##### 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, 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
    
    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
 o þ
 
 Class
    
    Outstanding as of April 15, 2008Common Stock, $0.01 par value
    
    26,334,593 Shares




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##### 



INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Unaudited Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets  March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income -Three Months Ended March 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows  Three Months Ended March 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-20Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21-28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28-29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Not applicable
    
    
    31Item 4. Not applicable
    
    
    31Item 5. Not applicable
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURE
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



CERADYNE, INC.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2008
 
 PART I. FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 CERADYNE, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (Amounts in thousands
except share data)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT ASSETSCash and cash equivalents
    
    $
    185,766
    
    
    $
    155,103Restricted cash
    
    
    2,678
    
    
    
    2,660Short-term investments
    
    
    11,488
    
    
    
    29,582Accounts receivable, net of allowances for doubtful accounts of approximately
$941 and $792 at March 31, 2008 and December 31, 2007, respectively
    
    
    89,298
    
    
    
    85,346Other receivables
    
    
    7,354
    
    
    
    5,704Inventories, net
    
    
    98,595
    
    
    
    92,781Production tooling, net
    
    
    15,024
    
    
    
    16,632Prepaid expenses and other
    
    
    12,372
    
    
    
    12,391Deferred tax asset
    
    
    12,590
    
    
    
    12,455TOTAL CURRENT ASSETS
    
    
    435,165
    
    
    
    412,654PROPERTY, PLANT AND EQUIPMENT, net
    
    
    266,657
    
    
    
    243,892LONG TERM INVESTMENTS
    
    
    35,564
    
    
    
    38,089INTANGIBLE ASSETS, net
    
    
    36,533
    
    
    
    37,578GOODWILL
    
    
    47,685
    
    
    
    46,848OTHER ASSETS
    
    
    4,133
    
    
    
    4,225TOTAL ASSETS
    
    $
    825,737
    
    
    $
    783,286CURRENT LIABILITIESAccounts payable
    
    $
    37,450
    
    
    $
    35,990Accrued expenses
    
    
    27,082
    
    
    
    22,483Income taxes payable
    
    
    16,389
    
    
    
    258TOTAL CURRENT LIABILITIES
    
    
    80,921
    
    
    
    58,731LONG-TERM DEBT
    
    
    121,000
    
    
    
    121,000EMPLOYEE BENEFITS
    
    
    15,126
    
    
    
    13,650OTHER LONG TERM LIABILITY
    
    
    5,108
    
    
    
    4,985DEFERRED TAX LIABILITY
    
    
    5,865
    
    
    
    6,291TOTAL LIABILITIES
    
    
    228,020
    
    
    
    204,657COMMITMENTS AND CONTINGENCIES (Note 14)SHAREHOLDERS EQUITYCommon stock, $0.01 par value,
100,000,000 authorized, 26,334,593
and 27,318,530 shares issued and
outstanding at March 31, 2008 and
December 31, 2007, respectively
    
    
    263
    
    
    
    272Additional paid in capital
    
    
    156,268
    
    
    
    185,702Retained earnings
    
    
    394,203
    
    
    
    361,301Accumulated other comprehensive income
    
    
    46,983
    
    
    
    31,354TOTAL SHAREHOLDERS EQUITY
    
    
    597,717
    
    
    
    578,629TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    825,737
    
    
    $
    783,286
   3




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CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Amounts in thousands, except per share data)
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)NET SALES
    
    $
    188,537
    
    
    $
    188,443COST OF GOODS SOLD
    
    
    117,008
    
    
    
    111,331Gross profit
    
    
    71,529
    
    
    
    77,112OPERATING EXPENSESSelling
    
    
    7,855
    
    
    
    6,298General and administrative
    
    
    11,815
    
    
    
    9,777Research and development
    
    
    3,007
    
    
    
    3,48622,677
    
    
    
    19,561Income from operations
    
    
    48,852
    
    
    
    57,551OTHER INCOME (EXPENSE):Royalty income
    
    
    31
    
    
    
    30Interest income
    
    
    2,709
    
    
    
    2,778Interest expense
    
    
    (1,112
    )
    
    
    (1,025
    )Miscellaneous
    
    
    1,132
    
    
    
    2742,760
    
    
    
    2,057Income before provision for income taxes
    
    
    51,612
    
    
    
