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~~September 30, 2012

¨	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 x 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 x

Accelerated filer ¨

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~~November ~~as of July 19~~9, 2012
Common Stock, $0.01 par value		24,~~200~~049,~~145~~437 Shares

Exhibit Index on Page 3236

CERADYNE, INC.

INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Financial Statements		3
	Consolidated Balance Sheets – June 30, 2012 and December 31, 2011		3
	Consolidated Balance Sheets – September 30, 2012 and December 31, 2011		3
	Consolidated Statements of Income – Three and Six Months Ended June 30, 2012 and 2011		4
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2012 and 2011		4
	Consolidated Statements of Comprehensive Income – Six Months Ended June 30, 2012 and 2011		5
	Consolidated Statements of Comprehensive Income – Nine Months Ended September 30, 2012 and 2011		5
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011		6
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011		6
	Notes to Consolidated Financial Statements		7-17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-2930
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		~~30-~~31-32
Item 4.	Controls and Procedures		3132
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		3233
Item 1A.	Risk Factors		3233
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3233
Item 3.	Defaults Upon Senior Securities		3234
Item 4.	Mine Safety Disclosures		3234
Item 5.	Other Information		3234
Item 6.	Exhibits		3234
SIGNATURE			3335

CERADYNE, INC.

FORM 10-Q

FOR THE QUARTER ENDED

~~June~~September 30, 2012

PART I. FINANCIAL INFORMATION

Item 1.

Unaudited Consolidated Financial Statements

CERADYNE, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	3596,~~261~~984		$	50,275
Short-term investments		~~232~~184,~~821~~353			224,772
Accounts receivable, net of allowances for doubtful accounts of $2,789
Accounts receivable, net of allowances for doubtful accounts of $9,946
and $1,547 at June 30, 2012 and December 31, 2011, respectively		73,834			73,646
and $1,547 at September 30, 2012 and December 31, 2011, respectively		54,504			73,646
Other receivables		5,~~084~~955			6,040
Inventories		~~130~~129,~~130~~050			117,273
Production tooling, net		1011,~~833~~380			11,792
Prepaid expenses and other		3533,~~300~~884			43,860
Deferred tax asset		54,~~191~~635			5,782
TOTAL CURRENT ASSETS		~~528~~520,~~454~~745			533,440
PROPERTY, PLANT AND EQUIPMENT, net		~~235~~222,~~525~~473			243,376
LONG TERM INVESTMENTS		21,~~785~~770			15,026
INTANGIBLE ASSETS, net		9897,~~136~~042			100,690
GOODWILL		42,~~720~~853			42,926
OTHER ASSETS		1318,~~520~~231			12,673
TOTAL ASSETS	$	~~940~~923,~~140~~114		$	948,131
CURRENT LIABILITIES
Accounts payable	$	2223,~~999~~202		$	29,191
Accrued expenses		2630,~~340~~954			30,470
Income taxes payable		7,~~082~~917			5,331
Short-term debt		9192,~~241~~259			89,294
TOTAL CURRENT LIABILITIES		~~147~~154,~~662~~332			154,286
EMPLOYEE BENEFITS		24,~~078~~649			24,462
OTHER LONG TERM LIABILITIES		3738,~~569~~695			37,224
DEFERRED TAX LIABILITY		23,~~429~~253			23,461
TOTAL LIABILITIES		~~232~~240,~~738~~929			239,433
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value, 100,000,000 authorized, 24,179,414 and 24,175,051 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		242			242
Common stock, $0.01 par value, 100,000,000 authorized, 24,047,187 and 24,175,051 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		240			242
Additional paid-in capital		~~121~~118,~~263~~282			121,940
Retained earnings		~~586~~560,~~793~~127			583,420
Accumulated other comprehensive income (loss)		~~(896~~3,536	)		3,096
TOTAL SHAREHOLDERS’ EQUITY		~~707~~682,~~402~~185			708,698
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	~~940~~923,~~140~~114		$	948,131

See accompanying condensed notes to Consolidated Financial Statements

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(Unaudited)						(Unaudited)
NET SALES	$	~~130~~106,~~643~~204		$	~~145~~147,~~376~~974		$	~~236~~343,~~952~~156		$	~~295~~443,~~478~~452
COST OF GOODS SOLD		9375,~~941~~777			9294,~~419~~248			~~171~~246,~~106~~883			~~184~~278,~~433~~681
Gross profit		36,702			52,957			65,846			111,045
IMPAIRMENT CHARGES		7,000			-			7,000			-
Gross profit		23,427			53,726			89,273			164,771
OPERATING EXPENSES
Selling, general and administrative		1817,~~839~~864			19,~~456~~251			3654,~~349~~213			3857,~~292~~543
Research and development		4,~~717~~842			32,~~214~~974			813,~~347~~189			69,~~281~~255
Restructuring - plant closure and severance		-289			-			~~673~~962			-
Acquisition related charges		~~231~~2,023			~~838~~702			~~231~~2,254			12,~~422~~124
		23,787			23,508			45,600			45,995
Impairment charges		13,795			-			13,795			-
INCOME FROM OPERATIONS		12,915			29,449			20,246			65,050
		38,813			22,927			84,413			68,922
INCOME (LOSS) FROM OPERATIONS		(15,386	)		30,799			4,860			95,849
OTHER INCOME (EXPENSE):
Interest income		~~1,128~~995			~~877~~1,069			23,~~194~~189			12,~~675~~744
Interest expense		(1,~~825~~795	)		(1,~~669~~721	)		(35,~~568~~363	)		(34,~~117~~838	)
Miscellaneous		(~~791~~1,178	)		~~677~~1,081			(12,~~449~~627	)		~~590~~1,671
		(1,488	)		(115	)		(2,823	)		(852	)
		(1,978	)		429			(4,801	)		(423	)
INCOME BEFORE PROVISION FOR INCOME TAXES		11,427			29,334			17,423			64,198
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(17,364	)		31,228			59			95,426
PROVISION FOR INCOME TAXES		45,~~581~~696			10,~~203~~819			612,~~795~~491			2132,~~472~~291
NET INCOME	$	6,846		$	19,131		$	10,628		$	42,726
NET INCOME (LOSS)	$	(23,060	)	$	20,409		$	(12,432	)	$	63,135
BASIC INCOME PER SHARE	$	0.28		$	0.77		$	0.44		$	1.72
BASIC INCOME (LOSS) PER SHARE	$	(0.96	)	$	0.83		$	(0.51	)	$	2.55
DILUTED INCOME PER SHARE	$	0.28		$	0.76		$	0.44		$	1.70
DILUTED INCOME (LOSS) PER SHARE	$	(0.96	)	$	0.82		$	(0.51	)	$	2.52
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		24,~~204~~105			24,~~898~~556			24,~~207~~173			24,~~869~~764
DILUTED		24,~~307~~105			2524,~~224~~811			24,~~300~~173			25,~~172~~029

See accompanying condensed notes to Consolidated Financial Statements

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(Unaudited)						(Unaudited)
NET INCOME	$	6,846		$	19,131		$	10,628		$	42,726
NET INCOME (LOSS)	$	(23,060	)	$	20,409		$	(12,432	)	$	63,135
FOREIGN CURRENCY TRANSLATION		~~(10~~3,~~850~~539	)		5(14,~~684~~613	)		(51,~~285~~744	)		162,~~620~~006
UNREALIZED GAIN (LOSS) ON INVESTMENTS		~~(376~~892	)		(~~116~~3,186	)		12,~~294~~185			5(3,180	)
COMPREHENSIVE INCOME (LOSS)	$	(418,~~380~~629	)	$	242,~~699~~610		$	6(11,~~637~~991	)	$	5961,~~351~~961

See accompanying condensed notes to Consolidated Financial Statements

CERADYNE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,628		$	42,726
Net income (loss)	$	(12,432	)	$	63,135
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization		1826,~~215~~481			1929,~~678~~438
Amortization of bond premium		~~223~~310			~~661~~827
Non cash interest expense on convertible debt		12,~~952~~968			12,~~795~~742
Deferred income taxes		(~~266~~452	)		~~249~~556
Stock compensation		23,~~266~~226			23,~~026~~150
(Gain) loss on marketable securities		(54	)		103
Loss from equity investments		34			-
(Gain) loss on equipment disposal		(12	)		178
(Gain) loss on marketable securities		(701	)		87
Loss on equipment disposal		511			245
Impairment charges		20,795			-
Change in operating assets and liabilities (net of effect of businesses acquired):
Accounts receivable, net		~~(647~~11,573	)		~~914~~(15,813	)
Other receivables		~~904~~85			15,~~638~~535
Inventories		(1319,~~908~~106	)		(1113,~~287~~329	)
Production tooling, net		~~946~~404			(27,~~866~~064	)
Prepaid expenses and other assets		816,~~494~~964			(94,~~600~~945	)
Accounts payable and accrued expenses		(105,~~386~~611	)		611,~~001~~043
Income taxes payable		12,~~919~~620			3,~~384~~532
Other long term liability		~~373~~1,468			23,~~762~~353
Employee benefits		~~645~~956			~~422~~633
NET CASH PROVIDED BY OPERATING ACTIVITIES		2150,~~292~~093			5883,~~784~~125
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1018,~~524~~197	)		(1723,~~055~~833	)
Purchases of marketable securities		(2946,~~354~~107	)		(6378,~~053~~607	)
Proceeds from sales and maturities of marketable securities		1683,~~499~~757			3547,757
Cash paid for acquisitions		-			(27,673	)
Cash paid for other investments		(~~939~~4,762	)		-
Proceeds from sale of equipment		4269			1,~~442~~440
NET CASH USED IN INVESTING ACTIVITIES:		(24,276	)		(70,582	)
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES:		14,760			(80,916	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock due to exercise of options		317			~~991~~1,033
Excess tax benefit due to exercise of stock options		~~618~~663			12,~~827~~018
Common stock cash dividends paid		(710,~~255~~861	)		-
Shares repurchased		(47,~~027~~760	)		(325,~~889~~775	)
NET CASH USED IN FINANCING ACTIVITIES		(1017,~~347~~641	)		(122,~~071~~724	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(~~1,683~~503	)		3(1,~~896~~380	)
DECREASE IN CASH AND CASH EQUIVALENTS		(15,014	)		(8,973	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		46,709			(21,895	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		50,275			53,436
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3596,~~261~~984		$	4431,~~463~~541

See accompanying condensed notes to Consolidated Financial Statements

CERADYNE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~JUNE~~SEPTEMBER 30, 2012

(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 three and ~~six~~nine month periods ended ~~June~~September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet at December 31, 2011 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, 2011.

Pending Transaction

On September 30, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 3M Company (“3M”) and Cyborg Acquisition Corporation, a wholly owned subsidiary of 3M (“Purchaser”). Subject to the terms and conditions of the Merger Agreement, on October 15, 2012, Purchaser commenced a tender offer to purchase all of the Company’s outstanding shares of common stock, par value $0.01, at a purchase price of $35.00 per share, net to the holder in cash, without interest, less any required withholding taxes.

The consummation of the tender offer is conditioned on the tender of a majority of the outstanding shares of the Company’s common stock on a fully diluted basis, as well as receipt of antitrust clearances, and other conditions that are specified in the Merger Agreement. Following successful completion of the tender offer and, if required, receipt of stockholder approval, the Purchaser will merge with and into the Company (the “Merger”), and the remaining Company stockholders, other than

Purchaser, 3M or the Company or any wholly owned subsidiary of 3M or the Company or any stockholders who have properly exercised appraisal rights under the General Corporation Law of the State of Delaware, will receive the same cash price per share as paid in the tender offer. In connection with the completion of the tender offer and the Merger, all of the Company's outstanding stock options and restricted stock units, whether vested or unvested, will become fully vested and converted into a right to receive a cash payment of $35.00 per share, less any applicable exercise price.

