##### 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 March 31, 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
    
    33-0055414(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    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
  þ o o
  o þ
  Class
    
    Outstanding as of April 24, 2007Common Stock, $0.01 par value
    
    27,194,060 Shares




---



##### 



INDEX
 PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  March 31, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income Three months ended March 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Three Months Ended March 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-17Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18-23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Not applicable
    
    
    25Item 3.
    
    Not applicable
    
    
    26Item 4.
    
    Not applicable
    
    
    26Item 5.
    
    Not applicable
    
    
    26Item 6.
    
    Exhibits
    
    
    26SIGNATURE
    
    
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2007
 
 PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 CERADYNE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands)
 March 31,
    
    
    December2007
    
    
    31, 2006(Unaudited)CURRENT ASSETSCash and cash equivalents
    
    $
    18,186
    
    
    $
    13,547Short-term investments
    
    
    236,362
    
    
    
    190,565Accounts receivable, net of allowances for doubtful accounts of approximately
$977 and $1,158 at March 31, 2007 and December 31, 2006, respectively
    
    
    73,418
    
    
    
    77,162Other receivables
    
    
    3,365
    
    
    
    3,289Inventories, net
    
    
    80,024
    
    
    
    73,109Production tooling, net
    
    
    20,813
    
    
    
    20,975Prepaid expenses and other
    
    
    12,770
    
    
    
    11,859Deferred tax asset
    
    
    11,690
    
    
    
    11,469TOTAL CURRENT ASSETS
    
    
    456,628
    
    
    
    401,975PROPERTY, PLANT & EQUIPMENT, net
    
    
    186,444
    
    
    
    183,011INTANGIBLE ASSETS, net
    
    
    8,322
    
    
    
    8,389GOODWILL
    
    
    16,641
    
    
    
    16,518OTHER ASSETS
    
    
    3,933
    
    
    
    3,922TOTAL ASSETS
    
    $
    671,968
    
    
    $
    613,815CURRENT LIABILITIESAccounts payable
    
    $
    32,829
    
    
    $
    35,470Accrued expenses
    
    
    23,212
    
    
    
    21,821Income taxes payable
    
    
    23,521
    
    
    
    12,621TOTAL CURRENT LIABILITIES
    
    
    79,562
    
    
    
    69,912LONG-TERM DEBT
    
    
    121,000
    
    
    
    121,000EMPLOYEE BENEFITS
    
    
    13,846
    
    
    
    13,274OTHER LONG TERM LIABILITY
    
    
    6,895
    
    
    
    DEFERRED TAX LIABILITY
    
    
    2,065
    
    
    
    3,018TOTAL LIABILITIES
    
    
    223,368
    
    
    
    207,204COMMITMENTS AND CONTINGENCIES (Note 12)SHAREHOLDERS EQUITYCommon stock, $0.01 par value,
100,000,000 authorized, 27,175,041 and
27,119,012 shares issued and
outstanding at March 31, 2007 and
December 31, 2006, respectively
    
    
    272
    
    
    
    272Additional paid in capital
    
    
    179,740
    
    
    
    178,252Retained earnings
    
    
    255,125
    
    
    
    217,036Accumulated
other comprehensive income
    
    
    13,463
    
    
    
    11,051TOTAL SHAREHOLDERS EQUITY
    
    
    448,600
    
    
    
    406,611TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    671,968
    
    
    $
    613,815
  3




---



##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Amounts in thousands, except per share data)
 Three Months EndedMarch 31,2007
    
    
    2006(Unaudited)NET SALES
    
    $
    188,443
    
    
    $
    136,347COST OF PRODUCT SALES
    
    
    111,331
    
    
    
    82,362Gross profit
    
    
    77,112
    
    
    
    53,985OPERATING EXPENSESSelling
    
    
    6,298
    
    
    
    5,774General and administrative
    
    
    9,777
    
    
    
    6,996Research and development
    
    
    3,486
    
    
    
    2,52219,561
    
    
    
    15,292Income from operations
    
    
    57,551
    
    
    
    38,693OTHER INCOME (EXPENSE):Royalty income
    
    
    30
    
    
    
    30Interest income
    
    
    2,778
    
    
    
    1,057Interest expense
    
    
    (1,025
    )
    
    
    (1,028
    )Miscellaneous
    
    
    274
    
    
    