    59,608PROVISION FOR INCOME TAXES
    
    
    18,710
    
    
    
    21,519NET INCOME
    
    $
    32,902
    
    
    $
    38,089BASIC INCOME PER SHARE
    
    $
    1.21
    
    
    $
    1.40DILUTED INCOME PER SHARE
    
    $
    1.20
    
    
    $
    1.38WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    27,150
    
    
    
    27,150DILUTED
    
    
    27,407
    
    
    
    27,528
   4




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CERADYNE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Amounts in thousands)
 Three Months EndedMarch 31,2008
    
    
    2007(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    32,902
    
    
    $
    38,089ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:Depreciation and amortization
    
    
    8,803
    
    
    
    5,253Deferred income taxes
    
    
    82
    
    
    
    (1,372
    )Stock compensation
    
    
    630
    
    
    
    476Loss on sale of securities
    
    
    147
    
    
    
    Loss on equipment disposal
    
    
    1
    
    
    
    118Change in operating assets and liabilities:Accounts receivable, net
    
    
    (2,679
    )
    
    
    3,956Other receivables
    
    
    (1,207
    )
    
    
    (52
    )Inventories
    
    
    (2,412
    )
    
    
    (6,458
    )Production tooling
    
    
    1,708
    
    
    
    188Prepaid expenses and other assets
    
    
    296
    
    
    
    (889
    )Accounts payable and accrued expenses
    
    
    4,597
    
    
    
    (1,429
    )Income taxes payable
    
    
    16,087
    
    
    
    10,941Other long term liability
    
    
    123
    
    
    
    6,895Employee benefits
    
    
    337
    
    
    
    386NET CASH
PROVIDED BY OPERATING ACTIVITIES
    
    
    59,415
    
    
    
    56,102CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (18,554
    )
    
    
    (7,153
    )Changes in restricted cash
    
    
    (18
    )
    
    
    Purchases of marketable securities
    
    
    
    
    
    
    (129,034
    )Proceeds from sales and maturities of marketable securities
    
    
    18,094
    
    
    
    83,237NET CASH USED IN INVESTING ACTIVITIES
    
    
    (478
    )
    
    
    (52,950
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of stock due to exercise of options
and vesting of restricted stock units
    
    
    195
    
    
    
    346Excess tax benefit due to exercise of stock options
    
    
    171
    
    
    
    839Shares repurchased
    
    
    (30,313
    )
    
    
    Other
    
    
    (126
    )
    
    
    (166
    )NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (30,073
    )
    
    
    1,019EFFECT OF EXCHANGE RATES ON CASH AND EQUIVALENTS
    
    
    1,799
    
    
    
    468INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    30,663
    
    
    
    4,639CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    155,103
    
    
    
    13,547CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    185,766
    
    
    $
    18,186SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:Interest paid
    
    $
    1
    
    
    $
    1Income taxes paid
    
    $
    3,386
    
    
    $
    4,199
   5




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Basis of Presentation
    Share Based Compensation
          6




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##### Table of Contents



Three Months EndedMarch 31,2008
    
    
    2007Share-based compensation expense recognized:General and administrative, options
    
    $
    115
    
    
    $
    189General and administrative, restricted stock units
    
    
    515
    
    
    
    287Related deferred income tax benefit
    
    
    (228
    )
    
    
    (172
    )Decrease in net income
    
    $
    402
    
    
    $
    304Decrease in basic earnings per share
    
    $
    0.01
    
    
    $
    0.01Decrease in diluted earnings per share
    
    $
    0.01
    
    
    $
    0.01
    Three Months EndedMarch 31, 2008WeightedAverageNumber of
    
    
    ExerciseOptions
    
    
    PriceOutstanding, December 31, 2007
    
    
    497,325
    
    
    $
    12.04Options granted
    
    
    
    
    
    $
    Options exercised
    
    
    (14,475
    )
    
    $
    7.40Options cancelled
    
    
    (3,750
    )
    
    $
    15.05Outstanding, March 31, 2008
    
    
    479,100
    
    
    $
    12.16Exercisable, March 31, 2008
    
    
    414,000
    
    
    $
    10.97
  Three Months EndedMarch 31, 2008WeightedAverage GrantUnits
    
    
    Fair ValueNon-vested Units at December 31, 2007
    
    
    149,759
    
    
    $
    52.94Granted
    
    
    28,500
    
    
    $
    44.47Vested
    
    
    (11,510
    )
    
