6. Employee Retirement and Other Benefit Plans

Supplemental Retirement Plan

In December 1988, the Board of Directors of the Company approved the adoption of a supplemental retirement plan, the Ceradyne SMART 401(k) Plan (the Plan), in which substantially all employees are eligible to participate after completing 90 days of employment. Participation in the Plan is voluntary. An employee may elect to contribute up to the maximum deferred tax amount of $16,500 in 2011 as a basic contribution. The Company may contribute any amount which the Board of Directors annually determines appropriate. Company contributions fully vest and are non-forfeitable after the participant has completed five years of service. The Company's related contributions for the years ended December 31, 2011, 2010 and 2009 were $1.5 million, $1.3 million and $1.5 million, respectively.

Pension and Other Postretirement Benefit Plans

The Company has defined benefit pension and benefit plans for employees in its ESK Ceramics and Ceradyne Boron Products subsidiaries. The overfunded or underfunded status of the defined benefit pension and benefit plans are recognized as an asset or liability in the statement of financial position and changes in that funded status in the year in which the changes occur are recognized through other comprehensive income.

German Pension and Benefit Plans

The Company provides pension benefits to the employees of its ESK Ceramics subsidiary 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 measurement date for the Company's pension plan assets and obligations, including Pensionskasse - Old, is December 31. The measurement date for the Company's net periodic pension cost is January 1. Assumed discount rates and rates of increase in remuneration used in calculating the projected benefit obligation together with long-term rates of return on plan assets vary according to the economic conditions of Germany, where the pension plans are situated.

As noted above the Pensionskasse - Old is a multi employer defined benefit pension plan. ESK Ceramics is one of numerous employers who participate in the plan. Therefore, the Company has recognized as net pension benefit cost the required contribution for the period. However, due to the current development of the financial markets and the overall decrease of the return on pension plan assets, the pension facility (“WACKER-Pensionskasse”) requested a one-off payment in 2008 from its members to further ensure its risk-bearing capacity and in addition requested that future pension adjustments from 2009 onwards have to be paid by the employers. Management believes, based on the bylaws of WACKER-Pensionskasse and its expected future performance, that this obligation will exist only for a limited period of time. The projected benefit obligation for those future pension adjustments which management believes the Company will have to pay was accrued as an additional liability.

The following table outlines the plan information for the year ended December 31, 2011.

Legal Name of the plan		Pensionskasse der Wacker Chemie Versicherungsverein auf Gegenseitigkeit
Employer Identification Number / Plan number		N/A
Funded Status		The plan was more than 80% funded as of December 31, 2011
Expiration date(s) of the collective bargaining agreement(s) requiring contributions to the plan		N/A (no expiration date)

Contributions to the plan by year	For the year ended December 31,
	2009	2010	2011
	$1.3 million	$1.3 million	$1.4 million
As of the end of the most recent annual period:	December 31, 2011
1. Whether a funding improvement plan or a rehabilitation plan had been implemented	No
2. Whether the employer paid surcharge to the plan	No
3. Description of any minimum contributions(s), required for future periods by collective bargaining agreement(s), statutory obligations, or other contractual obligations, if applicable	The majority of the employers' contributions depend on the employees' contributions. The relation between the employers' and the employees' contribution can either decrease or increase in the future. Until 2011 the employer paid 250% of the employees' contribution. For the future – starting with 2012 – the employer has to pay 350% of the employees' contribution.

Additional information of the Pensionskasse der Wacker Chemie VVaG is available in the public domain. In particular, the annual report as published by the Pensionskasse can be accessed at www.ebundesanzeiger.de. However, since the information is available in German only, ESK Ceramics provides this information hereafter.

Description of the nature of plan benefits	The Pensionskasse der Wacker Chemie VVaG provides monthly payments in case of retirement, disability or death (spouse or children). The benefits depend mainly on the employees' contributions.
Qualitative description of the extent to which the employer could be responsible for the obligations of the plan, including benefits earned by employees during employment with another employer	The plan is under very strict supervision by the German authorities. Therefore, in normal course it is very unlikely that the Pensionskasse der Wacker Chemie VVaG fails to fulfill its obligations. In this unlikely event, by law, the employer is responsible for the obligations of the plan. The employer is liable for the benefits of its employees who participate in the plan.
Other quantitative information, to the extent available, as of the most recent data available	December 31, 2010 (in thousand EUR)
	Fair value of plan assets	1,395.3
	Actuarial present value of accumulated plan benefits (The actuarial present value of accumulated plan benefits was calculated according to German GAAP. The interest rate used according to German GAAP equals about 4.0%. As a result the actuarial present value of accumulated plan benefits according to US-GAAP would be less than the amount shown.)	1,317.7
	Total contributions received by the plan	47.1

