Btu International (BTUI) 10-Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 2, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 000-17297

BTU INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

DELAWARE	04-2781248
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)
23 Esquire Road, North Billerica, Massachusetts	01862-2596
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (978) 667-4111

     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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filero      Accelerated filero       Non-accelerated filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     Indicate the number of shares outstanding of the Registrant’s Common Stock, par value $.01 per share, as of the latest practicable date: As of August 10, 2006: 9,165,429 shares.

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets	1
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income	3
Condensed Consolidated Statements of Cash Flows	4-5
Notes to Condensed Consolidated Financial Statements	6-12
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-15
Item 3.Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.Controls and Procedures	15-17
PART II. OTHER INFORMATION
Item 1A.Risk Factors	17-21
Item 4.Submission of Matters to a Vote of Security Holders	21
Item 6.Exhibits	21
Signatures	22
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32.1 Section 906 Certification of C.E.O.
EX-32.2 Section 906 Certification of C.F.O.

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
unaudited

	July 2,			December 31,
	2006			2005
Assets
Current assets
Cash and cash equivalents	$	17,206		$	15,460
Accounts receivable, net		22,414			16,519
Inventories		16,600			13,933
Other current assets		763			489
Total current assets		56,983			46,401
Property, plant and equipment, net		3,486			2,343
Other assets, net		2,369			161
Total assets	$	62,838		$	48,905
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	267		$	183
Accounts payable		5,675			6,069
Other current liabilities		5,428			4,781
Total current liabilities		11,370			11,033
Long-term debt, less current portion		9,695			5,106
Long-term deferred compensation		283			—
Long-term liabilities		600			283
Total liabilities		21,948			16,422
Commitments and contingencies
Stockholders’ equity
Preferred stock, $1.00 par value - 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.01 par value - 25,000,000 shares authorized; 10,288,246 shares issued and 9,139,236 shares outstanding at July 2, 2006 and 10,039,759 shares issued and 8,890,749 shares outstanding at December 31, 2005		103			100
Additional paid in capital		42,181			39,746
Deferred compensation		—			(49	)
Accumulated earnings (deficit)		2,499			(3,356	)
Treasury stock, at cost		(4,177	)		(4,177	)
Accumulated other comprehensive income		284			219
Total stockholders’ equity		40,890			32,483
Total liabilities and stockholders’ equity	$	62,838		$	48,905

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)

	Three Months Ended						Six Months Ended
	July 2, 2006			July 3, 2005			July 2, 2006			July 3, 2005
Net sales	$	22,538		$	15,806		$	43,473		$	28,598
Costs of goods sold		13,518			10,218			26,420			18,495
Gross profit		9,020			5,588			17,053			10,103
Operating expenses:
Selling, general and administrative		4,457			3,813			8,861			7,257
Research, development and engineering		1,254			867			2,183			1,639
Operating income		3,309			908			6,009			1,207
Interest income		138			1			230			2
Interest expense		(162	)		(139	)		(232	)		(272	)
Other income (loss), net		16			—			(32	)		—
Income before provision for income taxes		3,301			770			5,975			937
Provision for income taxes		(66	)		—			(120	)		—
Net income	$	3,235		$	770		$	5,855		$	937
Income per share:
Basic	$	0.35		$	0.11		$	0.65		$	0.13
Diluted	$	0.34		$	0.11		$	0.62		$	0.13
Weighted average number of shares outstanding:
Basic shares		9,133,371			7,246,924			9,070,845			7,232,620
Effect of dilutive options		308,518			119,805			312,719			100,545
Diluted shares		9,441,889			7,366,729			9,383,564			7,333,165

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JULY 2, 2006

(unaudited)

(in thousands)

										Retained								Accumulated
					Additional					Earnings								Other
	Common Stock				Paid-In		Deferred			(Accum.			Treasury Stock					Comprehensive
	# of shares		$		Capital		Comp.			Deficit)			# of shares		$			Income		Total
Six months ended July 2, 2006
Balance at December 31, 2005		10,040	$	100	$	39,746	$	(49	)	$	(3,356	)		1,149	$	(4,177	)	$	219	$	32,483
Net income		—		—		—		—			5,855			—		—			—		5,855
Exercise of stock options		90		1		293		—			—			—		—			—		294
Issuance of common stock, net of issuance costs of $63		158		2		2,069		—			—			—		—			—		2,071
Reclass of deferred compensation and compensation expense related to SFAS 123R		—		—		73		49			—			—		—			—		122
Translation adjustment		—		—		—		—			—			—		—			65		65
Balance at July 2, 2006		10,288	$	103	$	42,181	$	—		$	2,499			1,149	$	(4,177	)	$	284	$	40,890

	Six
	Months
	Ended
	July 2, 2006
Comprehensive income is calculated as follows:
Net income	$	5,855
Other comprehensive gain
Foreign currency translation adjustment		65
Comprehensive income	$	5,920

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 2, 2006 AND JULY 3, 2005
(unaudited)
(in thousands)

