Operations
    
    Defense Applications:
    
    Lightweight ceramic armorCosta Mesa and Irvine, California(1)
    
    Industrial Applications:Approximately 240,000 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
    
    
    
    
    
    Clarity® ceramic orthodontic brackets
    
    Components for medical devicesESK Ceramics
    
    Defense Applications:
    
    Boron carbide powders for body armorKempten, Germany(4)Approximately 548,000 square feet
    
    Industrial 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® boron nitride powder for cosmeticsCeradyne Semicon Associates
    
    Industrial Applications:Lexington, Kentucky(6)
    
    
    
    
    
    Ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubesApproximately 35,000 square feet
    
    
    
    
    
    Samarium cobalt magnetsCeradyne Thermo Materials
    
    Defense Applications:
    
    Missile radomes (nose cones)Scottdale and Clarkston, Georgia(7)
Approximately 225,000 square feet
    
    
    
    
    
    High purity fused silica used to manufacture missile radomes (nose cones)Tianjin, China(8)
    
    Industrial Applications:Approximately 98,000 square feet
    
    
    
    
    
    Glass tempering rolls
    
    Metallurgical toolingMidway, Tennessee(9)
    
    
    
    
    
    Castable and other fused silica productsApproximately 105,000 square feet
    
    
    
    
    
    Crucibles for photovoltaic solar cell applications
    
    Turbine components used in aerospace applicationsCeradyne Canada
    
    Industrial Applications:
    
    Boral® structural neutron absorbing materialsChicoutimi, Quebec, Canada(10)
    
    
    
    
    
    Metal matrix composite structuresApproximately 86,000 square feet
  15




---



##### Table of Contents



Operating Segment and Facility Location
    
    ProductsCeradyne 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 manufacturing
    
    P-dopants for ion implanting 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. In Irvine, California, we occupy a 24,000 square foot facility under a lease that expires
in April 2009 and a 76,000 square foot facility under a lease that expires in April 2011.(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 140,000 square foot facility
in Clarkson, Georgia which expires in June 2013.(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.  16




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue from External CustomersACO
    
    $
    119,336
    
    
    $
    149,297
    
    
    $
    249,323
    
    
    $
    301,188ESK Ceramics
    
    
    45,653
    
    
    
    41,262
    
    
    
    84,929
    
    
    
    82,454Semicon Associates
    
    
    2,076
    
    
    
    2,232
    
    
    
    4,345
    
    
    
    4,381Thermo Materials
    
    
    21,729
    
    
    
    4,063
    
    
    
    39,032
    
    
    
    8,284Ceradyne Canada
    
    
    2,246
    
    
    
    1,042
    
    
    
    4,808
    
    
    
    1,783Ceradyne Boron Products
    
    
    5,208
    
    
    
    
    
    
    
    10,240
    
    
    
    Inter-segment elimination
    
    
    (11,273
    )
    
    
    (12,537
    )
    
    
    (19,165
    )
    
    
    (24,288
    )Total
    
    $
    184,975
    
    
    $
    185,359
    
    
    $
    373,512
    
    
    $
    373,802Depreciation and AmortizationACO
    
    $
    2,504
    
    
    $
    2,326
    
    
    $
    4,991
    
    
    $
    4,577ESK Ceramics
    
    
    3,456
    
    
    
    2,536
    
    
    
    6,505
    
    
    
    4,963Semicon Associates
    
    
    86
    
    
    
    78
    
    
    
    175
    
    
    
    169Thermo Materials
    
    
    1,308
    
    
    
    340
    
    
    
    2,586
    
    
    
    645Ceradyne Canada
    
    
    250
    
    
    
    172
    
    
    
    493
    
    
    
    352Ceradyne Boron Products
    
    
    1,658
    
    
    
    
    
    
    
    3,313
    
    
    
    Total
    
    $
    9,262
    
    
    $
    5,452
    
    
    $
    18,063
    
    
    $
    10,706Segment Income (Loss) before Provision for Income TaxesACO
    
    $
    42,551
    
    
    $
    57,750
    
    
    $
    86,198
    
    
    $
    113,279ESK Ceramics
    
    
    2,755
    
    
    
    4,078
    
    
    
    5,381
    
    
    
    8,343Semicon Associates
    
    
    256
    
    
    
    357
    
    
    
    738
    
    
    
    499Thermo Materials
    
    
    5,932
    
    
    
    176
    
    
    
    9,018
    
    
    
    522Ceradyne Canada
    
    
    40
    
    
    
    (1,245
    )
    
    
    706
    
    
    
    (2,088
    )Ceradyne Boron Products
    
    
    (151
    )
    
    
    
    
    
    
    333
    
    
    
    Inter-segment elimination
    
    
    745
    
    
    
    (1,359
    )
    
    
    1,366
    
    
    
    (1,190
    )Total
    
    $
    52,128
    
    
    $
    59,757
    
    
    $
    103,740
    
    
    $
    119,365Segment AssetsACO
    
    $
    405,175
    
    
    $
    457,528
    
    
    $
    405,175
    
    
    $
    457,528ESK Ceramics
    
    
    243,720
    
    
    
