10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Or

¨ 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

(Exact name of Registrant as specified in its charter)

Delaware	33-0055414
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3169 Red Hill Avenue, Costa Mesa, CA	92626
(Address of principal executive)	(Zip Code)

Registrant’s telephone number, including area code (714) 549-0421

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

            Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of July 21, 2011
Common Stock, $0.01 par value	24,881,724 Shares

Exhibit Index on Page 37

CERADYNE, INC.

INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements		3
	Consolidated Balance Sheets – June 30, 2011 and December 31, 2010		3
	Consolidated Statements of Income – Three and Six Months Ended June 30, 2011 and 2010		4
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010		5
	Notes to Consolidated Financial Statements		6-21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22-31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32-33
Item 4.	Controls and Procedures		33
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3.	Not applicable		35
Item 4.	Not applicable		35
Item 5.	Not applicable		35
Item 6.	Exhibits		35
SIGNATURE			36

2

CERADYNE, INC.

FORM 10-Q

FOR THE QUARTER ENDED

June 30, 2011

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Consolidated Financial Statements

CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	June 30, 2011		December 31, 2010
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	44,463	$	53,436
Short-term investments		228,710		192,860
Accounts receivable, net of allowances of $4,682 and $685 at June 30, 2011 and December 31, 2010, respectively		55,914		53,019
Other receivables		16,443		17,553
Inventories, net		111,241		94,258
Production tooling, net		18,314		10,037
Prepaid expenses and other		43,624		38,653
Deferred tax asset		6,917		6,808
TOTAL CURRENT ASSETS		525,626		466,624
PROPERTY, PLANT AND EQUIPMENT, net		256,059		243,681
LONG TERM INVESTMENTS		16,903		26,187
INTANGIBLE ASSETS, net		103,870		83,475
GOODWILL		51,021		43,219
OTHER ASSETS		2,436		2,127
TOTAL ASSETS	$	955,915	$	865,313
CURRENT LIABILITIES
Accounts payable	$	28,877	$	25,738
Accrued expenses		29,665		24,603
Income taxes payable		5,456		1,869
TOTAL CURRENT LIABILITIES		63,998		52,210
LONG-TERM DEBT		87,394		85,599
EMPLOYEE BENEFITS		24,034		22,269
OTHER LONG TERM LIABILITY		56,189		41,902
DEFERRED TAX LIABILITY		11,687		11,124
TOTAL LIABILITIES		243,302		213,104
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 authorized, 24,852,780 and 24,713,126 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		248		247
Additional paid-in capital		143,025		141,973
Retained earnings		542,258		499,532
Accumulated other comprehensive income		27,082		10,457
TOTAL SHAREHOLDERS’ EQUITY		712,613		652,209
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	955,915	$	865,313

See accompanying condensed notes to Consolidated Financial Statements

3

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Unaudited)						(Unaudited)
NET SALES	$	145,376		$	100,415		$	295,478		$	210,453
COST OF GOODS SOLD		92,419			74,570			184,431			159,242
Gross profit		52,957			25,845			111,047			51,211
OPERATING EXPENSES
Selling, general and administrative		19,456			15,632			38,294			29,529
Acquisition related charge (credit)		838			(31	)		1,422			(119	)
Research and development		3,214			3,174			6,281			6,118
Restructuring - plant closure and severance		-			-			-			7
		23,508			18,775			45,997			35,535
INCOME FROM OPERATIONS		29,449			7,070			65,050			15,676
OTHER INCOME (EXPENSE):
Interest income		877			728			1,675			1,627
Interest expense		(1,669	)		(1,609	)		(3,117	)		(3,195	)
Gain (loss) on auction rate securities		-			949			-			(978	)
Miscellaneous		677			881			590			1,410
		(115	)		949			(852	)		(1,136	)
INCOME BEFORE PROVISION FOR INCOME TAXES		29,334			8,019			64,198			14,540
PROVISION FOR INCOME TAXES		10,203			1,456			21,472			2,987
NET INCOME	$	19,131		$	6,563		$	42,726		$	11,553
BASIC INCOME PER SHARE	$	0.77		$	0.26		$	1.72		$	0.45
DILUTED INCOME PER SHARE	$	0.76		$	0.26		$	1.70		$	0.45
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		24,898			25,431			24,869			25,421
DILUTED		25,224			25,597			25,172			25,576

See accompanying condensed notes to Consolidated Financial Statements

4

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Six Months Ended June 30,
	2011			2010
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	42,726		$	11,553
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization		19,678			18,237
Amortization of bond premium		661			-
Non cash interest expense on convertible debt		1,795			1,670
Deferred income taxes		249			644
Stock compensation		2,026			1,969
Loss on marketable securities		103			978
Loss on equipment disposal		178			104
Change in operating assets and liabilities (net of effect of businesses acquired):
Accounts receivable, net		914			9,069
Other receivables		1,638			(9,261	)
Inventories, net		(11,287	)		16,340
Production tooling, net		(2,866	)		598
Prepaid expenses and other assets		(9,600	)		3,219
Accounts payable and accrued expenses		6,001			(4,667	)
Income taxes payable		3,384			49
Other long term liability		2,762			(906	)
Employee benefits		422			292
NET CASH PROVIDED BY OPERATING ACTIVITIES		58,784			49,888
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(17,055	)		(19,172	)
Changes in restricted cash		-			3,130
Purchases of marketable securities		(63,053	)		(95,380	)
Proceeds from sales and maturities of marketable securities		35,757			4,501
Cash paid for acquisitions		(27,673	)		-
Proceeds from sale of equipment		1,442			406
NET CASH USED IN INVESTING ACTIVITIES		(70,582	)		(106,515	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock due to exercise of options		991			36
Excess tax benefit due to exercise of stock options		1,827			7
Shares repurchased		(3,889	)		(3,379	)
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES		(1,071	)		(3,336	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		3,896			(3,275	)
DECREASE IN CASH AND CASH EQUIVALENTS		(8,973	)		(63,238	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		53,436			122,154
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	44,463		$	58,916

See accompanying condensed notes to Consolidated Financial Statements

5

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

(Unaudited)

1.   Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in Ceradyne’s annual report on Form 10-K for the year ended December 31, 2010.

2.   Share Based Compensation

Share-based compensation expense for the three and six months ended June 30, 2011 was $1.1 million and $2.0 million, respectively, which was related to restricted stock units only as the Company did not have any share-based compensation expense for stock options. This compared to $1.0 million and $1.9 million for the three and six months ended June 30, 2010, respectively.

Share-based compensation expense is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Forfeitures are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company’s Consolidated Statements of Income for the three and six month periods ended June 30, 2011 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the estimated grant-date fair value and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the estimated grant-date fair value. Since share-based compensation expense recognized in the Consolidated Statements of Income for the three and six month periods ended June 30, 2011 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

The Company maintains the 1994 Stock Incentive Plan and 2003 Stock Incentive Plan.

The Company was authorized to grant options for up to 2,362,500 shares under its 1994 Stock Incentive Plan. The Company has granted options for 2,691,225 shares and has had cancellations of 397,811 shares through June 30, 2011. There are no remaining stock options available to grant under this plan. The options granted under this plan generally became exercisable over a five-year period for incentive stock options and six months for nonqualified stock options and have a maximum term of ten years.

The 2003 Stock Incentive Plan was amended in 2005 to allow the issuance of Restricted Stock Units (the “Units”) to eligible employees and non-employee directors. The Units are payable in shares of the Company’s common stock upon vesting. For directors, the Units typically vest annually over three years following the date of their issuance. For officers and employees, Units typically vest annually over five years following the date of their issuance.

The Company may grant options and Units for up to 1,875,000 shares under the 2003 Stock Incentive Plan. The Company has granted options for 475,125 shares and Units for 862,531 shares under this plan through June 30, 2011. There have been cancellations of 113,375 shares associated with this plan through June 30, 2011. The options under this plan have a life of ten years.

During the three and six months ended June 30, 2011 and 2010, the Company issued Units to certain directors, officers and employees with weighted average grant date fair values and Units issued as indicated in the table below. The Company records compensation expense for the amount of the grant date fair value on a straight line basis over the vesting period.

6

Share-based compensation expense reduced the Company’s results of operations as follows (dollars in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Share-based compensation expense recognized:
General and administrative, options	$	-		$	12		$	-		$	42
General and administrative, restricted stock units		1,058			950			2,026			1,884
Related deferred income tax benefit		(422	)		(384	)		(807	)		(768	)
Decrease in net income	$	636		$	578		$	1,219		$	1,158
Decrease in basic earnings per share	$	0.03		$	0.02		$	0.05		$	0.04
Decrease in diluted earnings per share	$	0.03		$	0.02		$	0.05		$	0.04

The amounts above include the impact of recognizing compensation expense related to non-qualified stock options.

As of June 30, 2011, all stock options were vested, consequently there was no unrecognized compensation cost related to them. The aggregate intrinsic value of stock options exercised was $3.5 million and $130,000 for the six months ended June 30, 2011 and 2010, respectively.

As of June 30, 2011, there was approximately $10.9 million of total unrecognized compensation cost related to non-vested Units granted under the 2003 Stock Incentive Plan. That cost is expected to be recognized over a weighted average period of 3.2 years.

The following is a summary of stock option activity:

	Six Months Ended June 30, 2011
	Number of Options			Weighted Average Exercise Price
Outstanding, December 31, 2010		428,000		$	12.28
Options exercised		(150,850	)	$	6.57
Outstanding, June 30, 2011		277,150		$	15.39
Exercisable, June 30, 2011		277,150		$	15.39

The following is a summary of Unit activity:

	Six Months Ended June 30, 2011
	Number of Units			Weighted Average Grant Date Fair Value
Non-vested Units at December 31, 2010		399,684		$	28.40
Granted		102,500		$	22.98
Forfeited		(1,800	)	$	43.58
Vested		(75,827	)	$	34.08
Non-vested Units at June 30, 2011		424,557		$	30.82

7

The following table summarizes information regarding options outstanding and options exercisable at June 30, 2011:

		Outstanding								Exercisable
Range of Exercise Prices		Number of Options		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)		Number of Options		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)
	$2.98 - $4.58		66,850		1.07	$	3.59	$	2,366		66,850		1.07	$	3.59	$	2,366
	$16.90 - $18.80		118,700		2.34	$	17.05	$	2,604		118,700		2.34	$	17.05	$	2,604
	$21.50 - $22.67		91,600		3.15	$	21.85	$	1,570		91,600		3.15	$	21.85	$	1,570
			277,150		2.30	$	15.39	$	6,540		277,150		2.30	$	15.39	$	6,540

The following table summarizes information regarding Units outstanding at June 30, 2011:

		Outstanding
Range of Grant Prices		Number of Units		Average Remaining Contractual Life (Years)		Weighted Average Grant Date Fair Value
$	16.53 - $31.69		241,845		2.48	$	21.19
$	35.67 - $39.43		64,692		2.72	$	37.61
$	40.73 - $45.70		106,500		3.60	$	44.76
$	52.47 - $62.07		4,600		0.68	$	55.90
$	66.35 - $81.18		6,920		0.94	$	72.38
			424,557		2.75	$	30.82

3.   Net Income Per Share

Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and Units using the treasury stock method and the net share settlement method for the convertible debt. During the three and six months ended June 30, 2011 and 2010, the average trading price of the Company’s stock did not exceed the conversion price of the convertible debt, therefore there was no impact to the calculation of diluted shares.

The following is a summary of the number of shares entering into the computation of net income per common and potential common shares:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Weighted average number of shares outstanding		24,898,357		25,431,414		24,869,054		25,421,251
Dilutive stock options		227,411		155,607		223,906		154,434
Dilutive restricted stock units		97,989		9,947		78,937		204
Dilutive contingent convertible debt common shares		-		-		-		-
Number of shares used in fully diluted computations		25,223,757		25,596,968		25,171,897		25,575,889

The following are the number of shares not included in the fully diluted computation pertaining to restricted stock units as their impact would be anti-dilutive.

8

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Anti-dilutive restricted stock units		106,620		222,974		107,520		222,974

4.   Composition of Certain Financial Statement Captions

Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs include the cost of material, labor and manufacturing overhead. The following is a summary of the inventory components as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011		December 31, 2010
Raw materials	$	5,518	$	9,459
Work-in-process		66,199		49,825
Finished goods		39,524		34,974
	$	111,241	$	94,258

Property, plant and equipment are recorded at cost and consist of the following (in thousands):

	June 30, 2011			December 31, 2010
Land	$	19,444		$	18,902
Buildings and improvements		122,484			97,076
Machinery and equipment		235,495			209,334
Leasehold improvements		8,663			8,401
Office equipment		36,501			32,269
Construction in progress		13,043			37,286
		435,630			403,268
Less accumulated depreciation and amortization		(179,571	)		(159,587	)
	$	256,059		$	243,681

The components of intangible assets are as follows (in thousands):

	June 30, 2011						December 31, 2010
	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Amortizing Intangible Assets
Backlog	$	1,871	$	1,871	$	-	$	1,826	$	1,826	$	-
Developed technology		70,969		6,908		64,061		50,530		5,387		45,143
Tradename		4,110		630		3,480		1,110		571		539
Customer relationships		47,604		14,191		33,413		47,604		12,087		35,517
Non-compete agreement		1,100		650		450		500		500		-
Non-amortizing tradename		2,466		-		2,466		2,276		-		2,276
Total	$	128,120	$	24,250	$	103,870	$	103,846	$	20,371	$	83,475

9

The estimated useful lives for intangible assets are:

Identified Intangible Asset	Estimated Useful Life in Years or Months
Developed technology	10 years – 20 years
Tradename	10 years
Customer relationships	10 years – 12.5 years
Backlog	1 month – 3 months
Non-compete agreement	15 months

Amortization of definite-lived intangible assets will be approximately (in thousands): $6,692 for the balance of fiscal year 2011, $7,905 in fiscal year 2012, $10,246 in fiscal year 2013, $12,684 in fiscal year 2014 and $15,440 in fiscal year 2015.

The roll forward of the goodwill balance by segment during the six months ended June 30, 2011 is as follows (in thousands):

	ACO		Thermo		ESK		Boron			Total
Balance at December 31, 2010
Goodwill	$	5,311	$	10,331	$	9,326	$	22,083		$	47,051
Accumulated impairment losses		-		-		-		(3,832	)		(3,382	)
		5,311		10,331		9,326		18,251			43,219
Acquisition of VIOX Corporation		7,022		-		-		-			7,022
Translation and other		-		-		780		-			780
Balance at June 30, 2011
Goodwill		12,333		10,331		10,106		22,083			54,853
Accumulated impairment losses		-		-		-		(3,832	)		(3,832	)
	$	12,333	$	10,331	$	10,106	$	18,251		$	51,021

The Company is required to test annually whether the estimated fair value of its reporting units is sufficient to support the goodwill assigned to those reporting units; the Company performs the annual test in the fourth quarter. The Company is also required to test goodwill for impairment before the annual test if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, such as a significant adverse change in the business climate. The Company determined that a test of goodwill for impairment was not required as of June 30, 2011.

5.   Stock Repurchases

During the six months ended June 30, 2011, the Company repurchased and retired 100,000 shares of its common stock at an aggregate cost of $3.9 million under a stock repurchase program authorized in 2008 by the Company’s Board of Directors. From the inception of the stock purchase program, the Company has repurchased and retired 3,099,371 shares of its common stock at an aggregate cost of $78.1 million. The Company is authorized to repurchase an additional $21.9 million for a total of $100.0 million.

6.   Fair Value Measurements

The Company measures fair value and provides required disclosures about fair value measurements as it relates to financial and nonfinancial assets and liabilities in accordance with a framework specified by GAAP. This framework addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. The framework also includes additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event.

The fair value framework requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1:  quoted market prices in active markets for identical assets and liabilities

Level 2:  observable market based inputs or unobservable inputs that are corroborated by market data

Level 3:  unobservable inputs that are not corroborated by market data

The carrying value of cash and cash equivalents, accounts receivable and trade payables approximates the fair value due to their short-term maturities.

10

For recognition purposes, on a recurring basis, the Company measures available for sale short-term and long-term investments at fair value. Short-term investments had an aggregate fair value of $228.7 million at June 30, 2011 and $192.9 million at December 31, 2010. The fair value of these investments is determined using quoted prices in active markets. Long-term investments at June 30, 2011 and December 31, 2010 were comprised as follows:

	June 30, 2011		December 31, 2010
Auction rate securities	$	15,848	$	15,789
Corporate bonds		1,055		10,398
	$	16,903	$	26,187

The fair value of corporate bonds is determined using quoted prices in active markets. The fair value of long-term investments in auction rate securities is based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral, and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs.