	July 2,			July 3,
	2006			2005
Cash flows from operating activities:
Net income	$	5,855		$	937
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization		529			515
Provision for bad debt		111			55
Provision for inventory		436			—
Stock based compensation		122			(60	)
Net change in operating assets and liabilities:
Accounts receivable		(5,930	)		(3,907	)
Inventories		(3,026	)		1,059
Other current assets		(204	)		(257	)
Other assets		(129	)		697
Customer deposits		(238	)		—
Accounts payable		(960	)		40
Accrued expenses		457			520
Deferred compensation		—			(229	)
Net cash used in operating activities		(2,977	)		(630	)
Cash flows from investing activities:
Acquisition of assets of Radiant Technology Corporation		(500	)		—
Acquisition of Atmoplas Technology and Research		(475	)		—
Purchases of property, plant and equipment		(313	)		(110	)
Net cash used in investing activities		(1,288	)		(110	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements		(84	)		(85	)
Proceeds from bank loan		4,686			—
Net borrowings under revolving credit agreement		—			627
Issuance of common stock		1,070			—
Proceeds from the exercise of stock options		294			386
Net cash provided by financing activities		5,966			928
Effects of exchange rates on cash		45			(92	)
Net increase in cash and cash equivalents		1,746			96
Cash and cash equivalents, beginning of period		15,460			372
Cash and cash equivalents, end of period	$	17,206		$	468

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE SIX MONTHS ENDED JULY 2, 2006 AND JULY 3, 2005
(unaudited)
(in thousands)

	July 2,			July 3,
	2006			2005
Supplemental disclosures of cash flow information:
Cash paid (received) during the periods for:
Interest	$	8		$	272
Income taxes		25			24
Non-cash disclosure:
Acquisition of Radiant Technology Corporation
Fair value of assets acquired		1,591			—
Fair value of common stock issued		(1,001	)		—
Less fair value of liabilities assumed		(90	)		—
Cash paid	$	500		$	—
Acquisition of Atmoplas Technology and Research
Fair value of assets acquired		1,390			—
Less fair value of liabilities assumed		(915	)		—
Cash paid	$	475		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

BTU INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis for Presentation

The condensed consolidated balance sheet, financial information and related disclosures as of and for the year ended December 31, 2005 have been derived from our consolidated financial statements which have been audited as of that date. The condensed consolidated balance sheet as of July 2, 2006 and the related condensed consolidated statements of operations and the condensed consolidated statements of stockholders’ equity and comprehensive income for the six months ended July 2, 2006 and July 3, 2005 are unaudited. The condensed consolidated statements of cash flows for the six months ended July 2, 2006 and July 3, 2005 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for the full year. These financial statements do not include all disclosures associated with annual financial statements and accordingly, should be read in conjunction with the footnotes contained in the Company’s consolidated financial statements as of and for the year ended December 31, 2005, together with the auditors’ report, included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

(2) Inventories

Inventories at July 2, 2006 and December 31, 2005 consisted of (in thousands):

	July 2,		December 31,
	2006		2005
Raw materials and manufactured components	$	10,440	$	8,491
Work-in-process		4,021		3,571
Finished goods		2,139		1,871
	$	16,600	$	13,933

(3) Debt

Long-Term Debt at July 2, 2006 and December 31, 2005 consisted of (in thousands):

	July 2,		December 31,
	2006		2005
Mortgage note payable	$	9,947	$	5,272
Capital lease obligations, interest rate of 6.75%		15		17
		9,962		5,289
Less — current maturities		267		183
	$	9,695	$	5,106

On March 30, 2006, we entered into a new mortgage note that is secured by our real property in Billerica, MA, in the amount of $10 million. The mortgage note requires monthly payments of $74,733, which includes interest calculated at the rate of 5.42% per annum thru December 23, 2006. Effective January 23, 2007, the monthly payment will be $77,103, which includes interest calculated at the rate of 6.84% per annum. This mortgage note payable has a balloon payment of $6.5 million due and payable at maturity on December 23, 2015.

6

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The Company has a secured revolving loan agreement that allows for aggregate borrowings, including letters of credit, up to a maximum of $14 million against a borrowing base of secured accounts receivable. The Company may elect to borrow at interest rates of either the bank’s prime rate or LIBOR plus 2.25%. This loan agreement extends to May 31, 2007 and is subject to maintaining certain financial covenants. At July 2, 2006, there were no borrowings outstanding under this agreement.

(4) Earnings Per Share (EPS)

Basic EPS is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period, using the treasury stock method.

(5) Accounting for Stock-Based Compensation

On January 1, 2006, the Company adopted the provisions of Financial Accounting Standards Board Statement 123R,Share-Based Payment(“SFAS 123R”). This statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. The statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as the options issued under the Company’s Stock Option Plans. The statement provides for, and the Company has elected to adopt the standard, using the modified prospective application under which compensation cost is recognized on or after the required effective date for the fair value of all future share-based award grants and for the portion of outstanding awards at the date of adoption of this statement for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated under Statement 123 for pro forma disclosures. The Company’s stock option compensation expense was $58,000 and $114,000 respectively, for the three and six months ended July 2, 2006.

Prior to January 1, 2006, the Company accounted for its share-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No share-based employee compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The application of SFAS 123R had the following effect on the reported amounts for the three and six-month period ended July 2, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting:

123R Effect on Reported Income:

	Three months ended July 2, 2006						Six months ended July 2, 2006
	Previous		123R Adj		As Reported		Previous		123R Adj		As Reported
Operating income		3,367,302		58,329		3,308,973		6,122,328		114,329		6,007,999
Earnings before income taxes		3,358,812		58,329		3,300,483		6,089,058		114,329		5,974,729
Net income		3,291,636		57,010		3,234,626		5,967,277		112,070		5,855,207
Basic earnings per share	$	0.36	$	0.01	$	0.35	$	0.66	$	0.01	$	0.65
Diluted earnings per share	$	0.35	$	0.01	$	0.34	$	0.63	$	0.01	$	0.62

7

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Stock-based compensation for the three and six month periods ended July 3, 2005 was determined using the intrinsic value method. The following table provides supplemental information for that period as if stock-based compensation had been computed under SFAS 123:

	Three months ended			Six months ended
	July 3, 2005			July 3, 2005
Net Income, as Reported		770			937
Value of Stock-Based Compensation Expense Under Fair Value-Based Method		(113	)		(226	)
Pro Forma Net Income		657			711
Basic EPS — as Reported	$	0.11		$	0.13
Basic EPS — Pro Forma	$	0.09		$	0.10
Diluted EPS — as Reported	$	0.11		$	0.13
Diluted EPS — Pro Forma	$	0.09		$	0.10

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. We used the following assumptions for options issued in the following period:

	Six months ended
	July 2,			July 3,
	2006			2005
Expected Volatility		60	%		60	%
Expected Life		5			7
Risk-Free Interest Rate		4.96	%		4.13	%
Expected Dividend Yield	None			None

Expected volatilities are based on the historical volatility of the Company’s common stock and that of an index of companies in our industry group. The Company had significant historical data to help evaluate the expected lives of options in developing its assumption. The risk-free interest rate is based upon quoted market yields for Unites States Treasury debt securities. The expected dividend yield is based upon the Company’s history of having never issued a dividend and management’s current expectation of future action surrounding dividends. The Company also analyzed those options that were historically forfeited in determining an appropriate forfeiture rate when computing compensation expense.

8

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table summarizes stock option activity during the six-month period ended July 2, 2006:

				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Options
Outstanding at December 31, 2005		525,378		$	2.99
Granted		207,920			13.35
Exercised		(90,987	)		2.82
Forfeited		(14,612	)		2.88
Outstanding at July 2, 2006		627,699		$	6.45		6.56	$	4,739,369
Exercisable at July 2, 2006		187,835		$	2.98		5.78	$	2,070,816

The weighted-average grant-date fair value of options granted during the six-month period ended July 2, 2006 and July 3, 2005 was $7.26 and $1.91, respectively. The total intrinsic value of options exercised during the six-month period ended July 2, 2006 and July 3, 2005 was $1,017,528 and $19,279, respectively.

A summary of the status of the Company’s nonvested options as of July 2, 2006, and changes during the six-month period ended July 2, 2006, is presented below:

				Weighted-
				Average
				Grant-Date
	Shares			Fair Value
Nonvested options
Nonvested at December 31, 2005		299,826		$	1.89
Granted		207,920			7.26
Vested		(53,271	)		1.89
Forfeited		(14,612	)		1.77
Nonvested at July 2, 2006		439,863		$	4.43

As of July 2, 2006, there was $1,576,593 of total unrecognized compensation cost related to nonvested options granted under all of the Company’s option plans. That cost is expected to be recognized over a weighted average period of 2.2 years. The total fair value of shares vested during the six-month period ended July 2, 2006 was $102,915.

As of July 2, 2006, there was $41,000 of unrecognized compensation costs related to restricted stock grants. These grants have a remaining life of 3 years.

(6) Segment Reporting

Segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company operates as a single business segment called thermal processing capital equipment.

9

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The thermal processing capital equipment segment consists of the designing, manufacturing, selling and servicing of thermal processing equipment and related process controls for use in the electronics, energy generation and other industries. This business segment includes the supply of equipment used in a number of process steps to produce electronic devices such as: solder reflow systems used for surface mount applications in printed circuit board assembly, integrated circuit packaging and sealing; and processing multi-chip modules. In addition, the thermal process equipment is used in several process steps for alternative energy generation such as: sintering nuclear fuel for commercial power generation; metallization and diffusion of photovoltaic solar cells and the doping and firing of solid oxide fuel cells. The business segment’s customers are multi-national original equipment manufacturers and electronic manufacturing service providers.

Revenue by geographic location is as follows (in thousands):

	Three Months Ended				Six Months Ended
	July 2,		July 3,		July 2,		July 3,
	2006		2005		2006		2005
United States	$	2,685	$	2,852	$	5,062	$	6,471
Europe, Near East		5,546		3,290		10,794		7,489
Asia Pacific		11,924		9,140		22,375		13,823
Other Americas		2,383		524		5,242		815
	$	22,538	$	15,806	$	43,473	$	28,598

Long-lived assets by geographic location are as follows (in thousands):

	July 2,		December 31,
	2006		2005
North America	$	5,360	$	2,156
Asia Pacific		495		348
	$	5,855	$	2,504

(7) Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” as updated by SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”. Under these guidelines, revenue is recognized when persuasive evidence of an arrangement exists, shipment has occurred or services rendered, the price is fixed or determinable and payment is reasonably assured. Under these requirements, when the terms of sale include customer acceptance provisions, and compliance with those provisions has not been previously demonstrated, revenues are recognized upon acceptance. Furthermore, revenues for products that require installation for which the installation is essential to functionality and is not deemed inconsequential or perfunctory are recognized upon completion of installation. Revenues for products sold where installation is not essential to functionality and is deemed inconsequential or perfunctory are recognized upon shipment with estimated installation and warranty costs accrued.

Applying the requirements of SAB No. 101 to future sales arrangements used in the Company’s equipment sales may result in the deferral of the revenue for some equipment sales.

10

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The Company also has certain sales transactions for projects that are not completed within the normal operating cycle of the business. These contracts are accounted for on a percentage completion basis. Under the percentage completion method, revenues are recognized based upon the ratio of costs incurred to the total estimated costs. Revisions in costs and profit estimates are reflected in the period in which the facts causing the revision become known. Provisions for total estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined.