    (9
    )2,057
    
    
    
    50Income before provision for income taxes
    
    
    59,608
    
    
    
    38,743PROVISION FOR INCOME TAXES
    
    
    21,519
    
    
    
    14,130NET INCOME
    
    $
    38,089
    
    
    $
    24,613BASIC INCOME PER SHARE
    
    $
    1.40
    
    
    $
    0.92DILUTED INCOME PER SHARE
    
    $
    1.38
    
    
    $
    0.90WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    27,150
    
    
    
    26,801DILUTED
    
    
    27,528
    
    
    
    27,385
  4




---



##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Three Months EndedMarch 31,2007
    
    
    2006(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    38,089
    
    
    $
    24,613ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:Depreciation and amortization
    
    
    5,253
    
    
    
    4,097Deferred income taxes
    
    
    (1,372
    )
    
    
    (34
    )Stock compensation
    
    
    476
    
    
    
    275Loss on equipment disposal
    
    
    118
    
    
    
    Change in operating assets and liabilities:Accounts receivable, net
    
    
    3,956
    
    
    
    (10,040
    )Other receivables
    
    
    (52
    )
    
    
    1,638Inventories
    
    
    (6,458
    )
    
    
    (10,572
    )Production tooling
    
    
    188
    
    
    
    (6,355
    )Prepaid expenses and other assets
    
    
    (889
    )
    
    
    (824
    )Accounts payable and accrued expenses
    
    
    (1,429
    )
    
    
    18,866Income taxes payable
    
    
    10,941
    
    
    
    10,378Other long term liability
    
    
    6,895
    
    
    
    Employee benefits
    
    
    386
    
    
    
    319NET CASH PROVIDED BY OPERATING ACTIVITES
    
    
    56,102
    
    
    
    32,361CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (7,153
    )
    
    
    (6,903
    )Purchases of short-term investments
    
    
    (45,797
    )
    
    
    (59,796
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (52,950
    )
    
    
    (66,699
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock due to
exercise of options and vesting of restricted
stock units
    
    
    346
    
    
    
    57Excess tax benefit due to exercise of stock options
    
    
    839
    
    
    
    365Other
    
    
    (166
    )
    
    
    (52
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    1,019
    
    
    
    370EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS
    
    
    468
    
    
    
    290INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,639
    
    
    
    (33,678
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    13,547
    
    
    
    91,542CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    18,186
    
    
    $
    57,864SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:Interest paid
    
    $
    1
    
    
    $
    6Income taxes paid
    
    $
    4,199
    
    
    $
    3,392
  5




---



##### Table of Contents



Basis of Presentation
   Share Based Compensation
         6




---



##### Table of Contents



Three Months Ended March 31,2007
    
    
    2006Share-based compensation expense recognized:General and administrative, stock options
    
    $
    189
    
    
    $
    149General and administrative, Units
    
    
    287
    
    
    
    126Related deferred income tax benefit
    
    
    (172
    )
    
    
    (101
    )Decrease in net income
    
    $
    304
    
    
    $
    174Decrease in basic earnings per share
    
    $
    0.01
    
    
    $
    0.01Decrease in diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
     Three Months EndedMarch 31, 2007WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding, January 1, 2007
    
    
    677,370
    
    
    $
    11.41Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (52,050
    )
    
    $
    6.67Options cancelled
    
    
    
    
    
    $
    Outstanding, March 31, 2007
    
    
    625,320
    
    
    $
    11.81Exercisable, March 31, 2007
    
    
    429,420
    
    
    $
    10.21
  Three Months Ended March 31, 2007WeightedAverage GrantUnits
    
    Fair ValueNon-vested Units at January 1, 2007
    
    
    137,100
    
    
    $
    41.13Granted
    
    
    22,500
    
    
    $
    56.52Vested
    
    
    (7,910
    )
    
    $
    62.07Forfeited
    
    
    (15,400
    )
    
    $
    52.72Non-vested Units at March 31, 2007
    
    
    136,290
    
    
    $
    41.14
 7




---



##### 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
    
    
    8,875
    
    
    
    1.90
    
    
    $
    1.70
    
    
    $
    474
    
    
    
    8,875
    
    
    
    1.90
    
    
    $
    1.70
    
    
    $
    474$2.98 - $4.58
    
    
    301,645
    
    
    