The Merger Agreement contains certain termination rights by the Company and 3M including the Company's acceptance of a superior proposal. In the event that the Merger Agreement is terminated, the Company may, under specified circumstances, be required to pay a termination fee of approximately $17.1 million.

2.	Share-Based Compensation

Share-based compensation expense for the three and ~~six~~nine months ended ~~June~~September 30, 2012 was $1.0 million and $2.3.2 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 $1.12 million and $23.01 million for the three and ~~six~~nine months ended ~~June~~September 30, 2011, 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~~nine month periods ended ~~June~~September 30, 2012 includes compensation expense for share-based payment awards 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~~nine month periods ended ~~June~~September 30, 2012 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~~September 30, 2012. 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 1,003,869 shares under this plan through ~~June~~September 30, 2012. There have been cancellations of ~~135~~138,~~393~~413 shares associated with this plan through ~~June~~September 30, 2012. The options under this plan have a life of ten years.

During the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, 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,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Share-based compensation expense recognized:
General and administrative, options	$	-		$	-		$	-		$	-
General and administrative, restricted stock units		~~1,041~~960			1,~~058~~120			23,~~266~~226			23,~~026~~150
Related deferred income tax benefit		(~~415~~383	)		(~~422~~446	)		(~~904~~1,287	)		(~~807~~1,255	)
Decrease in net income	$	~~626~~577		$	~~636~~674		$	1,~~362~~939		$	1,~~219~~895
Decrease in basic earnings per share	$	0.0302		$	0.03		$	0.0608		$	0.0508
Decrease in diluted earnings per share	$	0.0302		$	0.03		$	0.0608		$	0.0508

7As of September 30, 2012, all stock options were vested, consequently there was no unrecognized compensation cost related to them. The aggregate intrinsic value of stock options exercised was $1.1 million and $4.3 million for the nine months ended September 30, 2012 and 2011, respectively.

As of ~~June~~September 30, 2012, ~~all~~there ~~stock~~was ~~options~~approximately ~~were~~$8.5 ~~vested,~~million ~~consequently~~of ~~there~~total ~~was no~~ unrecognized compensation cost related to ~~them.~~non-vested ~~The~~Units ~~aggregate~~granted ~~intrinsic~~under ~~value~~the of2003 ~~stock~~Stock ~~options~~Incentive ~~exercised was $1~~Plan.1 ~~million~~That ~~and~~cost ~~$4.0~~is ~~million~~expected ~~for~~to ~~the~~be ~~six~~recognized ~~months~~over ~~ended~~a ~~June~~weighted ~~30,~~average ~~2012~~period ~~and~~of ~~2011,~~3.2 ~~respectively~~years.

As of June 30, 2012, there was approximately $9.6 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 3.3 years.

The following is a summary of stock option activity:

	Six Months Ended June 30, 2012
	Nine Months Ended September 30, 2012
	Number of Options			Weighted Average Exercise Price
Outstanding, December 31, 2011		259,150		$	15.80
Options exercised		(57,275	)	$	5.51
Outstanding, June 30, 2012		201,875		$	18.71
Outstanding, September 30, 2012		201,875		$	18.71
Exercisable, June 30, 2012		201,875		$	18.71
Exercisable, September 30, 2012		201,875		$	18.71

The following is a summary of Unit activity:

	Six Months Ended June 30, 2012
	Number of Units			Weighted Average Grant Date Fair Value
Non-vested Units at December 31, 2011		362,727		$	31.43
Granted		134,004		$	29.13
Forfeited		(12,984	)	$	31.97
Vested		(97,883	)	$	33.33
Non-vested Units at June 30, 2012		385,864		$	30.13

The following table summarizes information regarding options outstanding and options exercisable at June 30, 2012:

		Outstanding and Exercisable
Range of Grant Prices		Number of Options		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)
	$2.98 - $4.58		6,075		0.40	$	3.69	$	133
	$16.89 - $18.80		109,450		1.35	$	17.06	$	938
	$21.46 - $22.67		86,350		2.12	$	21.86	$	325
			201,875		1.65	$	18.71	$	1,396

The following ~~table~~is ~~summarizes~~a ~~information~~summary ~~regarding~~of ~~Units~~Unit ~~outstanding at June 30, 2012~~activity:

				Outstanding
		Nine Months Ended September 30, 2012
Range of Grant Prices				Number of Units				Average Remaining Contractual Life (Years)		Weighted Average Grant Date Fair Value
		Number of Units				Weighted Average Grant Date Fair Value
	$16.53 - $28.10				191,569				2.27	$	21.87
Non-vested Units at December 31, 2011			362,727			$	31.43
	$30.99 - $39.43				114,075				3.86	$	33.42
Granted			134,004			$	29.13
	$40.73 - $45.70				79,000				2.72	$	44.66
Forfeited			(16,004	)		$	34.41
	$66.35 - $81.18				1,220				0.10	$	77.26
Vested			(142,157	)		$	31.36
					385,864				2.83	$	30.13
Non-vested Units at September 30, 2012			338,570			$	30.40

The following table summarizes information regarding options outstanding and options exercisable at September 30, 2012:

		Outstanding and Exercisable
Range of Grant Prices		Number of Options		Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value (000s)
	$2.98 - $4.58		6,075		0.15	$	3.69	$	156
	$16.89 - $18.80		109,450		1.09	$	17.06	$	1,339
	$21.46 - $22.67		86,350		1.87	$	21.86	$	642
			201,875		1.40	$	18.71	$	2,137

The following table summarizes information regarding Units outstanding at September 30, 2012:

		Outstanding
Range of Grant Prices		Number of Units		Average Remaining Contractual Life (Years)		Weighted Average Grant Date Fair Value
	$16.53 - $28.10		158,927		2.18	$	22.14
	$30.99 - $39.43		111,542		3.68	$	33.36
	$40.73 - $45.70		68,101		2.80	$	44.86
	$66.35 - $81.18		-		-		-
			338,570		2.80	$	30.40

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~~nine months ended ~~June~~September 30, 2012 and 2011, 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 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Weighted average number of shares outstanding		24,~~204~~105		24,~~898~~556		24,~~207~~173		24,~~869~~764
Dilutive stock options		79-		~~228~~205		85-		~~224~~218
Dilutive restricted stock units		24-		9850		8-		7947
Dilutive contingent convertible debt common shares		-		-		-		-
Number of shares used in fully diluted computations		24,~~307~~105		2524,~~224~~811		24,~~300~~173		25,~~172~~029

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,
	2012		2011		2012		2011
Anti-dilutive restricted stock units		194		107		194		108

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Anti-dilutive restricted stock units		180		171		180		141

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~~September 30, 2012 and December 31, 2011 (in thousands):

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
Raw materials	$	1216,~~829~~193	$	8,533
Work-in-process		7873,~~426~~949		65,645
Finished goods		38,~~875~~908		43,095
	$	~~130~~129,~~130~~050	$	117,273

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

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
Land	$	18,~~314~~528		$	18,550
Buildings and improvements		~~116~~112,~~477~~281			117,961
Machinery and equipment		~~235~~228,~~185~~320			233,702
Leasehold improvements		8,~~685~~632			8,482
Office equipment		4041,~~013~~673			37,906
Construction in progress		1415,~~136~~691			11,961
		432,810			428,562
		425,125			428,562
Less accumulated depreciation and amortization		(~~197~~202,~~285~~652	)		(185,186	)
	$	~~235~~222,~~525~~473		$	243,376

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

	June 30, 2012						December 31, 2011
	September 30, 2012						December 31, 2011
	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Amortizing Intangible Assets
Backlog	$	1,~~797~~805	$	1,~~797~~805	$	-	$	1,808	$	1,808	$	-
Developed technology		70,~~474~~549		8,~~072~~428		62,~~402~~121		70,590		7,233		63,357
Tradename		4,110		~~746~~770		3,~~364~~340		4,110		698		3,412
Customer relationships		47,604		1718,~~688~~434		29,~~916~~170		47,604		16,212		31,392
Non-compete agreement		1,100		~~800~~875		~~300~~225		1,100		775		325
Non-amortizing tradename		2,~~154~~186		-		2,~~154~~186		2,204		-		2,204
Total	$	127,~~239~~354	$	2930,~~103~~312	$	9897,~~136~~042	$	127,416	$	26,726	$	100,690

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): $54,~~689~~018 for the balance of fiscal year 2012, $65,~~014~~637 in fiscal year 2013, $86,~~213~~865 in fiscal year 2014, $109,~~921~~826 in fiscal year 2015 and $13,~~427~~275 in fiscal year 2016.

10The roll forward of the goodwill balance by segment during the nine months ended September 30, 2012 is as follows (in thousands):

The roll forward of the goodwill balance by segment during the six months ended June 30, 2012 is as follows (in thousands):

	ACO			Thermo		ESK			Boron			Total
Balance at December 31, 2011:
Goodwill	$	13,108		$	10,331	$	9,033		$	22,083		$	54,555
Accumulated impairment losses		(7,797	)		-		-			(3,832	)		(11,629	)
		5,311			10,331		9,033			18,251			42,926
Translation and other		-			-		(73	)		-			(73	)
Balance at September 30, 2012:
Goodwill		13,108			10,331		8,960			22,083			54,482
Accumulated impairment losses		(7,797	)		-		-			(3,832	)		(11,629	)
	$	5,311		$	10,331	$	8,960		$	18,251		$	42,853

	ACO			Thermo		ESK			Boron			Total
Balance at December 31, 2011:
Goodwill	$	13,108		$	10,331	$	9,033		$	22,083		$	54,555
Accumulated impairment losses		(7,797	)		-		-			(3,832	)		(11,629	)
		5,311			10,331		9,033			18,251			42,926
Translation and other		-			-		( 206	)		-			(206	)
Balance at June 30, 2012:
Goodwill		13,108			10,331		8,827			22,083			54,349
Accumulated impairment losses		(7,797	)		-		-			(3,832	)		(11,629	)
	$	5,311		$	10,331	$	8,827		$	18,251		$	42,720

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 required for the Thermo reporting unit as of September 30, 2012 as a result of certain triggering events in China as further described in Note 14. Based upon the impairment test, the fair value of the Thermo reporting unit exceeded its carrying value at September 30, 2012, thus there was no goodwill impairment.

5.	Stock Repurchases

During the ~~six~~nine months ended ~~June~~September 30, 2012, the Company repurchased and retired ~~161~~326,~~000~~900 shares of its common stock at an aggregate cost of $47.08 million under a stock repurchase program authorized in 2011 by the Company’s Board of Directors. ~~From the inception of this stock purchase program, the Company has repurchased and retired 161,000 shares of its common stock at an aggregate cost of $4.0 million.~~ The Company is authorized to repurchase an additional $9692.02 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.

For recognition purposes, on a recurring basis, the Company measures available for sale short-term and long-term investments at fair value. Approximately $21.98 million of the unrealized losses in short term investments as of ~~June~~September 30, 2012 have been in a loss position for more than 12 months. The fair value of the following investments is determined using quoted prices in active markets (Level 1):

	Level 1 Investments at June 30, 2012
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	231,959	$	152	$	(3,342	)	$	228,769
Corporate bonds		4,054		-		(2	)		4,052
Total short term investments	$	236,013	$	152	$	(3,344	)	$	232,821
Long term investments:
Corporate bonds	$	6,302	$	8	$	(8	)	$	6,302
	Level 1 Investments at December 31, 2011
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	220,778	$	30	$	(4,881	)	$	215,927
Corporate bonds		8,851		1		(7	)		8,845
Total short term investments	$	229,629	$	31	$	(4,888	)	$	224,772

The fair value of long-term investments in auction rate securities is based on a Level 3 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. The fair values of auction rate securities at June 30, 2012 and December 31, 2011 were $15.5 million and $15.0 million, respectively.