For the three and six months ended July 2, 2006, there was $403,000 and $1,226,000 respectively, of revenue recognized using the percentage of completion method. For the three and six months ended July 3, 2005, there was $699,000 of revenue recognized using the percentage of completion method.

The Company accounts for shipping and handling costs billed to customers in accordance with the Emerging Issues Task Force (EITF) Issue 00-10 “Accounting for Shipping and Handling Fees and Cost”. Amounts billed to customers for shipping and handling costs are recorded as revenues with the associated costs reported as cost of goods sold.

(8) Product Warranty Costs

The Company provides standard warranty coverage for parts and labor for 12 months and special extended material only coverage on certain other products. The Company sets aside a reserve for anticipated warranty claims based on revenue. The reserve for warranty covers the estimated costs of material, labor and travel. Actual warranty claims incurred are charged to expense. Factors that affect the Company’s product warranty liability include the number of installed units, the anticipated cost of warranty repairs and historical and anticipated rates of warranty claims.

The following table reflects changes in the Company’s accrued warranty account during the six months ended July 2, 2006 (in thousands):

	Six Months Ended
	July 2, 2006
Beginning balance, December 31, 2005	$	1,036
Plus: accruals related to new sales		583
Less: warranty claims incurred		(307	)
Less: reversal of excess requirements		(166	)
Balance, end of period	$	1,146

11

BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

(9) Recent Accounting Pronouncements

In May 2005, the FASB issued FASB Statement No. 154,“Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”(SFAS No. 154).Previously, APB No. 20, “Accounting Changes”and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements” required the inclusion of the cumulative effect of changes in accounting principle in net income of the period of the change. SFAS No. 154 requires companies to recognize a change in accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions retrospectively to prior periods’ financial statements. We will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS No. 154 if such a change arises.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109(FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.

(10) Acquisitions

On January 30, 2006, the Company entered into a purchase and sale agreement to acquire the product lines, trademarks and other related assets of Radiant Technology Corporation (RTC). The purchase price for this acquisition is as follows: 1) $500,000 in cash and 100,000 shares of the Company’s common stock, of which 30,000 shares are contingent upon RTC’s successful achievement of certain non-financial performance criteria; and 2) Royalty payments on any products using the RTC technology manufactured by the Company for a period of 4 years. In addition, the parties entered into a supply agreement under which RTC will continue to manufacture its products for distribution by the Company after the closing. The transaction closed on March 17, 2006.

On May 18, 2006, the Company entered into a purchase and sale agreement to acquire the assets and intellectual property of Atmoplas, a division of Dana Corporation. The purchase price is as follows: 1) $474,564 in cash; 2) Royalty payments on any products using Atmoplas technology manufactured by the Company and sold during the third through seventh years after the acquisition with minimum royalties in years three and four of not less than $300,000 per year; and 3) Royalty payments on licensing revenues received from third parties for a period of seven years after the closing date calculated on a percentage basis. The transaction closed on May 31, 2006.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

BTU International, founded in 1950 and headquartered in Billerica, Massachusetts, is a supplier of advanced thermal processing equipment to the electronics manufacturing and energy generation markets. We manufacture reflow furnaces for printed circuit board assembly as well as semiconductor wafer-level and die-level packaging equipment. We also provide thermal process solutions for the solar cell, fuel cell and nuclear fuel industries.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. Our convection solder reflow systems are used to attach electronic components to the printed circuit boards, primarily in the advanced high-density surface mount segments of this market. In the semiconductor market, we participate in both wafer level and die level packaging, where our thermal processing systems are used to connect and seal integrated

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circuits into a package. Our customers in the energy generation market use our thermal systems to process advanced ceramics and metal alloys which are used in fuel cell, solar cell and nuclear fuel applications.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected items in our statements of operations (in thousands) expressed as a percentage of total revenue and percent change:

	Three Months Ended
	July 2, 2006					July 3, 2005
			% of					% of			Percent
	$ thousands		revenues			$ thousands		revenues			change
Total revenues	$	22,538		100.0	%	$	15,806		100.0	%		42.6	%
Cost of goods sold		13,518		60.0	%		10,218		64.6	%		32.3	%
Gross profit		9,020		40.0	%		5,588		35.4	%		61.4	%
Selling, general and administrative expenses		4,457		19.8	%		3,813		24.1	%		16.9	%
Research, development and engineering		1,254		5.6	%		867		5.5	%		44.7	%
Operating income		3,309		14.6	%		908		5.8	%		264.4	%
Income before provision for income taxes		3,301		14.6	%		770		4.9	%		328.8	%
Net income	$	3,235		14.3	%	$	770		4.9	%		320.2	%

	Six Months Ended
	July 2, 2006					July 3, 2005
			% of					% of			Percent
	$ thousands		revenues			$ thousands		revenues			change
Total revenues	$	43,473		100.0	%	$	28,598		100.0	%		52.0	%
Cost of goods sold		26,420		60.8	%		18,495		64.7	%		42.9	%
Gross profit		17,053		39.2	%		10,103		35.3	%		68.8	%
Selling, general and administrative expenses		8,861		20.4	%		7,257		25.4	%		22.1	%
Research, development and engineering		2,183		5.0	%		1,639		5.7	%		33.2	%
Operating income		6,009		13.8	%		1,207		4.2	%		397.8	%
Income before provision for income taxes		5,975		13.7	%		937		3.3	%		537.7	%
Net income	$	5,855		13.5	%	$	937		3.3	%		524.8	%

Net Sales. The growth in net sales in the second quarter and first six months of 2006 versus the same periods in 2005 was due largely to an increase in sales of our printed circuit board assembly and energy generation products.