    4.70
    
    
    $
    4.06
    
    
    $
    15,405
    
    
    
    246,070
    
    
    
    4.52
    
    
    $
    4.20
    
    
    $
    12,534$10.53 - $16.89
    
    
    141,325
    
    
    
    6.44
    
    
    $
    16.89
    
    
    $
    5,405
    
    
    
    94,975
    
    
    
    6.44
    
    
    $
    16.89
    
    
    $
    3,632$18.80 - $24.07
    
    
    173,475
    
    
    
    7.43
    
    
    $
    21.65
    
    
    $
    5,809
    
    
    
    79,500
    
    
    
    7.40
    
    
    $
    21.81
    
    
    $
    2,650Total
    
    
    625,320
    
    
    
    5.81
    
    
    $
    11.81
    
    
    $
    27,093
    
    
    
    429,420
    
    
    
    5.42
    
    
    $
    10.21
    
    
    $
    19,290
  OutstandingAverage
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Grant
    
    
    ValueRange of Grant Prices
    
    Units
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)$21.46 - $22.68
    
    
    59,550
    
    
    
    2.98
    
    
    $
    22.43
    
    
    $
    1,947$42.28 - $45.67
    
    
    18,000
    
    
    
    3.49
    
    
    $
    44.35
    
    
    $
    194$52.46 - $62.07
    
    
    58,740
    
    
    
    4.39
    
    
    $
    59.13
    
    
    $
    13136,290
    
    
    
    3.66
    
    
    $
    41.14
    
    
    $
    2,154
 Review of Historical Stock Option Grant Procedures Share Based Compensation
     8




---



##### Table of Contents



Materiality
  Net Income Per Share
   Three Months Ended March 31,2007
    
    
    2006Weighted average number of shares outstanding
    
    
    27,149,839
    
    
    
    26,800,780Dilutive stock options
    
    
    344,053
    
    
    
    531,142Dilutive restricted stock units
    
    
    34,045
    
    
    
    52,864Number of shares used in dilutive computation
    
    
    27,527,937
    
    
    
    27,384,786
 Composition of Certain Financial Statement Captions
  March 31,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    13,527
    
    
    $
    16,398Work-in-process
    
    
    41,233
    
    
    
    34,265Finished goods
    
    
    25,264
    
    
    
    22,446$
    80,024
    
    
    $
    73,109
 9




---



##### Table of Contents



March 31,
    
    
    December 31,2007
    
    
    2006Land
    
    $
    11,341
    
    
    $
    11,226Buildings and improvements
    
    
    63,434
    
    
    
    62,509Machinery and equipment
    
    
    140,959
    
    
    
    138,557Leasehold improvements
    
    
    15,637
    
    
    
    15,077Office equipment
    
    
    14,645
    
    
    
    13,816Construction in progress
    
    
    12,713
    
    
    
    9,020258,729
    
    
    
    250,205Less accumulated depreciation and amortization
    
    
    (72,285
    )
    
    
    (67,194
    )$
    186,444
    
    
    $
    183,011
  March 31, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizing Intangible AssetsBacklog
    
    $
    575
    
    
    $
    575
    
    
    $
    
    
    
    $
    575
    
    
    $
    558
    
    
    $
    17Developed technology
    
    
    6,110
    
    
    
    943
    
    
    
    5,167
    
    
    
    6,007
    
    
    
    820
    
    
    
    5,187Trade name
    
    
    460
    
    
    
    34
    
    
    
    426
    
    
    
    460
    
    
    
    23
    
    
    
    437Customer Relationships
    
    
    730
    
    
    
    55
    
    
    
    675
    
    
    
    730
    
    
    
    36
    
    
    
    694Non-amortizing tradename
    
    
    2,054
    
    
    
    
    
    
    
    2,054
    
    
    
    2,054
    
    
    
    
    
    
    
    2,054Total
    
    $
    9,929
    
    
    $
    1,607
    
    
    $
    8,322
    
    
    $
    9,826
    
    
    $
    1,437
    
    
    $
    8,389
  Recent Accounting Pronouncements
    10




---



##### Table of Contents



Convertible Debt and Credit Facility
          Disclosure About Segments of an Enterprise and Related Information
  11




---



##### Table of Contents



Operating Segment and Facility Location
    
    ProductsCeradyne Advanced Ceramic Operations
    
    Defense Applications: Lightweight ceramic armorCosta Mesa, Irvine and San Diego, California(1)
    