	Level 1 Investments at September 30, 2012
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	181,965	$	78	$	(1,820	)	$	180,223
Investment funds – equity securities		1,138		3		(28	)		1,113
Corporate bonds		3,017		-		-			3,017
Total short term investments	$	186,120	$	81	$	(1,848	)	$	184,353

Long term investments:
Corporate bonds	$	6,253	$	22	$	-		$	6,275

	Level 1 Investments at December 31, 2011
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short term investments:
Investment funds – debt securities	$	220,778	$	30	$	(4,881)		$	215,927
Corporate bonds		8,851		1		(7)			8,845
Total short term investments	$	229,629	$	31	$	(4,888)		$	224,772

~~During~~The ~~the~~fair ~~three~~value ~~months~~of ~~ended~~long-term ~~June~~investments ~~30,~~in ~~2012~~auction ~~and~~rate ~~2011~~securities ~~there~~is ~~were~~based noon ~~charges~~a ~~due~~Level to3 ~~other-than-temporary~~valuation ~~reductions~~technique inthat includes the present value of ~~investments~~future incash ~~auction~~flows ~~rate~~(principal ~~securities.~~and ~~The~~interest ~~Company~~payments), ~~also~~review ~~recognized~~of ~~pre-tax~~the ~~credits~~underlying ~~of $4~~collateral,~~000~~ and ~~$111,000~~considers inrelevant ~~other~~probability ~~comprehensive~~weighted ~~income~~and ~~during~~risk adjusted observable inputs and minimizes the ~~three~~use ~~months~~of ~~ended~~unobservable ~~June~~inputs. ~~30,~~The ~~2012~~fair ~~and~~values ~~2011,~~of ~~respectively,~~auction ~~due~~rate tosecurities ~~temporary~~at ~~increases~~September in30, ~~the~~2012 ~~value~~and ofDecember 31, ~~its~~2011 ~~investments~~were in$15.5 ~~auction~~million ~~rate~~and ~~securities~~$15.0 million, respectively.

During the ~~six~~three months ended ~~June~~September 30, 2012 and 2011, there were no charges due to other-than-temporary reductions in the value of investments in auction rate securities. The Company also recognized a pre-tax credit of $~~457~~12,000 and a pre-tax reduction of $~~53,000~~0.9 million in other comprehensive income during the ~~six~~three months ended ~~June~~September 30, 2012 and 2011, respectively, due to temporary changes in the value of its investments in auction rate securities.

~~Cumulatively~~During tothe ~~date,~~nine ~~the~~months ~~Company~~ended ~~has~~September ~~incurred~~30, ~~$4.7~~2012 ~~million~~and in2011, ~~pre-tax~~there were no charges due to other-than-temporary reductions in the value of ~~its~~ investments in auction rate securities,. ~~realized~~The ~~losses~~Company ofalso ~~$8.8~~recognized ~~million~~a ~~from~~pre-tax ~~sales~~credit of ~~auction~~$0.5 ~~rate~~million ~~securities~~ and pre-tax ~~temporary~~reduction ~~impairment charges~~ of $20.6 8 million ~~reflected~~ in other comprehensive income. Asduring ofthe ~~June~~nine months ended September 30, 2012, ~~the~~and ~~fair~~2011, ~~value~~respectively, ofdue ~~the~~to ~~Company’s~~temporary ~~investments~~changes in ~~auction~~the ~~rate securities was below cost by approximately $7.3 million. The fair~~ value of ~~the~~its investments in auction rate securities ~~has been below cost for more than one year~~.

~~For~~Cumulatively ~~disclosure~~to ~~purposes~~date, the Company ishas ~~required~~incurred $4.7 million in pre-tax charges due to ~~measure~~other-than-temporary ~~the~~reductions ~~fair~~in the value of ~~outstanding~~its ~~debt~~investments onin aauction ~~recurring~~rate ~~basis~~securities, realized losses of $8.8 ~~The~~million ~~fair~~from ~~value~~sales of ~~outstanding~~auction ~~debt~~rate issecurities ~~determined~~and ~~using~~pre-tax ~~quoted~~temporary ~~prices~~impairment charges of $2.6 million reflected in ~~active~~other ~~markets~~comprehensive income. ~~The~~As of September 30, 2012, the fair value of ~~short-term~~the ~~debt,~~Company’s ~~based~~investments onin ~~quoted~~auction ~~market~~rate ~~prices,~~securities was below cost by approximately $937.5 3 million. atThe ~~both~~fair ~~June~~value ~~30,~~of ~~2012~~the ~~and~~auction ~~December 31,~~rate ~~2011~~securities has been below cost for more than one year.

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 short-term debt, based on quoted market prices, was $93.1 million at September 30, 2012 and $93.5 million at December 31, 2011.

7.	Recent Accounting Pronouncements

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 International Financial Reporting Standards (“IFRS”). This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The Company adopted this standard in the first quarter of 2012 which did 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. The Company adopted this standard in the first quarter of 2012 which changed the presentation of its consolidated financial statements with the inclusion of a new separate statement labeled “Consolidated Statements of Comprehensive Income”.

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~~September 30, 2012 and December 31, 2011, short-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, 2012				December 31, 2011
		September 30, 2012				December 31, 2011
Outstanding debt
Principal amount	$	~~93,100~~$	93,100		$	~~93,100~~$	93,100
Unamortized discount		~~(1,859~~	)(841	)		~~(3,806~~	)(3,806	)
Net carrying amount		~~91,241~~	92,259			~~89,294~~	89,294
Current portion of outstanding debt		~~91,241~~	92,259			~~89,294~~	89,294
Noncurrent portion of outstanding debt	$	-$	-		$	-$	-
Equity component, net of income tax benefit	$	~~16,399~~$	16,399		$	~~16,399~~$	16,399

The discount on the liability component of short-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, excluding capitalized interest, for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 included the following (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Contractual interest coupon	$	~~665~~673	$	~~669~~673	$	12,~~331~~004	$	12,~~330~~003
Non-cash amortization of discount on the liability component		~~977~~1,018		~~905~~947		12,~~952~~966		12,~~795~~742
Non-cash amortization of debt issuance costs		98100		9496		~~195~~296		~~187~~283
	$	1,~~740~~791	$	1,~~668~~716	$	35,~~478~~266	$	35,~~312~~028

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, if any, up to but excluding the repurchase date.

In December 2005, the Company established an unsecured $10.0 million line of credit (“2005 LOC”) which was closed in April 2012. In June 2011, the Company established an unsecured $5.0 million line of credit (“2011 LOC”) that was increased to $7.0 million on December 19, 2011 and will mature on April 1, 2013. The Company expects to renew the 2011 LOC at that time for multiple years. As of ~~June~~September 30, 2012, there were no outstanding amounts on the 2011 LOC. However, the available line of credit at ~~June~~September 30, 2012 has been reduced by outstanding letters of credit in the aggregate amount of $56.74 million. The interest rate on the 2011 LOC was 1.2% as of ~~June~~September 30, 2012 which was based on the LIBOR rate for a period of one month, plus a margin of 1.0% percent.

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, 2012.

9.	Disclosure About Segments of an Enterprise and Related Information

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,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Revenue from External Customers

Advanced Ceramic Operations

7053,~~395~~366

6674,~~637~~041

~~119~~172,~~100~~466

~~143~~217,~~267~~308

ESK Ceramics

3733,~~524~~187

4539,~~880~~904

79113,~~932~~119

86125,~~003~~907

Thermo Materials

15,~~290~~443

2924,~~295~~229

3045,~~156~~599

6084,~~406~~635

Boron

138,~~820~~354

1113,~~420~~356

2129,~~023~~377

1932,~~360~~716

Inter-segment elimination

(64,~~386~~146

)

(73,~~856~~556

)

(1317,~~259~~405

)

(1317,~~558~~114

)

Total

~~130~~106,~~643~~204

~~145~~147,~~376~~974

~~236~~343,~~952~~156

~~295~~443,~~478~~452

Depreciation and Amortization

Advanced Ceramic Operations

2,~~358~~329

2,~~514~~364

46,~~651~~976

57,~~385~~749

ESK Ceramics

2,~~925~~553

3,~~276~~249

58,~~900~~438

69,~~415~~665

Thermo Materials

1,~~934~~848

2,~~094~~078

35,~~954~~623

35,~~778~~853

Boron

1,~~855~~734

2,~~047~~071

35,~~710~~444

46,~~100~~171

Total

98,~~072~~464

9,~~931~~762

1826,~~215~~481

1929,~~678~~438

Segment Income (Loss) from Operations and Income Before Provision for Income Taxes

Advanced Ceramic Operations

~~9,749~~487

14,~~041~~622

13,~~144~~631

3145,~~055~~677

ESK Ceramics

4,~~066~~020

96,~~201~~973

1115,~~243~~263

1723,~~006~~979

Thermo Materials

(221,~~474~~982

)

65,~~066~~966

(426,~~257~~239

)

1622,~~920~~886

Boron

1,~~930~~699

~~726~~2,106

12,~~054~~753

~~726~~2,832

Inter-segment elimination

~~(356~~390

)

~~(585~~1,132

)

(~~938~~548

)

~~(657~~475

)

Income from Operations

12(15,~~915~~386

)

2930,~~449~~799

204,~~246~~860

6595,~~050~~849

Other Income (Expense)

(1,~~488~~978

)

~~(115~~429

)

(24,~~823~~801

)

(~~852~~423

)

Income before Provision for Income Taxes

11(17,~~427~~364

)

2931,~~334~~228

~~17,423~~59

6495,~~198~~426

Segment Assets

Advanced Ceramic Operations

~~486~~492,~~404~~006

~~468~~462,~~385~~544

~~486~~492,~~404~~006

~~468~~462,~~385~~544

ESK Ceramics

~~162~~165,~~998~~227

~~190~~178,~~440~~058

~~162~~165,~~998~~227

~~190~~178,~~440~~058

Thermo Materials

~~164~~140,~~637~~690

~~169~~173,~~420~~245

~~164~~140,~~637~~690

~~169~~173,~~420~~245

Boron

~~126~~125,~~101~~191

127,~~670~~651

~~126~~125,~~101~~191

127,~~670~~651

Total

~~940~~923,~~140~~114

~~955~~941,~~915~~498

~~940~~923,~~140~~114

~~955~~941,~~915~~498

Expenditures for Property, Plant & Equipment

Advanced Ceramic Operations

~~911~~1,964

21,~~076~~495

24,~~724~~968

34,~~475~~971

ESK Ceramics

13,~~501~~239

1,~~322~~722

36,~~675~~943

13,~~984~~704

Thermo Materials

~~351~~439

41,~~672~~687

~~911~~1,298

911,~~622~~353

Boron

1,~~855~~774

1,~~324~~831

34,~~214~~988

13,~~974~~805

Total

47,~~618~~416

96,~~394~~735

1018,~~524~~197

1723,~~055~~833

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Percentage of U.S. net sales from external customers
Advanced Ceramic Operations		4845	%		3944	%		4445	%		4241	%
ESK Ceramics		45	%		34	%		4	%		36	%
Thermo Materials		710	%		61	%		89	%		64	%
Boron		56	%		45	%		5	%		4	%
Total percentage of U.S. net sales from external customers		6466	%		5254	%		6163	%		55	%
Percentage of foreign net sales from external customers
Advanced Ceramic Operations		64	%		57	%		6	%		56	%
ESK Ceramics		2023	%		2422	%		24	%		22	%
Thermo Materials		45	%		1514	%		54	%		15	%
Boron		62	%		43	%		43	%		32	%
Total percentage of foreign net sales from external customers		3634	%		4846	%		3937	%		45	%
Percentage of total net sales from external customers
Advanced Ceramic Operations		5449	%		4451	%		5051	%		47	%
ESK Ceramics		2428	%		2726	%		28	%		2528	%
Thermo Materials		1115	%		2115	%		13	%		2119	%
Boron		118	%		8	%		98	%		76	%
Total percentage of total net sales from external customers		100	%		100	%		100	%		100	%

Foreign sales are determined by the country to which the shipment is delivered.