There were no losses from other than temporary reductions in the fair value of investments in auction rate securities during the three months ended June 30, 2011. During the three months ended June 30, 2010, the Company recognized a net pre-tax gain of $0.9 million from auction rate securities. The net pre-tax gain of $0.9 million includes a pre-tax gain of $1.1 million from the sale of auction rate securities as a result of proceeds of $3.5 million from the sales of auction rate securities in excess of the cost basis of $2.4 million, partially offset by a pre-tax charge of $102,000 due to other than temporary reductions in the fair value of its investments in auction rate securities. The Company recognized a pre-tax decrease of $53,000 in other comprehensive income during the three months ended June 30, 2011 and a pre-tax decrease of $1.4 million in other comprehensive income during the three months ended June 30, 2010, due to temporary changes in the fair value of its investments in auction rate securities.

There were no losses from other than temporary reductions in the fair value of investments in auction rate securities during the six months ended June 30, 2011. During the six months ended June 30, 2010, the Company recognized a net pre-tax loss of $1.0 million from auction rate securities. Included in the net pre-tax loss of $1.0 million from auction rate securities is a $2.1 million charge for other than temporary impairment losses, partially offset by a realized gain of $1.1 million as a result of proceeds of $3.5 million from the sales of auction rate securities in excess of the cost basis of $2.4 million. The Company recognized a net pre-tax increase of $59,000 in other comprehensive income during the six months ended June 30, 2011 and a pre-tax increase of $168,000 which increased other comprehensive income during the six months ended June 30, 2010, due to temporary changes in the fair value of its investments in auction rate securities.

Cumulatively to date, the Company has incurred $9.2 million in pre-tax charges due to other-than-temporary reductions in the value of its investments in auction rate securities, realized losses of $4.9 million from sales of auction rate securities and pre-tax temporary impairment charges of $2.2 million reflected in other comprehensive income. The Company’s investments in auction rate securities represent interests in insurance securitizations collateralized by pools of residential and commercial mortgages, asset backed securities and other structured credits relating to the credit risk of various bond guarantors that mature at various dates from June 2021 through July 2052. These auction rate securities were intended to provide liquidity via an auction process which is scheduled every 28 days, that resets the applicable interest rate, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. Interest rates are capped at a floating rate of one month LIBOR plus additional spread ranging from 1.25% to 4.00% depending on prevailing rating. During the second half of the year 2007, through 2008, 2009, 2010 and through June 30, 2011, the auctions for these securities failed. As a result of current negative conditions in the global credit markets, auctions for the Company’s investment in these securities have recently failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid through the normal auction process and may be liquidated if a buyer is found outside the auction process. Although the auctions have failed, the Company continues to receive underlying cash flows in the form of interest income from the investments in auction rate securities. As of June 30, 2011, the fair value of the Company’s investments in auction rate securities was below cost by approximately $11.5 million. The fair value of the auction rate securities has been below cost for more than one year.

Beginning in the third quarter of 2008 and at June 30, 2011, the Company determined that the market for its investments in auction rate securities and for similar securities continued to be inactive since there were few observable or recent transactions for these securities or similar securities. The Company’s investments in auction rate securities were classified within Level 3 of the fair value hierarchy because the Company determined that significant adjustments using unobservable inputs were required to determine fair value as of June 30, 2011 and December 31, 2010.

11

An auction rate security is a type of structured financial instrument where its fair value can be estimated based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. Probability weighted inputs included the following:

• Probability of earning maximum rate until maturity
• Probability of passing auction at some point in the future
• Probability of default at some point in the future (with appropriate loss severity assumptions)

The Company determined that the appropriate risk-free discount rate (before risk adjustments) used to discount the contractual cash flows of its auction rate securities ranged from 0.1% to 4.7%, based on the term structure of the auction rate security. Liquidity risk premiums are used to adjust the risk-free discount rate for each auction rate security to reflect uncertainty and observed volatility of the current market environment. This risk of nonperformance has been captured within the probability of default and loss severity assumptions noted above. The risk-adjusted discount rate, which incorporates liquidity risk, appropriately reflects the Company’s estimate of the assumptions that market participants would use (including probability weighted inputs noted above) to estimate the selling price of the asset at the measurement date.

In determining whether the decline in value of the ARS investments was other-than-temporary, the Company considered several factors including, but not limited to, the following: (1) the reasons for the decline in value (credit event, interest related or market fluctuations); (2) the Company’s ability and intent to hold the investments for a sufficient period of time to allow for recovery of value; (3) whether the decline is substantial; and (4) the historical and anticipated duration of the events causing the decline in value. The evaluation for other-than-temporary impairments is a quantitative and qualitative process, which is subject to various risks and uncertainties. The risks and uncertainties include changes in the credit quality of the securities, changes in liquidity as a result of normal market mechanisms or issuer calls of the securities, and the effects of changes in interest rates.

Assets measured at fair value on a recurring basis include the following as of June 30, 2011 and December 31, 2010 (in thousands):

	Fair Value Measurements  at June 30, 2011 Using
(In thousands)	Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at  June 30, 2011
Cash and cash equivalents	$	44,463	$	-	$	-	$	44,463
Short term investments:
Investment funds – debt securities		216,482		-		-		216,482
Corporate bonds		12,228		-		-		12,228
Total short term investments		228,710		-		-		228,710
Long term investments:
Auction rate securities		-		-		15,848		15,848
Corporate bonds		1,055		-		-		1,055
Total long term investments		1,055		-		15,848		16,903
Other long-term financial asset		1,059		-		-		1,059
Derivative financial instrument		301		-		-		301

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	Fair Value Measurements  at December 31, 2010 Using
(In thousands)	Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at  December 31, 2010
Cash and cash equivalents	$	53,436	$	-	$	-	$	53,436
Short term investments:
Investment funds – debt securities		171,462		-		-		171,462
Corporate bonds		21,398		-		-		21,398
Total short term investments		192,860		-		-		192,860
Long term investments:
Auction rate securities		-		-		15,789		15,789
Corporate bonds		10,398		-		-		10,398
Total long term investments		10,398		-		15,789		26,187
Other long-term financial asset		1,335		-		-		1,335
Derivative financial instrument		49		-		-		49

 Activity in long term investments (Level 3) was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011		2010
Balance at beginning of period	$	15,900		$	19,612		$	15,789	$	20,018
Proceeds from sales of auction rate securities		-			(3,463	)		-		(3,463	)
Realized gain included in net earnings		-			1,052			-		1,052
Unrealized gain (loss) included in net earnings		-			(102	)		-		(2,030	)
Unrealized gain (loss) included in other comprehensive income		(52	)		(1,353	)		59		169
Balance at end of period	$	15,848		$	15,746		$	15,848	$	15,746

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of VIOX Corporation at the estimated fair value of $11.5 million as of January 3, 2011. The contingent consideration arrangement requires the Company to pay the former owners of VIOX Corporation an earnout agreed upon amount, depending on the achievement of certain revenue and operating profit performance goals, with the earnout period ending 30 months after the acquisition date. The fair value of the contingent consideration arrangement was estimated based on expected revenue and operating profit during the earnout period and the discounted future cash payments that result from the calculation of the earnout as specified in the purchase agreement. The fair value of the earnout is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 20 percent and estimated revenues and operating profit during the earnout period as defined in the purchase agreement. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income. During the three months and six months ended June 30, 2011, the change in the fair value of this contingent consideration liability was $0.6 million and $1.1 million, respectively, based on an estimated fair value of $12.6 million as of June 30, 2011. See Note 15 for additional information regarding this acquisition.

For disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of outstanding debt is determined using quoted prices in active markets. The fair value of long-term debt, based on quoted market prices, was $93.8 million at June 30, 2011 and $93.1 million at December 31, 2010.

7.   Recent Accounting Pronouncements

In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance was adopted on January 1, 2010 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosure requirements were adopted on January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

13

In December 2010, the FASB issued authoritative guidance that amended the disclosure requirements for supplementary pro forma related to business combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this guidance on January 1, 2011 and the amended disclosure requirements will be included in consolidated financial statements as applicable for the year ended December 31, 2011.

In May 2011, the FASB issued new guidance which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 will not materially expand its consolidated financial statement footnote disclosures.

In June 2011, the FASB issued new guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in equity. This new guidance requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 may materially change the presentation of its consolidated financial statements.

8.   Convertible Debt and Credit Facility

During December 2005, the Company issued $121.0 million of 2.875% senior subordinated convertible notes (“Notes”) due December 15, 2035. The Company subsequently repurchased $27.9 million of the Notes during 2009 which reduced the outstanding principal amount to $93.1 million. Since the Notes are convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separately accounts for the liability and equity components of the Notes in a manner that reflects the Company’s nonconvertible debt borrowing rate as interest cost is recognized.

As of June 30, 2011 and December 31, 2010, long-term debt and the equity component (recorded in additional paid in capital, net of income tax benefit), determined in accordance with the accounting guidance for convertible debt, comprised the following (in thousands):

	June 30, 2011			December 31, 2010
Long-term debt
Principal amount	$	93,100		$	93,100
Unamortized discount		(5,706	)		(7,501	)
Net carrying amount	$	87,394		$	85,599
Equity component, net of income tax benefit	$	16,399		$	16,399

The discount on the liability component of long-term debt is being amortized using the effective interest method based on an annual effective rate of 7.5%, which represented the market interest rate for similar debt without a conversion option on the issuance date, through December 2012, which coincides with the first date that holders of the Notes can exercise their put option as discussed below.

Interest expense on the Notes for the three and six months ended June 30, 2011 and 2010 included the following (in thousands):

14

	Three Months Ended  June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Contractual interest coupon	$	669	$	669	$	1,330	$	1,330
Non-cash amortization of discount on the liability component		905		842		1,795		1,670
Non-cash amortization of debt issuance costs		94		90		187		179
	$	1,668	$	1,601	$	3,312	$	3,179

Interest on the Notes is payable on December 15 and June 15 of each year, commencing on June 15, 2006. The Notes are convertible into 17.1032 shares of Ceradyne’s common stock for each $1,000 principal amount of the Notes (which represents a conversion price of approximately $58.47 per share), subject to adjustment. The conversion rate will be adjusted upon the occurrence of events that affect Ceradyne’s outstanding common stock, such as the issuance of our common stock or other securities as a dividend distribution to holders of our common stock, a subdivision or combination of our common stock, a recapitalization, reclassification or change of our common stock, or a consolidation or merger involving Ceradyne, as a result of which our common stock would be converted into, or exchanged for, stock, other securities or other property. Generally, the conversion rate would be adjusted as of the effective time of such transaction, such that the Notes would then be convertible into the kind and amount of shares of stock, other securities or other property, that a holder of a number of shares of common stock equal to the conversion rate prior to such transaction would have owned or been entitled to receive upon such transaction. The conversion rate will also be adjusted under certain circumstances to provide for a make whole premium, as described below.

The Notes are convertible only under certain circumstances, including  (a) during a calendar quarter if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 120% of the then effective conversion price, (b) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 98% of the product of the closing price for our common stock for each day of that period and the then applicable conversion rate, (c) if the Notes are called for redemption, (d) if specified corporate transactions or fundamental changes occur, or (e) during the ten trading days prior to maturity of the Notes.

With respect to each $1,000 principal amount of the Notes surrendered for conversion, the Company will deliver the conversion value to holders as follows: (1) an amount in cash equal to the lesser of (a) the aggregate conversion value of the Notes to be converted and (b) $1,000, and (2) if the aggregate conversion value of the Notes to be converted is greater than $1,000, an amount in shares or cash equal to such aggregate conversion value in excess of $1,000.

The Notes contain put options, which may require the Company to repurchase in cash all or a portion of the Notes on December 15, 2012, December 15, 2015, December 15, 2020, December 15, 2025, and December 15, 2030 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest (as described below), if any, up to but excluding the repurchase date.

The Company is obligated to pay contingent interest to the holders of the Notes during any six-month period from June 15 to December 14 and from December 15 to June 14, commencing with the six-month period beginning December 20, 2010 and ending on June 14, 2011, if the average trading price of the note for the five trading day period ending on the third trading day immediately preceding the first day of the relevant contingent interest period equals $1,200 (120% of the principal amount of a note) or more. The criteria for paying contingent interest was not achieved during this period. The amount of contingent interest payable per note for any relevant contingent interest period shall equal 0.25% per annum of the average trading price of a note for the five trading day period ending on the third trading day immediately preceding the first day of the relevant contingent interest period. This contingent interest payment feature represents an embedded derivative. However, based on the de minimus value associated with this feature, no value has been assigned at issuance or at June 30, 2011.

On or prior to the maturity date of the Notes, upon the occurrence of a fundamental change, under certain circumstances, the Company will provide for a make whole amount by increasing, for the time period described herein, the conversion rate by a number of additional shares for any conversion of the Notes in connection with such fundamental change transactions. The amount of additional shares will be determined based on the price paid per share of Ceradyne’s common stock in the transaction constituting a fundamental change and the effective date of such transaction. This make whole premium feature represents an embedded derivative. Since this feature has no measurable impact on the fair value of the Notes and no separate trading market exists for this derivative, the value of the embedded derivative was determined to be de minimus. Accordingly, no value has been assigned at issuance or at June 30, 2011.

15

The Company utilizes a convertible bond pricing model and a probability weighted valuation model, as applicable, to determine the fair values of the embedded derivatives noted above.

In December 2005, the Company established an unsecured $10.0 million line of credit which will expire on May 1, 2014. As of June 30, 2011, there were no outstanding amounts on the line of credit. However, the available line of credit at June 30, 2011 has been reduced by outstanding letters of credit in the aggregate amount of $5.0 million. The interest rate on the credit line was 1.2% as of June 30, 2011 which was based on the LIBOR rate for a period of one month, plus a fixed margin of 1.0%.

Pursuant to the bank line of credit, the Company is subject to certain covenants, which include, among other things, the maintenance of specified minimum amounts of net income and liquidity. The Company was in compliance with all covenants at June 30, 2011.

During the six months ended June 30, 2011, the Company capitalized interest of approximately $198,000 in connection with the construction of its new manufacturing plant in Tianjin, China. During the six months ended June 30, 2010, the Company capitalized interest of approximately $48,000 in connection with the construction of its new manufacturing plant in Tianjin, China.

9.   Disclosure About Segments of an Enterprise and Related Information

The Company changed the measure of segment profitability during the third quarter of 2010 from “income (loss) before provision for income taxes” to “income (loss) from operations” as this measure is most relied upon by the chief operating decision maker for assessing performance of each segment and for deciding how to allocate resources. This was an operational change as the income (loss) from operations as used by the chief operating decision maker is a more accurate measure of the operational performance of each segment.

The Company serves its markets and manages its business through four operating segments, each of which has its own manufacturing facilities and administrative and selling functions.

