##### 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, 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 July 20, 2007Common Stock, $0.01 par value
    
    27,301,605 Shares




---



##### 



INDEX
 PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  June 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Income Six Months Ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-17Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18-25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25-26Item 4.
    
    Controls and Procedures
    
    
    26PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26-27Item 1A.
    
    Risk Factors
    
    
    27Item 2.
    
    Not applicable
    
    
    27Item 3.
    
    Not applicable
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Item 5.
    
    Not applicable
    
    
    27Item 6.
    
    Exhibits
    
    
    27-28SIGNATURE
    
    
    29EXHIBIT 2.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2007
 
 PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 CERADYNE, INC.
 
 CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 December 31,June 30, 2007
    
    
    2006(Unaudited)CURRENT ASSETSCash and cash equivalents
    
    $
    38,980
    
    
    $
    13,547Restricted cash
    
    
    2,603
    
    
    
    Short-term investments
    
    
    216,431
    
    
    
    190,565Accounts receivable, net of allowances for doubtful accounts of approximately
$873 and $1,158 at June 30, 2007 and December 31, 2006, respectively
    
    
    71,682
    
    
    
    77,162Other receivables
    
    
    3,853
    
    
    
    3,289Inventories, net
    
    
    91,423
    
    
    
    73,109Production tooling, net
    
    
    21,032
    
    
    
    20,975Prepaid expenses and other
    
    
    16,550
    
    
    
    11,859Deferred tax asset
    
    
    12,030
    
    
    
    11,469TOTAL CURRENT ASSETS
    
    
    474,584
    
    
    
    401,975PROPERTY, PLANT AND EQUIPMENT, net
    
    
    190,697
    
    
    
    183,011INTANGIBLE ASSETS, net
    
    
    8,239
    
    
    
    8,389GOODWILL
    
    
    16,743
    
    
    
    16,518OTHER ASSETS
    
    
    4,001
    
    
    
    3,922TOTAL ASSETS
    
    $
    694,264
    
    
    $
    613,815CURRENT LIABILITIESAccounts payable
    
    $
    33,484
    
    
    $
    35,470Accrued expenses
    
    
    22,581
    
    
    
    21,821Income taxes payable
    
    
    
    
    
    
    12,621TOTAL CURRENT LIABILITIES
    
    
    56,065
    
    
    
    69,912LONG-TERM DEBT
    
    
    121,000
    
    
    
    121,000EMPLOYEE BENEFITS
    
    
    14,420
    
    
    
    13,274OTHER LONG TERM LIABILITY
    
    
    7,093
    
    
    
    DEFERRED TAX LIABILITY
    
    
    1,883
    
    
    
    3,018TOTAL LIABILITIES
    
    
    200,461
    
    
    
    207,204COMMITMENTS AND CONTINGENCIES (Note 12)SHAREHOLDERS EQUITYCommon stock, $0.01 par value,
100,000,000 authorized, 27,299,818 and
27,119,012 shares issued and
outstanding at June 30, 2007 and
December 31, 2006, respectively
    
    
    273
    
    
    
    272Additional paid in capital
    
    
    184,715
    
    
    
    178,252Retained earnings
    
    
    293,428
    
    
    
    217,036Accumulated other comprehensive income
    
    
    15,387
    
    
    
    11,051TOTAL
SHAREHOLDERS EQUITY
    
    
    493,803
    
    
    
    406,611TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    694,264
    
    
    $
    613,815
  3




---



##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)NET SALES
    
    $
    185,359
    
    
    $
    162,016
    
    
    $
    373,802
    
    
    $
    298,363COST OF PRODUCT SALES
    
    
    107,975
    
    
    
    98,335
    
    
    
    219,306
    
    
    
    180,697Gross profit
    
    
    77,384
    
    
    
    63,681
    
    
    
    154,496
    
    
    
    117,666OPERATING EXPENSESSelling
    
    
    6,447
    
    
    
    5,916
    
    
    
    12,745
    
    
    