The following table sets forth, for the periods indicated, select geographical data (in thousands) expressed in dollars and as a percentage of total revenue.

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	Three Months Ended										Six Months Ended
	July 2, 2006					July 3, 2005					July 2, 2006					July 3, 2005
			% of					% of					% of					% of
	$		revenues			$		revenues			$		revenues			$		revenues
United States	$	2,685		11.9	%	$	2,852		18.0	%	$	5,062		11.6	%	$	6,471		22.6	%
Europe, Near East		5,546		24.6	%		3,290		20.8	%		10,794		24.8	%		7,489		26.2	%
Asia Pacific		11,924		52.9	%		9,140		57.9	%		22,375		51.5	%		13,823		48.4	%
Other Americas		2,383		10.6	%		524		3.3	%		5,242		12.1	%		815		2.8	%
	$	22,538				$	15,806				$	43,473				$	28,598

In the second quarter and six months periods of 2006 versus the same periods of 2005, the Company has experienced substantial sales growth. The geographical distribution percentage of sales has shifted with an increasing percentage for Other Americas offset by a decreasing percentage for the United States. Asia Pacific and Europe, Near East percentage of sales have remained relatively stable.

Gross Profit. The increase in the gross profit percentage for the second quarter and the first six months of 2006 versus the same periods in 2005 was principally the result of lower costs in our U.S. operations and improvements and expansion in our China assembly and China material sourcing for global operations.

Selling, General and Administrative.The increase in selling, general and administrative expense in absolute dollars, although a decrease as a percentage of net sales in 2006 versus 2005, was due to increased commission costs resulting from additional sales. Also, the Company increased its spending for customer service, sales, marketing and administration related costs in line with its expanding business needs.

Research, Development and Engineering.In the first half of 2006, the Company has increased its spending on RD&E versus the first half of 2005 in support of its expanding product lines.

Operating Income.The increase in operating income was primarily the result of increased revenues and improved margins.

Income Taxes.The Company has federal and state net operating loss carry forwards of approximately $8 million. The Company has recorded a full valuation allowance to offset the deferred tax asset arising as a result of these loss carryforwards because of uncertainty surrounding realization. The Company’s China manufacturing facility is currently under a tax holiday. Our statutory federal income tax rate is 34.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of July 2, 2006, the Company had $17.2 million in cash and cash equivalents.

During the six months ended July 2, 2006, the Company used net cash resources of approximately $3.0 million for operating activities. This use of cash was primarily the result of an increase in accounts receivable of $5.9 million, a decrease of accounts payable of $1.0 million, and an increase in inventory of $3.0 million, and was offset by adding back depreciation and amortization of $0.5 million, an increase in accrued expenses of $0.5 million and a net profit of $5.9 million.

The Company’s accounts receivable balance increased by $5.9 million or 36% in the six months ended July 2, 2006. The Company has increased its accounts receivable reserve balances in line with the increase in its accounts receivables.

The Company has a secured revolving loan agreement that allows for aggregate borrowings, including letters of credit, up to a maximum of $14 million against a borrowing base of secured accounts receivable. The Company may elect to borrow at interest rates of either the bank’s prime rate or LIBOR plus 2.25%. This loan agreement extends to May 31, 2007 and is subject to maintaining certain financial covenants. At July 2, 2006, there were no borrowings outstanding under this agreement.

On March 30, 2006, we entered into a new mortgage note that is secured by our real property in Billerica, MA, in the amount of $10 million. The mortgage note requires monthly payments of $74,733, which

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includes interest calculated at the rate of 5.42% per annum through December 23, 2006. Effective January 23, 2007, the monthly payment will be $77,103, which includes interest calculated at the rate of 6.84% per annum. This mortgage note has a balloon payment of $6.5 million due and payable at maturity on December 23, 2015.

As of July 2, 2006, the Company has committed to approximately $342,000 in capital expenditures relating to a new ERP system. These costs primarily represent commitments to purchase software. The full ERP system implementation is anticipated to be completed by the end of 2007.

The Company’s business forecasts project that our cash position, cash flow and our working capital line of credit will be sufficient to meet our corporate, operating and capital requirements through 2007.

OTHER MATTERS

The impact of inflation and the effect of foreign exchange rate changes during 2006 have had no material impact on our business and financial results.

FORWARD LOOKING STATEMENTS

This Report, other than historical financial information, includes forward-looking statements that involve known and unknown risks and uncertainties, including quarterly fluctuations in results. In particular, our forecast of compliance with financial covenants in our bank agreement is a forward-looking statement. Such statements are made pursuant to the “safe harbor” provisions under the securities laws, and are based on the assumptions and expectations of the Company’s management at the time such statements are made. Important factors that could cause actual results to differ include the cyclicality of our business; our shift of manufacturing to China; a failure to maintain cost reductions; risks related to sales to the energy generation market; a failure to increase sales across our industries; a failure to effectively develop and market our products; changes in the economic, political, legal and business environments in the countries in which we operate; a failure of our business systems; the time and costs related to complying with the requirements of the Sarbanes-Oxley Act; and the loss of key personnel. Actual results may vary materially. Accordingly, you should not place undue reliance on any forward-looking statements. Unless otherwise required by law, the Company disclaims any obligation to revise or update such forward-looking statements in order to reflect future events or developments.

See the risks described in “Risk Factors” in Part II, Item 1A of this Report.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not believe that we have any material market risk exposure with respect to derivative or other financial instruments.