    Industrial Applications:Approximately 272,000 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: Boron carbide powders for body armorKempten, Germany(4)Approximately 544,000 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 coatingsIndustrial Applications:Ceradyne Semicon Associates
Lexington, Kentucky(6)
    
     Ceramic-impregnated dispenser cathodes for microwave tubes, lasers and
cathode ray tubesApproximately 35,000 square feet
    
     Samarium cobalt magnetsDefense Applications: Missile radomes (nose cones)Industrial Applications: Glass tempering rollsCeradyne Thermo Materials
    
     Metallurgical toolingScottdale and Clarkston, Georgia(7)
    
     Castable and other fused silica productsApproximately 132,000 square feet
    
     Crucibles for photovoltaic solar cell applicationsCeradyne Canada
    
    Industrial Applications:Chicoutimi, Canada(8)
    
     Boral® structural neutron absorbing materialsApproximately 86,000 square feet
    
     Metal matrix composite structures
 
 (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 also lease in Irvine, California a 24,000 12




---



##### Table of Contents



square foot facility
that expires in April 2009 and a 76,000 square foot facility that expires in April
2011. We also have a lease on our 23,000 square foot facility in Irvine that expires in
April 2009. We rent our 10,000 square foot facility in San Diego, California, on a month
to month basis.(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 have a lease on our 85,000 square foot facility in Scottdale, Georgia which expires in
December 2015. We have a lease on our 47,000 square foot facility in Clarkston, Georgia which
expires in May 2009.(8)
    
    We own our facility in Chicoutimi, Canada, as well as the seven-acre property on which
our facility is located. 13




---



##### Table of Contents



Three Months EndedMarch 31,2007
    
    
    2006RevenueACO
    
    $
    151,891
    
    
    $
    102,241ESK Ceramics
    
    
    41,192
    
    
    
    36,261Semicon Associates
    
    
    2,149
    
    
    
    2,342Thermo Materials
    
    
    4,221
    
    
    
    3,217Ceradyne Canada
    
    
    741
    
    
    
    Inter-segment elimination
    
    
    (11,751
    )
    
    
    (7,714
    )Total revenue from external customers
    
    $
    188,443
    
    
    $
    136,347Depreciation and AmortizationACO
    
    $
    2,251
    
    
    $
    1,690ESK Ceramics
    
    
    2,426
    
    
    
    2,069Semicon Associates
    
    
    91
    
    
    
    92Thermo Materials
    
    
    305
    
    
    
    246Ceradyne Canada
    
    
    180
    
    
    
    Total
    
    $
    5,253
    
    
    $
    4,097Segment Income before Provision for Income TaxesACO
    
    $
    55,529
    
    
    $
    34,314ESK Ceramics
    
    
    4,265
    
    
    
    4,489Semicon Associates
    
    
    142
    
    
    
    542Thermo Materials
    
    
    346
    
    
    
    143Ceradyne Canada
    
    
    (843
    )
    
    
    Inter-segment elimination
    
    
    169
    
    
    
    (745
    )Total
    
    $
    59,608
    
    
    $
    38,743Segment AssetsACO
    
    $
    442,936
    
    
    $
    300,353ESK Ceramics
    
    
    184,034
    
    
    
    168,962Semicon Associates
    
    
    6,141
    
    
    
    6,457Thermo Materials
    
    
    19,677
    
    
    
    13,669Ceradyne Canada
    
    
    19,180
    
    
    
    Total
    
    $
    671,968
    
    
    $
    489,441Expenditures for PP&EACO
    
    $
    1,879
    
    
    $
    5,236ESK Ceramics
    
    
    2,151
    
    
    
    1,152Semicon Associates
    
    
    51
    
    
    
    57Thermo Materials
    
    
    2,958
    
    
    
    458Ceradyne Canada
    
    
    114
    
    
    
    Total
    
    $
    7,153
    
    
    $
    6,903
 Three Months EndedMarch 31,2007
    
    
    2006Percentage of U.S. net sales from external customersACO
    
    
    79
    %
    
    
    73
    %ESK Ceramics
    
    
    2
    %
    
    
    6
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
 14




---



##### Table of Contents



Three Months EndedMarch 31,2007
    
    
    2006Thermo Materials
    
    
    2
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    Total percentage of U.S. net sales from external customers
    