    11,690General and administrative
    
    
    9,161
    
    
    
    10,377
    
    
    
    18,938
    
    
    
    17,373Research and development
    
    
    4,395
    
    
    
    2,677
    
    
    
    7,881
    
    
    
    5,19920,003
    
    
    
    18,970
    
    
    
    39,564
    
    
    
    34,262Income from operations
    
    
    57,381
    
    
    
    44,711
    
    
    
    114,932
    
    
    
    83,404OTHER INCOME (EXPENSE):Royalty income
    
    
    45
    
    
    
    30
    
    
    
    75
    
    
    
    60Interest income
    
    
    3,483
    
    
    
    1,545
    
    
    
    6,261
    
    
    
    2,602Interest expense
    
    
    (1,035
    )
    
    
    (1,030
    )
    
    
    (2,060
    )
    
    
    (2,058
    )Miscellaneous
    
    
    (117
    )
    
    
    (111
    )
    
    
    157
    
    
    
    (120
    )2,376
    
    
    
    434
    
    
    
    4,433
    
    
    
    484Income before provision for income taxes
    
    
    59,757
    
    
    
    45,145
    
    
    
    119,365
    
    
    
    83,888PROVISION FOR INCOME TAXES
    
    
    21,454
    
    
    
    16,016
    
    
    
    42,973
    
    
    
    30,146NET INCOME
    
    $
    38,303
    
    
    $
    29,129
    
    
    $
    76,392
    
    
    $
    53,742BASIC INCOME PER SHARE
    
    $
    1.41
    
    
    $
    1.08
    
    
    $
    2.81
    
    
    $
    2.00DILUTED INCOME PER SHARE
    
    $
    1.38
    
    
    $
    1.07
    
    
    $
    2.77
    
    
    $
    1.97WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    27,237
    
    
    
    26,857
    
    
    
    27,194
    
    
    
    26,829DILUTED
    
    
    27,786
    
    
    
    27,325
    
    
    
    27,585
    
    
    
    27,323
  4




---



##### Table of Contents



CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 Six Months EndedJune 30,2007
    
    
    2006(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    76,392
    
    
    $
    53,742ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:Depreciation and amortization
    
    
    10,706
    
    
    
    8,499Deferred income taxes
    
    
    (1,459
    )
    
    
    (350
    )Stock compensation
    
    
    1,184
    
    
    
    2,913Loss on equipment disposal
    
    
    220
    
    
    
    158Change in operating assets and liabilities:Accounts receivable, net
    
    
    5,816
    
    
    
    (8,968
    )Other receivables
    
    
    (515
    )
    
    
    (1,172
    )Inventories
    
    
    (17,466
    )
    
    
    (15,559
    )Production tooling
    
    
    (22
    )
    
    
    (8,712
    )Prepaid expenses and other assets
    
    
    (4,724
    )
    
    
    (1,670
    )Accounts payable and accrued expenses
    
    
    (1,499
    )
    
    
    22,947Income taxes payable
    
    
    (13,039
    )
    
    
    (1,101
    )Other long term liability
    
    
    7,093
    
    
    
    Employee benefits
    
    
    808
    
    
    
    599NET CASH PROVIDED BY OPERATING ACTIVITES
    
    
    63,495
    
    
    
    51,326CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (15,503
    )
    
    
    (21,528
    )Changes in restricted cash
    
    
    (2,603
    )
    
    
    Purchases of short-term investments
    
    
    (25,866
    )
    
    
    (77,912
    )Acquisition of a business, net of cash acquired
    
    
    
    
    
    
    (6,188
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (43,972
    )
    
    
    (105,628
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock due to
exercise of options and
vesting of restricted stock units
    
    
    500
    
    
    
    1,062Proceeds from issuance of stock for stock plans
    
    
    1,078
    
    
    
    828Excess tax benefit due to exercise of stock options
    
    
    3,702
    
    
    
    1,046Other
    
    
    6
    
    
    
    (72
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    5,286
    
    
    