Item 4. CONTROLS AND PROCEDURES

          (a)Evaluation of Disclosure Controls and Procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures. While we have identified certain internal control deficiencies, which are described below, our evaluation indicated that these deficiencies did not impair the effectiveness of our overall disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Our management and Audit Committee were notified by Vitale, Caturano & Company (“VCC”) of several significant deficiencies in our internal control over financial reporting that they observed during the audit of the December 31, 2005 financial statements.

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The first significant deficiency relates to a need to replace our out-dated ERP system. VCC noted the system is no longer supported and if it should fail could significantly impact operations, financial reporting and financial disclosure requirements.

The second significant deficiency relates to the need to have a well-defined, formally documented disaster recovery plan for the information technology function.

The third significant deficiency relates to the need for increased training and technical expertise for accounting personnel in the appropriate application of authoritative accounting literature and SEC rules and regulations.

The fourth significant deficiency relates to the need for taking the appropriate steps to ensure timely compliance with Sarbanes – Oxley and Regulation 404.

The fifth significant deficiency relates to the need for automating our financial consolidation process and the related accounting for currency translation adjustments as they are currently processed through the use of spreadsheets. We have determined that the manual and complex consolidation and currency translation process has several inherent risks that need to be addressed.

Steps we have taken (or plan to take) to remediate these significant deficiencies are discussed below.

          (b)Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during the 2005 fiscal year or in the six months of 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we have taken (or plan to take) the following steps to remediate the significant deficiencies identified above:

• With respect to the first significant deficiency, we have selected an ERP solution. Our project plan has the new ERP system being implemented in our Chinese subsidiary by late 2006 and in the United States in 2007. Additionally, we have engaged consultants to help us determine if additional controls can be placed around the current business system to minimize the current system’s inherent risks. We are taking the following actions related to out current system:

1.	We have secured both hardware and software support currently and for the foreseeable future.
2.	We have contracted with a third party to provide a “warm-site” meaning a complete duplicate of our current system resides in a secure remote location.
3.	In 2006, we have installed a complete (hardware and software) redundant version of our current system on-site. This redundant system will utilize the last nightly data backup to restore the system in the event of a major hardware or software failure on the current system.

• With respect to the second significant deficiency, we have begun to implement and formally document a disaster recovery plan as it relates to information technology. We have secured consultants to assist us in developing the disaster recovery plan as a component of a larger business continuity plan. We anticipate this initiative to be completed in 2006.

• With respect to the third significant deficiency, we have increased the accounting staff to provide additional expertise in GAAP, taxation and SEC reporting requirements. Additionally, we have engaged several consultants to assist us with complex accounting and taxation related matters. We are continuing training of our current staff and evaluating the need for additional financial resources.

• With respect to the fourth significant deficiency, we are aggressively securing resources and technologies to comply with Sarbanes – Oxley and Regulation 404. Actions we are taking include the following:

1. We have secured and evaluated our dedicated internal resources and have identified and secured various consultants to eliminate areas of weakness.

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2.	We have identified and have begun to document our significant financial processes and are reviewing all relevant policies and procedures and where appropriate, changes will be made to our internal controls over financial reporting.
3.	We have committed to a new ERP system that, when fully implemented, will provide increased controls over financial reporting by replacing our current manual process.
4.	We are enhancing our core IT infrastructure to provide increase access security to our networks and financial information.

• With respect to the fifth significant deficiency, we believe the successful implementation of the new ERP system will remediate this issue. Our ERP selection criteria evaluated the manufacturer’s financial consolidation program and we concluded that, when fully tested in our environment, the chosen system will provide accurate and repeatable financial information in an automated process. We are reviewing our current process and will make changes to our internal controls over financial reporting as required.

In summary, we intend to continue to evaluate and, when appropriate, enhance our disclosure for controls and procedures, including our internal control over financial reporting. In particular, we intend to rigorously assess, document and test our internal control over financial reporting during fiscal 2006 in order to move towards compliance with the rules and regulations promulgated under Section 404 for fiscal 2006. We anticipate that, as a result of this assessment process, changes will be made to our internal control over financial reporting and, if necessary, such changes will be described in our future filings under the Exchange Act. We anticipate that certain of these changes will also help address the conditions that management and VCC consider to be significant deficiencies in internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. RISK FACTORS

The description of risk factors associated with our business is set forth below.

We are subject to cyclical downturns in the electronics and semiconductor industries. Recent favorable financial trends in our business may not be sustained.

Our business depends predominantly on the capital expenditures of electronics, semiconductor and energy generation manufacturers, which in turn depend on current and anticipated market demand for printed circuit boards, integrated circuits and energy cells and the products that use them. The electronics semiconductor and energy generation industries have historically been cyclical and have experienced periodic downturns that have had a material adverse effect on the demand for electronic semiconductor and energy generation processing equipment, including equipment that we manufacture and market. During periods of declining demand, we may have difficulty aligning our costs with prevailing market conditions, as well as motivating and retaining key employees. In particular, our inventory levels during periods of reduced demand may be higher than optimal, and we may be required to make inventory valuation adjustments in future periods. During periods of rapid growth, on the other hand, we may fail to acquire and/or develop sufficient manufacturing capacity to meet customer demand, and we may fail to hire and assimilate a sufficient number of qualified people. Our business may be adversely affected if we fail to respond to rapidly changing industry cycles in a timely and effective manner.

We have shifted a significant and growing portion of our production capacity to a new and expanding manufacturing facility in Shanghai, China. We may encounter manufacturing problems associated with managing these operations.