    187,362
    
    
    
    243,720
    
    
    
    187,362Semicon Associates
    
    
    6,013
    
    
    
    5,958
    
    
    
    6,013
    
    
    
    5,958Thermo Materials
    
    
    84,135
    
    
    
    23,950
    
    
    
    84,135
    
    
    
    23,950Ceradyne Canada
    
    
    22,413
    
    
    
    19,466
    
    
    
    22,413
    
    
    
    19,466Ceradyne Boron Products
    
    
    69,740
    
    
    
    
    
    
    
    69,740
    
    
    
    Total
    
    $
    831,196
    
    
    $
    694,264
    
    
    $
    831,196
    
    
    $
    694,264Expenditures for Property, Plant & EquipmentACO
    
    $
    1,970
    
    
    $
    2,708
    
    
    $
    2,467
    
    
    $
    4,587ESK Ceramics
    
    
    3,801
    
    
    
    2,904
    
    
    
    15,423
    
    
    
    5,047Semicon Associates
    
    
    33
    
    
    
    127
    
    
    
    117
    
    
    
    178Thermo Materials
    
    
    3,469
    
    
    
    2,142
    
    
    
    7,851
    
    
    
    5,103Ceradyne Canada
    
    
    550
    
    
    
    474
    
    
    
    1,486
    
    
    
    588Ceradyne Boron Products
    
    
    157
    
    
    
    
    
    
    
    264
    
    
    
    Total
    
    $
    9,980
    
    
    $
    8,355
    
    
    $
    27,608
    
    
    $
    15,503
  17




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Percentage of U.S. net sales from external customersACO
    
    
    61
    %
    
    
    79
    %
    
    
    63
    %
    
    
    79
    %ESK Ceramics
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    4
    %
    
    
    2
    %
    
    
    4
    %
    
    
    2
    %Ceradyne Canada
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    2
    %
    
    
    0
    %
    
    
    2
    %
    
    
    0
    %Total percentage of U.S. net sales from external customers
    
    
    71
    %
    
    
    84
    %
    
    
    73
    %
    
    
    84
    %Percentage of foreign net sales from external customersACO
    
    
    3
    %
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %ESK Ceramics
    
    
    18
    %
    
    
    13
    %
    
    
    17
    %
    
    
    13
    %Semicon Associates
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Thermo Materials
    
    
    7
    %
    
    
    1
    %
    
    
    6
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Total percentage of foreign net sales from external customers
    
    
    29
    %
    
    
    16
    %
    
    
    27
    %
    
    
    16
    %Percentage of total net sales from external customersACO
    
    
    64
    %
    
    
    81
    %
    
    
    66
    %
    
    
    81
    %ESK Ceramics
    
    
    20
    %
    
    
    15
    %
    
    
    19
    %
    
    
    15
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    11
    %
    
    
    3
    %
    
    
    10
    %
    
    
    3
    %Ceradyne Canada
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %Ceradyne Boron Products
    
    
    3
    %
    
    
    0
    %
    
    
    3
    %
    
    
    0
    %Total percentage of total net sales from external customers
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Armor
    
    $
    108,653
    
    
    $
    140,799
    
    
    $
    228,489
    
    
    $
    285,116Automotive
    
    
    4,448
    
    
    
    2,246
    
    
    
    8,469
    
    
    
    4,263Orthodontics
    
    
    3,255
    
    
    
    2,705
    
    
    
    5,988
    
    
    
    5,495Industrial
    
    
    2,980
    
    
    
    3,547
    
    
    
    6,377
    
    
    
    6,314$
    119,336
    
    
    $
    149,297
    
    
    $
    249,323
    
    
    $
    301,188
 Pension and Other Post-retirement Benefit Plans
   18




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    144
    
    
    $
    114
    
    
    $
    283
    
    
    $
    225Interest cost
    
    
    258
    
    
    
    98
    
    
    
    511
    
    
    
    194Expected return on plan assets
    
    
    (174
    )
    
    
    
    
    
    
    (348
    )
    
    
    Amortization of unrecognized gain
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    29Net periodic benefit cost
    
    $
    228
    
    
    $
    227
    
    
    $
    446
    
    
    $
    448
 Financial Instruments
   Income Taxes
   June 30, 2008
    
    
    December 31, 2007Federal, state and foreign UTBs
    
    $
    4,665
    
    
    $
    4,556Interest
    
    
    1,271
    
    
    
    679Federal/State Benefit of Interest
    
    
    (474
    )
    
    
    (250
    )Total reserve for UTBs
    
    $
    5,462
    
    
    $
    4,985
     19




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##### Table of Contents



Commitments and Contingencies
  2008
    
    $
    1,5162009
    
    
    2,8502010
    
    
    2,5232011
    
    
    6682012
    
    
    293Thereafter
    
    
    99$
    7,949
        20




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##### Table of Contents



Comprehensive Income
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    33,196
    