The following is revenue by market application for the Advanced Ceramic Operations segment (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Defense

4937,~~289~~176

4952,~~949~~917

78115,~~675~~851

~~106~~159,~~376~~293

Industrial

109,~~421~~932

79,~~623~~943

1929,~~694~~626

1424,~~827~~770

Energy

41,~~473~~519

46,~~702~~644

810,~~793~~312

1319,~~125~~769

Automotive/Diesel

1,~~896~~362

2,~~647~~563

35,~~724~~086

57,~~149~~712

Commercial

43,~~316~~377

1,~~716~~974

811,~~214~~591

35,~~790~~764

7053,~~395~~366

6674,~~637~~041

~~119~~172,~~100~~466

~~143~~217,~~267~~308

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,
	2012			2011			2012			2011
Service cost	$	188		$	201		$	381		$	393
Interest cost		317			343			639			675
Expected return on plan assets		(144	)		(139	)		(288	)		(278	)
Amortization of unrecognized (gain) loss		2			(12	)		2			(22	)
Net periodic benefit cost	$	363		$	393		$	734		$	768

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Service cost	$	184		$	198		$	565		$	591
Interest cost		312			339			951			1,014
Expected return on plan assets		(144	)		(139	)		(432	)		(417	)
Amortization of unrecognized (gain) loss		3			(11	)		5			(33	)
Net periodic benefit cost	$	355		$	387		$	1,089		$	1,155

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 55.0 million Euros at ~~June~~September 30, 2012.

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~~September 30, 2012 and December 31, 2011 are as follows (in thousands):

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
Federal, state and foreign unrecognized tax benefits (“UTBs”)	$	1,~~897~~813		$	1,791
Interest		~~130~~155			80
Federal/State Benefit of Interest		(5161	)		(31	)
Total reserve for UTBs	$	1,~~976~~907		$	1,840

It is anticipated that any change in the above UTBs will impact the effective tax rate. At ~~June~~September 30, 2012, the 2007 through 2011 years are open and subject to potential examination in one or more local jurisdictions and 2009 through 2011 years are open for federal income tax purposes. 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 a 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. This manufacturing facility in China incurred a pre-tax loss for the three and ~~six~~nine months ended ~~June~~September 30, 2012, accordingly, there was no benefit from the tax holiday for this period. Income tax expense for the three and ~~six~~nine months ended ~~June~~September 30, 2011 was reduced by $0.4 million and $1.37 million, respectively, from the tax holiday in China.

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.

A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The factors used to assess the likelihood of realization of the deferred tax assets are the reversal of deferred tax liabilities, the Company’s forecast of future taxable income, and available tax planning strategies that are prudent and feasible. The Company evaluated positive and negative evidence and, although realization is not assured, management determined that it is more likely than not that the net deferred tax asset will be realized through future taxable income and tax planning strategies. Failure to achieve the forecasted taxable income and successful implementation of tax planning strategies in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

Based on the analysis as of September 30, 2012, and the weight of the evidence available, management determined that one of the manufacturing facilities in China will not generate sufficient taxable income in the foreseeable future to fully realize the deferred tax assets. Accordingly, management concluded that it is more likely than not that the Company will not be able to fully realize the benefit of these deferred tax assets and thus, a valuation allowance for $8.3 million was recorded during the third quarter of 2012. This amount includes a valuation allowance of $5.8 million that was attributable to the impairment and restructuring charges described in Note 14 below.

The Company concluded that it is more likely than not that the remaining net deferred tax assets will be realized through future taxable income and tax planning strategies based on evaluation positive and negative evidence. Management will reassess the realizability of the deferred tax assets during the fourth quarter of the year. Failure to achieve the forecasted taxable income and successful implementation of tax planning strategies in the applicable taxing jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

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 $23.20 million and $12.8 million for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, respectively. The approximate minimum rental commitments required under existing noncancelable leases as of ~~June~~September 30, 2012 are as follows (in thousands):

2012	$	21,~~148~~021
2013		23,~~942~~490
2014		~~949~~1,404
2015		~~198~~651
2016		18-
Thereafter		5-
	$	6,~~260~~566

14.	China Impairment and Restructuring Charges

Due to the continuing decrease in demand in the solar energy market due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels, during the third quarter of 2012, the Company made a strategic decision to reduce its solar manufacturing capacity by closing one of its plants. The Company initiated a restructuring plan to consolidate its solar crucible manufacturing operations in China and to reduce its workforce. In connection with the consolidation of its manufacturing operations in China, the Company recognized non-cash impairment charges totaling $20.8 million which comprised an impairment charge of $6.4 million for long-lived assets and an increase of $7.4 million in the allowance for bad debt. The Company also recognized a charge of $7.0 million for inventory for pricing pressures and to reflect the lower of cost or market. This write-down of the inventory was included in cost of goods sold. The consolidation plan also includes the future sale of a manufacturing facility with a net carrying value of $6.8 million, which approximates the expected sales price, less disposal costs, in Tianjin which has been reclassified to other current assets. The Company also incurred severance costs of $0.3 million for the reduction in workforce.

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 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 year ended December 31, 2011, 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;

•

bio-glass compounds as a key ingredient in tooth paste to rejuvenate the growth of enamel;

•

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 and pharmaceuticals;

•

PetroCeram® ceramic sand screens for oil and gas recovery and exploration; 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.

On September 30, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 3M Company (“3M”) and Cyborg Acquisition Corporation, a wholly owned subsidiary of 3M (“Purchaser”). Subject to the terms and conditions of the Merger Agreement, on October 15, 2012, Purchaser commenced a tender offer to purchase all of our outstanding shares of common stock, par value $0.01, at a purchase price of $35.00 per share, net to the holder in cash, without interest, less any required withholding taxes.

The consummation of the tender offer is conditioned on the tender of a majority of the outstanding shares of our common stock on a fully diluted basis, as well as receipt of antitrust clearances, and other conditions that are specified in the Merger Agreement. Following successful completion of the tender offer and, if required, receipt of stockholder approval, the Purchaser will merge with and into the Company (the “Merger”), and the remaining Company stockholders, other than Purchaser, 3M or the Company or any wholly owned subsidiary of 3M or the Company or any stockholders who have properly exercised appraisal rights under the General Corporation Law of the State of Delaware, will receive the same cash price per share as paid in the tender offer. In connection with the completion of the tender offer and the Merger, all of our outstanding stock options and restricted stock units, whether vested or unvested, will become fully vested and converted into a right to receive a cash payment of $35.00 per share, less any applicable exercise price.

The Merger Agreement contains certain termination rights by us and 3M including our acceptance of a superior proposal. In the event that the Merger Agreement is terminated, we may, under specified circumstances, be required to pay a termination fee of approximately $17.1 million.

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,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Advanced Ceramic Operations	$	7053.4		$	6674.60			5(27.69	%)	$	~~119~~172.15		$	~~143~~217.34			(1620.96	%)
ESK Ceramics		3733.52			4539.9			(1816.28	%)		79113.91			86125.09			(710.12	%)
Thermo Materials		15.34			2924.32			(4736.83	%)		3045.26			6084.46			(5046.1	%)
Boron		~~13.~~8.3			1113.4			21(37.05	%)		2129.04			1932.47			8(10.62	%)
Inter-segment elimination		(6.4.1	)		(73.85	)		~~(18~~16.76	%)		(1317.24	)		(1317.61	)		(21.27	%)
Total	$	~~130~~106.62		$	~~145~~148.40			(1028.12	%)	$	~~237~~343.02		$	~~295~~443.5			(1922.86	%)

Segment operating income (loss) (in millions):

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Advanced Ceramic Operations	$	90.75		$	14.06			(3096.67	%)	$	13.16		$	3145.17			(5770.72	%)
ESK Ceramics		4.10			97.20			(5542.83	%)		1115.3			1724.0			(3336.93	%)
Thermo Materials		(222.40	)		6.10			n/m	*		(426.3	)		1622.9			n/m
Boron		1.97			02.71			~~165~~(19.83	%)		12.18			02.78			~~45.~~(2.8	%)
Inter-segment elimination		(0.4	)		(01.61	)		3965.15	%		(1.0.5	)		(0.74	)		42215.84	%
Total	$	12(15.94	)	$	2930.48			~~(56.1~~n/m	%)	$	20(4.29	)	$	6595.08			~~(68.9~~n/m	%)

* 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,
	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		Change			2012		2011		Change
Defense	$	5543.62	$	5559.91		(026.58	%)	$	92135.24	$	~~120~~179.69		(2324.67	%)
Industrial		4039.81		42.85		(47.8	%)		81120.01		82126.38		(15.63	%)
Energy		2111.09		3433.02		(3864.32	%)		3547.87		6798.2		(4651.64	%)
Automotive/Diesel		87.09		10.32		(2123.3	%)		1725.98		2030.02		(1014.37	%)
Commercial		54.21		23.40		~~115~~37.83	%		1014.12		58.4		8568.97	%
Total	$	~~130~~106.62	$	~~145~~148.40		(1028.12	%)	$	~~237~~343.02	$	~~295~~443.5		(1922.86	%)

Percentage Contribution:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Defense		4240.68	%		3840.50	%		3839.95	%		40.95	%
Industrial		3136.28			2928.47			3435.10			2728.86
Energy		1611.02			2322.34			1513.19			22.72
Automotive/Diesel		67.24			76.19			7.65			6.8
Commercial		43.08			12.70			4.31			1.89
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. In 2011, our sales increased due to higher shipments of body armor due to the increased demand for ESAPI body armor, an increase of sales to the nuclear industry, and continuing growth of sales at our ESK Ceramics subsidiary.

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 in January 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 2011 (in millions).

	2011			2010			2009			2008			2007			2006			2005			2004			2003		2002
Sales from body armor	$	193.8		$	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		129.0			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 acquired companies		(66.2	)		(28.5	)		(24.5	)		(11.4	)		(4.5	)		(3.2	)		(3.2	)		(0.7	)		-		-

Sales from energy products due to organic growth		62.8			71.4			37.7			46.3			16.4			8.7			6.6			4.6			2.5		1.7
Sales from acquired companies		254.5			191.1			136.8			177.1			142.6			110.2			109.8			36.0			-		-
All other sales		60.9			70.0			56.1			71.8			62.5			64.6			52.4			54.7			40.8		33.3
Total sales	$	572.0		$	402.9		$	400.6		$	680.2		$	756.8		$	662.9		$	368.3		$	215.6		$	101.5	$	61.2

Sales decreased by $58.5 million during the first half of 2012 compared to the same period last year as shipments of body armor and ceramic crucibles were lower by $27.5 million and $35.5 million, respectively. Partially offsetting this were increased sales of nuclear products, ceramic missile radomes, and non-ECH Helmets.

Sales in the second quarter of 2012 rebounded compared to sales in the first quarter of 2012 due to increased shipments of body armor as we incurred fewer delays in testing by the U. S. government and because sales to the nuclear industry increased. Shipments of ceramic crucibles to the solar industry continued to be very weak and declined during the second quarter 2012 when compared to the first and second quarters of last year. Shipments of ceramic crucibles to the solar industry were approximately unchanged during the second quarter of 2012 compared to the first quarter of 2012. We continued to incur operating losses from our crucible product line during the second quarter 2012 as we did in the first quarter. Our ESK Ceramics subsidiary recorded lower sales in the second quarter of 2012 compared to the first quarter 2012 and the same quarter last year due to weakness in the European economy especially in the industrial and automotive segments of the economy. Offsetting the decline of ESK’s sales to the industrial sector of the economy were increases in shipments of industrial products in the United States.

