"Snap!"

If there's an audible clue that best sums up Ceradyne's (Nasdaq: CRDN) earnings report from Friday, that would be it. After posting back-to-back "earnings misses" in the latter half of 2007, Ceradyne snapped its losing streak last week and trumped the Street's expectations for the first quarter of 2008.

Sure, it wasn't a stellar quarter. Sales increased a bare $100,000 over last year's Q1, and profits actually declined 13%. Still, the Street was looking for a 2% slip in revs and an 18% tumble in profits. Ceradyne sidestepped both calls, and that alone deserves applause.

A BULL in the thicket
Make your applause short, though, because Ceradyne's not out of the woods yet. You've seen the stock price rise and heard the good news that inspired it. Now let's review the bad news.

First off, gross profit margin plummeted 300 basis points year over year, falling to 37.9% as delays in the awarding of government body-armor contracts hurt Ceradyne's manufacturing efficiency. This issue will continue to dog Ceradyne, as the backlog of firm orders to be filled this year remains far below where we were at by this time last year. On the plus side, the new body-armor orders mentioned in our pre-earnings Foolish Forecast are having an effect. New orders placed in Q1 2008 exceeded their Q1 2007 levels by 20%.

Of course, the orders shareholders really look forward to center on Ceradyne's long-awaited BULL MRAP, which is competing to succeed current offerings from General Dynamics (NYSE: GD), BAE, and Navistar as the next generation MRAP. Uncertainty over the BULL is tipping Ceradyne's forward guidance toward the "loose" side. It currently ranges to encompass the risk of winning no contracts, and also the opportunity of winning some. Sales could be as little as $715 million this year (a 6% decline from 2007) or as much as $836 million (a 10% increase), and profits expectations vary even more widely.

Rather than let its fate be decided by the Pentagon's whim, however, Ceradyne continues to expand its product offerings on the civilian side. For example, management predicts that its new 200,000-square-foot factory in Tianjin, China, will come on line within the year, and when it does, it will triple Ceradyne's capacity to produce ceramic crucibles used in cooking up polycrystalline silicon for photovoltaic solar cells. These should find a ready market among polysilicon producers such as MEMC Electronic Materials (NYSE: WFR) and Corning (NYSE: GLW) subsidiary Hemlock Semiconductor, who cook up the silica used by Chinese solar-panel makers such as Suntech (NYSE: STP), Sunpower (Nasdaq: SPWR) and Trina (NYSE: TSL).

Whether crucible cooking will prove as lucrative as Ceradyne's body armor business, however, remains to be seen.

What did we expect out of Ceradyne last quarter, and what did we get? Find out in:

Fool contributor Rich Smith owns shares of Ceradyne and does not own shares in any other company mentioned above. Sunpower is a Rule Breakers selection. The Motley Fool has a disclosure policy.