    2,864EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS
    
    
    624
    
    
    
    1,121INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    25,433
    
    
    
    (50,317
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    13,547
    
    
    
    91,542CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    38,980
    
    
    $
    41,225SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:Interest paid
    
    $
    1,751
    
    
    $
    1,707Income taxes paid
    
    $
    49,180
    
    
    $
    31,713
  5




---



##### Table of Contents



Basis of Presentation
   Share Based Compensation
         6




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Share-based compensation expense recognized:General and administrative, options
    
    $
    187
    
    
    $
    2,431
    
    
    $
    376
    
    
    $
    2,580General and administrative, restricted stock units
    
    
    521
    
    
    
    207
    
    
    
    808
    
    
    
    333Related deferred income tax benefit
    
    
    (255
    )
    
    
    (915
    )
    
    
    (426
    )
    
    
    (1,016
    )Decrease in net income
    
    $
    453
    
    
    $
    1,723
    
    
    $
    758
    
    
    $
    1,897Decrease in basic earnings per share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.07Decrease in diluted earnings per share
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.07
     Six Months EndedJune 30, 2007WeightedAverageNumber of
    
    ExerciseOptions
    
    PriceOutstanding, January 1, 2007
    
    
    677,370
    
    
    $
    11.41Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (142,895
    )
    
    $
    7.88Options cancelled
    
    
    (4,500
    )
    
    $
    22.67Outstanding, June 30, 2007
    
    
    529,975
    
    
    $
    12.27Exercisable, June 30, 2007
    
    
    363,250
    
    
    $
    10.87
  Six Months EndedJune 30, 2007WeightedAverage GrantUnits
    
    Fair ValueNon-vested Units at January 1, 2007
    
    
    137,100
    
    
    $
    41.13Granted
    
    
    59,850
    
    
    $
    63.80Vested
    
    
    (28,891
    )
    
    $
    40.36Forfeited
    
    
    (19,800
    )
    
    $
    46.84Non-vested Units at June 30, 2007
    
    
    148,259
    
    
    $
    49.66
 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
    
    5,850
    
    
    1.71
    
    $
    1.69
    
    $
    372
    
    
    5,850
    
    
    1.71
    
    $
    1.69
    
    $
    372$2.98 - $4.58
    
    239,200
    
    
    4.55
    
    $
    4.10
    
    $
    14,632
    
    
    193,975
    
    
    4.37
    
    $
    4.25
    
    $
    11,836$10.53 - $16.89
    
    138,525
    
    
    6.19
    
    $
    16.89
    
    $
    6,702
    
    
    92,175
    
    
    6.19
    
    $
    16.89
    
    $
    4,459$18.80 - $24.07
    
    146,400
    
    
    7.19
    
    $
    21.67
    
    $
    6,383
    
    
    71,250
    
    
    7.57
    
    $
    21.85
    
    $
    3,094529,975
    
    
    5.68
    
    $
    12.27
    
    $
    28,089
    
    
    363,250
    
    
    5.41
    
    $
    10.87
    
    $
    19,761
  OutstandingAverage
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Grant
    
    
    ValueRange of Grant Prices
    
    Units
    
    
    Life (Years)
    
    
    Fair Value
    
    
    (000s)$21.46 - $22.68
    
    
    40,700
    
    
    
    2.80
    
    
    $
    22.41
    
    
    $
    1,744$42.28 - $45.67
    
    
    14,869
    
    
    
    3.41
    
    
    $
    44.07
    
    
    $
    315$52.46 - $62.07
    
    
    58,340
    
    
    
    4.14
    
    
    $
    59.11
    
    
    $
    360$66.35 - $66.92
    
    
    34,350
    
    
    
    4.93
    
    
    $
    66.92
    
    
    $
    148,259
    
    
    
    3.89
    
    
    $
    49.66
    
    
    $
    2,419
 Review of Historical Stock Option Grant Procedures Share Based Compensation
     8