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, 2012, we have received delivery orders under the October 2008 ID/IQ contract totaling $278.8 million. Of this amount, we have shipped $278.4 million of body armor through June 30, 2012 and we expect to ship the balance of approximately $0.4 million in 2012. With less than two years remaining under this ID/IQ contract, the war in Iraq concluded, and the war in 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.

In September 2011, we were awarded a three-year ID/IQ contract for ESAPI ceramic armor plates from Defense Logistics Agency Troop Support group. This purchasing group services the United States Army, Navy, Air Force and Marine Corps. This award was in response to our 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. Simultaneously with the receipt of this award, we received an initial delivery order for $127.3 million for ESAPI ceramic body armor plates. Of this amount, we have shipped $46.5 million of body armor through June 30, 2012 and we expect to ship the balance of approximately $80.8 million by March 31, 2013. This ID/IQ contract includes options for additional deliveries of up to $127.3 million in each of the second and third years. Recent comments from the contracting officer of the U.S. Military indicate that the 2013 ESAPI order will be approximately $90.0 million, but this is a preliminary estimate with no guarantee.

InSales ~~October~~decreased ~~2011,~~by ~~we announced the receipt of a delivery order for approximately~~ $6100.93 million ~~for~~during ~~ceramic body armor plates from~~ the ~~United~~nine ~~States~~month ~~Special~~period ~~Operations~~ended ~~Command~~September ~~(“SOCOM”).~~30, ~~In March~~ 2012, wecompared ~~received~~to athe ~~stop~~same ~~work~~period ~~notice~~last onyear ~~this~~as ~~order~~shipments ~~and~~of ~~other orders from SOCOM because the ceramic~~ body armor ~~plates~~and ~~failed~~ceramic ~~government~~crucibles ~~testing.~~were Onlower ~~June~~by ~~1, 2012 we received an extension of this stop work notice~~$43.9 Wemillion ~~recommended solutions to SOCOM~~ and on$46.7 ~~July 20~~million, ~~2012, SOCOM issued a show cause notice questioning our proposed solutions~~respectively. ~~SOCOM~~Partially isoffsetting ~~providing~~this uswere anincreased ~~opportunity~~sales toof ~~present~~nuclear ~~an acceptable corrective action plan within 30 days. We are working on a response that addresses SOCOM’s concern. This situation will cause a further delay in shipping these orders~~products, ~~which~~ceramic ~~total~~missile ~~$17.0 million. However~~radomes, wenon-ECH ~~believe~~Helmets ~~that we will be able to resolve this matter~~ and ~~resume~~specialty ~~shipments~~glass ofor ~~these~~bio-glass ~~orders during the fourth quarter of 2012~~products.

Sales in the third quarter of 2012 decreased $41.8 million compared to sales in the same quarter of 2011 due to decreased shipments of body armor as demand for ESAPI plates was lower, continued very weak shipments of ceramic crucibles and solar paste to the solar industry. We continued to incur approximately the same amount of operating losses from our crucible product line during the third quarter 2012 as we did in the first two quarters of 2012. Our ESK Ceramics subsidiary recorded lower sales in the third quarter of 2012 compared to the same quarter last year due to weakness in the European economy especially in the industrial and automotive segments of the economy.

Through September 30, 2012, we have received delivery orders under the October 2008 ID/IQ contract totaling $278.8 million. We have completed the shipmentsof these delivery orders. With less than two years remaining under this ID/IQ contract, the war in Iraq concluded, and the war in 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.

In September 2011, we were awarded a three-year ID/IQ contract for ESAPI ceramic armor plates from Defense Logistics Agency Troop Support group. This purchasing group services the United States Army, Navy, Air Force and Marine Corps. This award was in response to our 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. Simultaneously with the receipt of this award, we received an initial delivery order for $127.1 million for ESAPI ceramic body armor plates and two additional delivery orders of $15.4 million for a total of $142.5 million. Of this amount, we have shipped $84.7 million of body armor through September 30, 2012 and we expect to ship the balance of $57.9 million by April 30, 2013. This ID/IQ contract includes options for additional deliveries of up to $127.3 million in each of the second and third years. We estimate that we will receive $71.1 million in ESAPI delivery orders for all of 2013.

In October 2011, we announced the receipt of a delivery order for approximately $6.9 million for ceramic body armor plates from the United States Special Operations Command (“SOCOM”). In March 2012, we received a stop work notice on this order and other orders from SOCOM because the ceramic body armor plates failed government testing. On June 1, 2012, we received an extension of this stop work notice. We recommended solutions to SOCOM and on July 20, 2012, SOCOM issued a show cause notice questioning our proposed solutions. SOCOM provided us an opportunity to present an acceptable corrective action plan (“CAP") by August 20, 2012. Ceradyne provided a CAP for line items SPEAR BALCS GEN III and for TSA Swimmer GEN III on August 17, 2012 and was notified on October 30, 2012 that SOCOM would accept the recommendations for the SPEAR line item but determined not to accept the CAP for the TSA line item. Ceradyne will incorporate the CAP for the SPEAR line item in November and submit the new design for First Article Testing in the first quarter of 2013.

For 2012 and for the next several years, we expect that our sales of body armor will continue in a range of approximately $50.0 to $150.0 million per year. We will 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.

In June 2009, we acquired substantially all of the business, assets, technology and intellectual property related to ballistic combat and non-combat helmets of Diaphorm Technologies, LLC, based in Salem, New Hampshire. Based on this technology, we submitted a proposal to the U.S. Marine Corps Systems Command in June 2009 in response to a solicitation for the procurement of Enhanced Combat Helmets (ECH), which are intended to provide substantially increased levels of protection compared to combat helmets now in use. In response to our proposal, the U.S. Marine Corps Systems Command in July 2009 awarded us a contract for up to a maximum of 246,840 helmets. After an extended period of First Article Testing, our helmets have been approved by the U.S. Government. In March 2012, we received the first of two low rate initial production ECH Helmet orders. The initial release has a value of approximately $3.0 million. The second low rate initial production order was received in May 2012 with a value of approximately $3.9 million. The full multi-year production order ishas ~~expected~~been bydelayed ~~the~~pending ~~end~~resolution of ~~the~~technical ~~third~~issues ~~quarter~~related ofto ~~calendar~~production ~~year~~and ~~2012~~testing. If ~~The~~these issues are successfully resolved,the total ~~for~~of the initial orders plus full production isorders ~~expected~~could to exceed $170.0 million. Our strategy regarding this acquisition is to combine our successful track record in body armor programs with the proprietary helmet-forming technologies acquired from Diaphorm to create a world class manufacturer of Enhanced Combat Helmets.

New orders for the three and six months ended June 30, 2012 were $79.4 million and $160.2 million, respectively, compared to $108.8 million and $340.5 million, respectively, for the same periods last year. There were no new orders for ceramic body armor for the six months ended June 30, 2012 , compared to $15.0 million and $108.1 million, for the three and six months ended June 30, 2011, respectively.

Our order backlog was $208.8 million as of June 30, 2012 and $230.8 million as of June 30, 2011. The backlog for ceramic body armor represented approximately $93.7 million, or 44.9%, of the total backlog as of June 30, 2012 and $84.2 million, or 36.5%, of the total backlog as of June 30, 2011. We expect that substantially all of our order backlog as of June 30, 2012 will be shipped during the next 12 months.

For the next several quarters, demand for ceramic body armor is likely to be the most significant factor affecting our sales. We expect sales of body armor will be lower in 2012 than in 2011.

~~Results~~New oforders ~~Operations~~for the three and nine months ended September 30, 2012 were $76.1 million and $236.2 million, respectively, compared to $272.0 million and $612.5 million, respectively, for the ~~Three~~same periods last year. Orders for ceramic body armor for the three and ~~Six~~nine ~~Months~~months ~~Ended~~ended ~~June~~September 30, 2012 were $15.8 million and $15.5 million compared to $174.7 million and $282.8 million, for the three and nine months ended September 30, 2011, respectively.

Our order backlog was $179.0 million as of September 30, 2012 and $354.9 million as of September 30, 2011. The backlog for ceramic body armor represented approximately $75.7 million, or 42.3%, of the total backlog as of September 30, 2012 and $208.7 million, or 58.8%, of the total backlog as of September 30, 2011. We expect that substantially all of our order backlog as of September 30, 2012 will be shipped during the next 12 months.

For the next several quarters, demand for ceramic body armor is likely to be the most significant factor affecting our sales. We expect sales of body armor will be lower in 2012 than in 2011.

Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Net Sales

Our total net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Sales	$	~~130~~106.62		$	~~145~~148.40		$	~~237~~343.02		$	~~295~~443.5
Increase (decrease) in net sales	$	(1441.8	)	$	4556.02		$	(58100.53	)	$	85141.03
Percentage change in net sales		(1028.12	%)		4461.83	%		(1922.86	%)		4046.47	%

Sales declined in the ~~six~~nine month period ended ~~June~~September 30, 2012 as shipments of ceramic body armor, and ceramic crucibles and solar paste to the solar industry were lower by $2743.59 million and $3555.3 million, respectively, when compared to the same period last year. ~~Shipments~~We ofcontinued ~~energy products~~ to ~~the~~experience ~~solar~~lower ~~industry~~sales ~~continued~~in toour beESK ~~weak~~Ceramics ~~and~~subsidiary ~~declined~~ during the ~~first~~nine ~~half~~month ofperiod ~~2012~~ended ~~when~~September 30, 2012 compared to the same period last year due to continued weakness in the European economy especially in the industrial and automotive segments of the economy.

Sales declined infor the ~~second~~three ~~quarter~~months ofended September 30, 2012 compared to the same period last year, primarily from decreases in shipments of body armor of $16.5 million, lower shipments of ceramic crucibles and solar paste to the solar industry of $1516.92 million, lower shipments of metal matrix composite products to the nuclear industry by our Ceradyne Canada business unit of $4.7 million and lower shipments of $86.47 million by our ESK Ceramics subsidiary, reflecting softness in the European economy. Offsetting these declines, were increased shipments to the ~~nuclear~~semiconductor industry by our Boron segment of $51.23 million, increased shipments of non-ECH Helmets of $21.8 million and ceramic missile radomes of $1.9 million, and increased shipments of $1.13 million of our bio-glass product for use as an ingredient in tooth paste. ~~Net sales for the three months ended June 30, 2012 of body armor products were $47.2 million, nearly unchanged from the $48.1 million in the prior year.~~

Sales for the three months ended ~~June~~September 30, 2012 of energy products amounted to $2111.09 million, a decrease of $1321.03 million, or 3864.32%, from $3433.02 million in the prior year as sales of ceramic crucibles to the solar industry continued their decline due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels.

Sales of industrial products for the three months ended ~~June~~September 30, 2012 decreased $23.03 million compared to the prior year due to weakness in the European economy.

Sales of automotive/diesel products for the three months ended ~~June~~September 30, 2012 decreased $2.34 million compared to the same period last year due to lower sales to our European customers.

Our net sales of commercial products for the three months ended June 30, 2012 were $5.2 million, an increase of $2.8 million, or 115.8%, from $2.4 million in the prior year. This increase was caused by increased demand for our bio-glass product for use as an ingredient in tooth paste and increased sales of our orthodontic brackets.

Advanced Ceramic Operations Segment

Our Advanced Ceramic Operations segment had net sales for the three and six months ended June 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net Sales	$	70.4		$	66.6		$	119.1		$	143.3
Increase (decrease) in net sales	$	3.8		$	25.2		$	(24.2	)	$	47.8
Percentage change in net sales		5.6	%		61.1	%		(16.9	%)		50.1	%

Contributing to the increase of $3.8 million in sales during the three months ended June 30, 2012 were higher shipments of non-ECH helmets of $2.8 million, microwave cathodes of $0.5 million and increased sales of $1.1 million of bio-glass products. For the six months ended June 30, 2012, shipments of ceramic body armor amounted to $74.6 million, a decrease of $27.5 million, or 26.9%, from $102.1 million in the same period last year. The primary reasons for the decrease in shipments of ceramic body armor were a decrease in demand for ESAPI body armor plates.