The accumulated benefit obligations and projected benefit obligations are computed utilizing the same methods and assumptions as those used in the Additional and Deferred Compensation Plans noted above and are solely based on the ESK Ceramics employees participating in the plan. However, the assets of the plan are allocated based upon the relative percentage of the projected benefit obligation to the total for all participating employers. The long-term asset structure of the Pensionskasse is determined significantly by asset-liability-studies conducted regularly calculating an optimal investment portfolio based on the known business in force and the actuarial assumptions. Input parameters are assumed risk and return rates as well as specific correlation samples of the respective asset categories. The priority objective of the asset allocation is to achieve a rate of return compensating the benefit commitments within the limits of a justifiable risk and volatility. The operative investment policy has to conform to legal requirements (insurance control and investment law) as well as to internal investment guidelines and restrictions. The use of derivatives is permitted within the legally allowed scope. The expected overall rate of return is based on numerous factors like the portfolio selection and the anticipated long-term rate of return of the respective asset categories determined by the Black-Litterman Market Equilibrium Model. The expected long-term rate of return therewith is approximated to long-term historical averages, future expectations are also covered by the Black-Litterman Model. In certain cases assumptions in expected long-term rates of return are modified marginally by the responsible manager of the WACKER Pensionskasse in order to consider personal experience and different medium-term market expectations respectively. The projected benefit obligations for the pension plan “continuation of payments in case of death” were $125,971 and $126,001 for the years ended December 31, 2011 and 2010, respectively.

The Pensionskasse - New covers all German employees with membership as of January 1, 2005. Contributions and costs are determined as 2.0 percent of each covered employee's salary and totalled $207,603 in 2011, $130,173 in 2010 and $134,346 in 2009.

Components of net periodic benefit costs under the Additional and Deferred Compensation Plans for the years ended December 31, 2011, 2010 and 2009 were as follows (in thousands):

	2011		2010		2009
Service cost	$	757	$	675	$	592
Interest cost		850		727		681
Amortization of actuarial loss		229		164		88
Net periodic benefit cost	$	1,836	$	1,566	$	1,361

The weighted-average assumptions used to determine net periodic benefit cost were as follows:

	2011			2010			2009
Discount rate		5.10	%		5.40	%		6.25	%
Rate of long-term compensation increase		3.00	%		3.00	%		3.00	%

The funded status and components of the change in benefit obligations of the Additional and Deferred Compensation Plans for December 31, 2011 and 2010 were as follows (in thousands):

	2011			2010
Funded status at end of year:
Projected benefit obligation	$	(18,323	)	$	(16,109	)
Assets at fair value		-			-
Funded status	$	(18,323	)	$	(16,109	)
Net amounts recognized in consolidated balance sheet:
Current liabilities	$	(275	)	$	(238	)
Non-current liabilities	$	(18,048	)	$	(15,871	)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	(16,109	)	$	(14,657	)
Foreign currency exchange rate changes		712			944
Service costs		(757	)		(675	)

		2011			2011
Interest costs		(850	)		(727	)
Actuarial gains (losses)		(1,495	)		(1,146	)
Benefits paid		176			152
Projected benefit obligation at end of year	$	(18,323	)	$	(16,109	)

Accumulated benefit obligation	$	(16,656	)	$	(14,576	)

The weighted-average assumptions used to determine pension benefit obligations were as follows:

	2011	2010
Discount rate	4.60%	5.10%
Rate of long-term compensation increase	3.00%	3.00%

Components of the related tax effects for each component of other comprehensive income follows related to the Additional and Deferred Compensation Plans for December 31, 2011 and 2010 are as follows (in thousands):

	2011
	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Accumulated other comprehensive (loss) income at beginning of year	$	(4,938	)	$	1,448		$	(3,490	)
Net actuarial (loss) gain arising during current year		(1,495	)		440			(1,055	)
Amortization of actuarial loss		229			(67	)		162
Foreign currency effect		71			(21	)		50
Accumulated other comprehensive (loss) income at end of year(1)	$	(6,133	)	$	1,800		$	(4,333	)

(1) Approximately $276 of net actuarial loss included in accumulated other comprehensive loss will be amortized into income in 2012.

	2010
	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Accumulated other comprehensive income (loss) at beginning of year	$	(3,956	)	$	1,160		$	(2,796	)
Net actuarial (loss) gain arising during current year		(1,146	)		336			(810	)
Amortization of actuarial loss		163			(48	)		115
Foreign currency effect		1			-			1
Accumulated other comprehensive (loss) income at end of year	$	(4,938	)	$	1,448		$	(3,490	)

The Company expects to contribute to its defined benefit plans in 2012 (in thousands):

Pensionkasse – old	$	1,744
Additional compensation		1,370
Deferred compensation		214
Total contributions expected in 2012	$	3,328

The following estimated future benefit payments are expected to be paid in the years indicated (in thousands):

2012	$	274
2013		303
2014		369
2015		412
2016		459
2017 – 2021		3,667

Assumed discount rates and rates of increase in remuneration used in calculating the projected benefit obligation together with long-term rates of return on plan assets vary according to the economic conditions of Germany in which pension plans are situated. The discount rate is typically changed at least annually. The interest rate used is comparable to long-term corporate bonds with an AA rating.