---



##### Table of Contents



Materiality
  Net Income Per Share
   Three Months Ended
    
    Six Months EndedJune 30,


    
    June 30,2007
    
    2006
    
    2007
    
    2006Weighted average number of shares outstanding
    
    
    27,236,784
    
    
    
    26,857,300
    
    
    
    27,193,551
    
    
    
    26,829,199Dilutive stock options
    
    
    303,709
    
    
    
    447,189
    
    
    
    297,796
    
    
    
    448,222Dilutive restricted stock units
    
    
    30,152
    
    
    
    20,891
    
    
    
    32,723
    
    
    
    45,925Dilutive contingent convertible debt common shares
    
    
    215,599
    
    
    
    
    
    
    
    60,805
    
    
    
    Number of
shares used in fully diluted computations
    
    
    27,786,244
    
    
    
    27,325,380
    
    
    
    27,584,875
    
    
    
    27,323,346
 9




---



##### Table of Contents



Composition of Certain Financial Statement Captions
   June 30, 2007
    
    
    December 31, 2006Raw materials
    
    $
    20,995
    
    
    $
    16,398Work-in-process
    
    
    48,440
    
    
    
    34,265Finished goods
    
    
    21,988
    
    
    
    22,446$
    91,423
    
    
    $
    73,109
 Property, plant and equipment is recorded
at cost and consists of the following (in thousands):
 June 30, 2007
    
    

December 31, 2006Land
    
    $
    11,436
    
    
    $
    11,226Buildings and improvements
    
    
    67,393
    
    
    
    62,509Machinery and equipment
    
    
    150,705
    
    
    
    138,557Leasehold improvements
    
    
    15,766
    
    
    
    15,077Office equipment
    
    
    15,350
    
    
    
    13,816Construction in progress
    
    
    7,866
    
    
    
    9,020268,516
    
    
    
    250,205Less accumulated depreciation and amortization
    
    
    (77,819
    )
    
    
    (67,194
    )$
    190,697
    
    
    $
    183,011
  June 30, 2007
    
    
    December 31, 2006Gross
    
    
    Accumulated
    
    
    Net
    
    
    Gross
    
    
    Accumulated
    
    
    NetAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizing Intangible AssetsBacklog
    
    $
    575
    
    
    $
    575
    
    
    $
    
    
    
    $
    575
    
    
    $
    558
    
    
    $
    17Developed technology
    
    
    6,195
    
    
    
    1,081
    
    
    
    5,114
    
    
    
    6,007
    
    
    
    820
    
    
    
    5,187Trade name
    
    
    460
    
    
    
    46
    
    
    
    414
    
    
    
    460
    
    
    
    23
    
    
    
    437Customer relationships
    
    
    730
    
    
    
    73
    
    
    
    657
    
    
    
    730
    
    
    
    36
    
    
    
    694Non-amortizing tradename
    
    
    2,054
    
    
    
    
    
    
    
    2,054
    
    
    
    2,054
    
    
    
    
    
    
    
    2,054Total
    
    $
    10,014
    
    
    $
    1,775
    
    
    $
    8,239
    
    
    $
    9,826
    
    
    $
    1,437
    
    
    $
    8,389
  Recent Accounting Pronouncements
   10




---



##### Table of Contents



Convertible Debt and Credit Facility
         11




---



##### Table of Contents



Disclosure About Segments of an Enterprise and Related Information
   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:
    
    Boron carbide powders for body armorKempten, Germany(4)Approximately 544,000 square feet
    
    Industrial Applications:Bazet, France(5)
    
    
    
    
    
    Ceramic powders: boron carbide, boron nitride, titanium
diboride, calcium hexaboride and zirconium diborideApproximately 88,000 square feet
    
    
    
    
    
    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)
    
    
    
    
    
    Ceramic-impregnated dispenser cathodes for microwave tubes,
lasers and cathode ray tubesApproximately 35,000 square feet
    
    
    
    
    
    Samarium cobalt magnets
 12




---



##### Table of Contents



Operating Segment and Facility Location
    
    ProductsCeradyne Thermo Materials
    
    Defense Applications:
    