Our net sales of commercial products for the three months ended September 30, 2012 were $4.1 million, an increase of $1.0 million, or 37.3%, from $3.1 million in the prior year. This increase was caused by increased demand for our bio-glass product for use as an ingredient in tooth paste and increased sales of our orthodontic brackets.

Advanced Ceramic Operations Segment

Our Advanced Ceramic Operations segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Sales	$	53.4		$	74.0		$	172.5		$	217.3
Increase (decrease) in net sales	$	(20.6	)	$	45.7		$	(44.8	)	$	93.6
Percentage change in net sales		(27.9	%)		161.8	%		(20.6	%)		75.6	%

Contributing to the decrease of $20.6 million in sales during the three months ended September 30, 2012 were lower shipments of body armor and solar paste of $16.5 million and $4.9 million, respectively. For the nine months ended September 30, 2012, shipments of ceramic body armor amounted to $108.3 million, a decrease of $43.9 million, or 28.8%, from $152.2 million in the same period last year. The primary reasons for the decrease in shipments of ceramic body armor were a decrease in demand for ESAPI body armor plates.

ESK Ceramics Segment

Our ESK Ceramics segment had net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Sales	$	3733.52		$	4539.9		$	79113.91		$	86125.09
Increase (decrease) in net sales	$	(86.47	)	$	147.98		$	(612.18	)	$	2331.31
Percentage change in net sales		(1816.28	%)		4824.2	%		(710.12	%)		3732.18	%

On a constant currency basis, sales for the three months ended ~~June~~September 30, 2012 were $4036.7 5 million, a decrease of $53.24 million, or 118.26%, from the corresponding quarter of the prior year. The major factor causing the decrease in sales was weakness in the European economy which impacted all product lines except ~~boron~~the ~~nitride~~PetroCeram® ceramic sand screens whose sales ~~for~~increased ~~the~~by ~~cosmetic~~$0.2 ~~industry~~million. Sales of industrial products for the three months ended ~~June~~September 30, 2012 were $2018.47 million, a decrease of $43.68 million, or 1816.58%, from $2522.05 million in the corresponding quarter of the prior year. Sales of defense products for the three months ended ~~June~~September 30, 2012 were $85.04 million, a decrease of $10.28 million, or 1312.87%, from $96.2 million in the corresponding quarter of the prior year. Included in sales of defense products for the three months ended ~~June~~September 30, 2012 were inter-segment sales of $63.18 million compared to $62.89 million in the prior year. Sales of automotive/diesel products for the three months ended ~~June~~September 30, 2012 were $6.25 million, a decrease of $1.42 million, or 1815.95%, from $7.67 million in the corresponding quarter of the prior year.

On a constant currency basis, sales for the ~~six~~nine months ended ~~June~~September 30, 2012 were $84120.59 million, a decrease of $1.5.0 million, or 14.80%, from the corresponding prior year period. Sales declined for the reasons stated above. Sales of industrial products for the ~~six~~nine months ended ~~June~~September 30, 2012 were $4260.17 million, a decrease of $610.4 million, or 1314.5%, from $4871.51 million in the corresponding prior year period. Sales of defense products for the ~~six~~nine months ended ~~June~~September 30, 2012 were $1722.37 million, an increase of $21.02 million, or 135.17%, from $1521.35 million in the corresponding prior year period. Included in sales of defense products for the ~~six~~nine months ended ~~June~~September 30, 2012 were inter-segment sales of $1216.64 million compared to $1114.5 million in the prior year period. The increase of $1.19 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~~nine months ended ~~June~~September 30, 2012 were $1420.27 million, a decrease of $01.78 million, or 48.21%, from $1422.95 million in the corresponding prior year period. Lower demand from European automotive original equipment manufacturers accounted for the decrease in sales.

Thermo Materials Segment

Our Thermo Materials segment had net sales for the three and six months ended June 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net Sales	$	15.3		$	29.3		$	30.2		$	60.4
Increase (decrease) in net sales	$	(14.0	)	$	5.8		$	(30.2	)	$	17.0
Percentage change in net sales		(47.8	%)		24.6	%		(50.1	%)		39.3	%

During the three months ended June 30, 2012, the decrease in sales at our Thermo Materials segment was due to lower shipments of crucibles to the solar energy market, partially offset by increased shipments of ceramic missile radomes to the defense industry. Sales of crucibles used in the manufacture of photovoltaic cells for the three months ended June 30, 2012 were $3.5 million, a decrease of $15.9 million, or 81.9%, from $19.4 million in the corresponding period a year ago. The decrease was due to the continuing slowdown of demand in the solar energy market 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, 2012 were $4.5 million, an increase of $1.5 million, or 46.9%, from $3.0 million when compared to the corresponding prior year period due to increased sales of ceramic missile radomes. Sales of precision investment casting products for the three months ended June 30, 2012 were $6.8 million, an increase of $0.8 million, or 12.3%, from $6.0 million in the same period last year.

~~Sales~~Thermo ofMaterials crucibles used in the manufacture of photovoltaic cells for the six months ended June 30, 2012 were $7.0 million, a decrease of $35.3 million, or 83.4%, from $42.3 million in the corresponding period a year ago. Sales to the defense industry for the six months ended June 30, 2012 were $8.8 million, an increase of $3.6 million, or 68.5%, from $5.2 million when compared to the corresponding prior year period due to increased shipments of ceramic missile radomes. Sales of precision investment casting products for the six months ended June 30, 2012 were $13.1 million, an increase of $1.9 million, or 16.2%, from $11.2 million in the same period last year.Segment

Our Thermo Materials segment had net sales for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Sales	$	15.4		$	24.2		$	45.6		$	84.6
Increase (decrease) in net sales	$	(8.8	)	$	(2.3	)	$	(39.0	)	$	14.8
Percentage change in net sales		(36.3	%)		(8.4	%)		(46.1	%)		21.2	%

During the three months ended September 30, 2012, the decrease in sales at our Thermo Materials segment was due to lower shipments of crucibles to the solar energy market, partially offset by increased shipments of ceramic missile radomes to the defense industry. Sales of crucibles used in the manufacture of photovoltaic cells for the three months ended September 30, 2012 were $3.9 million, a decrease of $11.4 million, or 74.4%, from $15.3 million in the corresponding period a year ago. The decrease was due to the continuing slowdown of demand in the solar energy market due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels. Sales to the defense industry for the three months ended September 30, 2012 were $4.5 million, an increase of $1.9 million, or 74.0%, from $2.6 million when compared to the corresponding prior year period due to increased sales of ceramic missile radomes.

Sales of crucibles used in the manufacture of photovoltaic cells for the nine months ended September 30, 2012 were $10.9 million, a decrease of $46.7 million, or 81.0%, from $57.6 million in the corresponding period a year ago. Sales to the defense industry for the nine months ended September 30, 2012 were $13.3 million, an increase of $5.5 million, or 70.4%, from $7.8 million when compared to the corresponding prior year period, due to increased shipments of ceramic missile radomes. Sales of precision investment casting products for the nine months ended September 30, 2012 were $19.2 million, an increase of $1.9 million, or 11.0%, from $17.3 million in the same period last year.

Boron Segment

Our Boron segment had net sales for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net Sales	$	~~13.~~8.4		$	1113.4		$	2129.04		$	1932.47
Increase (decrease) in net sales	$	2(5.40	)	$	4.02		$	1(3.63	)	$	59.45
Percentage change in net sales		21(37.05	%)		5345.53	%		8(10.62	%)		3841.73	%

Our Boron business segment comprises the business units Ceradyne Boron Products, SemEquip, Inc. and Ceradyne Canada. The reason for the ~~increase~~decrease in sales ~~for~~in ~~both~~this ~~the~~segment for three ~~and six~~ months ended ~~June~~September 30, 2012 ~~was~~were anlower ~~increase~~sales ~~in shipments~~ to the nuclear industry. ~~For~~Sales ~~the three months ended June 30, 2012, sales~~ to the nuclear industry were $114.27 million, ana ~~increase~~decrease of $35.45 million, or 4453.37%, from $710.82 million in the corresponding period last year. ~~Offsetting~~Of ~~this~~the ~~increase~~$5.5 ~~was~~million a decrease in sales ofto the nuclear industry, $14.07 million byoriginated from our ~~SemEquip~~Ceradyne Canada business unit. Offsetting this was an increase in shipments by $1.3 million to the semiconductor industry.

For the ~~six~~nine months ended ~~June~~September 30, 2012, sales to the nuclear industry were $1620.18 million, ana ~~increase~~decrease of $31.68 million, or 298.12%, from $1222.56 million in the corresponding period last year and sales by our SemEquip business unit were $144,000, a decrease of $2.6 ~~Offsetting~~million, or 94.8%, from $2.8 million. Partially offsetting this ~~increase~~decrease was aan ~~decrease~~increase in sales of $1.81 million byto ~~our~~the ~~SemEquip~~semiconductor ~~unit~~industry.

Gross Profit

Our total gross profit for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross profit	$	3623.74		$	53.07		$	6589.83		$	~~111~~164.08
Increase (decrease) in gross profit	$	(1630.3	)	$	2730.21		$	(4575.25	)	$	5990.80
Gross profit percentage		2822.1	%		36.43	%		2726.80	%		37.62	%

During the three months ended June 30, 2012, the decrease in gross profits of $16.3 million was primarily due to lower gross profits of body armor and ceramic crucibles by $6.2 million and $9.0 million, respectively. For the six months ended June 30, 2012, gross profit was lower by $45.2 million and was attributable to a decline in gross profits of body armor and ceramic crucibles by $20.3 million and $22.3 million, respectively.

Several factors caused the decrease in gross profit and the gross margin during both the three and six month periods ended June 30, 2012. The main factors were lower average unit selling prices of our largest product line, body armor, substantially lower average unit selling prices of ceramic crucibles, and lower units shipped for both items when compared to both the three and six months ended June 30, 2011. The other factor was lower shipments of industrial products by our ESK Ceramics subsidiary, all resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses during the three and six months ended June 30, 2012.

During the three months ended September 30, 2012, the decrease in gross profits of $30.3 million was primarily due to impairment charges of $7.0 million as we reduced our China solar manufacturing capacity by closing one of our plants, lower gross profits from body armor of $8.8 million, ceramic crucibles of $17.4 million and lower gross profits from our ESK Ceramics subsidiary of $2.6 million.

For the nine months ended September 30, 2012, gross profit was lower by $75.5 million and was attributable to a decline in gross profits of body armor by $29.1 million, ceramic crucibles by $39.7 million, to the impairment charges of $7.0 million described above, and from lower gross profits from sales of industrial products by ESK Ceramics of $6.8 million.

Several factors caused the decrease in gross profit and the gross profit as a percentage of net sales during both the three and nine month periods ended September 30, 2012. The main factors were the impairment charges in connection with the reduction in our China solar crucible manufacturing capacity, lower average unit selling prices of our largest product line, body armor, substantially lower average unit selling prices of ceramic crucibles, and lower units shipped for both items when compared to both the three and nine months ended September 30, 2011. The other factor was lower shipments of industrial products by our ESK Ceramics subsidiary, all resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses during the three and nine months ended September 30, 2012.