    
    $
    38,303
    
    
    $
    66,098
    
    
    $
    76,392Foreign currency translation
    
    
    (449
    )
    
    
    1,925
    
    
    
    16,623
    
    
    
    4,330Unrealized gain (loss) on investments
    
    
    (50
    )
    
    
    (1
    )
    
    
    (1,493
    )
    
    
    6Comprehensive income
    
    $
    32,697
    
    
    $
    40,227
    
    
    $
    81,228
    
    
    $
    80,728
  21




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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;
    
    fused silica powders for industrial applications and ceramic crucibles;
    
    neutron absorbing materials, structural and non-structural, in combination with
aluminum metal matrix composites that serve as part of a barrier system for spent fuel wet
and dry storage in the nuclear industry, and non-structural neutron absorbing materials
for use in the transport of nuclear fresh fuel rods;
    
    nuclear chemistry products for use in pressurized water reactors and boiling water
reactors;
    
    boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of
silicon wafers; and
    
    technical ceramic bearings for down hole oil drilling and for coal bed methane
pumps and steam assisted oil extraction pumps.
   22




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Defense
    
    
    60.1
    %
    
    
    77.3
    %
    
    
    62.6
    %
    
    
    77.3
    %Industrial
    
    
    31.8
    
    
    
    17.1
    
    
    
    29.7
    
    
    
    17.1Automotive/Diesel
    
    
    6.0
    
    
    
    3.9
    
    
    
    5.7
    
    
    
    3.8Commercial
    
    
    2.1
    
    
    
    1.7
    
    
    
    2.0
    
    
    
    1.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
      23




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##### Table of Contents



       
   
   Review of Historical Stock Option Grant Procedures
      24




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##### Table of Contents



Results of Operations for the Three and Six Months Ended June 30, 2008 and 2007
 Net Sales.
    25




---



##### Table of Contents



®
      26




---



##### Table of Contents



®
  Gross Profit.
      27




---



##### Table of Contents



®
  Selling Expenses.
  General and Administrative Expenses.
  Research and Development Expenses.
  28




---



##### Table of Contents



Other Income (Expense).
 Income before Provision for Income Taxes.
     ®
  29




---



##### Table of Contents



Income Taxes.
 Liquidity and Capital Resources
          30




---



##### Table of Contents



31




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
       
 Item 4. Controls and Procedures
 Review of Historical Stock Option Grant Procedures
   32




---



##### Table of Contents



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
       33




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##### Table of Contents



Daniel Vargas, Jr. v. Ceradyne, Inc., Orange County Superior Court, Civil Action No.
07CC01232 :
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 (d)Maximum Number(c)
    
    
    (or ApproximateTotal Number of
    
    
    Dollar Value) ofShares Purchased as
    
    
    Shares that May Yet(a)
    
    
    (b)
    
    
    Part of Publicly
    
    
    Be Purchased UnderTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsApril 1 to April
30, 2008
    
    
    14,910
    
    
    $
    38.92
    
    
    
    1,024,746
    
    
    $
    69,107,482May 1 to May 31,
2008
    
    
    103,091
    
    
    $
    38.91
    
    
    
    1,127,837
    
    
    $
    65,096,150June 1 to June 30,
2008
    
    
    400
    
    
    $
    38.46
    
    
    
    1,128,237
    
    
    $
    65,080,754Total
    
    
    118,401
    
    
    $
    38.86
    
    
    
    1,128,237
    
    
    $
    65,080,754
 (1)
    
    On March 4, 2008, we announced that our board of directors had authorized the repurchase and
retirement of up to $100 million of our common stock in open market transactions, including
block purchases, or in privately negotiated transactions. We did not set a time limit for
completion of this repurchase program, and we may suspend or terminate it at any time.  34




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##### Table of Contents



Item 3. Not applicable
 
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    The following six persons were elected to the Board of Directors of the Company
to serve until the next annual meeting of stockholders or until their successors are
elected and have qualified:
 Number of Votes CastAuthorityFor
    
    
    WithheldJoel P. Moskowitz
    
    
    23,313,818
    
    
    
    435,140Richard A. Alliegro
    
    
    23,319,682
    
    
    
    429,276Frank Edelstein
    
    
    23,316,892
    
    
    
    432,066Richard A. Kertson
    
    
    23,344,038
    
    
    
    404,920William C. LaCourse
    
    
    23,343,903
    
    
    
    405,055Milton L. Lohr
    
    
    23,292,492
    
    
    
    456,466
 2.
    
    The appointment of PricewaterhouseCoopers LLP to serve as the Companys
independent registered public accounting firm for the year ending December 31, 2008 was
approved by the following vote:
 For: 23,202,077
    
    Against: 503,068
    
    Abstain: 43,823
 
 Item 5. Not applicable
 
 Item 6. 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.
  35




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##### Table of Contents



CERADYNE, INC.Date: July 25, 2008
    
    By:
    
    /s/ JERROLD J. PELLIZZON

Jerrold J. PellizzonVice PresidentChief Financial Officer(Principal Financial and Accounting Officer)
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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.
  37