    Missile radomes (nose cones)Scottdale and Clarkston, Georgia(7)Approximately 132,000 square feet
    
    Industrial Applications:
    
    Glass tempering rollsTianjin, China
    
    
    
    
    
    Metallurgical toolingApproximately 98,000 square feet (8)
    
    
    
    
    
    Castable and other fused silica products
    
    Crucibles for photovoltaic solar cell applicationsCeradyne Canada
    
    Industrial Applications:Chicoutimi, Quebec, Canada (9)
    
    
    
    
    
    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 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 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 Tianjin, China as well as the four-acre property on which our facility is located.(9)
    
    We own our facility in Chicoutimi, Quebec, Canada, as well as the seven-acre
property on which our facility is located. 13




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue from External CustomersACO
    
    $
    149,297
    
    
    $
    128,645
    
    
    $
    301,188
    
    
    $
    230,886ESK Ceramics
    
    
    41,262
    
    
    
    37,164
    
    
    
    82,454
    
    
    
    73,425Semicon Associates
    
    
    2,232
    
    
    
    2,346
    
    
    
    4,381
    
    
    
    4,688Thermo Materials
    
    
    4,063
    
    
    
    3,614
    
    
    
    8,284
    
    
    
    6,831Ceradyne Canada
    
    
    1,042
    
    
    
    
    
    
    
    1,783
    
    
    
    Inter-segment elimination
    
    
    (12,537
    )
    
    
    (9,753
    )
    
    
    (24,288
    )
    
    
    (17,467
    )Total
    
    $
    185,359
    
    
    $
    162,016
    
    
    $
    373,802
    
    
    $
    298,363Depreciation and AmortizationACO
    
    $
    2,326
    
    
    $
    1,829
    
    
    $
    4,577
    
    
    $
    3,519ESK Ceramics
    
    
    2,536
    
    
    
    2,188
    
    
    
    4,963
    
    
    
    4,275Semicon Associates
    
    
    78
    
    
    
    90
    
    
    
    169
    
    
    
    182Thermo Materials
    
    
    340
    
    
    
    277
    
    
    
    645
    
    
    
    523Ceradyne Canada
    
    
    172
    
    
    
    
    
    
    
    352
    
    
    
    Total
    
    $
    5,452
    
    
    $
    4,384
    
    
    $
    10,706
    
    
    $
    8,499Segment Income (Loss) before Provision for Income TaxesACO
    
    $
    57,750
    
    
    $
    41,134
    
    
    $
    113,279
    
    
    $
    75,448ESK Ceramics
    
    
    4,078
    
    
    
    3,745
    
    
    
    8,343
    
    
    
    8,234Semicon Associates
    
    
    357
    
    
    
    367
    
    
    
    499
    
    
    
    909Thermo Materials
    
    
    176
    
    
    
    258
    
    
    
    522
    
    
    
    401Ceradyne Canada
    
    
    (1,245
    )
    
    
    (24
    )
    
    
    (2,088
    )
    
    
    (24
    )Inter-segment elimination
    
    
    (1,359
    )
    
    
    (335
    )
    
    
    (1,190
    )
    
    
    (1,080
    )Total
    
    $
    59,757
    
    
    $
    45,145
    
    
    $
    119,365
    
    
    $
    83,888Segment AssetsACO
    
    $
    457,528
    
    
    $
    314,994
    
    
    $
    457,528
    
    
    $
    314,994ESK Ceramics
    
    
    187,362
    
    
    
    177,192
    
    
    
    187,362
    
    
    
    177,192Semicon Associates
    
    
    5,958
    
    
    
    6,461
    
    
    
    5,958
    
    
    
    6,461Thermo Materials
    
    
    23,950
    
    
    
    13,328
    
    
    
    23,950
    
    
    
    13,328Ceradyne Canada
    
    
    19,466
    
    
    
    14,925
    
    
    
    19,466
    
    
    