The financial information for all segments is presented below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue from External Customers
Advanced Ceramic Operations	$	66,637		$	41,375		$	143,267		$	95,463
ESK Ceramics		45,880			30,961			86,003			62,709
Thermo Materials		29,295			23,513			60,406			43,360
Boron		11,420			7,440			19,360			13,959
Inter-segment elimination		(7,856	)		(2,874	)		(13,558	)		(5,038	)
Total	$	145,376		$	100,415		$	295,478		$	210,453
Depreciation and Amortization
Advanced Ceramic Operations	$	2,514		$	2,396		$	5,385		$	4,828
ESK Ceramics		3,276			2,956			6,415			6,259
Thermo Materials		2,094			1,691			3,778			3,036
Boron		2,047			2,016			4,100			4,114
Total	$	9,931		$	9,059		$	19,678		$	18,237
Segment Income (Loss) from Operations and Income Before Provision for Income Taxes
Advanced Ceramic Operations	$	14,041		$	(3,753	)	$	31,055		$	(930	)
ESK Ceramics		9,201			4,643			17,006			7,353
Thermo Materials		6,066			7,561			16,920			12,814
Boron		726			(1,350	)		726			(3,507	)
Inter-segment elimination		(585	)		(31	)		(657	)		(54	)
Income from Operations		29,449			7,070			65,050			15,676
Other Income (Expense)		(115	)		949			(852	)		(1,136	)
Income before Provision for Income Taxes	$	29,334		$	8,019		$	64,198		$	14,540

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Segment Assets
Advanced Ceramic Operations	$	468,385	$	410,987	$	468,385	$	410,987
ESK Ceramics		190,440		164,567		190,440		164,567
Thermo Materials		169,420		121,215		169,420		121,215
Boron		127,670		128,272		127,670		128,272
Total	$	955,915	$	825,041	$	955,915	$	825,041
Expenditures for Property, Plant & Equipment
Advanced Ceramic Operations	$	2,076	$	2,091	$	3,475	$	3,591
ESK Ceramics		1,322		349		1,984		836
Thermo Materials		4,672		9,289		9,622		12,678
Boron		1,324		592		1,974		2,067
Total	$	9,394	$	12,321	$	17,055	$	19,172

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Percentage of U.S. net sales from external customers
Advanced Ceramic Operations		39	%		33	%		42	%		41	%
ESK Ceramics		3	%		4	%		3	%		4	%
Thermo Materials		6	%		5	%		6	%		5	%
Boron		4	%		5	%		4	%		4	%
Total percentage of U.S. net sales from external customers		52	%		47	%		55	%		54	%
Percentage of foreign net sales from external customers
Advanced Ceramic Operations		5	%		9	%		5	%		5	%
ESK Ceramics		24	%		24	%		22	%		24	%
Thermo Materials		15	%		18	%		15	%		15	%
Boron		4	%		2	%		3	%		2	%
Total percentage of foreign net sales from external customers		48	%		53	%		45	%		46	%
Percentage of total net sales from external customers
Advanced Ceramic Operations		44	%		42	%		47	%		46	%
ESK Ceramics		27	%		28	%		25	%		28	%
Thermo Materials		21	%		23	%		21	%		20	%
Boron		8	%		7	%		7	%		6	%
Total percentage of total net sales from external customers		100	%		100	%		100	%		100	%

The following is revenue by product line for ACO (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Armor	$	49,949	$	29,796	$	106,376	$	73,145
Automotive		2,647		2,230		5,149		4,758
Energy		4,702		1,440		13,125		2,117
Commercial (Orthodontics)		1,716		2,031		3,790		4,203
Industrial		7,623		5,878		14,827		11,240
	$	66,637	$	41,375	$	143,267	$	95,463

17

10.   Pension and Other Post-retirement Benefit Plans

The Company provides pension benefits to its employees in Germany. These pension benefits are rendered for the time after the retirement of the employees by payments into legally independent pension and relief facilities. They are generally based on length of service, wage level and position in the company. The direct and indirect obligations comprise obligations for pensions that are already paid currently and expectations for those pensions payable in the future. The Company has four separate plans in Germany: a) Pensionskasse - Old; b) Pensionskasse - New; c) Additional Compensation Plan; and d) Deferred Compensation Plan. For financial accounting purposes, the Additional and Deferred Compensation Plans are accounted for as single-employer defined benefit plans, Pensionskasse - Old is a multiemployer defined benefit plan and the Pensionskasse - New is a defined contribution plan. The Company also provides pension benefits to its employees of Ceradyne Boron Products located in Quapaw, Oklahoma. There are two defined benefit retirement plans, one for eligible salaried employees and one for hourly employees. The benefits for the salaried employee plan are based on years of credited service and compensation. The benefits for the hourly employee plan are based on stated amounts per year of service.

Components of net periodic benefit costs under these defined benefit plans were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	201		$	183		$	393		$	383
Interest cost		343			300			675			618
Expected return on plan assets		(139	)		(132	)		(278	)		(264	)
Amortization of unrecognized (gain) loss		(12	)		(2	)		(22	)		(8	)
Net periodic benefit cost	$	393		$	349		$	768		$	729

11.   Financial Instruments

The Company occasionally enters into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business operations. Accordingly, the Company enters into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges. The Company had outstanding foreign exchange forward contracts with a notional value of 40.0 million Euros at June 30, 2011.

The Company measures the financial statements of its foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders’ equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.

12.   Income Taxes

The Company classifies accrued interest and penalties as part of the accrued liability for uncertain tax positions and records the corresponding expense in the provision for income taxes.

Components of the required reserve at June 30, 2011 and December 31, 2010 are as follows (in thousands):

	June 30, 2011			December 31, 2010
Federal, state and foreign unrecognized tax benefits (“UTBs”)	$	1,445		$	806
Interest		218			144
Federal/State Benefit of Interest		(87	)		(59	)
Total reserve for UTBs	$	1,576		$	891

It is anticipated that any change in the above UTBs will impact the effective tax rate. At June 30, 2011, the 2009 and 2010 years are open and subject to potential examination in one or more jurisdictions. The Company does not anticipate any significant release of UTBs within the next twelve months.

18

Effective January 1, 2008, the Company was granted an income tax holiday for our manufacturing facility in China. The tax holiday allows for tax-free operations through December 31, 2009, followed by operations at a reduced income tax rate of 12.5% on the profits generated in 2010 through 2012, with a return to the full statutory rate of 25% for periods thereafter. As a result of the tax holiday in China, income tax expense for the three months ended June 30, 2011 and 2010 was reduced by $499,000 and $0.5 million, respectively, and income tax expense for the six months ended June 30, 2011 and 2010 was reduced by $1.4 million and $1.0 million, respectively.

Income taxes are determined using an annual effective tax rate, which generally differs from the United States federal statutory rate, primarily because of state taxes, research and development tax credits and the income tax holiday in China. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial and tax reporting of the Company's assets and liabilities, along with net operating loss and credit carry forwards.

13.   Commitments and Contingencies

The Company leases certain of its manufacturing facilities under noncancelable operating leases expiring at various dates through 2015. The Company incurred rental expense under these leases of $1.8 million and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of June 30, 2011 are as follows (in thousands):

2010	$	1,873
2011		3,051
2012		2,066
2013		925
2014		434
Thereafter		364
	$	8,713

A class action lawsuit was filed on April 8, 2011, in the California Superior Court for Orange County (Civil Action No. 30-2011-00465269), in which it was asserted that the representative plaintiff, a former Ceradyne employee, and the putative class members, were not provided with meal and rest periods in accordance with California law, and were not paid overtime at an appropriate overtime rate. The Company removed the case to the Federal District Court for the Central District of California in Santa Ana, Case No. 8:11-cv-00778-CJC-MLG. The Company thereafter met and conferred related to a motion to dismiss as required by local rules and Plaintiff agreed to dismiss a significant portion of the Complaint. In an amended Complaint, Plaintiff has alleged that certain terminated employees from the fourth quarter of 2009 to the present were not paid the full amount of their overtime on a bonus paycheck given to them after they were terminated. Plaintiff also claims he is entitled to additional overtime because he was required to perform some work during his meal breaks. The Company disputes such contentions and is aggressively defending the claims. While the posture of the case is such that it is indeterminable as to the outcome at this time, Plaintiff only alleges actual unpaid overtime of $8,000 for the entire purported class. The Plaintiff alleges waiting time penalties for this putative class, but such award is contingent upon a showing that Ceradyne intentionally withheld pay from the purported Plaintiffs, which is simply not the case. 

14.   Comprehensive Income

Comprehensive income encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net income, currency translation adjustments, pension adjustments and unrealized net gains and losses on investments classified as available-for-sale. Comprehensive income is net income adjusted for changes in unrealized gains and losses on marketable securities and foreign currency translation.

Comprehensive income was (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011		2010
Net income	$	19,131		$	6,563		$	42,726	$	11,553
Foreign currency translation		5,684			(15,617	)		16,620		(25,775	)
Unrealized gain (loss) on investments		(116	)		(857	)		5		(36	)
Comprehensive income (loss)	$	24,699		$	(9,911	)	$	59,351	$	(14,258	)

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15.   Acquisition of VIOX Corporation

On January 3, 2011, the Company acquired 100% of Seattle, Washington based specialty glass company, VIOX Corporation (“VIOX”). The purchase price consists of $26.0 million in cash paid at closing, plus a post-closing adjustment of $1.7 million that was paid in March 2011. In addition, the Company is obligated to pay contingent consideration of up to a maximum of $22.0 million, based on VIOX achieving certain sales diversification and earnings targets during the 30-month period following the closing. As of the acquisition date, the estimated value of the contingent consideration was $11.5 million which was accrued as additional purchase consideration. VIOX is a 40-year-old corporation that develops, manufactures and markets specialty glass compositions for a wide range of electronic, industrial and health care markets. The Company will record the purchase of VIOX using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of VIOX will be included in the Company's consolidated results of operations beginning with the date of the acquisition. The Company is currently planning to make an election to treat the acquisition as an asset purchase for income tax purposes under Internal Revenue Code Section 338 (“Section 338 Election”). However, the Company is still reviewing the potential impact of the election. Accordingly, the purchase price allocation is subject to change pending the outcome of this decision which is expected to be finalized by the end of September 2011.

This transaction has been accounted for under the acquisition method of accounting. Under this method, assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values.

The total purchase price of the VIOX acquisition on January 3, 2011 was as follows (in thousands):

Cash consideration paid	$	27,673
Accrued contingent purchase consideration		11,521
Total purchase price	$	39,194

The above purchase price has been allocated based on the fair values of assets acquired and liabilities assumed as follows (in thousands):

Accounts receivable, net	$	2,385
Inventories		2,702
Other current assets		706
Property, plant and equipment		3,490
Intangible assets		23,600
Goodwill		7,022
Other noncurrent assets		1,269
Accounts payable and other liabilities		(1,980	)
	$	39,194

The purchase price allocation is based on a fair market valuation of acquired intangible assets, inventory and property, plant and equipment. Of the $23.6 million of acquired intangible assets, $20.0 million was assigned to technology-based intangible assets that have a useful life of approximately 20 years, non-amortizable trade name of $3.0 million and $0.6 million was assigned to non-compete agreements with a useful life of three years. The amounts assigned to intangible assets were based on management’s estimate of the fair value. The technology-based intangible assets comprise trade secrets used in manufacturing process and related customer relationships which have been valued together as complementary assets with similar useful lives due to the long-term nature of the manufacturing processes inherent in the trade secrets, VIOX’ historical pattern of customer retention and VIOX ability to attract new customers with its manufacturing processes. The technology-based intangible assets are both transferable and separable from the acquired assets.

Identification and allocation of value to the identified intangible assets was based on the acquisition method of accounting. The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

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The estimates of expected useful lives take into consideration the effects of competition, regulatory changes and possible obsolescence. The useful lives of technology-based intangible assets were based on the number of years in which net cash flows have been projected.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of VIOX’ historical operating margins and performance of comparable publicly traded entities; number of customers and VIOX’ market share; contractual and non-contractual relationships with large customers and patents held.

The goodwill resulting from the VIOX acquisition is included with the ACO segment and resulted primarily from intellectual property and other intangibles acquired that do not qualify for separate recognition. Goodwill will not be amortized but is subject to an ongoing assessment for impairment.

The historical results of the operations acquired from VIOX were not material to the Company’s consolidated results of operations in current and prior periods. Therefore, proforma disclosures are not necessary.

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Item 2.                 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Preliminary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements which may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. One generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof, or variations thereon, or similar terminology. Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. Reference is made to the risks and uncertainties which are described in this report in Note 13 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements, in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Part II, Item 1A under the caption “Risk Factors.” Reference is also made to the risks and uncertainties described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission, in Item 1A under the caption “Risk Factors,” and in Item 7 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Overview

We develop, manufacture and market advanced technical ceramic products, ceramic powders and components for defense, industrial, energy, automotive/diesel and commercial applications. Our products include:

• 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, zirconium diboride and fused silica, which are used in manufacturing armor and a broad range of industrial products and  consumer 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;

• specialty glass compositions for solar, electronic, industrial and health care markets;

• ceramic missile radomes (nose cones) for the defense industry;

• fused silica powders for precision investment casting (PIC);

• neutron absorbing materials, structural and non-structural, in combination with aluminum metal matrix composite that serve as part of a barrier system for spent fuel wet and dry storage in the nuclear industry, and non-structural neutron absorbing materials for use in the transport of nuclear fresh fuel rods;

• nuclear chemistry products for use in pressurized water reactors and boiling water reactors;

• boron dopant chemicals for semiconductor silicon manufacturing and for ion implanting of silicon wafers;

• ceramic bearings and bushings for oil drilling and fluid handling pumps;

• ceramic micro-reactors used to process chemicals;

• PetroCeram® sand filters for oil and gas recovery; and

• enhanced combat helmets for soldiers.

Our customers include the U.S. government, prime government contractors, companies engaged in solar energy, oil and natural gas exploration and nuclear energy, and large industrial, automotive, diesel and commercial manufacturers in both domestic and international markets.

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The tables below show, for each of our four operating segments, revenues and income (loss) from operations in the periods indicated.

Segment revenues (in millions):

	Three Months Ended June 30,									Six Months Ended June 30,
	2011			2010			Change			2011			2010			Change
Advanced Ceramic Operations	$	66.6		$	41.4			61.1	%	$	143.3		$	95.5			50.1	%
ESK Ceramics		45.9			31.0			48.2	%		86.0			62.7			37.1	%
Thermo Materials		29.3			23.5			24.6	%		60.4			43.4			39.3	%
Boron		11.4			7.4			53.5	%		19.4			14.0			38.7	%
Inter-segment elimination		(7.8	)		(2.9	)		173.3	%		(13.6	)		(5.1	)		169.1	%
T  Total	$	145.4		$	100.4			44.8	%	$	295.5		$	210.5			40.4	%

Segment operating income (loss) (in millions):

	Three Months Ended June 30,									Six Months Ended June 30,
	2011			2010			Change			2011			2010			Change
Advanced Ceramic Operations	$	14.0		$	(3.7	)		n/m	*	$	31.1		$	(0.9	)		n/m
ESK Ceramics		9.2			4.6			98.2	%		17.0			7.3			131.3	%
Thermo Materials		6.1			7.6			(21.6	%)		16.9			12.8			30.3	%
Boron		0.7			(1.4	)		(153.8	%)		0.7			(3.5	)		n/m
Inter-segment elimination		(0.6	)		-			n/m			(0.7	)		-			n/m
T  Total	$	29.4		$	7.1			316.5	%	$	65.0		$	15.7			315.0	%

* Not meaningful

We categorize our products into five market applications. The tables below show our sales by market application and the percentage contribution to our total sales of each market application in the different time periods.

Sales by Market Application (in millions):

	Three Months Ended June 30,							Six Months Ended June 30,
	2011		2010		Change			2011		2010		Change
Defense	$	55.9	$	33.8		65.6	%	$	120.6	$	79.5		51.8	%
Industrial		42.8		32.2		32.8	%		82.3		65.5		25.5	%
Energy		34.0		23.1		46.9	%		67.1		41.9		60.5	%
Automotive/Diesel		10.3		8.3		24.1	%		20.0		17.7		12.9	%
Commercial		2.4		3.0		(19.4	%)		5.4		5.9		(8.0	%)
Total	$	145.4	$	100.4		44.8	%	$	295.4	$	210.5		40.4	%

Percentage Contribution:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Defense		38.5	%		33.7	%		40.9	%		37.8	%
Industrial		29.4			32.1			27.8			31.2
Energy		23.3			23.0			22.7			19.9
Automotive/Diesel		7.1			8.2			6.8			8.4
Commercial		1.7			3.0			1.8			2.7
Total		100.0	%		100.0	%		100.0	%		100.0	%

The principal factor contributing to our growth in sales from 2002 through 2007 was increased demand by the U.S. military for ceramic body armor that protects soldiers, which was driven primarily by military conflicts such as those in Iraq and Afghanistan. This demand was driven by recognition of the performance and life saving benefits of utilizing advanced technical ceramics in lightweight body armor. Our sales declined in 2008 primarily because of a reduction in shipments of body armor. Our sales declined in 2009 primarily because of a continued reduction in shipments of body armor and also due to a decline in sales of our industrial, automotive/diesel and commercial market product lines due to the severe economic recession. In 2010, sales of body armor continued to decline. However, sales from energy related products grew by 61.6% in 2010 when compared to 2009. Most of this growth in energy sales was generated by sales of our ceramic crucibles used in the production of photovoltaic cells for solar panels. Additionally, sales of industrial and automotive/diesel products rebounded sharply in 2010, particularly at our ESK Ceramics subsidiary.

