Btu International (BTUI) 10-Q 2006 Q3 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 October 1, 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 Incorporation or Organization)	(I.R.S. Employer Identification Number)
23 Esquire Road, North Billerica, Massachusetts (Address of principal executive offices)	01862-2596 (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 November 2, 2006: 9,176,807 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 6.Exhibits	21
Signatures	22
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)
(unaudited)

	October 1,			December 31,
	2006			2005
Assets
Current assets
Cash and cash equivalents	$	20,113		$	15,460
Accounts receivable, net		19,415			16,519
Inventories		16,780			13,933
Other current assets		850			489
Total current assets		57,158			46,401
Property, plant and equipment, net		3,972			2,343
Other assets, net		2,347			161
Total assets	$	63,477		$	48,905
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	253		$	183
Accounts payable		3,977			6,069
Other current liabilities		5,140			4,781
Total current liabilities		9,370			11,033
Long-term debt, less current portion		9,639			5,106
Long-term deferred compensation		283			283
Other long-term liabilities		600			—
Total liabilities		19,892			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; 10,319,817 shares issued and 9,170,807 shares outstanding at October 1, 2006 and 10,039,759 shares issued and 8,890,749 shares outstanding at December 31, 2005		103			100
Additional paid in capital		42,388			39,746
Deferred compensation		—			(49	)
Accumulated earnings (deficit)		4,849			(3,356	)
Treasury stock, at cost		(4,177	)		(4,177	)
Accumulated other comprehensive income		422			219
Total stockholders’ equity		43,585			32,483
Total liabilities and stockholders’ equity	$	63,477		$	48,905

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

1

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	October 1, 2006			October 2, 2005			October 1, 2006			October 2, 2005
Net sales	$	18,254		$	18,543		$	61,726		$	47,141
Costs of goods sold		10,627			11,880			37,047			30,375
Gross profit		7,627			6,663			24,679			16,766
Operating expenses:
Selling, general and administrative		3,871			4,031			12,733			11,288
Research, development and engineering		1,377			893			3,559			2,532
Operating income		2,379			1,739			8,387			2,946
Interest income		193			2			423			2
Interest expense		(157	)		(149	)		(389	)		(420	)
Other loss, net		(18	)		(1	)		(48	)		—
Income before provision for income taxes		2,397			1,591			8,373			2,528
Provision for income taxes		(48	)		—			(168	)		—
Net income	$	2,349		$	1,591		$	8,205		$	2,528
Income per share:
Basic	$	0.26		$	0.22		$	0.90		$	0.35
Diluted	$	0.25		$	0.20		$	0.87		$	0.34
Weighted average number of shares outstanding:
Basic shares		9,161,509			7,383,503			9,100,874			7,282,603
Effect of dilutive options		270,753			395,873			292,944			219,674
Diluted shares		9,432,262			7,779,376			9,393,818			7,502,277

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

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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED OCTOBER 1, 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
Nine months ended October 1, 2006
Balance at December 31, 2005		10,040	$	100	$	39,746	$	(49	)	$	(3,356	)		1,149	$	(4,177	)	$	219	$	32,483
Net income		—		—		—		—			8,205			—		—			—		8,205
Exercise of stock options		119		1		344		—			—			—		—			—		345
Employee stock plan purchases		3		—		34		—			—			—		—			—		34
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		—		—		187		45			—			—		—			—		232
Translation adjustment		—		—		—		—			—			—		—			203		203
Amortization of deferred compensation		—		—		8		4			—			—		—			—		12
Balance at October 1, 2006		10,320	$	103	$	42,388	$	—		$	4,849			1,149	$	(4,177	)	$	422	$	43,585

	Nine Months Ended
	October 1, 2006
Comprehensive income is calculated as follows:
Net income	$	8,205
Other comprehensive gain Foreign currency translation adjustment		203
Comprehensive income	$	8,408