    
    84
    %
    
    
    81
    %Percentage of foreign net sales from external customersACO
    
    
    2
    %
    
    
    2
    %ESK Ceramics
    
    
    14
    %
    
    
    15
    %Semicon Associates
    
    
    0
    %
    
    
    1
    %Thermo Materials
    
    
    0
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    Total percentage of Foreign net sales from external customers
    
    
    16
    %
    
    
    19
    %Percentage of total net sales from external customersACO
    
    
    81
    %
    
    
    75
    %ESK Ceramics
    
    
    16
    %
    
    
    21
    %Semicon Associates
    
    
    1
    %
    
    
    2
    %Thermo Materials
    
    
    2
    %
    
    
    2
    %Ceradyne Canada
    
    
    0
    %
    
    
    Total percentage of net sales from external customers
    
    
    100
    %
    
    
    100
    %
  Three Months EndedMarch 31,2007
    
    
    2006Armor
    
    $
    143,860
    
    
    $
    93,166Automotive
    
    
    2,020
    
    
    
    4,126Orthodontics
    
    
    2,790
    
    
    
    2,284Industrial
    
    
    3,221
    
    
    
    2,665$
    151,891
    
    
    $
    102,241
 Pension and Other Post-retirement Benefit Plans
   Three Months EndedMarch 31,2007
    
    
    2006Service cost
    
    $
    111
    
    
    $
    518Interest cost
    
    
    96
    
    
    
    433Expected return on plan assets
    
    
    
    
    
    
    (508
    )Amortization of unrecognized gain
    
    
    14
    
    
    
    22Net periodic benefit cost
    
    $
    221
    
    
    $
    465
 15




---



##### Table of Contents



Financial Instruments
   Income Taxes
   March 31, 2007
    
    
    January 01, 2007Federal, state and foreign UTBs
    
    $
    6,464
    
    
    $
    6,178Interest
    
    
    671
    
    
    
    554Federal/State Benefit of Interest
    
    
    (240
    )
    
    
    (202
    )Total reserve for UTBs
    
    $
    6,895
    
    
    $
    6,530
   Commitments and Contingencies
  2007
    
    $
    1,9772008
    
    
    2,4472009
    
    
    2,2412010
    
    
    1,8232011
    
    
    455Thereafter
    
    
    1,133$
    10,076
  16




---



##### Table of Contents



Comprehensive Income
   Three Months Ended March 31,2007
    
    
    2006Net income
    
    $
    38,089
    
    
    $
    24,613Foreign currency translation
    
    
    2,405
    
    
    
    3,635Unrealized gains (losses) on investments
    
    
    7
    
    
    
    (52
    )Comprehensive income
    
    $
    40,501
    
    
    $
    28,196
 17




---



##### 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;
    
    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; and
    
    metal matrix composite structures.
   Three Months EndedMarch 31,2007
    
    2006Defense
    
    
    77.4
    %
    
    
    73.1
    %Industrial
    
    
    17.4
    
    
    
    19.1Automotive/Diesel
    
    
    3.7
    
    
    
    6.1Commercial
    
    
    1.5
    
    
    
    1.7Total
    
    
    100.0
    %
    
    
    100.0
    %
  18




---



##### Table of Contents



Review of Historical Stock Option Grant Procedures
    19




---



##### Table of Contents



Results of Operations for the Three Months Ended March 31, 2007 and 2006
 Net Sales.
  20




---



##### Table of Contents



Gross Profit.
     21




---



##### Table of Contents



Selling Expenses.
 General and Administrative Expenses.
 Research and Development Expenses.
 Other Income (Expense).
 Income before Provision for Income Taxes.
      Income Taxes.
 22




---



##### Table of Contents



Liquidity and Capital Resources
          23




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
       24




---



##### Table of Contents



Item 4. Controls and Procedures
 Review of Historical Stock Option Grant Procedures
   Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Not applicable
 25




---



##### Table of Contents



Item 3. Not applicable
 
 Item 4. Not applicable
 
 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.
 26




---



##### Table of Contents



CERADYNE, INC.Date: April 27, 2007
    By:
    /s/ JERROLD J. PELLIZZONJerrold J. PellizzonVice President     
Chief Financial Officer
(Principal Financial and Accounting Officer) 27




---



##### 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.
 28