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Commencing in 2004, several strategic acquisitions also have contributed to our sales growth. These include our acquisition of ESK Ceramics in August 2004, our acquisition of Minco, Inc. in July 2007, our acquisition of EaglePicher Boron, LLC in August 2007, which we renamed Boron Products, LLC, and our acquisition of VIOX Corporation on January 3, 2011.

VIOX Corporation, located in Seattle, Washington, develops, manufactures and markets specialty glass compositions for a wide range of electronic, industrial and health care markets. VIOX has developed a specialty glass formulation for polycrystalline silicon photovoltaic solar applications. VIOX’ customers add electrically conducting powdered metals such as silver or aluminum to the VIOX powdered specialty glass. Many of the ultimate solar users of VIOX’ glass are also customers for Ceradyne’s high purity ceramic solar crucibles. VIOX is included in our Advanced Ceramic Operations operating segment. We began to consolidate and report their operations with ours as of January 3, 2011.

To illustrate the impact of body armor, energy-related products, and our acquisitions, the following table shows our sales from body armor, energy-related products, from our acquisitions, and from all other sources for each of the years 2002 through 2010 (in millions).

	2010			2009			2008			2007			2006			2005			2004			2003		2002
Sales from body armor	$	70.4		$	170.0		$	385.0		$	535.3		$	479.4		$	199.5		$	120.3		$	58.2	$	26.2
Sales from energy products:
Gross sales from energy products		99.9			62.2			57.7			20.9			11.9			9.8			5.3			2.5		1.7
Less sales from energy products included in acquisitions		(28.5	)		(24.5	)		(11.4	)		(4.5	)		(3.2	)		(3.2	)		(0.7	)		-		-
Sales from energy products due to organic growth		71.4			37.7			46.3			16.4			8.7			6.6			4.6			2.5		1.7
Sales from acquisitions		191.1			136.8			177.1			142.6			110.2			109.8			36.0			-		-
All other sales		70.0			56.1			71.8			62.5			64.6			52.4			54.7			40.8		33.3
Total sales	$	402.9		$	400.6		$	680.2		$	756.8		$	662.9		$	368.3		$	215.6		$	101.5	$	61.2

Sales continued their strong rebound in the first half of 2011, especially in our products for defense, industrial and energy applications. The principal factors contributing to this growth included renewed purchasing of ceramic body armor by the U.S. military, continued growth in sales of our ceramic crucibles, the sales contribution from VIOX Corporation, and the continued rebound of the economy in general.

Sales of ceramic body armor represented the majority, and most volatile, portion of our defense business, rising from approximately $26.2 million, or 42.8% of our total sales in 2002, to a peak of approximately $535.3 million, or 70.7% of our total sales in 2007, and then declining to approximately $70.4 million, or 17.5% of our total sales in 2010. Shipments of the first generation of ceramic body armor, known as small armed protective inserts, or SAPI, began before 2002 and accelerated rapidly with the onset of the war in Afghanistan in 2002 and thereafter the war in Iraq. Shipments of the second generation of ceramic body armor, known as enhanced small armed protective inserts, or ESAPI, began in 2005. The military’s subsequent decision to deploy ESAPI body armor “full fleet,” that is, to replace all SAPI body armor with the new ESAPI body armor, and the introduction in 2006 of enhanced side ballistic inserts, known as ESBI, which protect the sides of the soldier’s torso, resulted in continued growth in our sales of ceramic body armor, ultimately reaching our peak sales of body armor in 2007. Once “full fleet” was achieved, our sales of body armor began a steady decline.

In October 2008, we were awarded an Indefinite Delivery/Indefinite Quantity, or ID/IQ, contract by the U.S. Army for the next ballistic threat generation of ceramic body armor plates, called XSAPI, as well as for the current generation ESAPI plates. This five-year contract has a maximum value of $2.37 billion and allows the U.S. Army to order either XSAPI or ESAPI body armor from us. Through June 30, 2011, we have shipped $181.8 million of body armor against delivery orders received by us under this ID/IQ contract, and we expect to ship an additional $59.8 million under existing orders during 2011. With less than three years remaining under this ID/IQ contract and the wars in Iraq and Afghanistan winding down, we expect that the total amount of body armor that we ultimately ship under this contract will be substantially less than the maximum amount.

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In March 2011, we announced the receipt of a delivery order for approximately $56.6 million for ESAPI ceramic body armor plates and the receipt of a delivery order for approximately $36.0 million for XSAPI ceramic body armor plates. During the three months ended June 30, 2011, we shipped $35.5 million against these two delivery orders. The balance of these delivery orders are expected to be shipped by the end of the third quarter of 2011. In July 2011, we announced the receipt of a delivery order for approximately $36.2 million for ESAPI ceramic body armor plates. This delivery order is expected to be shipped beginning in the fourth quarter of 2011 with full shipment expected to be completed early in the first quarter of 2012.

For 2011 and for the next several years, we expect that our sales of body armor will continue, but generally at more moderate levels than in the past. On April 26, 2011, we submitted a bid to the Defense Supply Center Philadelphia (DSCP) in response to their requirement for a three year sustainment order for the replacement of body armor inserts. We anticipate receiving the results of the bid by September 30, 2011. We will also continue to bid on Foreign Military Sales (FMS) for the first generation of SAPI body armor through our existing ID/IQ contract with Aberdeen Proving Grounds.

Although we believe that demand for ceramic body armor will continue for many years, the quantity and timing of government orders depends on a number of factors outside of our control, such as the amount of U.S. defense budget appropriations, positions and strategies of the current U.S. government, the level of international conflicts and the deployment of armed forces. Moreover, ceramic armor contracts generally are awarded in an open competitive bidding process and may be cancelled by the government at any time without penalty. Therefore, our future level of sales of ceramic body armor will depend on our ability to successfully compete for and retain this business.

New orders for the three and six months ended June 30, 2011 were $108.8 million and $340.5 million, respectively, compared to $87.6 million and $193.3 million, respectively, for the same periods last year. Orders for ceramic body armor for the three and six months ended June 30, 2011 were approximately $15.0 million and $108.1 million, respectively, compared to $7.2 million and $13.1 million, respectively, for the same periods last year.

Our order backlog was $230.8 million as of June 30, 2011 and $118.0 million as of  June 30, 2010. The backlog for ceramic body armor represented approximately $84.2 million, or 36.5%, of the total backlog as of June 30, 2011 and $14.4 million, or 12.2%, of the total backlog as of June 30, 2010. We expect that substantially all of our order backlog as of June 30, 2011 will be shipped during 2011.

Based on our current backlog and anticipated orders for ceramic body armor and the level of sales to date in 2011, we expect our shipments of ceramic body armor to be higher in fiscal year 2011 than in 2010. For the next two quarters, demand for ceramic body armor is likely to be the most significant factor affecting our sales. We expect sales of body armor will begin to decline in the fourth quarter of this fiscal year and will be lower in 2012 than in 2011.

Results of Operations for the Three and Six Months Ended June 30, 2011 and 2010

Net Sales

Our total net sales for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net Sales	$	145.4		$	100.4		$	295.5		$	210.5
Increase (decrease) in net sales	$	45.0		$	5.1		$	85.0		$	15.4
Percentage change in net sales		44.8	%		5.4	%		40.4	%		7.9	%

Sales continued their strong rebound in the first half of 2011, especially in our products for defense, industrial and energy applications, although sales and orders of ceramic crucibles to the solar industry slowed somewhat in the later part of the second quarter of 2011. The principal factors contributing to this growth included renewed purchasing of ceramic body armor by the U.S. military, continued growth in sales of our ESK Ceramics operating segment, the sales contribution from VIOX Corporation which we began to consolidate and report the results of their operations with ours during the six months ended June 30, 2011, and the continued rebound of the economy in general.

Advanced Ceramic Operations Segment

Our Advanced Ceramic Operations segment had net sales for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

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	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net Sales	$	66.6		$	41.4		$	143.3		$	95.5
Increase (decrease) in net sales	$	25.2		$	(13.2	)	$	47.8		$	(17.4	)
Percentage change in net sales		61.1	%		(24.2	%)		50.1	%		(15.4	%)

Contributing to the increase of $25.2 million in sales during the three months ended June 30, 2011 at our Advanced Ceramic Operations segment were higher shipments of ceramic body armor that totaled $48.1 million, an increase of $29.8 million, or 162.8%, from $18.3 million in the same period last year. For the six months ended June 30, 2011, shipments of ceramic body armor amounted to $102.1 million, an increase of $52.9 million, or 107.4%, from $49.2 million in the same period last year. The primary reasons for the increase in shipments of ceramic body armor were an increase in demand for shipments of ESAPI armor plates. This increase in body armor sales during the three and six month periods ended June 30, 2011 was offset by a decrease in sales of vehicle armor during this period. We shipped $0.6 million of vehicle armor for the three months ended June 30, 2011, a decrease of $8.6 million, or 93.4%, from $9.2 million for the same period last year and $1.4 million of vehicle armor for the six months ended June 30, 2011, a decrease of $16.2 million, or 92.2%, from $17.5 million for the six months ended June 30, 2010. The decline was caused by a lack of shipments of armor for the MRAP All Terrain Vehicle (M-ATV) and the High Mobility Multipurpose Wheeled Vehicle (HMMWV or Humvee) during the six months ended June 30, 2011 compared to the same period last year.

As of January 3, 2011, the date of acquisition, we began to include the financial results of VIOX Corporation in the Advanced Ceramic Operations segment. VIOX sales amounted to $4.0 million for the three months ended June 30, 2011 and $11.7 million during the six months ended June 30, 2011. VIOX Sales declined in the second quarter of 2011 compared to the first quarter of 2010 due to reduced levels of demand for solar panels.

ESK Ceramics Segment

Our ESK Ceramics segment had net sales for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net Sales	$	45.9		$	31.0		$	86.0		$	62.7
Increase (decrease) in net sales	$	14.9		$	6.9		$	23.3		$	15.0
Percentage change in net sales		48.2	%		28.6	%		37.1	%		31.6	%

On a constant currency basis, sales for the three months ended June 30, 2011 were $43.3 million, an increase of $12.3 million, or 39.7%, from the corresponding quarter of the prior year. Sales of industrial products for the three months ended June 30, 2011 were $25.0 million, an increase of $5.8 million, or 30.1%, from $19.2 million in the corresponding quarter of the prior year. This increase was the result of a higher demand for composite coatings, an increase in shipments of industrial parts for the packaging industry, an increase in shipments of industrial wear parts and an increase in shipments of boron nitride ceramic powders. Sales of defense products for the three months ended June 30, 2011 were $9.2 million, an increase of $6.3 million, or 209.7%, from $2.9 million in the corresponding quarter of the prior year. Included in sales of defense products for the three months ended June 30, 2011 were inter-segment sales of $6.7 million compared to $2.7 million in the prior year. The increase of $4.0 million in inter-segment sales was due to an increase in demand for boron carbide powder used in body armor plates manufactured by our Advanced Ceramic Operations division. Sales of automotive/diesel products for the three months ended June 30, 2011 were $7.6 million, an increase of $1.6 million, or 26.1%, from $6.0 million in the corresponding quarter of the prior year. Increased demand from automotive original equipment manufacturers accounted for the increase in sales.

On a constant currency basis, sales for the six months ended June 30, 2011 were $82.3 million, an increase of $19.6 million, or 31.2%, from the corresponding prior year period. Sales of industrial products for the six months ended June 30, 2011 were $48.5 million, an increase of $8.9 million, or 22.7%, from $39.6 million in the corresponding prior year period. This increase was for the same reasons as stated above. Sales of defense products for the six months ended June 30, 2011 were $15.3 million, an increase of $10.0 million, or 190.1%, from $5.3 million in the corresponding prior year period. Included in sales of defense products for the six months ended June 30, 2011 were inter-segment sales of $11.5 million compared to $4.8 million in the prior year period. The increase of $6.7 million in inter-segment sales was due to an increase in demand for boron carbide powder used in body armor plates manufactured by our Advanced Ceramic Operations division. Sales of automotive/diesel products for the six months ended June 30, 2011 were $14.9 million, an increase of $2.0 million, or 14.6%, from $12.9 million in the corresponding prior year period. Increased demand from automotive original equipment manufacturers accounted for the increase in sales.

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Thermo Materials Segment

Our Thermo Materials segment had net sales for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net Sales	$	29.3		$	23.5		$	60.4		$	43.4
Increase (decrease) in net sales	$	5.8		$	9.5		$	17.0		$	11.9
Percentage change in net sales		24.6	%		68.4	%		39.3	%		37.5	%

The increase in sales at our Thermo Materials segment was due to higher shipments of crucibles to the solar energy market, increased sales of precision investment cast products and refractory products due to the continued improvement in the industrial sector of the economy. Sales of crucibles used in the manufacture of photovoltaic cells for the three months ended June 30, 2011 were $19.4 million, an increase of $5.4 million, or 38.6%, from $14.0 million in the corresponding period a year ago. The increase was due to increasing demand in the solar energy market. However, sales and orders from the solar energy market began to slow in the later part of the second quarter due to a reduction of government subsidies for the installation of solar panels. Sales to the defense industry for the three months ended June 30, 2011 were $3.0 million, a decrease of $1.5 million, or 32.0%, from $4.5 million when compared to the corresponding prior year period. This decrease was caused by lower shipments of ceramic missile radomes compared to the same period last year.

Sales of crucibles used in the manufacture of photovoltaic cells for the six months ended June 30, 2011 were $42.3 million, an increase of $16.7 million, or 65.7%, from $25.6 million in the corresponding period a year ago. Sales to the defense industry for the six months ended June 30, 2011 were $5.2 million, a decrease of $2.6 million, or 33.5%, from $7.8 million when compared to the corresponding prior year period.

Boron Segment

Our Boron segment had net sales for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net Sales	$	11.4		$	7.4		$	19.4		$	14.0
Increase (decrease) in net sales	$	4.0		$	0.0		$	5.4		$	0.2
Percentage change in net sales		53.5	%		0.4	%		38.7	%		1.4	%

Our Boron business segment comprises the business units Ceradyne Boron Products, SemEquip, Inc. and Ceradyne Canada. A major contribution to the increase in sales of this segment during the three and six month periods ended June 30, 2011 were from Ceradyne Boron Products. Sales from our Ceradyne Boron Products business unit for the three months ended June 30, 2011were $8.4 million, an increase of $2.0 million, or 31.5%, from $6.4 million in the prior year period. For the six months ended June 30, 2011, sales of this unit were $15.4 million, an increase of $3.1 million, or 25.0%, from $12.3 million compared to the corresponding prior year period. This increase for both periods was the result of higher shipments to the nuclear industry.

Gross Profit

Our total gross profit for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Gross profit	$	53.0		$	25.8		$	111.0		$	51.2
Increase (decrease) in gross profit	$	27.2		$	2.8		$	59.8		$	4.6
Gross profit percentage		36.4	%		25.7	%		37.6	%		24.3	%

Several factors caused the increase in gross profit during both the three and six month periods ended June 30, 2011. These factors include selected price increases on industrial product lines, improved sales mix, substantially higher sales of body armor, and increased operating leverage resulting in better absorption of manufacturing overhead expenses in the production of body armor. Our body armor product line was responsible for $19.3 million of the increase in gross profit, or 66.7% of the total increase in gross profit during the three months ended June 30, 2011, and $35.3 million of the increase in gross profit, or 56.1% of the total increase in gross profit for the first half of this year.

27

Advanced Ceramic Operations Segment

Our Advanced Ceramic Operations segment had total gross profit for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Gross profit	$	23.0		$	4.7		$	49.6		$	14.7
Increase (decrease) in gross profit	$	18.3		$	(10.4	)	$	34.9		$	(14.5	)
Gross profit percentage		34.5	%		11.3	%		34.6	%		15.4	%

The primary reasons for the increase in gross profit and gross profit as a percentage of net sales for the three and six months ended June 30, 2011 were higher volumes of production of body armor and industrial products resulting in an increase of absorbed manufacturing overhead expenses, lower scrap rates incurred in the production of body armor, and improved sales mix caused by shipments of higher gross margin ESAPI body armor products compared to the same periods prior year.

ESK Ceramics Segment

Our ESK Ceramics segment had total gross profit for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Gross profit	$	15.6		$	9.8		$	28.7		$	17.2
Increase (decrease) in gross profit	$	5.8		$	7.4		$	11.5		$	11.4
Gross profit percentage		34.1	%		31.5	%		33.4	%		27.4	%

Gross profit and gross profit as a percentage of sales increased during the three and six months ended June 30, 2011 due to an increase in manufacturing production, which generated better absorption of manufacturing overhead expenses. Additionally, decreases in scrap rates, some product line price increases and a favorable sales mix contributed to the increase in gross profit.