    $
    59.94Forfeited
    
    
    
    
    
    $
    Non-vested Units at March 31, 2008
    
    
    166,749
    
    
    $
    50.97
  7




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##### Table of Contents



Outstanding
    
    
    ExercisableAverage
    
    
    Weighted
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    Intrinsic
    
    
    
    
    
    
    Remaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Exercise
    
    
    Value
    
    
    Number of
    
    
    Contractual
    
    
    Exercise
    
    
    ValueRange of Exercise Prices
    
    Options
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)
    
    
    Options
    
    
    Life (Years)
    
    
    Price
    
    
    (000s)$1.44 - $2.81
    
    
    5,400
    
    
    
    1.21
    
    
    $
    1.68
    
    
    $
    164
    
    
    
    5,400
    
    
    
    1.21
    
    
    $
    1.68
    
    
    $
    164$2.98 - $4.58
    
    
    217,575
    
    
    
    4.10
    
    
    $
    4.11
    
    
    $
    6,059
    
    
    
    217,575
    
    
    
    4.10
    
    
    $
    4.11
    
    
    $
    6,059$10.53 - $16.89
    
    
    127,875
    
    
    
    5.69
    
    
    $
    16.89
    
    
    $
    1,927
    
    
    
    108,525
    
    
    
    5.69
    
    
    $
    16.89
    
    
    $
    1,635$18.80 - $24.07
    
    
    128,250
    
    
    
    6.71
    
    
    $
    21.53
    
    
    $
    1,337
    
    
    
    82,500
    
    
    
    6.62
    
    
    $
    21.86
    
    
    $
    833479,100
    
    
    
    5.19
    
    
    $
    12.16
    
    
    $
    9,487
    
    
    
    414,000
    
    
    
    4.98
    
    
    $
    10.97
    
    
    $
    8,691
  OutstandingAverage
    
    
    Weighted
    
    
    AggregateRemaining
    
    
    Average
    
    
    IntrinsicNumber of
    
    
    Contractual
    
    
    Grant
    
    
    ValueRange of Grant Prices
    
    Units
    
    
    Life (Years)
    
    
    Fair Value
    
    
    (000s)$21.46 - $22.68
    
    
    34,700
    
    
    
    2.03
    
    
    $
    22.36
    
    
    $
    333$42.28 - $45.7
    
    
    41,169
    
    
    
    3.86
    
    
    $
    44.38
    
    
    $
    $52.46 - $62.07
    
    
    44,030
    
    
    
    3.42
    
    
    $
    58.93
    
    
    $
    $66.35 - $81.18
    
    
    46,850
    
    
    
    4.06
    
    
    $
    70.46
    
    
    $
    166,749
    
    
    
    3.42
    
    
    $
    50.97
    
    
    $
    333
 Review of Historical Stock Option Grant Procedures
      8




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Materiality
  Net Income Per Share
  
 Three Months Ended March 31,2008
    
    
    2007Weighted average number of shares outstanding
    
    
    27,149,984
    
    
    
    27,149,839Dilutive stock options
    
    
    256,516
    
    
    
    344,053Dilutive restricted stock units
    
    
    
    
    
    
    34,045Number of shares used in fully diluted computations
    
    
    27,406,500
    
    
    
    27,527,937
  9




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5.
    
    Composition of Certain Financial Statement Captions
  
 March 31, 2008
    
    
    December 31, 2007Raw materials
    
    $
    19,946
    
    
    $
    22,772Work-in-process
    
    
    52,213
    
    
    
    46,853Finished goods
    
    
    26,436
    
    
    
    23,156$
    98,595
    
    
    $
    92,781
 
 March 31, 2008
    
    
    December 31, 2007Land
    
    $
    18,863
    
    
    $
    15,086Buildings and improvements
    
    
    94,033
    
    
    
    81,965Machinery and equipment
    
    
    191,470
    
    
    
    179,727Leasehold improvements
    
    
    15,809
    
    
    
    16,572Office equipment
    
    
    21,658
    
    
    
    19,512Construction in progress
    
    
    20,769
    
    
    
    16,880362,602
    
    
    
    329,742Less accumulated depreciation and amortization
    
    
    (95,945
    )
    
    
    (85,850
    )$
    266,657
    
    
    $
    243,892
  March 31, 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
    
    
    12,318
    
    
    