    14,925Total
    
    $
    694,264
    
    
    $
    526,900
    
    
    $
    694,264
    
    
    $
    526,900Expenditures for PP&EACO
    
    $
    2,708
    
    
    $
    4,852
    
    
    $
    4,587
    
    
    $
    10,088ESK Ceramics
    
    
    2,904
    
    
    
    1,266
    
    
    
    5,047
    
    
    
    2,428Semicon Associates
    
    
    127
    
    
    
    102
    
    
    
    178
    
    
    
    159Thermo Materials
    
    
    2,142
    
    
    
    395
    
    
    
    5,103
    
    
    
    853Ceradyne Canada
    
    
    474
    
    
    
    8,000
    
    
    
    588
    
    
    
    8,000Total
    
    $
    8,355
    
    
    $
    14,615
    
    
    $
    15,503
    
    
    $
    21,528
 14




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Percentage of U.S. net sales from external customersACO
    
    
    79
    %
    
    
    77
    %
    
    
    79
    %
    
    
    75
    %ESK Ceramics
    
    
    2
    %
    
    
    4
    %
    
    
    2
    %
    
    
    5
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    2
    %
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total percentage of U.S. net sales from external customers
    
    
    84
    %
    
    
    83
    %
    
    
    84
    %
    
    
    82
    %Percentage of foreign net sales from external customersACO
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %ESK Ceramics
    
    
    13
    %
    
    
    14
    %
    
    
    13
    %
    
    
    14
    %Semicon Associates
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Thermo Materials
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Ceradyne Canada
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total percentage of foreign net sales from external customers
    
    
    16
    %
    
    
    17
    %
    
    
    16
    %
    
    
    18
    %Percentage of total net sales from external customersACO
    
    
    81
    %
    
    
    79
    %
    
    
    81
    %
    
    
    77
    %ESK Ceramics
    
    
    15
    %
    
    
    18
    %
    
    
    15
    %
    
    
    19
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %
    
    
    2
    %Thermo Materials
    
    
    3
    %
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Ceradyne Canada
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Total percentage of total net sales from external customers
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Armor
    
    $
    140,550
    
    
    $
    118,438
    
    
    $
    284,407
    
    
    $
    211,585Automotive
    
    
    2,246
    
    
    
    4,672
    
    
    
    4,263
    
    
    
    8,798Orthodontics
    
    
    2,705
    
    
    
    2,663
    
    
    
    5,495
    
    
    
    4,948Industrial
    
    
    3,796
    
    
    
    2,872
    
    
    
    7,023
    
    
    
    5,555$
    149,297
    
    
    $
    128,645
    
    
    $
    301,188
    
    
    $
    230,886
 9.
    
    Pension and Other Post-retirement Benefit Plans
  15




---



##### Table of Contents



Three Months Ended June 30,
    
    

Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    114
    
    
    $
    546
    
    
    $
    225
    
    
    $
    1,063Interest cost
    
    
    98
    
    
    
    457
    
    
    
    194
    
    
    
    891Expected return on plan assets
    
    
    
    
    
    
    (550
    )
    
    
    
    
    
    
    (1,058
    )Amortization of unrecognized gain
    
    
    15
    
    
    
    20
    
    
    
    29
    
    
    
    42Net periodic benefit cost
    
    $
    227
    
    
    $
    473
    
    
    $
    448
    
    
    $
    938
 Financial Instruments
   Income Taxes
   June 30, 2007
    
    
    January 1, 2007Federal, state and foreign UTBs
    
    $
    6,522
    
    
    $
    6,178Interest
    
    
    851
    
    
    
    554Federal/State Benefit of Interest
    
    
    (280
    )
    
    
    (202
    )Total reserve for UTBs
    
    $
    7,093
    
    
    $
    6,530
   Commitments and Contingencies
  16




---



##### Table of Contents



2007
    
    $
    1,3442008
    
    
    2,4472009
    
    
    2,2412010
    
    
    1,8232011
    
    
    455Thereafter
    
    
    1,133$
    9,443
   Comprehensive Income
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    38,303
    