Thermo Materials Segment

Our Thermo Materials segment had total gross profit for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Gross profit	$	10.9		$	10.3		$	26.3		$	17.9
Increase (decrease) in gross profit	$	0.6		$	4.5		$	8.4		$	6.3
Gross profit percentage		37.3	%		43.7	%		43.5	%		41.3	%

Gross profit increased during the three and six months ended June 30, 2011 primarily because of the increase in unit sales and production of crucibles. Additionally, an approximate 5% price increase for precision investment casting products was implemented in the United States during the three months ended June 30, 2011 with minimal impact on volume. During the three months ended June 30, 2011, we incurred temporary quality issues relating to the production of our ceramic crucibles that resulted in increased scrap charges which reduced gross profit by $4.2 million and also caused the decline in gross profit as a percentage of sales. These temporary quality issues were corrected as of mid-June 2011. We opened a new plant in China for the production of crucibles during February 2011 and incurred start up expenses of approximately $0.3 million and $0.7 million during the three and six months ended June 30, 2011, respectively.

Boron Segment

Our Boron segment had total gross profit for the three and six months ended June 30, 2011 and 2010 as follows (dollars in millions):

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	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Gross profit	$	4.0		$	1.3		$	7.1		$	1.7
Increase (decrease) in gross profit	$	2.7		$	1.5		$	5.4		$	1.7
Gross profit percentage		35.3	%		17.8	%		36.7	%		11.9	%

The increases in gross profit and gross profit as a percentage of sales in the three and six months ended June 30, 2011 were the result of higher sales to the semiconductor and nuclear industries, a favorable sales mix and improved absorption of fixed manufacturing costs.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses (“SG&A”) for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
SG&A expenses	$	19.5		$	15.6		$	38.3		$	29.5
Increase (decrease) in SG&A expenses	$	3.9		$	(1.8	)	$	8.8		$	(4.5	)
Percentage change in SG&A expenses		24.5	%		(10.4	%)		29.7	%		(13.4	%)
SG&A expenses; as a percentage of net sales		13.4	%		15.6	%		13.0	%		14.0	%

The increase in selling, general and administrative expenses during the three and six months ended June 30, 2011 was caused by larger employee bonuses due to the improved financial performance, increased group health insurance expense, an increase in information technology expenses as a result of the implementation of SAP as our enterprise resource planning software, and additional general and administrative expenses associated with our new plant in China. Also contributing to the increase was the acquisition of VIOX Corporation in January 2011, which added $0.6 million and $1.2 million, respectively, to the three and six months ended June 30, 2011.

Research and Development Expenses

Our research and development expenses for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Research and development expenses	$	3.2		$	3.2		$	6.3		$	6.1
Increase (decrease) in research and development expenses		-		$	(0.1	)	$	0.2		$	(0.6	)
Percentage change in research and development expenses		1.3	%		(3.0	%)		2.7	%		(8.0	%)
Research & development expenses as a percentage of net sales		2.2	%		3.2	%		2.1	%		2.9	%

Acquisition Related Charge (Credit)

Our acquisition related charges and credits for the three and six months ended June 30, 2011 and 2010 were as follows (dollars shown as actual):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Acquisition related charges and credits	$	838,000		$	(31,000	)	$	1,422,000		$	(119,000	)
Increase (decrease) in acquisition related charges and credits	$	869,000		$	(31,000	)	$	1,541,000		$	(119,000	)
Percentage change in acquisition related charges and credits		n/m			n/m			n/m			n/m
Acquisition charges and credits as a percentage of net sales		0.6	%		n/m			0.5	%		(0.1	%)
* Not meaningful

During the three months ended June 30, 2011, we recorded acquisition-related charges of $0.8 million to reflect the fair value of contingent purchase price consideration for SemEquip, Inc., acquired in 2008, Diaphorm Technologies, LLC, acquired in 2009 and VIOX Corporation, acquired on January 3, 2011.

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Other Income (Expense)

Our net other income (expense) for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Other income (expense)	$	(0.1	)	$	0.9		$	(0.9	)	$	(1.1	)
Increase (decrease) in other income (expense)	$	(1.0	)	$	2.4		$	0.2		$	1.7
Percentage change in other income (expense)		n/m			n/m			(25.0	%)		(59.0	%)
Other income (expense) as percentage of net sales		(0.1	%)		0.9	%		(0.3	%)		(0.5	%)

Net other income (expense) during the three months ended June 30, 2011 decreased by $1.0 million because during the second quarter of 2010, we recognized a gain from foreign currency transactions of $1.8 million compared to $0.0 million during the second quarter of this year. This was offset by a $0.8 million favorable settlement of a dispute with a former workers compensation insurance company.

Income Taxes

Our provision for income taxes for the three and six months ended June 30, 2011 and 2010 were as follows (dollars in millions):

	Three Months Ended June30,						Six Months Ended June 30,
	2011			2010			2011			2010
Provision for income taxes	$	10.2		$	1.5		$	21.5		$	3.0
Increase (decrease) in provision for income taxes	$	8.7		$	4.0		$	18.5		$	5.0
Percentage change in provision for income taxes		600.8	%		n/m			618.8	%		n/m
Provision for income taxes as a percentage of net sales		7.0	%		1.4	%		7.3	%		1.4	%
Effective tax rate		34.8	%		18.2	%		33.4	%		20.5	%

The increase in the provision for income taxes for both the three and six months ended June 30, 2011 and 2010 reflect higher levels of income before income taxes compared to the corresponding periods last year. The effective tax rate for both the three and six month periods ended June 30, 2011 was higher compared to the same periods last year because a greater portion of our pre-tax income was generated by operating units other than our China operations, where we enjoy a lower tax rate than the average of other countries.

Liquidity and Capital Resources

We generally have met our operating and capital requirements with cash flow from operating activities and borrowings under our credit facility.

The following tables present selected financial information and statistics as of  June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 (in millions):

	June 30, 2011		December 31, 2010
Cash, cash equivalents and short term investments	$	273.2	$	246.3
Accounts receivable, net	$	55.9	$	53.0
Inventories	$	111.2	$	94.3
Working capital	$	461.6	$	414.4

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Operating cash flow	$	40.4	$	33.4	$	58.8	$	49.9
Increase in cash, cash equivalents and short term investments	$	32.2	$	19.2	$	26.9	$	31.4

During the six months ended June 30, 2011, we generated $58.8 million of cash from operations compared to $49.9 million for the six months ended June 30, 2010. The $58.8 million of cash flow from operations during 2011 is primarily comprised of net income totaling $42.7 million, with $24.7 million of non-cash charges included therein, offset by an increase in working capital of $17.5 million resulting from increased sales and production. During the six months ended June 30, 2011, we invested $27.7 million to purchase VIOX Corporation, based in Seattle, Washington. We also invested $17.1 million to expand manufacturing capacity in selected product lines that included $3.8 million to complete our new manufacturing plant in China. We purchased $63.1 million of marketable securities while we received $35.8 million from proceeds and maturities of marketable securities. During the six months ended June 30, 2011, we repurchased and retired 100,000 shares of our common stock at an aggregate cost of $3.9 million under a stock repurchase program authorized in 2008 by our Board of Directors. To date, we have purchased and retired a cumulative total of 3,099,371 shares at an aggregate cost of $78.1 million. We are authorized to repurchase and retire an additional $21.9 million for a total of $100.0 million. As a result, our net cash at June 30, 2011 decreased by $9.0 million as compared to a $63.2 million decrease during the six months ended June 30, 2010.

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During December 2005, we issued $121.0 million principal amount of 2.875% senior subordinated convertible notes due December 15, 2035. During 2009, we purchased and retired an aggregate of $27.9 million principal amount of our convertible debt for $23.2 million, which reduced the outstanding balance of the notes to $93.1 million. We have not purchased any of the notes since 2009. Since the notes are convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), we separately account for the liability and equity components of the notes in a manner that reflects the nonconvertible debt borrowing rate as interest cost is recognized.

As of June 30, 2011 and December 31, 2010, long-term debt and the equity component (recorded in additional paid in capital, net of income tax benefit) associated with the adoption in 2009 of the accounting guidance for convertible debt comprised the following (in thousands):

	June 30, 2011			December 31, 2010
Long-term debt
Principal amount	$	93,100		$	93,100
Unamortized discount		(5,706	)		(7,501	)
Net carrying amount	$	87,394		$	85,599
Equity component, net of income tax benefit	$	16,399		$	16,399

The discount on the liability component of long-term debt is being amortized using the effective interest method based on an annual effective rate of 7.5%, which represented the market interest rate for similar debt without a conversion option on the issuance date, through December 2012, which coincides with the first date that holders of the notes can exercise their put option as discussed below.

Interest on the notes is payable on December 15 and June 15 of each year, commencing on June 15, 2006. The notes are convertible into 17.1032 shares of our common stock for each $1,000 principal amount of the notes (which represents a conversion price of approximately $58.47 per share), subject to adjustment. The notes contain put options, which may require us to repurchase in cash all or a portion of the notes on December 15, 2012, December 15, 2015, December 15, 2020, December 15, 2025, and December 15, 2030 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, including contingent interest, if any, up to but excluding the repurchase date. For further information regarding the notes, refer to Note 8 of Notes to Consolidated Financial Statements included in this Form 10-Q.

In December 2005, we established an unsecured $10.0 million line of credit. As of June 30, 2011, there were no outstanding amounts on the line of credit. However, the available line of credit at June 30, 2011 has been reduced by outstanding letters of credit in the amount of $5.0 million. The interest rate on the credit line is based on the LIBOR rate for a period of one month, plus a margin of 1.0% which equaled 1.2% as of June 30, 2011.

Pursuant to the bank line of credit, we are subject to certain covenants, which include, among other things, the maintenance of specified minimum amounts of liquidity and profitability and annual net income. At June 30, 2011, we were in compliance with these covenants.

Our cash, cash equivalents, and short-term investments totaled $273.2 million at June 30, 2011, compared to $246.3 million at December 31, 2010. At June 30, 2011, we had working capital of $461.6 million, compared to $414.4 million at December 31, 2010. Our cash position includes amounts denominated in foreign currencies. The repatriation of cash balances from our ESK Ceramics subsidiary does not result in additional tax costs. We believe that our current cash and cash equivalents on hand and cash available from the sale of short-term investments, cash available from additional borrowings under our revolving line of credit and cash we expect to generate from operations will be sufficient to finance our anticipated capital and operating requirements for at least the next 12 months. Our anticipated capital requirements primarily relate to the normal replacement and some expansion of our manufacturing facilities at ESK Ceramics and the completion of our new manufacturing facility in China. We also may utilize cash, and, to the extent necessary, borrowings from time to time to acquire other businesses, technologies or product lines that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities. From time to time, we may utilize cash to repurchase our common stock or our convertible debt.

Our material contractual obligations and commitments as of June 30, 2011 include a $1.4 million reserve for unrecognized tax benefits. The reserve is classified as long term liabilities on our Consolidated Balance Sheet as of June 30, 2011.

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Item 3.                 Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our debt. We routinely monitor our risks associated with fluctuations in currency exchange rates and interest rates. We address these risks through controlled risk management that may, in the future, include the use of derivative financial instruments to economically hedge or reduce these exposures. We do not enter into foreign exchange contracts for speculative or trading purposes. Currently, we do not utilize interest rate swaps. Our investments in marketable securities consist primarily of high-grade corporate and government securities with maturities of less than two years. Investments purchased with an original maturity of three months or less are considered cash equivalents.

Our long term investments at June 30, 2011 included $15.8 million of auction rate securities. Cumulatively to date, the Company has incurred $9.2 million in pre-tax losses from its investments in auction rate securities, realized losses of $4.9 million from the sale of auction rate securities and pre-tax temporary impairment charges against other comprehensive income of $2.2 million. The Company’s investments in auction rate securities represent interests in insurance securitizations collateralized by pools of residential and commercial mortgages, asset backed securities and other structured credits relating to the credit risk of various bond guarantors that mature at various dates from June 2021 through July 2052. These auction rate securities were intended to provide liquidity via an auction process which is scheduled every 28 days, that resets the applicable interest rate, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. Interest rates are capped at a floating rate of one month LIBOR plus additional spread ranging from 1.25% to 4.00% depending on prevailing rating. During the second half of the year 2007, through 2008, 2009, 2010 and through June 30, 2011, the auctions for these securities failed. As a result of current negative conditions in the global credit markets, auctions for the Company’s investment in these securities failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid through the normal auction process and may be liquidated if a buyer is found outside the auction process. Although the auctions have failed, the Company continues to receive underlying cash flows in the form of interest income from the investments in auction rate securities. As of June 30, 2011, the fair value of the Company’s investments in auction rate securities was below cost by approximately $11.5 million. The fair value of the auction rate securities has been below cost for more than one year.

Beginning in the third quarter of 2008 and at June 30, 2011, the Company determined that the market for its investments in auction rate securities and for similar securities continued to be inactive since there were few observable or recent transactions for these securities or similar securities. The Company’s investments in auction rate securities continued to be classified within Level 3 of the fair value hierarchy because the Company determined that significant adjustments using unobservable inputs were required to determine fair value as of June 30, 2011 and December 31, 2010.

An auction rate security is a type of structured financial instrument where its fair value can be estimated based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. Probability weighted inputs included the following:

• Probability of earning maximum rate until maturity

• Probability of passing auction at some point in the future

• Probability of default at some point in the future (with appropriate loss severity assumptions)

The Company determined that the appropriate risk-free discount rate (before risk adjustments) used to discount the contractual cash flows of its auction rate securities ranged from 0.1% to 4.7%, based on the term structure of the auction rate security. Liquidity risk premiums are used to adjust the risk-free discount rate for each auction rate security to reflect uncertainty and observed volatility of the current market environment. This risk of nonperformance has been captured within the probability of default and loss severity assumptions noted above. The risk-adjusted discount rate, which incorporates liquidity risk, appropriately reflects the Company’s estimate of the assumptions that market participants would use (including probability weighted inputs noted above) to estimate the selling price of the asset at the measurement date.

In determining whether the decline in value of the ARS investments was other-than-temporary, the Company considered several factors including, but not limited to, the following: (1) the reasons for the decline in value (credit event, interest related or market fluctuations); (2) the Company’s ability and intent to hold the investments for a sufficient period of time to allow for recovery of value; (3) whether the decline is substantial; and (4) the historical and anticipated duration of the events causing the decline in value. The evaluation for other-than-temporary impairments is a quantitative and qualitative process, which is subject to various risks and uncertainties. The risks and uncertainties include changes in the credit quality of the securities, changes in liquidity as a result of normal market mechanisms or issuer calls of the securities, and the effects of changes in interest rates.

32

We enter into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow our management team to focus its attention on its core business operations. Accordingly, we enter into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. We enter into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges. We had an outstanding foreign exchange forward contract at June 30, 2011 for 40 million Euros.

Given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our operating results and financial position and cash flows.

We measure the financial statements of our foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders’ equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.

Our debt is comprised of $93.1 million of a convertible note with a fixed coupon rate of 2.875% (“Notes”). The fair value of long-term debt was $93.8 million and is based on quoted market prices at June 30, 2011.

Approximately 46.6% of our revenues for the six months ended June 30, 2011 were derived from operations outside the United States. Overall, we are a net recipient of currencies other than the U.S. dollar and, as such, we benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect net sales, gross profit, and net income from our subsidiary, ESK Ceramics, as expressed in U.S. dollars. This would also negatively impact our consolidated reported results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011 (the end of the period covered by this report). Based on this evaluation, our principal executive officer and principal financial officer concluded that our current disclosure controls and procedures (as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) are effective.