In 2004, we began manufacturing and material sourcing operations in a facility in Shanghai, China. The successful operation of our facility in China is important to our ability to remain profitable and competitive. We may encounter difficulty with the management, technical and administrative organization requirements of doing business in China. If we are not successful in managing our operation in China, our business and profitability will be adversely affected.

In the past year, we have substantially improved our global supply chain and reduced our material costs. Failure to maintain these cost reductions would negatively affect our profit margins.

In the two years, we have substantially improved our global supply chain and reduced our materials costs. These efforts have resulted in a major improvement in gross margins in our Pyramax product line. While

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continuous improvement in the supply chain is a key strategic imperative, we may not be successful in achieving our cost reduction goals, in which case further increases in our gross margins would not be achieved. If our costs increase, our gross margin gains will erode. This could be caused by foreign exchange trends, supplier cost increases, increase in fuel costs and other factors.

Sales of our products to the energy generation markets are subject to substantial risks.

Fuel Cells.The developing fuel cell sector of the energy markets is in an early stage of product development, without any guarantees of commercial success. There is considerable risk that this technology may not succeed and our sales to this market may not develop. We have only recently expanded our product offerings to the fuel cell sector of the energy market. Given our limited experience in this segment of the energy generation market, we may encounter problems growing this part of our business.

Solar Energy.The solar energy sector is partially dependent upon continuation of governmental subsidies that may not continue and the supply of materials that may be constrained. A decline in these subsidies would reduce our ability to grow our business in this market segment. The solar energy sector also depends on the availability of raw materials such as silicon. Limits in the supply of these raw materials will constrain growth in this sector and, therefore, limit our prospects for increasing sales in this area.

Nuclear Energy.The market for nuclear fuel pellets used in power generation is dependent upon further growth in nuclear power production. Consequently, without growth in the production of nuclear power, our opportunities to grow in this area will be limited. In addition, we may need export licenses to supply this type of equipment to some countries. Failure to maintain such licenses or obtain new required licenses will limit our ability to expand our revenue from this market.

If we are unable to increase sales and reduce costs, our profitability may be affected negatively.

We generated net income of $5.9 million for the six months ended, July 2, 2006. Our quarter over quarter net income increase was mainly due to a combination of an increase in net sales and an increase in gross margin resulting in an increase in gross profit. We attribute this increase in gross profit primarily to reduced costs resulting from better procurement management in the U.S. and our global sourcing of materials, as well as manufacturing efficiencies achieved with the transition of a portion of our production to China. We may not experience comparable cost reductions in future periods. Because we compete, in part, based on our reputation for high quality, a malfunction or other problem with any of our products could undermine our ability to increase or maintain our revenues.

Our future success will depend on our ability to effectively develop and market our products against those of our competitors.

The industry in which we compete is extremely competitive. Some of our competitors have substantially greater financial, engineering, manufacturing and customer support capabilities and offer more extensive product offerings. If customers prefer products offered by our competitors, we will have difficulty maintaining or increasing our revenue. Our principal competitors for solder reflow systems are Vitronics-Soltec, Heller, Furakawa, ERSA, Rehm and Electrovert. Our principal competitors for advanced semiconductor packaging are Sikama, SEMIgear and Heller. Our systems for the energy generation markets and other applications compete primarily against products offered by SierraTherm, Centrotherm and Harper. We expect our competitors to continue to improve the design and performance of their current products and to introduce new products with improved performance capabilities. Our failure to introduce new products in a timely manner, or the introduction by our competitors of products with perceived or actual advantages, could result in reduced sales of, or lower margins on, our products. In future years, we expect to face increased competition based on price, particularly from companies in Asia. If we are unable to reduce the costs of our products or introduce new lower cost products, we may lose sales to these competitors.

Our international sales and operations are subject to the economic, political, legal and business environments of the countries in which we do business, and our failure to operate successfully or adapt to changes in these environments could cause our international sales and operations to be limited or disrupted.

Our international sales accounted for 88.4% of our consolidated revenue for the six months ended July 2, 2006. We expect to continue to generate a significant percentage of our revenue outside the United States for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of

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the U.S., primarily in Asia and Europe. Our international operations could be limited or disrupted, and the value of our direct investments may be diminished, by any of the following:

• fluctuations in currency exchange rates;

• the imposition of governmental controls;

• import and export license requirements;

• political instability;

• difficulties enforcing contractual and intellectual property rights;

• terrorist activities and armed conflict;

• restrictions on direct investments by foreign entities and trade restrictions;

• changes in tax laws and tariffs;

• costs and difficulties in staffing and managing international operations; and

• longer payment cycles.

Additionally, we are subject to the Foreign Corrupt Practices Act, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations.

We conduct a portion of our business in currencies other than the U.S. dollar. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. As a result, currency fluctuations among the U.S. dollar and the currencies in which we do business have caused foreign currency transaction gains and losses in the past and will likely do so in the future. Because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates, we may suffer foreign currency transaction losses in the future due to the effect of exchange rate fluctuations.

A majority of our revenue is generated from sales in the Asia Pacific region. Our operations are particularly vulnerable to instability in this region and competition from organizations based in this region.

During the six months ended July 2, 2006, 51.5% of our revenue was generated from sales in the Asia Pacific region. Political or economic instability in any of the major Asia Pacific economies may adversely impact the demand for capital equipment, including equipment of the type we manufacture and market. In addition, we face competition from a number of suppliers based in the Asia Pacific region that have certain advantages over U.S. suppliers, including us. These advantages include, among other things, proximity to customers, favorable tariffs and affiliation with significantly larger organizations. In addition, changes in the amount or price of electronics produced in the Asia Pacific region could negatively impact spending by our customers.