    2,099
    
    
    
    10,219
    
    
    
    11,617
    
    
    
    1,666
    
    
    
    9,951Tradename
    
    
    1,110
    
    
    
    182
    
    
    
    928
    
    
    
    1,110
    
    
    
    142
    
    
    
    968Customer relationships
    
    
    25,230
    
    
    
    2,126
    
    
    
    23,104
    
    
    
    25,230
    
    
    
    947
    
    
    
    24,283Non-compete agreement
    
    
    500
    
    
    
    272
    
    
    
    228
    
    
    
    500
    
    
    
    178
    
    
    
    322Non-amortizing tradename
    
    
    2,054
    
    
    
    
    
    
    
    2,054
    
    
    
    2,054
    
    
    
    
    
    
    
    2,054Total
    
    $
    43,007
    
    
    $
    6,474
    
    
    $
    36,533
    
    
    $
    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
   10




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##### Table of Contents



CeradyneBoronACO
    
    
    Semicon
    
    
    Thermo
    
    
    ESK
    
    
    Canada
    
    
    Products
    
    
    TotalDecember 31, 2007
    
    $
    2,608
    
    
    $
    603
    
    
    $
    11,378
    
    
    $
    10,176
    
    
    $
    3,832
    
    
    $
    18,251
    
    
    $
    46,848Translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    837
    
    
    
    
    
    
    
    
    
    
    
    837March 31, 2008
    
    $
    2,608
    
    
    $
    603
    
    
    $
    11,378
    
    
    $
    11,013
    
    
    $
    3,832
    
    
    $
    18,251
    
    
    $
    47,685
 Stock Repurchases
  Fair Value Measurements
          Fair Value Measurements at March 31, 2008UsingSignificantQuoted Prices
    
    
    Other
    
    
    Significantin Active
    
    
    Observable
    
    
    Unobservable
    
    
    Total CarryingMarkets
    
    
    Inputs
    
    
    Inputs
    
    
    Value at(In thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    March 31, 2008Cash and
cash equivalents (including restricted cash)
    
    $
    188,444
    
    
    $
    
    
    
    $
    
    
    
    $
    188,444Short term
investments
    
    
    11,488
    
    
    
    
    
    
    
    
    
    
    
    11,488Derivatives
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Long term
investments
    
    
    
    
    
    
    35,564
    
    
    
    
    
    
    
    35,564
  11




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Recent Accounting Pronouncements
 
    12




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##### Table of Contents



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




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##### Table of Contents



10
 
 Operating Segment and Facility Location
    
    ProductsCeradyne Advanced Ceramic Operations
    
    Defense Applications:      Lightweight ceramic armorCosta Mesa and Irvine, California(1)
Approximately 240,000 square feet
    
    Industrial Applications:     Ceralloy® 147 SRBSN wear parts
      Precision ceramicsLexington, Kentucky(2)
Approximately 115,000 square feet
    
    Automotive/Diesel Applications:      Ceralloy® 147 SRBSN automotive/diesel engine partsWixom, Michigan(3)
Approximately 29,000 square feet
    
    Commercial Applications:      Ceramic orthodontic brackets
      Components for medical devicesESK Ceramics
    
    Defense Applications:Kempten, Germany(4)
    
          Boron carbide powders for body armorApproximately 548,000 square feetBazet, France(5)
Approximately 88,000 square feet
    
    Industrial
Applications:      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)
Approximately 35,000 square feet
    
         Ceramic-impregnated dispenser cathodes for microwave tubes,
lasers and cathode ray tubes
     Samarium cobalt magnetsCeradyne Thermo Materials
    
    Defense Applications:Scottdale and Clarkston, Georgia(7)
Approximately 225,000 square feet
    
          Missile radomes (nose cones)
      High purity fused silica used to manufacture missile radomes
(nose cones)Tianjin, China(8)
Approximately 98,000 square feet
    
    Industrial Applications:      Glass tempering rolls
      Metallurgical toolingMidway, Tennessee(9)
Approximately 105,000 square feet
    
          Castable and other fused silica products
      Crucibles for photovoltaic solar cell applications
      Turbine components used in aerospace applications
  14




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Operating Segment and Facility Location
    
    ProductsCeradyne Canada
    
    Industrial Applications:Chicoutimi, Quebec, Canada(10)
Approximately 86,000 square feet
    