Changes in Internal Control over Financial Reporting

Our management evaluated our internal control over financial reporting and there have been no changes during the fiscal quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

A class action lawsuit was filed on April 8, 2011, in the California Superior Court for Orange County (Civil Action No. 30-2011-00465269), in which it was asserted that the representative plaintiff, a former Ceradyne employee, and the putative class members, were not provided with meal and rest periods in accordance with California law, and were not paid overtime at an appropriate overtime rate. The Company removed the case to the Federal District Court for the Central District of California in Santa Ana, Case No. 8:11-cv-00778-CJC-MLG. The Company thereafter met and conferred related to a motion to dismiss as required by local rules and Plaintiff agreed to dismiss a significant portion of the Complaint. In an amended Complaint, Plaintiff has alleged that certain terminated employees from the fourth quarter of 2009 to the present were not paid the full amount of their overtime on a bonus paycheck given to them after they were terminated. Plaintiff also claims he is entitled to additional overtime because he was required to perform some work during his meal breaks. The Company disputes such contentions and is aggressively defending the claims. While the posture of the case is such that it is indeterminable as to the outcome at this time, Plaintiff only alleges actual unpaid overtime of $8,000 for the entire purported class. The Plaintiff alleges waiting time penalties for this putative class, but such award is contingent upon a showing that Ceradyne intentionally withheld pay from the purported Plaintiffs, which is simply not the case. 

Item 1A.       Risk Factors

There have been no significant changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding shares of our common stock that we repurchased during the three months ended June 30, 2011.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2011		-	$	0.00		2,999,371	$	25,775,450
May 1 to May 31, 2011		-	$	0.00		2,999,371	$	25,775,450
June 1 to June 30, 2011		100,000	$	38.89		3,099,371	$	21,886,237
Total		100,000	$	38.89		3,099,371	$	21,886,237

(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.

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Item 3.	Defaults Upon Senior Securities
	Not applicable.
Item 4.	[Removed and Reserved]
Item 5.	Other Information
	Not applicable.

Item 6.	Exhibits
(a)Exhibits
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonmy Presentation Linkbase Document

35

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CERADYNE, INC.
Date: July 26, 2011	By:	/s/ JERROLD J. PELLIZZON
		Jerrold J. Pellizzon
		Vice President Chief Financial Officer (Principal Financial and Accounting Officer)

36

Index to Exhibits

Exhibit	Description
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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonmy Presentation Linkbase Document

37

EX-31.1

EXHIBIT 31.1

Section 302 Certification of Principal Executive Officer

I, Joel P. Moskowitz certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ceradyne, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2011	By:	/s/ JOEL P. MOSKOWITZ
		Joel P. Moskowitz
		Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Section 302 Certification of Principal Financial Officer

I, Jerrold J. Pellizzon certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ceradyne, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 26, 2011	By:	/s/ JERROLD J. PELLIZZON
		Jerrold J. Pellizzon
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

Section 906 Certification of Chief Executive Officer

I, Joel P. Moskowitz certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 26, 2011	By:	/s/ JOEL P. MOSKOWITZ
		Joel P. Moskowitz
		Chief Executive Officer

EX-32.2

EXHIBIT 32.2

Section 906 Certification of Chief Financial Officer

I, Jerrold J. Pellizzon certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d)); and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: July 26, 2011	By:	/s/ JERROLD J. PELLIZZON
		Jerrold J. Pellizzon
		Chief Financial Officer

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Document And Entity Information (USD $) In Millions, except Share data	6 Months Ended
	Jun. 30, 2011	Jul. 21, 2011	Jun. 30, 2010
Entity Registrant Name	CERADYNE INC
Entity Central Index Key	0000018937
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 512.5
Entity Common Stock, Shares Outstanding		24,881,724
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011

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Stock Repurchases

6 Months Ended

Jun. 30, 2011

Stock Repurchases [Abstract]

Stock Repurchases

5. Stock Repurchases

During the six months ended June 30, 2011, the Company repurchased and retired  100,000 shares of its common stock at an aggregate cost of $3.9 million under a stock repurchase program authorized in 2008 by the Company's Board of Directors. From the inception of the stock purchase program, the Company has repurchased and retired 3,099,371 shares of its common stock at an aggregate cost of $78 million. The Company is authorized to repurchase an additional $21.9 million for a total of $100.0 million.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

6. Fair Value Measurements

The Company measures fair value and provides required disclosures about fair value measurements as it relates to financial and nonfinancial assets and liabilities in accordance with a framework specified by GAAP. This framework addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. The framework also includes additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event.

The fair value framework requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: quoted market prices in active markets for identical assets and liabilities

Level 2: observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: unobservable inputs that are not corroborated by market data

The carrying value of cash and cash equivalents, accounts receivable and trade payables approximates the fair value due to their short-term maturities.

For recognition purposes, on a recurring basis, the Company measures available for sale short-term and long-term investments at fair value. Short-term investments had an aggregate fair value of $228.7 million at June 30, 2011 and $192.9 million at December 31, 2010. The fair value of these investments is determined using quoted prices in active markets. Long-term investments at June 30, 2011 and December 31, 2010 were comprised as follows:

	June 30, 2011		December 31, 2010
Auction rate securities	$	15,848	$	15,789
Corporate bonds		1,055		10,398
	$	16,903	$	26,187

The fair value of corporate bonds is determined using quoted prices in active markets. The fair value of long-term investments in auction rate securities is based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral, and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs.

There were no losses from other than temporary reductions in the fair value of investments in auction rate securities during the three months ended June 30, 2011. During the three months ended June 30, 2010, the Company recognized a net pre-tax gain of $0.9 million from auction rate securities. The net pre-tax gain of $0.9 million includes a pre-tax gain of $1.1 million from the sale of auction rate securities as a result of proceeds of $3.5 million from the sales of auction rate securities in excess of the cost basis of $2.4 million, partially offset by a pre-tax charge of $102,000 due to other than temporary reductions in the fair value of its investments in auction rate securities. The Company recognized a pre-tax decrease of $53,000 in other comprehensive income during the three months ended June 30, 2011 and a pre-tax decrease of $1.4 million in other comprehensive income during the three months ended June 30, 2010, due to temporary changes in the fair value of its investments in auction rate securities.

There were no losses from other than temporary reductions in the fair value of investments in auction rate securities during the six months ended June 30, 2011. During the six months ended June 30, 2010, the Company recognized a net pre-tax loss of $1.0 million from auction rate securities. Included in the net pre-tax loss of $1.0 million from auction rate securities is a $2.1 million charge for other than temporary impairment losses, partially offset by a realized gain of $1.1 million as a result of proceeds of $3.5 million from the sales of auction rate securities in excess of the cost basis of $2.4 million. The Company recognized a net pre-tax increase of $59,000 in other comprehensive income during the six months ended June 30, 2011 and a pre-tax increase of $168,000 which increased other comprehensive income during the six months ended June 30, 2010, due to temporary changes in the fair value of its investments in auction rate securities.

Cumulatively to date, the Company has incurred $9.2 million in pre-tax charges due to other-than-temporary reductions in the value of its investments in auction rate securities, realized losses of $4.9 million from sales of auction rate securities and pre-tax temporary impairment charges of $2.2 million reflected in other comprehensive income. The Company's investments in auction rate securities represent interests in insurance securitizations collateralized by pools of residential and commercial mortgages, asset backed securities and other structured credits relating to the credit risk of various bond guarantors that mature at various dates from June 2021 through July 2052. These auction rate securities were intended to provide liquidity via an auction process which is scheduled every 28 days, that resets the applicable interest rate, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. Interest rates are capped at a floating rate of one month LIBOR plus additional spread ranging from 1.25% to 4.00% depending on prevailing rating. During the second half of the year 2007, through 2008, 2009, 2010 and through June 30, 2011, the auctions for these securities failed. As a result of current negative conditions in the global credit markets, auctions for the Company's investment in these securities have recently failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid through the normal auction process and may be liquidated if a buyer is found outside the auction process. Although the auctions have failed, the Company continues to receive underlying cash flows in the form of interest income from the investments in auction rate securities. As of June 30, 2011, the fair value of the Company's investments in auction rate securities was below cost by approximately $11.5 million. The fair value of the auction rate securities has been below cost for more than one year.

Beginning in the third quarter of 2008 and at June 30, 2011, the Company determined that the market for its investments in auction rate securities and for similar securities continued to be inactive since there were few observable or recent transactions for these securities or similar securities. The Company's investments in auction rate securities were classified within Level 3 of the fair value hierarchy because the Company determined that significant adjustments using unobservable inputs were required to determine fair value as of June 30, 2011 and December 31, 2010.

An auction rate security is a type of structured financial instrument where its fair value can be estimated based on a valuation technique that includes the present value of future cash flows (principal and interest payments), review of the underlying collateral and considers relevant probability weighted and risk adjusted observable inputs and minimizes the use of unobservable inputs. Probability weighted inputs included the following:

· Probability of earning maximum rate until maturity

· Probability of passing auction at some point in the future

· Probability of default at some point in the future (with appropriate loss severity assumptions)

The Company determined that the appropriate risk-free discount rate (before risk adjustments) used to discount the contractual cash flows of its auction rate securities ranged from 0.1% to 4.7%, based on the term structure of the auction rate security. Liquidity risk premiums are used to adjust the risk-free discount rate for each auction rate security to reflect uncertainty and observed volatility of the current market environment. This risk of nonperformance has been captured within the probability of default and loss severity assumptions noted above. The risk-adjusted discount rate, which incorporates liquidity risk, appropriately reflects the Company's estimate of the assumptions that market participants would use (including probability weighted inputs noted above) to estimate the selling price of the asset at the measurement date.

In determining whether the decline in value of the ARS investments was other-than-temporary, the Company considered several factors including, but not limited to, the following: (1) the reasons for the decline in value (credit event, interest related or market fluctuations); (2) the Company's ability and intent to hold the investments for a sufficient period of time to allow for recovery of value; (3) whether the decline is substantial; and (4) the historical and anticipated duration of the events causing the decline in value. The evaluation for other-than-temporary impairments is a quantitative and qualitative process, which is subject to various risks and uncertainties. The risks and uncertainties include changes in the credit quality of the securities, changes in liquidity as a result of normal market mechanisms or issuer calls of the securities, and the effects of changes in interest rates.

Assets measured at fair value on a recurring basis include the following as of June 30, 2011 and December 31, 2010 (in thousands):

	Fair Value Measurements  at June 30, 2011 Using
(In thousands)	Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at  June 30, 2011
Cash and cash equivalents	$	44,463	$	-	$	-	$	44,463
Short term investments:
Investment funds – debt securities		216,482		-		-		216,482
Corporate bonds		12,228		-		-		12,228
Total short term investments		228,710		-		-		228,710
Long term investments:
Auction rate securities		-		-		15,848		15,848
Corporate bonds		1,055		-		-		1,055
Total long term investments		1,055		-		15,848		16,903
Other long-term financial asset		1,059		-		-		1,059
Derivative financial instrument		301		-		-		301
	Fair Value Measurements  at December 31, 2010 Using
(In thousands)	Quoted Prices in Active Markets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Carrying Value at  December 31, 2010
Cash and cash equivalents	$	53,436	$	-	$	-	$	53,436
Short term investments:
Investment funds – debt securities		171,462		-		-		171,462
Corporate bonds		21,398		-		-		21,398
Total short term investments		192,860		-		-		192,860
Long term investments:
Auction rate securities		-		-		15,789		15,789
Corporate bonds		10,398		-		-		10,398
Total long term investments		10,398		-		15,789		26,187
Other long-term financial asset		1,335		-		-		1,335
Derivative financial instrument		49		-		-		49

Activity in long term investments (Level 3) was as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011		2010
Balance at beginning of period	$	15,900		$	19,612		$	15,789	$	20,018
Proceeds from sales of auction rate securities		-			(3,463	)		-		(3,463	)
Realized gain included in net earnings		-			1,052			-		1,052
Unrealized gain (loss) included in net earnings		-			(102	)		-		(2,030	)
Unrealized gain (loss) included in other comprehensive income		(52	)		(1,353	)		59		169
Balance at end of period	$	15,848		$	15,746		$	15,848	$	15,746

The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of VIOX Corporation at the estimated fair value of $11.5 million as of January 3, 2011. The contingent consideration arrangement requires the Company to pay the former owners of VIOX Corporation an earnout agreed upon amount, depending on the achievement of certain revenue and operating profit performance goals, with the earnout period ending 30 months after the acquisition date. The fair value of the contingent consideration arrangement was estimated based on expected revenue and operating profit during the earnout period and the discounted future cash payments that result from the calculation of the earnout as specified in the purchase agreement. The fair value of the earnout is based on significant inputs that are unobservable in the market, which is a Level 3 input. Key assumptions include a discount rate of 20 percent and estimated revenues and operating profit during the earnout period as defined in the purchase agreement. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income. During the three months and six months ended June 30, 2011, the change in the fair value of this contingent consideration liability was $0.6 million and $1.1 million, respectively, based on an estimated fair value of $12.6 million as of June 30, 2011. See Note 15 for additional information regarding this acquisition.

For disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of outstanding debt is determined using quoted prices in active markets. The fair value of long-term debt, based on quoted market prices, was $93.8 million at June 30, 2011 and $93.1 million at December 31, 2010.

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Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2011

Recent Accounting Pronouncements [Abstract]

Accounting Pronouncements

7. Recent Accounting Pronouncements

In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This guidance was adopted on January 1, 2010 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosure requirements were adopted on January 1, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.

In December 2010, the FASB issued authoritative guidance that amended the disclosure requirements for supplementary pro forma related to business combinations. The amendments specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this guidance on January 1, 2011 and the amended disclosure requirements will be included in consolidated financial statements as applicable for the year ended December 31, 2011.

In May 2011, the FASB issued new guidance which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 will not materially expand its consolidated financial statement footnote disclosures.

In June 2011, the FASB issued new guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in equity. This new guidance requires that all nonowner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 may materially change the presentation of its consolidated financial statements.

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Convertible Debt and Credit Facility

6 Months Ended

Jun. 30, 2011

Convertible Debt and Credit Facility [Abstract]

Convertible Debt and Credit Facility

8. Convertible Debt and Credit Facility

During December 2005, the Company issued $121.0 million of 2.875% senior subordinated convertible notes (“Notes”) due December 15, 2035. The Company subsequently repurchased $27.9 million of the Notes during 2009 which reduced the outstanding principal amount to $93.1 million. Since the Notes are convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separately accounts for the liability and equity components of the Notes in a manner that reflects the Company's nonconvertible debt borrowing rate as interest cost is recognized.

As of June 30, 2011 and December 31, 2010, long-term debt and the equity component (recorded in additional paid in capital, net of income tax benefit), determined in accordance with the accounting guidance for convertible debt, comprised the following (in thousands):

	June 30, 2011			December 31, 2010
Long-term debt
Principal amount	$	93,100		$	93,100
Unamortized discount		(5,706	)		(7,501	)
Net carrying amount	$	87,394		$	85,599
Equity component, net of income tax benefit	$	16,399		$	16,399

The discount on the liability component of long-term debt is being amortized using the effective interest method based on an annual effective rate of 7.5%, which represented the market interest rate for similar debt without a conversion option on the issuance date, through December 2012, which coincides with the first date that holders of the Notes can exercise their put option as discussed below.

Interest expense on the Notes for the three and six months ended June 30, 2011 and 2010 included the following (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Contractual interest coupon	$	669	$	669	$	1,330	$	1,330
Non-cash amortization of discount on the liability component		905		842		1,795		1,670
Non-cash amortization of debt issuance costs		94		90		187		179
	$	1,668	$	1,601	$	3,312	$	3,179

Interest on the Notes is payable on December 15 and June 15 of each year, commencing on June 15, 2006. The Notes are convertible into 17.1032 shares of Ceradyne's common stock for each $1,000 principal amount of the Notes (which represents a conversion price of approximately $58.47 per share), subject to adjustment. The conversion rate will be adjusted upon the occurrence of events that affect Ceradyne's outstanding common stock, such as the issuance of our common stock or other securities as a dividend distribution to holders of our common stock, a subdivision or combination of our common stock, a recapitalization, reclassification or change of our common stock, or a consolidation or merger involving Ceradyne, as a result of which our common stock would be converted into, or exchanged for, stock, other securities or other property. Generally, the conversion rate would be adjusted as of the effective time of such transaction, such that the Notes would then be convertible into the kind and amount of shares of stock, other securities or other property, that a holder of a number of shares of common stock equal to the conversion rate prior to such transaction would have owned or been entitled to receive upon such transaction. The conversion rate will also be adjusted under certain circumstances to provide for a make whole premium, as described below.

The Notes are convertible only under certain circumstances, including  (a) during a calendar quarter if the closing price of the Company's common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is more than 120% of the then effective conversion price, (b) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 98% of the product of the closing price for our common stock for each day of that period and the then applicable conversion rate, (c) if the Notes are called for redemption, (d) if specified corporate transactions or fundamental changes occur, or (e) during the ten trading days prior to maturity of the Notes.