Our business systems to manage our Chinese operations are still being developed. If they are not fully developed and implemented, it could have a material adverse effect on our business.

Our supply chain management process in China is manual in nature, which limits our global material visibility. Although we are upgrading and implementing new enterprise resource planning and material resource planning systems, we may not be successful in doing so. As our Chinese operations grow, the risks associated with a lack of advanced enterprise resource planning and material resource planning systems increase and could disrupt our business.

Our primary computer business system in the U.S. is outdated. A significant malfunction could disrupt our business operations.

Our U.S. manufacturing business system is at the end of its life, potentially posing a risk to the operation of our business. Some of the computer system’s hardware and software have limited support, which could result in an interruption in business activities. Solutions to address these risks are being developed but may not be successful.

Some of the requirements of Sarbanes-Oxley affect us as a small company disproportionately, and we may not be able to comply despite substantial effort and expense.

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The Sarbanes-Oxley Act of 2002 imposed many new requirements on public companies, the most significant of which involves the documentation, testing and reporting of the effectiveness of our internal control over financial reporting. We are required to be in compliance upon our annual report for the year ended December 2006, we have begun documenting and testing our internal controls in a way that we have never before been required to do. This effort involves substantial time and expense. In part because we limited the resources we devoted to this effort in previous years, we cannot be sure that we will be able to complete the task in a timely manner or that our internal controls will meet the standards that are currently required. In connection with our efforts to date, we have reviewed various significant control deficiencies identified by our registered public accounting firm. These deficiencies include, among other things, a computer accounting system that does not meet our current and future needs, the lack of a well defined and documented disaster recovery system and the need to improve and update the documentation of our policies, procedures, and related internal controls surrounding our accounting and financial reporting functions. Although we are not yet required to report on our assessment of the effectiveness of our internal control over financial reporting, and provide the required auditor attestation, until at least the end of this fiscal year, there is a reasonable likelihood that our registered public accounting firm will inform us of material weaknesses before we complete our compliance and remediation efforts. We are working to address the issues raised by these control deficiencies, but we may not be successful in remediating them within the required time frame.

If we fail to maintain positive relationships with key personnel, we may be unable to successfully grow our business.

Our future operating results depend substantially upon the continued service of our key personnel, some of whom are not bound by employment or non-competition agreements. Our future operating results also depend in significant part upon our ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel. Competition for qualified personnel, particularly those with technical skills, is intense, and we may fail to attract and retain qualified personnel. Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees.

Failure of critical suppliers to deliver sufficient quantities of parts in a timely and cost-effective manner would adversely impact our operations.

We use numerous vendors to supply components for the manufacture of our products. We do not use multiple qualified suppliers for all of our parts. Some key parts may only be available from a single supplier. Accordingly, we may experience problems in obtaining adequate and reliable quantities of various components. In addition, suppliers may cease manufacturing certain components that are difficult to replace without significant reengineering of our products. Our results of operations will be materially adversely impacted if we are unable to obtain adequate supplies of components in a timely and cost effective manner.

The occurrence of natural disasters in the Asia Pacific region may adversely impact our operations and sales.

We have an expanding engineering and manufacturing facility in China, and the majority of our sales are made to destinations in the Asia Pacific region. This region is known for being vulnerable to natural disasters and other risks, such as earthquakes, floods and avian (bird) flu, which at times have disrupted the local economies. A significant earthquake or health crisis could materially affect our operating results. We are not insured for most losses and business interruptions of this kind, and we do not have redundant, multiple site capacity in the event of a natural disaster. In the event of such a disaster, our business would suffer.

Provisions in our organizational documents could prevent or frustrate attempts by stockholders to replace our current management and could make acquisitions more difficult.

Our certificate of incorporation and by-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. Our certificate of incorporation provides that our stockholders may not take action by written consent. This provision may have the effect of preventing or hindering attempts by our stockholders to replace our current management. Furthermore, Delaware law prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the corporation’s board of directors approves the transaction. Our board of directors may use this

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provision to prevent changes in our management. Also, our board of directors may adopt additional anti-takeover measures in the future.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)	We held our 2006 Annual Meeting of Shareholders on May 19, 2006.
(b)	The following matters were voted upon at the 2006 Annual Meeting of Shareholders:

a. The election of the nominees for the Board of Directors who will serve a term to expire at the 2007 Annual Meeting of Shareholders. The nominees, all of whom were elected, were Paul J. van der Wansem, J. Chuan Chu, Joseph F. Wrinn, John E. Beard, G. Mead Wyman and J. Samuel Parkhill. The vote tabulations were as follows:

	Votes For		Votes Withheld
Paul J. van der Wansem		6,595,812		558,735
J. Chuan Chu		6,895,589		258,958
Joseph F. Wrinn		6,896,289		258,258
John E. Beard		6,965,231		189,316
G. Mead Wyman		6,647,923		506,624
J. Samuel Parkhill		6,896,279		258,268

Item 6. EXHIBITS

(a) Exhibits

Exhibit 31.1	- Section 302 Certification
Exhibit 31.2	- Section 302 Certification
Exhibit 32.1	- Section 906 Certification
Exhibit 32.2	- Section 906 Certification

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SIGNATURES

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.

	BTU INTERNATIONAL, INC.
DATE: August 16, 2006	BY:	/s/ Paul J. van der WansemPaul J. van der Wansem
		President, Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors
DATE: August 16, 2006	BY:	/s/ Thomas P. Kealy
		Thomas P. Kealy
		Vice President, Corporate Controller and Chief Accounting Officer (principal financial and accounting officer)

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