         Boral® structural neutron absorbing materials
     Metal matrix composite structuresCeradyne Boron Products
    
    Industrial Applications:Quapaw, Oklahoma(11)
Approximately 128,000 square feet
    
    Nuclear Applications:
     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 implaning of silicon wafers
 
 (1)
    
    We have leases on our facilities in Costa Mesa, California, aggregating approximately 99,000
square feet, all of which expire in October 2010. We own our 40,000 square foot facility in
Irvine, California. We lease in Irvine, California, a 24,000 square foot facility that expires
in April 2009 and a 76,000 square foot facility that expires in April 2011.(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 Clarkston, Georgia which expires in May 2012.(8)
    
    We own our facility in Tianjin, China, as well as the four-acre property on which our
facility is located.(9)
    
    We own our facility in Midway, Tennessee as well as the 40-acre property on which our
facility is located.(10)
    
    We own our facility in Chicoutimi, Quebec, Canada, as well as the seven-acre property on
which our facility is located.(11)
    
    We own our facility in Quapaw, Oklahoma as well as the 155-acre property on which our
facility is located.  15




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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007Revenue
from External CustomersACO
    
    $
    129,987
    
    
    $
    151,891ESK Ceramics
    
    
    39,276
    
    
    
    41,192Semicon Associates
    
    
    2,269
    
    
    
    2,149Thermo Materials
    
    
    17,303
    
    
    
    4,221Ceradyne Canada
    
    
    2,562
    
    
    
    741Ceradyne Boron Products
    
    
    5,032
    
    
    
    Inter-segment elimination
    
    
    (7,892
    )
    
    
    (11,751
    )Total
    
    $
    188,537
    
    
    $
    188,443Depreciation and AmortizationACO
    
    $
    2,487
    
    
    $
    2,251ESK Ceramics
    
    
    3,051
    
    
    
    2,426Semicon Associates
    
    
    89
    
    
    
    91Thermo Materials
    
    
    1,278
    
    
    
    305Ceradyne Canada
    
    
    243
    
    
    
    180Ceradyne Boron Products
    
    
    1,655
    
    
    
    Total
    
    $
    8,803
    
    
    $
    5,253Segment
Income (Loss) before Provision for Income TaxesACO
    
    $
    43,647
    
    
    $
    55,529ESK Ceramics
    
    
    2,626
    
    
    
    4,265Semicon Associates
    
    
    482
    
    
    
    142Thermo Materials
    
    
    3,086
    
    
    
    346Ceradyne Canada
    
    
    666
    
    
    
    (843
    )Ceradyne Boron Products
    
    
    484
    
    
    
    Inter-segment elimination
    
    
    621
    
    
    
    169Total
    
    $
    51,612
    
    
    $
    59,608Segment
AssetsACO
    
    $
    410,321
    
    
    $
    442,936ESK Ceramics
    
    
    240,810
    
    
    
    184,034Semicon Associates
    
    
    5,913
    
    
    
    6,141Thermo Materials
    
    
    74,462
    
    
    
    19,677Ceradyne Canada
    
    
    24,017
    
    
    
    19,180Ceradyne Boron Products
    
    
    70,214
    
    
    
    Total
    
    $
    825,737
    
    
    $
    671,968Expenditures for PP&EACO
    
    $
    497
    
    
    $
    1,879ESK Ceramics
    
    
    11,454
    
    
    
    2,151Semicon Associates
    
    
    84
    
    
    
    51Thermo Materials
    
    
    4,376
    
    
    
    2,958Ceradyne Canada
    
    
    2,036
    
    
    
    114Ceradyne Boron Products
    
    
    107
    
    
    
    Total
    
    $
    18,554
    
    
    $
    7,153
  16




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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007Percentage of U.S. net sales from external customers
ACO
    
    
    65
    %
    
    
    79
    %ESK Ceramics
    
    
    2
    %
    
    
    2
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    4
    %
    
    
    2
    %Ceradyne Canada
    
    
    1
    %
    
    
    Ceradyne Boron Products
    
    
    2
    %
    
    
    Total
percentage of U.S. net sales from external customers
    
    
    75
    %
    
    
    84
    %Percentage of foreign net sales from external customersACO
    
    
    3
    %
    
    
    2
    %ESK Ceramics
    
    
    15
    %
    
    
    14
    %Semicon Associates
    
    
    