With respect to each $1,000 principal amount of the Notes surrendered for conversion, the Company will deliver the conversion value to holders as follows: (1) an amount in cash equal to the lesser of (a) the aggregate conversion value of the Notes to be converted and (b) $1,000, and (2) if the aggregate conversion value of the Notes to be converted is greater than $1,000, an amount in shares or cash equal to such aggregate conversion value in excess of $1,000.

The Notes contain put options, which may require the Company to repurchase in cash all or a portion of the Notes on December 15, 2012, December 15, 2015, December 15, 2020, December 15, 2025, and December 15, 2030 at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest (as described below), if any, up to but excluding the repurchase date.

The Company is obligated to pay contingent interest to the holders of the Notes during any six-month period from June 15 to December 14 and from December 15 to June 14, commencing with the six-month period beginning December 20, 2010 and ending on June 14, 2011, if the average trading price of the note for the five trading day period ending on the third trading day immediately preceding the first day of the relevant contingent interest period equals $1,200 (120% of the principal amount of a note) or more. The criteria for paying contingent interest was not achieved during this period. The amount of contingent interest payable per note for any relevant contingent interest period shall equal 0.25% per annum of the average trading price of a note for the five trading day period ending on the third trading day immediately preceding the first day of the relevant contingent interest period. This contingent interest payment feature represents an embedded derivative. However, based on the de minimus value associated with this feature, no value has been assigned at issuance or at June 30, 2011.

On or prior to the maturity date of the Notes, upon the occurrence of a fundamental change, under certain circumstances, the Company will provide for a make whole amount by increasing, for the time period described herein, the conversion rate by a number of additional shares for any conversion of the Notes in connection with such fundamental change transactions. The amount of additional shares will be determined based on the price paid per share of Ceradyne's common stock in the transaction constituting a fundamental change and the effective date of such transaction. This make whole premium feature represents an embedded derivative. Since this feature has no measurable impact on the fair value of the Notes and no separate trading market exists for this derivative, the value of the embedded derivative was determined to be de minimus. Accordingly, no value has been assigned at issuance or at June 30, 2011.

The Company utilizes a convertible bond pricing model and a probability weighted valuation model, as applicable, to determine the fair values of the embedded derivatives noted above.

In December 2005, the Company established an unsecured $10.0 million line of credit which will expire on May 1, 2014. As of June 30, 2011, there were no outstanding amounts on the line of credit. However, the available line of credit at June 30, 2011 has been reduced by outstanding letters of credit in the aggregate amount of $5.0 million. The interest rate on the credit line was 1.2% as of June 30, 2011 which was based on the LIBOR rate for a period of one month, plus a fixed margin of 1.0%.

Pursuant to the bank line of credit, the Company is subject to certain covenants, which include, among other things, the maintenance of specified minimum amounts of net income and liquidity. The Company was in compliance with all covenants at June 30, 2011.

During the six months ended June 30, 2011, the Company capitalized interest of approximately $198,000 in connection with the construction of its new manufacturing plant in Tianjin, China. During the six months ended June 30, 2010, the Company capitalized interest of approximately $48,000 in connection with the construction of its new manufacturing plant in Tianjin, China.

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Disclosure About Segments of an Enterprise and Related Information

6 Months Ended

Jun. 30, 2011

Disclosure About Segments of an Enterprise and Related Information [Abstract]

About Segments of an Enterprise and Related Information

9. Disclosure About Segments of an Enterprise and Related Information

The Company changed the measure of segment profitability during the third quarter of 2010 from “income (loss) before provision for income taxes” to “income (loss) from operations” as this measure is most relied upon by the chief operating decision maker for assessing performance of each segment and for deciding how to allocate resources. This was an operational change as the income (loss) from operations as used by the chief operating decision maker is a more accurate measure of the operational performance of each segment.

The Company serves its markets and manages its business through four operating segments, each of which has its own manufacturing facilities and administrative and selling functions.

The financial information for all segments is presented below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue from External Customers
Advanced Ceramic Operations	$	66,637		$	41,375		$	143,267		$	95,463
ESK Ceramics		45,880			30,961			86,003			62,709
Thermo Materials		29,295			23,513			60,406			43,360
Boron		11,420			7,440			19,360			13,959
Inter-segment elimination		(7,856	)		(2,874	)		(13,558	)		(5,038	)
Total	$	145,376		$	100,415		$	295,478		$	210,453
Depreciation and Amortization
Advanced Ceramic Operations	$	2,514		$	2,396		$	5,385		$	4,828
ESK Ceramics		3,276			2,956			6,415			6,259
Thermo Materials		2,094			1,691			3,778			3,036
Boron		2,047			2,016			4,100			4,114
Total	$	9,931		$	9,059		$	19,678		$	18,237
Segment Income (Loss) from Operations and Income Before Provision for Income Taxes
Advanced Ceramic Operations	$	14,041		$	(3,753	)	$	31,055		$	(930	)
ESK Ceramics		9,201			4,643			17,006			7,353
Thermo Materials		6,066			7,561			16,920			12,814
Boron		726			(1,350	)		726			(3,507	)
Inter-segment elimination		(585	)		(31	)		(657	)		(54	)
Income from Operations		29,449			7,070			65,050			15,676
Other Income (Expense)		(115	)		949			(852	)		(1,136	)
Income before Provision for Income Taxes	$	29,334		$	8,019		$	64,198		$	14,540
Segment Assets
Advanced Ceramic Operations	$	468,385		$	410,987		$	468,385		$	410,987
ESK Ceramics		190,440			164,567			190,440			164,567
Thermo Materials		169,420			121,215			169,420			121,215
Boron		127,670			128,272			127,670			128,272
Total	$	955,915		$	825,041		$	955,915		$	825,041
Expenditures for Property, Plant & Equipment
Advanced Ceramic Operations	$	2,076		$	2,091		$	3,475		$	3,591
ESK Ceramics		1,322			349			1,984			836
Thermo Materials		4,672			9,289			9,622			12,678
Boron		1,324			592			1,974			2,067
Total	$	9,394		$	12,321		$	17,055		$	19,172

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Percentage of U.S. net sales from external customers
Advanced Ceramic Operations		39	%		33	%		42	%		41	%
ESK Ceramics		3	%		4	%		3	%		4	%
Thermo Materials		6	%		5	%		6	%		5	%
Boron		4	%		5	%		4	%		4	%
Total percentage of U.S. net sales from external customers		52	%		47	%		55	%		54	%
Percentage of foreign net sales from external customers
Advanced Ceramic Operations		5	%		9	%		5	%		5	%
ESK Ceramics		24	%		24	%		22	%		24	%
Thermo Materials		15	%		18	%		15	%		15	%
Boron		4	%		2	%		3	%		2	%
Total percentage of foreign net sales from external customers		48	%		53	%		45	%		46	%
Percentage of total net sales from external customers
Advanced Ceramic Operations		44	%		42	%		47	%		46	%
ESK Ceramics		27	%		28	%		25	%		28	%
Thermo Materials		21	%		23	%		21	%		20	%
Boron		8	%		7	%		7	%		6	%
Total percentage of total net sales from external customers		100	%		100	%		100	%		100	%

The following is revenue by product line for ACO (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Armor	$	49,949	$	29,796	$	106,376	$	73,145
Automotive		2,647		2,230		5,149		4,758
Energy		4,702		1,440		13,125		2,117
Commercial (Orthodontics)		1,716		2,031		3,790		4,203
Industrial		7,623		5,878		14,827		11,240
	$	66,637	$	41,375	$	143,267	$	95,463

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Pension and Other Post-retirement Benefit Plans

6 Months Ended

Jun. 30, 2011

Pension and Other Post-Retirement Benefit Plans [Abstract]

Pension and Other Post-retirement Benefit Plans

10. Pension and Other Post-retirement Benefit Plans

The Company provides pension benefits to its employees in Germany. These pension benefits are rendered for the time after the retirement of the employees by payments into legally independent pension and relief facilities. They are generally based on length of service, wage level and position in the company. The direct and indirect obligations comprise obligations for pensions that are already paid currently and expectations for those pensions payable in the future. The Company has four separate plans in Germany: a) Pensionskasse - Old; b) Pensionskasse - New; c) Additional Compensation Plan; and d) Deferred Compensation Plan. For financial accounting purposes, the Additional and Deferred Compensation Plans are accounted for as single-employer defined benefit plans, Pensionskasse - Old is a multiemployer defined benefit plan and the Pensionskasse - New is a defined contribution plan. The Company also provides pension benefits to its employees of Ceradyne Boron Products located in Quapaw, Oklahoma. There are two defined benefit retirement plans, one for eligible salaried employees and one for hourly employees. The benefits for the salaried employee plan are based on years of credited service and compensation. The benefits for the hourly employee plan are based on stated amounts per year of service.

Components of net periodic benefit costs under these defined benefit plans were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	201		$	183		$	393		$	383
Interest cost		343			300			675			618
Expected return on plan assets		(139	)		(132	)		(278	)		(264	)
Amortization of unrecognized (gain) loss		(12	)		(2	)		(22	)		(8	)
Net periodic benefit cost	$	393		$	349		$	768		$	729

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Financial Instruments

6 Months Ended

Jun. 30, 2011

Financial Instruments [Abstract]

Financial Instruments

11. Financial Instruments

The Company occasionally enters into foreign exchange forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its core business operations. Accordingly, the Company enters into contracts which change in value as foreign exchange rates change to economically offset the effect of changes in value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. The Company enters into foreign exchange forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year. These derivative instruments are not designated as accounting hedges. The Company had outstanding foreign exchange forward contracts with a notional value of 40.0 million Euros at June 30, 2011.

The Company measures the financial statements of its foreign subsidiaries using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the rates of exchange prevailing during the year. Translation adjustments resulting from this process are included in stockholders' equity. Gains and losses from foreign currency transactions are included in other income, miscellaneous.

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Income Taxes

6 Months Ended

Jun. 30, 2011

Income Taxes [Abstract]

Income Taxes

12. Income Taxes

The Company classifies accrued interest and penalties as part of the accrued liability for uncertain tax positions and records the corresponding expense in the provision for income taxes.

Components of the required reserve at June 30, 2011 and December 31, 2010 are as follows (in thousands):

	June 30, 2011			December 31, 2010
Federal, state and foreign unrecognized tax benefits (“UTBs”)	$	1,445		$	806
Interest		218			144
Federal/State Benefit of Interest		(87	)		(59	)
Total reserve for UTBs	$	1,576		$	891

It is anticipated that any change in the above UTBs will impact the effective tax rate. At June 30, 2011, the 2009 and 2010 years are open and subject to potential examination in one or more jurisdictions. The Company does not anticipate any significant release of UTBs within the next twelve months.

Effective January 1, 2008, the Company was granted an income tax holiday for our manufacturing facility in China. The tax holiday allows for tax-free operations through December 31, 2009, followed by operations at a reduced income tax rate of 12.5% on the profits generated in 2010 through 2012, with a return to the full statutory rate of 25% for periods thereafter. As a result of the tax holiday in China, income tax expense for the three months ended June 30, 2011 and 2010 was reduced by $499,000 and $0.5 million, respectively, and income tax expense for the six months ended June 30, 2011 and 2010 was reduced by $1.4 million and $1.0 million, respectively.

Income taxes are determined using an annual effective tax rate, which generally differs from the United States federal statutory rate, primarily because of state taxes, research and development tax credits and the income tax holiday in China. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial and tax reporting of the Company's assets and liabilities, along with net operating loss and credit carry forwards.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies [Abstract]

Commitments and Contingencies

13. Commitments and Contingencies

The Company leases certain of its manufacturing facilities under noncancelable operating leases expiring at various dates through 2015. The Company incurred rental expense under these leases of $1.8 million and $1.6 million for the six months ended June 30, 2011 and 2010, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of June 30, 2011 are as follows (in thousands):

2010	$	1,873
2011		3,051
2012		2,066
2013		925
2014		434
Thereafter		364
	$	8,713

A class action lawsuit was filed on April 8, 2011, in the California Superior Court for Orange County (Civil Action No. 30-2011-00465269), in which it was asserted that the representative plaintiff, a former Ceradyne employee, and the putative class members, were not provided with meal and rest periods in accordance with California law, and were not paid overtime at an appropriate overtime rate. The Company removed the case to the Federal District Court for the Central District of California in Santa Ana, Case No. 8:11-cv-00778-CJC-MLG.  The Company thereafter met and conferred related to a motion to dismiss as required by local rules and Plaintiff agreed to dismiss a significant portion of the Complaint.  In an amended Complaint, Plaintiff has alleged that certain terminated employees from the fourth quarter of 2009 to the present were not paid the full amount of their overtime on a bonus paycheck given to them after they were terminated.  Plaintiff also claims he is entitled to additional overtime because he was required to perform some work during his meal breaks.  The Company disputes such contentions and is aggressively defending the claims. While the posture of the case is such that it is indeterminable as to the outcome at this time, Plaintiff only alleges actual unpaid overtime of $8,000 for the entire purported class.  The Plaintiff alleges waiting time penalties for this putative class, but such award is contingent upon a showing that Ceradyne intentionally withheld pay from the purported Plaintiffs, which is simply not the case. 

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Comprehensive Income

6 Months Ended

Jun. 30, 2011

Comprehensive Income [Abstract]

Comprehensive Income

14. Comprehensive Income

Comprehensive income encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net income, currency translation adjustments, pension adjustments and unrealized net gains and losses on investments classified as available-for-sale. Comprehensive income is net income adjusted for changes in unrealized gains and losses on marketable securities and foreign currency translation.

Comprehensive income was (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011		2010
Net income	$	19,131		$	6,563		$	42,726	$	11,553
Foreign currency translation		5,684			(15,617	)		16,620		(25,775	)
Unrealized gain (loss) on investments		(116	)		(857	)		5		(36	)
Comprehensive income (loss)	$	24,699		$	(9,911	)	$	59,351	$	(14,258	)

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Consolidated Balance Sheets (Unaudited) (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
CURRENT ASSETS
Cash and cash equivalents	$ 44,463	$ 53,436
Short-term investments	228,710	192,860
Accounts receivable, net of allowances of $4,682 and $685 at June 30, 2011 and December 31, 2010, respectively	55,914	53,019
Other receivables	16,443	17,553
Inventories, net	111,241	94,258
Production tooling, net	18,314	10,037
Prepaid expenses and other	43,624	38,653
Deferred tax asset	6,917	6,808
TOTAL CURRENT ASSETS	525,626	466,624
PROPERTY, PLANT AND EQUIPMENT, net	256,059	243,681
LONG TERM INVESTMENTS	16,903	26,187
INTANGIBLE ASSETS, net	103,870	83,475
GOODWILL	51,021	43,219
OTHER ASSETS	2,436	2,127
TOTAL ASSETS	955,915	865,313
CURRENT LIABILITIES
Accounts payable	28,877	25,738
Accrued expenses	29,665	24,603
Income taxes payable	5,456	1,869
TOTAL CURRENT LIABILITIES	63,998	52,210
LONG-TERM DEBT	87,394	85,599
EMPLOYEE BENEFITS	24,034	22,269
OTHER LONG TERM LIABILITY	56,189	41,902
DEFERRED TAX LIABILITY	11,687	11,124
TOTAL LIABILITIES	243,302	213,104
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 100,000,000 authorized, 24,852,780 and 24,713,126 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively	248	247
Additional paid-in capital	143,025	141,973
Retained earnings	542,258	499,532
Accumulated other comprehensive income	27,082	10,457
TOTAL SHAREHOLDERS' EQUITY	712,613	652,209
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 955,915	$ 865,313

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Acquisition of VIOX Corporation

6 Months Ended

Jun. 30, 2011

Acquisition of VIOX Corporation [Abstract]

Acquisition of VIOX Corporation

15. Acquisition of VIOX Corporation

On January 3, 2011, the Company acquired 100% of Seattle, Washington based specialty glass company, VIOX Corporation (“VIOX”). The purchase price consists of $26.0 million in cash paid at closing, plus a post-closing adjustment of $1.7 million that was paid in March 2011. In addition, the Company is obligated to pay contingent consideration of up to a maximum of $22.0 million, based on VIOX achieving certain sales diversification and earnings targets during the 30-month period following the closing. As of the acquisition date, the estimated value of the contingent consideration was $11.5 million which was accrued as additional purchase consideration. VIOX is a 40-year-old corporation that develops, manufactures and markets specialty glass compositions for a wide range of electronic, industrial and health care markets. The Company will record the purchase of VIOX using the acquisition method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the date of the acquisition. The results of operations of VIOX will be included in the Company's consolidated results of operations beginning with the date of the acquisition. The Company is currently planning to make an election to treat the acquisition as an asset purchase for income tax purposes under Internal Revenue Code Section 338 (“Section 338 Election”). However, the Company is still reviewing the potential impact of the election. Accordingly, the purchase price allocation is subject to change pending the outcome of this decision which is expected to be finalized by the end of September 2011.