Ceradyne Boron Products Pension Plans

The Company provides pension benefits to employees in its Ceradyne Boron Products subsidiary. The plans cover employees who meet specified eligibility requirements. The measurement date for the Company's pension plan assets and obligations is December 31.

The Company expects to make a contribution at least as great as the minimum required by the IRS funding rules to the plan during the upcoming year. Funding requirements for subsequent years are uncertain and will significantly depend on the assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Company may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.

Components of the net periodic pension (benefit) for the years ended December 31, 2011, 2010 and 2009 were as follows (in thousands):

	2011			2010			2009
Service costs	$	8		$	63		$	86
Interest costs		478			506			513
Amortization of actuarial loss		116			146			202
Expected return on assets		(556	)		(520	)		(490	)
Net periodic pension (benefit)	$	46		$	195		$	311

The weighted-average assumptions used to determine net periodic benefit costs were as follows:

	2011			2010			2009
Discount rate		5.28	%		5.75	%		5.74	%
Rate of long-term compensation increase		3.00	%		3.00	%		4.00	%
Expected return on plan assets		8.00	%		8.00	%		8.00	%

The funded status and components of the change in benefit obligations and changes in plan assets for the years ended December 31, 2011 and 2010 were as follows (in thousands):

Funded status at end of year:	2011			2010
Projected benefit obligation	$	(10,425	)	$	(9,599	)
Assets at fair value		7,150			7,125
Funded status	$	(3,275	)	$	(2,474	)

Net amount recorded in consolidated balance sheet:
Noncurrent liabilities	$	(3,275	)	$	(2,474	)

Change in projected benefit obligation:
Benefit obligation at beginning of year	$	(9,599	)	$	(9,088	)
Service costs		(8	)		(63	)
Interest costs		(478	)		(506	)
Actuarial losses		(909	)		(521	)
Benefits paid		569			579
Projected benefit obligation at end of year	$	(10,425	)	$	(9,599	)

Fair value of plan assets at beginning of year	$	7,125		$	6,857
Actual return on plan assets		123			749
Employer contributions		471			98
Benefits paid		(569	)		(579	)
Fair value of plan assets at end of year	$	7,150		$	7,125

The fair value of plan assets was determined based on observable inputs (Level 2) using the net asset value of the investment funds. The net asset value represents price per share and is calculated by dividing the total value of all securities in the portfolio, less any liabilities, by the number of fund shares outstanding. Plan assets as of December 31, 2011 and 2010 comprised the following:

	2011			2010
Investment fund – equity securities	$	4,622		$	4,618
Investment fund – fixed income securities		2,528			2,507
Fair value of plan assets at end of year	$	7,150		$	7,125
Accumulated benefit obligation at end of year	$	(10,425	)	$	(9,596	)

The weighted-average assumptions used to determine pension benefit obligation were as follows:

	2011			2010
Discount rate		4.39	%		5.28	%
Rate of long-term compensation increase		3.00	%		3.00	%

Components of the related tax effects for each component of other comprehensive income follows related to the plan for the years ended December 31, 2011 and 2010 are as follows (in thousands):

	2011
	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Accumulated other comprehensive income (loss) at beginning of year	$	(2,217	)	$	864		$	(1,353	)
Net actuarial loss arising during current year		(1,125	)		478			(747	)
Accumulated other comprehensive income (loss) at end of year(1)	$	(3,442	)	$	1,342	)	$	(2,100	)

(1)Approximately $236 of actuarial net loss included in accumulated other comprehensive loss will be amortized into income in 2012.

	2010
	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-Tax Amount
Accumulated other comprehensive income (loss) at beginning of year	$	(2,072	)	$	807		$	(1,265	)
Net actuarial gain arising during current year		(145	)		57			(88	)
Accumulated other comprehensive income (loss) at end of year	$	(2,217	)	$	864	)	$	(1,353	)

The change in unrecognized net gain/loss is one measure of the degree to which important assumptions have coincided with actual experience. The company changes important assumptions whenever changing conditions warrant. The discount rate and the expected long term return on plan asset assumptions are assessed annually. Other material assumptions include the compensation increase rates, rates of employee termination, and rates of participant mortality. The discount rate was determined by projecting the plan's expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation. The expected return on plan assets was determined based on historical and expected future returns of the various asset classes, using the target allocations as follows: equity securities (65%), debt securities (25%) and other (10%). The plan's investment policy includes a mandate to diversify assets and invest in a variety of asset classes to achieve that goal. The plan's assets are currently invested in a variety of funds representing most standard equity and debt security classes. While no significant changes in the asset allocation are expected during the coming year, the Company may make changes at any time.

The following estimated future benefit payments are expected to be paid in the years indicated (in thousands):

2012	$	587
2013		644
2014		627
2015		618
2016		635
2017 – 2021		3,371