    
    
    
    Thermo Materials
    
    
    5
    %
    
    
    Ceradyne Canada
    
    
    1
    %
    
    
    Ceradyne Boron Products
    
    
    1
    %
    
    
    Total
percentage of foreign net sales from external customers
    
    
    25
    %
    
    
    16
    %Percentage of total net sales from external customersACO
    
    
    68
    %
    
    
    81
    %ESK Ceramics
    
    
    17
    %
    
    
    16
    %Semicon Associates
    
    
    1
    %
    
    
    1
    %Thermo Materials
    
    
    9
    %
    
    
    2
    %Ceradyne Canada
    
    
    2
    %
    
    
    Ceradyne Boron Products
    
    
    3
    %
    
    
    Total percentage of total net sales from external customers
    
    
    100
    %
    
    
    100
    %
  Three Months Ended March 31,2008
    
    
    2007Armor
    
    $
    115,572
    
    
    $
    143,860Automotive
    
    
    4,022
    
    
    
    2,020Orthodontics
    
    
    2,733
    
    
    
    2,790Industrial
    
    
    7,660
    
    
    
    3,221$
    129,987
    
    
    $
    151,891
 Pension and Other Post-retirement Benefit Plans
   17




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Three Months Ended March 31,2008
    
    
    2007Service cost
    
    $
    144
    
    
    $
    111Interest cost
    
    
    275
    
    
    
    96Expected return on plan assets
    
    
    (200
    )
    
    
    Amortization of unrecognized gain
    
    
    
    
    
    
    14Net periodic benefit cost
    
    $
    219
    
    
    $
    221
 Financial Instruments
   Income Taxes
   March 31, 2008
    
    
    December 31, 2007Federal, state and foreign UTBs
    
    $
    4,596
    
    
    $
    4,556Interest
    
    
    809
    
    
    
    679Federal/State Benefit of Interest
    
    
    (297
    )
    
    
    (250
    )Total reserve for UTBs
    
    $
    5,108
    
    
    $
    4,985
     18




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##### Table of Contents



Commitments and Contingencies
 
 2008
    
    $
    2,2272009
    
    
    2,7342010
    
    
    2,4122011
    
    
    5562012
    
    
    125$
    8,054
        19




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##### Table of Contents



Comprehensive Income
   Three Months Ended March 31,2008
    
    
    2007Net income
    
    $
    32,902
    
    
    $
    38,089Foreign currency translation
    
    
    17,072
    
    
    
    2,405Unrealized gain (loss) on investments
    
    
    (1,443
    )
    
    
    7Comprehensive income
    
    $
    48,531
    
    
    $
    40,501
  20




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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; and
 
    
    boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of
silicon wafers.
   21




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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007Defense
    
    
    62.7
    %
    
    
    77.4
    %Industrial
    
    
    30.1
    
    
    
    17.4
    %Automotive/Diesel
    
    
    5.4
    
    
    
    3.7
    %Commercial
    
    
    1.8
    
    
    
    1.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
        
  22




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##### Table of Contents



  
   
   Review of Historical Stock Option Grant Procedures
      23




---



##### Table of Contents



Results of Operations for the Three Months Ended March 31, 2008 and 2007
 Net Sales.
     24




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##### Table of Contents



®
  Gross Profit.
      25




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##### Table of Contents



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




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##### Table of Contents



®
  Income Taxes.
 Liquidity and Capital Resources
         27




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
   28




---



##### 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
   29




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##### Table of Contents



Item 1. Legal Proceedings
       Daniel Vargas, Jr. v. Ceradyne, Inc., Orange County Superior Court, Civil Action No.
07CC01232 :
   30




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  (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
    
    
    ProgramsJanuary 1 to
January 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1 to
February 29, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 1 to March
31, 2008
    
    
    1,009,836
    
    
    $
    30.02
    
    
    
    
    
    
    $
    69,688,234Total
    
    
    1,009,836
    
    
    $
    30.02
    
    
    
    
    
    
    $
    69,688,234
 (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. 
 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.
  31




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CERADYNE, INC.Date: April 25, 2008
    By:
    /s/ JERROLD J. PELLIZZONJerrold J. PellizzonVice President
Chief Financial Officer
(Principal Financial and Accounting Officer)  32




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