Advanced Ceramic Operations Segment

Our Advanced Ceramic Operations segment had total gross profit for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross profit	$	1913.71		$	2324.03		$	3144.34		$	4974.60
Increase (decrease) in gross profit	$	(311.32	)	$	1826.30		$	(1829.36	)	$	3461.90
Gross profit percentage		2824.06	%		3432.59	%		2625.38	%		34.60	%

The primary reason for the decrease in gross profit and gross profit as a percentage of net sales for the three months ended ~~June~~September 30, 2012 was lower average unit selling prices of body armor. For the ~~six~~nine months ended ~~June~~September 30, 2012, the decrease in gross profit and gross profit as a percentage of net sales were caused by lower average unit selling prices of body armor, by lower volumes of production of body armor resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses, and by lower sales of body armor as they declined by $2743.59 million, or 2628.98%, from the ~~six~~nine months ended ~~June~~September 30, 2011.

ESK Ceramics Segment

Our ESK Ceramics segment had total gross profit for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross profit	$	10.54		$	1513.60		$	2434.49		$	2841.7
Increase (decrease) in gross profit	$	(52.16	)	$	52.84		$	(46.38	)	$	1113.59
Gross profit percentage		2831.14	%		3432.16	%		30.68	%		33.41	%

Gross profit and gross profit as a percentage of sales decreased during the three and ~~six~~nine months ended ~~June~~September 30, 2012 due to a decrease in manufacturing production of industrial and automotive products leading to a decrease in absorption of manufacturing overhead expenses and an unfavorable change in sales mix to sales of products with lower sales margins.

Thermo Materials Segment

Our Thermo Materials segment had total gross profit for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Gross profit	$	1.9		$	10.9		$	4.2		$	26.3
Increase (decrease) in gross profit	$	(9.0	)	$	0.6		$	(22.1	)	$	8.4
Gross profit percentage		12.7	%		37.3	%		14.0	%		43.5	%

Gross profit decreased for the three and six months ended June 30, 2012 because of a decrease in sales of crucibles by $15.9 million, or 81.9%, and $35.3 million, or 83.4% during those periods, respectively, a decline in unit sales prices of crucibles due to pricing pressure from customers, and by lower volumes of production of ceramic crucibles resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses.

Boron Segment

Our Boron segment had total gross profit for the three and six months ended June 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Gross profit	$	4.9		$	4.0		$	6.9		$	7.1
Increase (decrease) in gross profit	$	0.9		$	2.7		$	(0.2	)	$	5.4
Gross profit percentage		35.5	%		35.3	%		32.6	%		36.7	%

The increases in gross profit in the three months ended June 30, 2012 were the result of higher sales to the nuclear industry, a favorable sales mix and improved absorption of fixed manufacturing costs. Gross profit and gross profit as a percentage of sales decreased in the six months ended June 30, 2012 due to an unfavorable sales mix, lower sales to the semiconductor industry and operating losses incurred in our Canada business unit due to much lower sales levels than the same period last year.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross profit	$	(4.8	)	$	10.0		$	(0.6	)	$	36.2
Increase (decrease) in gross profit	$	(14.8	)	$	(1.6	)	$	(36.8	)	$	6.7
Gross profit percentage		(31.1	%)		41.1	%		(1.3	%)		42.8	%

Gross profit decreased for the three and nine months ended September 30, 2012 because of impairment charges of $7.0 million as we reduced our China solar manufacturing capacity by closing one of our plants and reduced the carrying value of our inventory, a decrease in sales of crucibles by $11.4 million, or 74.4%, and $46.7 million, or 81.0% during those periods, respectively; a decline in unit sales prices of crucibles due to pricing pressure from customers, and because of lower volumes of production of ceramic crucibles resulting in reduced operating leverage and a decrease in absorption of manufacturing overhead expenses.

Boron Segment

Our Boron segment had total gross profit for the three and nine months ended September 30, 2012 and 2011 as follows (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross profit	$	4.3		$	5.3		$	11.1		$	12.4
Increase (decrease) in gross profit	$	(1.0	)	$	1.7		$	(1.3	)	$	7.1
Gross profit percentage		51.0	%		39.8	%		37.8	%		38.0	%

The decrease in gross profit in the three months ended September 30, 2012 was the result of lower sales to the nuclear industry, especially from our Ceradyne Canada business unit as sales were only $0.7 million, a decrease of $4.7 million, or 87.3%, from $5.4 million in the same period last year. This resulted in a reduction in gross profits of $2.3 million. This was offset by an increase in gross profit in the three months ended September 30, 2012 at our Ceradyne Boron business unit of $1.2 million.

Gross profit and gross profit as a percentage of sales decreased in the nine months ended September 30, 2012 due to an unfavorable sales mix, lower sales to the semiconductor and nuclear industries and gross margin losses of $3.0 million incurred in our Canada business unit due to much lower sales levels than the same period last year.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Selling, general and administrative expenses	$	1817.89		$	19.53		$	3654.32		$	3857.35
Increase (decrease) in selling, general and administrative expenses	$	(01.74	)	$	34.9		$	(23.03	)	$	813.86
Percentage change in selling, general and administrative expenses		(37.2	%)		2433.5	%		(5.18	%)		2930.79	%
Selling, general and administrative expenses as a % of net sales		1416.48	%		13.40	%		15.38	%		13.0	%

~~Although~~Total ~~total~~ selling, general and administrative expenses decreased 37.2% and 5.18% during the three and ~~six~~nine months ended ~~June~~September 30, 2012, compared to the same periods in 2011, respectively,. ~~they~~They increased as a percentage of net sales, due to the 1028.12% and 1922.86% year-over-year decline in the Company’s net sales during the three and ~~six~~nine months ended ~~June~~September 30, 2012, respectively.

For the three months ended ~~June~~September 30, 2012, the decrease of $01.74 million in selling, general and administrative expenses over the same period last year was caused by decreases in ~~professional fees,~~ personnel expenses caused by lower employee bonuses due to the reduction in financial performance, and lower group health expenses. Slightly offsetting these decreases was an increase in bad debts expense for our China operations, and anadditional ~~increase~~expenses infor payroll due to cost of living increases and for legal fees incurred for the proposed acquisition of Ceradyne by 3M.

~~For the six months ended June 30, 2012, the decrease of $2.0 million over the same period last year was caused by the same reasons as stated above.~~26

For the nine months ended September 30, 2012, the decrease of $3.3 million over the same period last year was caused by the same reasons as stated above.

Research and Development Expenses

Our research and development expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Research and development expenses	$	4.78		$	3.20		$	813.32		$	69.3
Increase (decrease) in research and development expenses	$	1.58		$	0.04		$	23.09		$	0.26
Percentage change in research and development expenses		4662.8	%		113.38	%		3242.95	%		26.70	%
Research & development expenses as a percentage of net sales		34.6	%		2.20	%		3.58	%		2.1	%

Research and development expenses increased for both the three and ~~six~~nine month periods ended ~~June~~September 30, 2012 due to an increase in expenditures for the qualification and development of the ECH Helmet program.

Restructuring – Plant Closure and Severance.

Our restructuring – plant closure and severance expenses for the ~~six~~three and nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Restructuring – plant closure and severance	$	0.03		$	0.0		$	01.70		$	0.0
Increase (decrease) in restructuring – plant closure and severance	$	0.03		$	0.0		$	01.70		$	0(7.0	)
Percentage change in restructuring – plant closure and severance		n/m			~~n/m~~0.0	%		n/m			n/m
Restructuring –as a percentage of net sales		0.03	%		0.0	%		0.3	%		0.0	%

During the ~~six~~three months ended ~~June~~September 30, 2012, we recorded pre-tax restructuring and severance charges of $0.63 million ~~and $0.1 million~~ for the ~~closure~~reduction ofin ~~our~~workforce ~~manufacturing facilities~~ in ~~India~~connection ~~and Utah, respectively. We closed the India facilities and moved the equipment associated~~ with ~~that~~our ~~facility~~plan to ~~the~~consolidate ~~United~~operations ~~States because the cost of manufacturing orthodontic products was lower~~ in ~~the~~China ~~United~~by ~~States~~selling ~~than~~one inof ~~India. In order to gain synergies and reduce costs in~~ our ~~police~~manufacturing ~~helmet operation, we closed our Utah facility and combined its operations with our Diaphorm business unit in Salem, New Hampshire~~facilities.

26During the nine months ended September 30, 2012, we recorded pre-tax restructuring and severance charges of $0.6 million, $0.1 million and $0.3 million for the closure of our manufacturing facilities in India, Utah and China, respectively. We closed the India facilities and moved the equipment associated with that facility to the United States because the cost of manufacturing orthodontic products was lower in the United States than in India. In order to gain synergies and reduce costs in our police helmet operation, we closed our Utah facility and combined its operations with our Diaphorm business unit in Salem, New Hampshire.

Acquisition Related Charge (Credit)

Our acquisition related charges and credits for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Acquisition related charges and credits	$	0.2.0		$	0.87		$	0.2.3		$	12.41
Increase (decrease) in acquisition related charges and credits	$	(01.63	)	$	0.87		$	(10.2	)	$	12.52
Percentage change in acquisition related charges and credits		~~(72~~188.42	%)		n/m			~~(83~~6.81	%)		n/m
Acquisition charges and credits as a percentage of net sales		01.29	%		0.65	%		0.17	%		0.5	%

During the three months ended ~~June~~September 30, 2012, we recorded acquisition-related charges of $0.2.0 million to reflect the fair value of contingent purchase price consideration for Diaphorm Technologies, acquired in 2009. During the three and ~~six~~nine months ended ~~June~~September 30, 2011, we recorded acquisition-related charges of $0.87 million and $12.41 million, respectively, to reflect the fair value of contingent purchase price consideration for SemEquip, Inc., acquired in 2008, Diaphorm Technologies, acquired in 2009 and VIOX Corporation, acquired on January 3, 2011.

Impairment charges

Our impairment charges for the three and nine months ended September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Impairment related charges	$	13.8		$	0.0		$	13.8		$	0.0
Increase (decrease) in impairment related charges	$	13.8		$	0.0		$	13.8		$	0.0
Percentage change in impairment related charges		n/m			n/m			n/m		$	0.0
Impairment charges as a percentage of net sales		13.0	%		0.0	%		4.0	%		0.0	%

Due to the continuing decrease in demand in the solar energy market due to a reduction of government subsidies for the installation of solar panels and a buildup of inventories of solar cells and solar wafers in end market distribution channels, during the third quarter of 2012, we made a strategic decision to reduce our solar manufacturing capacity by closing one of our plants. We initiated a restructuring plan to consolidate our solar crucible manufacturing operations in China and to reduce our workforce. In connection with the consolidation of its manufacturing operations in China, we recognized non-cash impairment charges totaling $20.8 million. Of this amount, $13.8 million was recognized as an operating expense and the balance of $7.0 million was for inventory write-downs included in cost of goods sold. The composition of the total non-cash impairment charges of $20.8 million were $6.4 million for long-lived assets, an increase of $7.4 million in the allowance for bad debt, and a charge of $7.0 million for pricing pressures and to reflect the lower of cost or market. This plan includes the future sale of a manufacturing facility in Tianjin, China with a net carrying value of $6.8 million, which approximates the expected sales price, less disposal costs. This asset has been reclassified to other current assets. We also incurred severance costs of $0.3 million for the reduction in workforce.

Other Income (Expense)

Our net other income (expense) for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Other income (expense)	$	(12.50	)	$	(0.14	)	$	(24.8	)	$	(0.94	)
Increase (decrease) in other income (expense)	$	(12.4	)	$	(1.09	)	$	(14.94	)	$	02.2
Percentage change in other income (expense)		n/m			n/m			~~231~~1,035.30	%		(2584.0	%)
Other income (expense) as percentage of net sales		(1.19	%)		(0.13	%)		(1.24	%)		(0.31	%)

Other income (expense), ~~net~~decreased ~~of other income, increased~~ by $12.4 million during the three months ended ~~June~~September 30, 2012 because we recognized a loss from foreign currency transactions of $01.93 million compared to noa gain orof ~~loss during the same period last year, we were reimbursed~~ $0.87 million ~~for legal fees~~ during the ~~three months ended June 30, 2011 concerning a workers compensation matter, and our interest income was $0.3 million higher this quarter than the~~ same period last year.