    
    $
    29,129
    
    
    $
    76,392
    
    
    $
    53,742Foreign currency translation
    
    
    1,925
    
    
    
    7,952
    
    
    
    4,330
    
    
    
    11,587Unrealized gain (loss) on investments
    
    
    (1
    )
    
    
    (20
    )
    
    
    6
    
    
    
    (72
    )Comprehensive income
    
    $
    40,227
    
    
    $
    37,061
    
    
    $
    80,728
    
    
    $
    65,257
 Subsequent Event
  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; BORONEIGE®, a cosmetic boron nitride powder for commercial
use.
    
    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 Ended
    
    
    Six Months EndedJune
30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Defense
    
    
    77.3
    %
    
    
    76.3
    %
    
    
    77.3
    %
    
    
    74.8
    %Industrial
    
    
    17.1
    
    
    
    16.5
    
    
    
    17.1
    
    
    
    17.7Automotive/Diesel
    
    
    3.9
    
    
    
    5.6
    
    
    
    3.8
    
    
    
    5.8Commercial
    
    
    1.7
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    1.7Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    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 and Six Months Ended June 30, 2007 and 2006
 Net Sales.
  20




---



##### Table of Contents



21




---



##### Table of Contents



Gross Profit.
      Selling Expenses.
 22




---



##### Table of Contents



General and Administrative Expenses. Review of Historical Stock Option
Grant Procedures,
 Research and Development Expenses.
 Other Income (Expense).
 Income before Provision for Income Taxes.
    23




---



##### Table of Contents



Income Taxes.
 Liquidity and Capital Resources
        24




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   25




---



##### 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
  26




---



##### Table of Contents



Item 1A. Risk Factors
  
 Item 2. Not applicable
 
 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
    
    
    15,574,434
    
    
    
    8,228,456Richard A. Alliegro
    
    
    17,555,575
    
    
    
    6,247,315Frank Edelstein
    
    
    17,557,750
    
    
    
    6,245,140Richard A. Kertson
    
    
    23,343,320
    
    
    
    459,570William C. La Course
    
    
    23,343,462
    
    
    
    459,428Milton L. Lohr
    
    
    17,540,122
    
    
    
    6,262,768
 2.
    
    The appointment of PricewaterhouseCoopers LLP to serve as the Companys independent
registered public accounting firm for the year ending December 31, 2007 was approved by
the following vote:
 For: 23,570,818
    
    Against: 200,909
    
    Abstain: 31,162
 
 Item 5. Not applicable
 
 Item 6. Exhibits
  ExhibitNumber
    
    Description2.1*
    
    Sale and Purchase Agreement dated June 26, 2007, among Ceradyne,
Inc., Ceradyne EPB, Inc., EaglePicher Boron, LLC, EaglePicher
Technology Holdings, LLC and EaglePicher Corporation.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.
 27




---



##### Table of Contents



ExhibitNumber
    
    Description32.1
    
    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.
 
 *
    
    Schedules and similar attachments to the Sale and Purchase Agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a copy of
any omitted schedule or similar attachment to the Securities and Exchange Commission upon
request. 28




---



##### Table of Contents



CERADYNE, INC.Date: July 24, 2007
    By:
    /s/ JERROLD J. PELLIZZONJerrold J. PellizzonVice President
Chief Financial Officer

(Principal Financial and Accounting Officer) 29




---



##### Table of Contents



Index to Exhibits
 Exhibit
    
    Description2.1*
    
    Sale and Purchase Agreement dated June 26, 2007, among Ceradyne,
Inc., Ceradyne EPB, Inc., EaglePicher Boron, LLC, EaglePicher
Technology Holdings, LLC and EaglePicher Corporation.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.
 *
    
    Schedules and similar attachments to the Sale and Purchase Agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish supplementally a copy of
any omitted schedule or similar attachment to the Securities and Exchange Commission upon
request. 30