This transaction has been accounted for under the acquisition method of accounting. Under this method, assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values.

The total purchase price of the VIOX acquisition on January 3, 2011 was as follows (in thousands):

Cash consideration paid	$	27,673
Accrued contingent purchase consideration		11,521
Total purchase price	$	39,194

The above purchase price has been allocated based on the fair values of assets acquired and liabilities assumed as follows (in thousands):

Accounts receivable, net	$	2,385
Inventories		2,702
Other current assets		706
Property, plant and equipment		3,490
Intangible assets		23,600
Goodwill		7,022
Other noncurrent assets		1,269
Accounts payable and other liabilities		(1,980	)
	$	39,194

The purchase price allocation is based on a fair market valuation of acquired intangible assets, inventory and property, plant and equipment. Of the $23.6 million of acquired intangible assets, $20.0 million was assigned to technology-based intangible assets that have a useful life of approximately 20 years, non-amortizable trade name of $3.0 million and $0.6 million was assigned to non-compete agreements with a useful life of three years. The amounts assigned to intangible assets were based on management's estimate of the fair value. The technology-based intangible assets comprise trade secrets used in manufacturing process and related customer relationships which have been valued together as complementary assets with similar useful lives due to the long-term nature of the manufacturing processes inherent in the trade secrets, VIOX' historical pattern of customer retention and VIOX ability to attract new customers with its manufacturing processes. The technology-based intangible assets are both transferable and separable from the acquired assets.

Identification and allocation of value to the identified intangible assets was based on the acquisition method of accounting. The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

The estimates of expected useful lives take into consideration the effects of competition, regulatory changes and possible obsolescence. The useful lives of technology-based intangible assets were based on the number of years in which net cash flows have been projected.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of VIOX' historical operating margins and performance of comparable publicly traded entities; number of customers and VIOX' market share; contractual and non-contractual relationships with large customers and patents held.

The goodwill resulting from the VIOX acquisition is included with the ACO segment and resulted primarily from intellectual property and other intangibles acquired that do not qualify for separate recognition. Goodwill will not be amortized but is subject to an ongoing assessment for impairment.

The historical results of the operations acquired from VIOX were not material to the Company's consolidated results of operations in current and prior periods. Therefore, proforma disclosures are not necessary.

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Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Balance Sheet [Abstract]
Accounts receivable, net of allowances	$ 4,682	$ 685
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock, authorized (in shares)	100,000,000	100,000,000
Common Stock, shares issued (in shares)	24,852,780	24,713,126
Common Stock, shares outstanding (in shares)	24,852,780	24,713,126

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Consolidated Statements of Income (Unaudited) (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Income Statement [Abstract]
NET SALES	$ 145,376	$ 100,415	$ 295,478	$ 210,453
COST OF GOODS SOLD	92,419	74,570	184,431	159,242
Gross profit	52,957	25,845	111,047	51,211
OPERATING EXPENSES
Selling, general and administrative	19,456	15,632	38,294	29,529
Acquisition related charge (credit)	838	(31)	1,422	(119)
Research and development	3,214	3,174	6,281	6,118
Restructuring - plant closure and severance	0	0	0	7
Operating Expenses, Total	23,508	18,775	45,997	35,535
INCOME FROM OPERATIONS	29,449	7,070	65,050	15,676
OTHER INCOME (EXPENSE):
Interest income	877	728	1,675	1,627
Interest expense	(1,669)	(1,609)	(3,117)	(3,195)
Gain (loss) on auction rate securities	0	949	0	(978)
Miscellaneous	677	881	590	1,410
Other Income (Expense), Total	(115)	949	(852)	(1,136)
INCOME BEFORE PROVISION FOR INCOME TAXES	29,334	8,019	64,198	14,540
PROVISION FOR INCOME TAXES	10,203	1,456	21,472	2,987
NET INCOME	$ 19,131	$ 6,563	$ 42,726	$ 11,553
BASIC INCOME PER SHARE (in dollars per share)	$ 0.77	$ 0.26	$ 1.72	$ 0.45
DILUTED INCOME PER SHARE (in dollars per share)	$ 0.76	$ 0.26	$ 1.70	$ 0.45
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC (in shares)	24,898	25,431	24,869	25,421
DILUTED (in shares)	25,224	25,597	25,172	25,576

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, except Share data	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 42,726	$ 11,553
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization	19,678	18,237
Amortization of bond premium	661	0
Non cash interest expense on convertible debt	1,795	1,670
Deferred income taxes	249	644
Stock compensation	2,026	1,969
Loss on marketable securities	103	978
Loss on equipment disposal	178	104
Change in operating assets and liabilities (net of effect of businesses acquired):
Accounts receivable, net	914	9,069
Other receivables	1,638	(9,261)
Inventories, net	(11,287)	16,340
Production tooling, net	(2,866)	598
Prepaid expenses and other assets	(9,600)	3,219
Accounts payable and accrued expenses	6,001	(4,667)
Income taxes payable	3,384	49
Other long term liability	2,762	(906)
Employee benefits	422	292
NET CASH PROVIDED BY OPERATING ACTIVITIES	58,784	49,888
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(17,055)	(19,172)
Changes in restricted cash	0	3,130
Purchases of marketable securities	(63,053)	(95,380)
Proceeds from sales and maturities of marketable securities	35,757	4,501
Cash paid for acquisitions	(27,673)	0
Proceeds from sale of equipment	1,442	406
NET CASH USED IN INVESTING ACTIVITIES	(70,582)	(106,515)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock due to exercise of options	991	36
Excess tax benefit due to exercise of stock options	1,827	7
Shares repurchased (in shares)	(3,889)	(3,379)
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES	(1,071)	(3,336)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS	3,896	(3,275)
DECREASE IN CASH AND CASH EQUIVALENTS	(8,973)	(63,238)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	53,436	122,154
CASH AND CASH EQUIVALENTS, END OF PERIOD	$ 44,463	$ 58,916

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Basis of Presentation

6 Months Ended

Jun. 30, 2011

Basis of Presentation [Abstract]

Basis of Presentation

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the Consolidated Financial Statements and Notes to Financial Statements included in Ceradyne's annual report on Form 10-K for the year ended December 31, 2010.

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Share Based Compensation

6 Months Ended

Jun. 30, 2011

Share Based Compensation [Abstract]

Share Based Compensation

2. Share Based Compensation

Share-based compensation expense for the three and six months ended June 30, 2011 was $1.1 million and $2.0 million, respectively, which was related to restricted stock units only as the Company did not have any share-based compensation expense for stock options. This compared to $1.0 million and $1.9 million for the three and six months ended June 30, 2010, respectively.

Share-based compensation expense is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Forfeitures are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates. Share-based compensation expense recognized in the Company's Consolidated Statements of Income for the three and six month periods ended June 30, 2011 includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the estimated grant-date fair value and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the estimated grant-date fair value. Since share-based compensation expense recognized in the Consolidated Statements of Income for the three and six month periods ended June 30, 2011 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.

The Company maintains the 1994 Stock Incentive Plan and 2003 Stock Incentive Plan.

The Company was authorized to grant options for up to 2,362,500 shares under its 1994 Stock Incentive Plan. The Company has granted options for 2,691,225 shares and has had cancellations of 397,811 shares through June 30, 2011. There are no remaining stock options available to grant under this plan. The options granted under this plan generally became exercisable over a five-year period for incentive stock options and six months for nonqualified stock options and have a maximum term of ten years.

The 2003 Stock Incentive Plan was amended in 2005 to allow the issuance of Restricted Stock Units (the “Units”) to eligible employees and non-employee directors. The Units are payable in shares of the Company's common stock upon vesting. For directors, the Units typically vest annually over three years following the date of their issuance. For officers and employees, Units typically vest annually over five years following the date of their issuance.

The Company may grant options and Units for up to 1,875,000 shares under the 2003 Stock Incentive Plan. The Company has granted options for 475,125 shares and Units for 862,531 shares under this plan through June 30, 2011. There have been cancellations of 113,375 shares associated with this plan through June 30, 2011. The options under this plan have a life of ten years.

During the three and six months ended June 30, 2011 and 2010, the Company issued Units to certain directors, officers and employees with weighted average grant date fair values and Units issued as indicated in the table below. The Company records compensation expense for the amount of the grant date fair value on a straight line basis over the vesting period.

Share-based compensation expense reduced the Company's results of operations as follows (dollars in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Share-based compensation expense recognized:
General and administrative, options	$	-		$	12		$	-		$	42
General and administrative, restricted stock units		1,058			950			2,026			1,884
Related deferred income tax benefit		(422	)		(384	)		(807	)		(768	)
Decrease in net income	$	636		$	578		$	1,219		$	1,158
Decrease in basic earnings per share	$	0.03		$	0.02		$	0.05		$	0.04
Decrease in diluted earnings per share	$	0.03		$	0.02		$	0.05		$	0.04

The amounts above include the impact of recognizing compensation expense related to non-qualified stock options.

As of June 30, 2011, all stock options were vested, consequently there was no unrecognized compensation cost related to them. The aggregate intrinsic value of stock options exercised was $3.5 million and $130,000 for the six months ended June 30, 2011 and 2010, respectively.

As of June 30, 2011, there was approximately $10.9 million of total unrecognized compensation cost related to non-vested Units granted under the 2003 Stock Incentive Plan. That cost is expected to be recognized over a weighted average period of 3.2 years.

The following is a summary of stock option activity:

	Six Months Ended June 30, 2011
	Number of Options			Weighted Average Exercise Price
Outstanding, December 31, 2010		428,000		$	12.28
Options exercised		(150,850	)	$	6.57
Outstanding, June 30, 2011		277,150		$	15.39
Exercisable, June 30, 2011		277,150		$	15.39

The following is a summary of Unit activity:

	Six Months Ended June 30, 2011
	Number of Units			Weighted Average Grant Date Fair Value
Non-vested Units at December 31, 2010		399,684		$	28.40
Granted		102,500		$	22.98
Forfeited		(1,800	)	$	43.58
Vested		(75,827	)	$	34.08
Non-vested Units at June 30, 2011		424,557		$	30.82

The following table summarizes information regarding options outstanding and options exercisable at June 30, 2011:

	Outstanding						Exercisable
Range of Exercise Prices	Number of Options	Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)	Number of Options	Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)
$2.98 - $4.58	66,850	1.07	$	3.59	$	2,366	66,850	1.07	$	3.59	$	2,366
$16.90 - $18.80	118,700	2.34	$	17.05	$	2,604	118,700	2.34	$	17.05	$	2,604
$21.50 - $22.67	91,600	3.15	$	21.85	$	1,570	91,600	3.15	$	21.85	$	1,570
	277,150	2.30	$	15.39	$	6,540	277,150	2.30	$	15.39	$	6,540

The following table summarizes information regarding Units outstanding at June 30, 2011:

	Outstanding
Range of Grant Prices	Number of Units	Average Remaining Contractual Life (Years)		Weighted Average Grant Date Fair Value
$16.53 - $31.69	241,845	2.48	$	$ 21.19
$35.67 - $39.43	64,692	2.72	$	$ 37.61
$40.73 - $45.70	106,500	3.60	$	$ 44.76
$52.47 - $62.07	4,600	0.68	$	$ 55.90
$66.35 - $81.18	6,920	0.94	$	$ 72.38
	424,557	2.75	$	$ 30.82

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Net Income Per Share

6 Months Ended

Jun. 30, 2011

Net Income Per Share [Abstract]

Net Income Per Share

3. Net Income Per Share

Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding plus the effect of any dilutive stock options and Units using the treasury stock method and the net share settlement method for the convertible debt. During the three and six months ended June 30, 2011 and 2010, the average trading price of the Company's stock did not exceed the conversion price of the convertible debt, therefore there was no impact to the calculation of diluted shares.

The following is a summary of the number of shares entering into the computation of net income per common and potential common shares:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Weighted average number of shares outstanding		24,898,357		25,431,414		24,869,054		25,421,251
Dilutive stock options		227,411		155,607		223,906		154,434
Dilutive restricted stock units		97,989		9,947		78,937		204
Dilutive contingent convertible debt common shares		-		-		-		-
Number of shares used in fully diluted computations		25,223,757		25,596,968		25,171,897		25,575,889

The following are the number of shares not included in the fully diluted computation pertaining to restricted stock units as their impact would be anti-dilutive.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Anit-dilutive restricted stock units		106,620		222,974		107,520		222,974

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Composition of Certain Financial Statement Captions

6 Months Ended

Jun. 30, 2011

Composition of Certain Financial Statement Captions [Abstract]

Composition of Certain Financial Statement Captions

4. Composition of Certain Financial Statement Captions

Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs include the cost of material, labor and manufacturing overhead. The following is a summary of the inventory components as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011		December 31, 2010
Raw materials	$	5,518	$	9,459
Work-in-process		66,199		49,825
Finished goods		39,524		34,974
	$	111,241	$	94,258

Property, plant and equipment are recorded at cost and consist of the following (in thousands):

	June 30, 2011			December 31, 2010
Land	$	19,444		$	18,902
Buildings and improvements		122,484			97,076
Machinery and equipment		235,495			209,334
Leasehold improvements		8,663			8,401
Office equipment		36,501			32,269
Construction in progress		13,043			37,286
		435,630			403,268
Less accumulated depreciation and amortization		(179,571	)		(159,587	)
	$	256,059		$	243,681

Depreciation expense for the three and six months ended June 30, 2011 were x.x million and x.x million, respectively.

The components of intangible assets are as follows (in thousands):

	June 30, 2011						December 31, 2010
	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Amortizing Intangible Assets
Backlog	$	1,871	$	1,871	$	-	$	1,826	$	1,826	$	-
Developed technology		70,969		6,908		64,061		50,530		5,387		45,143
Tradename		4,110		630		3,480		1,110		571		539
Customer relationships		47,604		14,191		33,413		47,604		12,087		35,517
Non-compete agreement		1,100		650		450		500		500		-
Non-amortizing tradename		2,466		-		2,466		2,276		-		2,276
Total	$	128,120	$	24,250 -	$	103,870	$	103,846	$	20,371	$	83,475

Amortization expense for the three and six months ended June 30, 2011 were x.x million and x.x million, respectively.

The estimated useful lives for intangible assets are:

Identified Intangible Asset	Estimated Useful Life in Years or Months
Developed technology	10 years – 20 years
Tradename	10 years
Customer relationships	10 years – 12.5 years
Backlog	1 month – 3 months
Non-compete agreement	15 months

Amortization of definite-lived intangible assets will be approximately (in thousands): $6,692 for the balance of fiscal year 2011, $7,905 in fiscal year 2012, $10,246 in fiscal year 2013, $12,684 in fiscal year 2014 and $15,440 in fiscal year 2015.

The roll forward of the goodwill balance by segment during the six months ended June 30, 2011 is as follows (in thousands):

	ACO		Thermo		ESK		Boron			Total
Balance at December 31, 2010
Goodwill	$	5,311	$	10,331	$	9,326	$	22,083		$	47,051
Accumulated impairment losses		-		-		-		(3,832	)		(3,382	)
		5,311		10,331		9,326		18,251			43,219
Acquisition of VIOX Corporation		7,022		-		-		-			7,022
Translation and other		-		-		780		-			780
Balance at June 30, 2011
Goodwill		12,333		10,331		10,106		22,083			54,853
Accumulated impairment losses		-		-		-		(3,832	)		(3,382	)
	$	12,333	$	10,331	$	10,106	$	18,251		$	51,021

The Company is required to test annually whether the estimated fair value of its reporting units is sufficient to support the goodwill assigned to those reporting units; the Company performs the annual test in the fourth quarter. The Company is also required to test goodwill for impairment before the annual test if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, such as a significant adverse change in the business climate. The Company determined that a test of goodwill for impairment was not required as of June 30, 2011.