Other income (expense), ~~net~~decreased ~~of other income, increased~~ by $14.94 million during the ~~six~~nine months ended ~~June~~September 30, 2012 because we recognized a loss from foreign currency transactions of $12.69 million compared to noa gain orof ~~loss~~$0.7 million during the same period last year, and we were reimbursed $0.8 million for legal fees during the six months ended June 30, 2011 concerning a workers compensation matter~~, and we incurred losses on sales of investments and assets of $0~~.~~3 million during the same period last year compared to no gain or loss for the six months ended June 30, 2012.~~

Income Taxes

Our provision for income taxes for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 were as follows (dollars in millions):

2728

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Provision for income taxes	$	45.67		$	10.28		$	612.85		$	2132.53
Increase (decrease) in provision for income taxes	$	(5.61	)	$	810.73		$	(1419.78	)	$	1828.58
Percentage change in provision for income taxes		(5547.14	%)		~~600.8~~n/m	%		(6861.43	%)		~~618~~821.85	%
Provision for income taxes as a percentage of net sales		3.5.4	%		7.03	%		23.96	%		7.3	%
Effective tax rate		40(16.16	%)		34.86	%		39(73.08	%)		33.48	%

The ~~decrease in the provision for income taxes for both the three and six months ended June 30, 2012 reflect lower levels of income before income taxes compared to the corresponding periods last year. The~~ effective tax rate for both the three and ~~six~~nine month periods ended ~~June~~September 30, 2012 was higher compared to the same periods last year because we recorded a ~~greater~~valuation ~~portion~~allowance of ~~our~~$8.3 ~~pre-tax~~million ~~income~~against ~~was~~the ~~generated~~deferred bytax ~~operating~~assets ~~units that~~from our ~~have~~China ~~higher~~operations ~~average~~in ~~tax~~the ~~rates~~third ~~than~~quarter ~~our~~of ~~China~~2012. ~~operations~~These ~~where~~deferred wetax ~~enjoy~~assets amost ~~lower~~likely ~~tax~~will ~~rate.~~not ~~Additionally,~~be werealizable ~~are~~due ~~incurring~~to ~~operating~~our ~~losses~~estimates inthat ~~China~~financial ~~that~~losses ~~are~~from ~~tax~~our ~~benefitted~~China atoperations awill ~~lower~~continue ~~rate~~indefinitely.

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~~September 30, 2012 and December 31, 2011 and for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 (in millions):

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
Cash, cash equivalents and short term investments	$	~~268~~281.13	$	275.0
Accounts receivable, net	$	7354.85	$	73.7
Inventories	$	~~130~~129.1	$	117.3
Working capital	$	~~380~~366.84	$	379.2

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2012			2011			2012			2011
Operating cash flow	$	1428.96		$	4024.47		$	2150.31		$	5883.81
Increase (decrease) in cash, cash equivalents and short term investments	$	(213.03	)	$	32(14.2	)	$	(76.03	)	$	2612.97

During the ~~six~~nine months ended ~~June~~September 30, 2012, we generated $2150.31 million of cash from operations compared to $5883.81 million for the ~~six~~nine months ended ~~June~~September 30, 2011. The $2150.31 million of cash flow from operations during 2012 is ~~primarily~~ comprised of net income ~~totaling~~before impairment charges of $108.64 million, with $2270.31 million of non-cash charges which included $20.8 million of non-cash impairment charges therein, offset by an increase in working capital of $129.04 million ~~resulting primarily from increased inventory levels~~. We also invested $1018.52 million in capital expenditures. Of this amount, $915.06 million was spent to replace manufacturing equipment in selected product lines and the balance, $12.56 million, was spent to expand manufacturing capacity at our Ceradyne Boron Products facility. We plan to spend a total of $9.93 million during this fiscal year for this expansion. We invested $01.90 million in connection with our purchase of a minority interest in Chemtrix, Ltd. Chemtrix develops and sells equipment and services based on the concept of executing research and development, and process development in revolutionary micro reactors with a direct scale to larger quantity production in mid-size reactors. Our ESK Ceramics subsidiary is a supplier of flow-chemistry reactors suitable for production on an industrial scale. We also invested $3.8 million in connection with our purchase of a minority interest in GMSI, LLC. GMSI develops and sells a proprietary method of applying a chemical vapor deposited silicon carbide ceramic coating on precision machined graphite shapes. We purchased $2946.41 million of marketable securities while we received $1683.58 million from proceeds and maturities of marketable securities. During the first ~~two~~three quarters of 2012, we disbursed a total of $710.39 million for cash dividends to holders of our common stock. During the ~~six~~nine months ended ~~June~~September 30, 2012, we repurchased and retired ~~161~~326,~~000~~ 900 shares of our common stock at an aggregate cost of $47.08 million under a stock repurchase program authorized in 2011 by our Board of Directors. Our net cash at ~~June~~September 30, 2012 ~~decreased~~increased by $1546.07 million as compared to a $921.09 million decrease during the ~~six~~nine months ended ~~June~~September 30, 2011.

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, 2012 and December 31, 2011, short-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):29

28As of September 30, 2012 and December 31, 2011, short-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, 2012				December 31, 2011
		September 30, 2012				December 31, 2011
Outstanding debt
Principal amount	$	~~93,100~~$	93,100		$	~~93,100~~$	93,100
Unamortized discount		~~(1,859~~	)(841	)		~~(3,806~~	)(3,806	)
Net carrying amount		~~91,241~~	92,259			~~89,294~~	89,294
Current portion of outstanding debt		~~91,241~~	92,259			~~89,294~~	89,294
Noncurrent portion of outstanding debt	$	-$	-		$	-$	-
Equity component, net of income tax benefit	$	~~16,399~~$	16,399		$	~~16,399~~$	16,399

The discount on the liability component of short-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.

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~~September 30, 2012, we were in compliance with these covenants.

Our cash, cash equivalents, and short-term investments totaled $~~268~~281.13 million at ~~June~~September 30, 2012, compared to $275.0 million at December 31, 2011. At ~~June~~September 30, 2012, we had working capital of $~~380~~366.84 million, compared to $379.2 million at December 31, 2011. Our cash position includes amounts denominated in foreign currencies. The repatriation of cash balances from our ESK Ceramics subsidiary will 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, 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 Ceradyne Boron Products. 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~~September 30, 2012 include a $21.09 million reserve for unrecognized tax benefits. The reserve is classified in Other Long Term Liabilities on our Consolidated Balance Sheet as of ~~June~~September 30, 2012.

We anticipate that in December 2012, holders of our convertible notes will exercise their put rights and require us to repurchase the entire outstanding principal amount of $93.1 million. To fund this obligation, we intend to use proceeds from sales of our short-term investments.

2930

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~~September 30, 2012 included $15.05 million of auction rate securities. Cumulatively to date, the Company has incurred $4.7 million in pre-tax losses from its investments in auction rate securities, realized losses of $8.8 million from the sale of auction rate securities and pre-tax temporary impairment charges against other comprehensive income of $2.6 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, 2011 and through ~~June~~September 30, 2012, 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~~September 30, 2012, the fair value of the Company’s investments in auction rate securities was below cost by approximately $7.3 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~~September 30, 2012, 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~~September 30, 2012 and December 31, 2011.

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 0.102% to 2.878%, 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.

3031

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~~September 30, 2012 for 55.0 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 short-term debt was $93.51 million and is based on quoted market prices at ~~June~~September 30, 2012.

Approximately 3837.91% of our revenues for the ~~six~~nine months ended ~~June~~September 30, 2012 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~~September 30, 2012 (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~~September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3132

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

~~The~~Between ~~Company~~October is9 ~~from~~and ~~time~~October to19, ~~time~~2012, ~~involved~~four plaintiffs filed putative class actions against Ceradyne, its directors, 3M and Cyborg Acquisition Corporation, a wholly owned subsidiary of 3M (“Purchaser”) in ~~various~~connection ~~legal~~with ~~proceedings~~the tender offer by Purchaser (the “Offer”) and the proposed merger of Purchaser with and into Ceradyne (the “Merger”). Two suits were filed in California Superior Court for the County of Orange and two suits were filed in the Delaware Court of Chancery. The suits seek principally to enjoin the Offer and the proposed Merger, and allege that ~~are~~the ~~incidental~~defendants breached and/or aided and abetted the breach of their fiduciary duties to ~~its~~Ceradyne ~~business.~~by ~~However~~seeking to sell Ceradyne through an allegedly unfair process and for an unfair price and on unfair terms, and/or by allegedly failing to ~~management~~make adequate disclosures to Ceradyne stockholders regarding the Offer and the proposed Merger. The California Superior Court, upon the parties’s ~~knowledge~~stipulation, ~~there~~consolidated ~~currently~~those ~~are~~two noactions, ~~material~~set ~~pending~~an ~~legal~~expedited briefing schedule, and set a preliminary injunction hearing for November 26, 2012. The Delaware Chancery Court similarly consolidated the two Delaware actions, and on November 2, 2012 denied the plaintiffs’ motion for expedited proceedings, ~~involving~~ruling that the ~~Company~~plaintiffs orhad ~~any~~presented no colorable claims. Ceradyne believes the allegations in all of ~~its~~these ~~subsidiaries~~cases are without merit, and is defending the actions vigorously.

Additional details regarding the four actions are as follows:

Court	Filing Date	Case Name	Case Number
Superior Court of the State of California, County of Orange	October 9, 2012	Golovoy v. Ceradyne, Inc., et al.	30-2012-00604001-CU-BT-CXC
Superior Court of the State of California, County of Orange	October 12, 2012	Kumar v. Ceradyne, Inc., et al.	30-2012-00604931-CU-SL-CXC
Court of Chancery of the State of Delaware	October 19, 2012	Fulton v. Moskowitz, et al.	C.A. No. 7965
Court of Chancery of the State of Delaware	October 19, 2012	Henderson v. Ceradyne, Inc., et al.	C.A. No. 7968

To management’s knowledge, there currently are no other material pending legal proceedings involving the Company or any of its subsidiaries.

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, 2011.

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~~September 30, 2012.

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, 2012		86,000	$	25.20		3,928,305	$	97,833,097
July 1 to July 31, 2012		-		-		4,003,305	$	95,973,088
May 1 to May 31, 2012		75,000	$	24.80		4,003,305	$	95,973,088
August 1 to August 31, 2012		165,900	$	22.51		4,169,205	$	92,239,493
June 1 to June 30, 2012		-		-		4,003,305	$	95,973,088
September 1 to September 30, 2012		-		-		4,169,205	$	92,239,493
Total		~~161~~165,~~000~~900	$	2522.0151		4,169,205

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 completed the $100 million of purchases under this authorization in September 2011. On August 31, 2011, we announced that our board of directors had authorized the repurchase and retirement of up to an additional $100 million of our common stock in open market transactions, including block purchases, or in privately negotiated transactions. We did not set a time limit for completion of this repurchase program, and we may suspend or terminate it at any time.

Item 3.	Defaults Upon Senior Securities
	Not applicable.
Item 4.	Mine Safety Disclosures
	Not applicable.
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 Taxonomy Presentation Linkbase Document

3234

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.	~~CERADYNE, INC.~~
Date: July 24, 2012		By:	/s/ JERROLD J. PELLIZZON
Date: November 14, 2012	By:	/s/ JERROLD J. PELLIZZON
		Jerrold J. Pellizzon	~~Jerrold J. Pellizzon~~
		Vice President Chief Financial Officer (Principal Financial and Accounting Officer)	~~Vice President Chief Financial Officer (Principal Financial and Accounting Officer)~~

3335

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 Taxonomy Presentation Linkbase Document

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