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

3

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 1, 2006 AND OCTOBER 2, 2005
(unaudited)
(in thousands)

	October 1,			October 2,
	2006			2005
Cash flows from operating activities:
Net income	$	8,205		$	2,528
Adjustments to reconcile net cash provided by (used in) operating activities:
Depreciation and amortization		881			731
Loss on disposal of fixed assets		—			19
Provision for bad debt		8			—
Provision for inventory		144			—
Stock based compensation		244			(53	)
Net change in operating assets and liabilities:
Accounts receivable		(2,795	)		(6,584	)
Inventories		(2,848	)		(568	)
Other current assets		—			(145	)
Other assets		(434	)		611
Customer deposits		(47	)		—
Accounts payable		(2,364	)		652
Accrued expenses		(114	)		1,528
Deferred compensation		—			(229	)
Net cash provided by (used in) operating activities		880			(1,510	)
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		(1,313	)		(183	)
Net cash used in investing activities		(2,288	)		(183	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements		(154	)		(129	)
Proceeds from bank loan		4,686			—
Net borrowings under revolving credit agreement		—			1,403
Issuance of common stock		1,070			—
Proceeds from the exercise of stock options		379			700
Net cash provided by financing activities		5,981			1,974
Effects of exchange rates on cash		80			(72	)
Net increase in cash and cash equivalents		4,653			209
Cash and cash equivalents, beginning of period		15,460			372
Cash and cash equivalents, end of period	$	20,113		$	581

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

4

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

FOR THE NINE MONTHS ENDED OCTOBER 1, 2006 AND OCTOBER 2, 2005
(unaudited)
(in thousands)

	October 1,			October 2,
	2006			2005
Supplemental disclosures of cash flow information:
Cash paid (received) during the periods for:
Interest	$	15		$	420
Income taxes		25			67
Non-cash disclosure:
Acquisition of Radiant Technology Corporation
Fair value of assets acquired		1,591			—
Less fair value of liabilities assumed		(1,091	)		—
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 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 October 1, 2006, the condensed consolidated statements of operations for the nine months ended October 1, 2006, and the condensed consolidated statements of stockholders’ equity and comprehensive income for the nine months ended October 1, 2006 and October 2, 2005 are unaudited. The condensed consolidated statements of cash flows for the nine months ended October 1, 2006 and October 2, 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 October 1, 2006 and December 31, 2005 consisted of (in thousands):

	October 1,		December 31,
	2006		2005
Raw materials and manufactured components	$	11,914	$	8,491
Work-in-process		2,659		3,571
Finished goods		2,207		1,871
	$	16,780	$	13,933

(3) Debt

Long-Term Debt at October 1, 2006 and December 31, 2005 consisted of (in thousands):

	October 1,		December 31,
	2006		2005
Mortgage note payable	$	9,878	$	5,272
Capital lease obligations, interest rate of 6.75%		14		17
		9,892		5,289
Less — current maturities		253		183
	$	9,639	$	5,106

We entered into a new mortgage note that is secured by our real property in Billerica, MA. The amount of the mortgage note executed on March 30, 2006 was $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 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 October 1, 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. The number of Common shares underlying options that were not included in the determination of diluted EPS, because their effect would be anti-dilutive, was 131,199 and 61,355 respectively, for the three and nine months ended October 1, 2006.

(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 $118,000 and $232,000 respectively, for the three and nine months ended October 1, 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 nine month period ended October 1, 2006 relative to amounts that would have been reported using the intrinsic value method under previous accounting treatment:

123R Effect on Reported Income:	Three months ended October 1, 2006						Nine months ended October 1, 2006
(in thousands, except per share data)	Previous		123R Adj.		As Reported		Previous		123R Adj.		As Reported
Operating income		2,497		118		2,379		8,619		232		8,387
Earnings before income taxes		2,515		118		2,397		8,604		232		8,373
Net income		2,465		115		2,349		8,432		227		8,205
Basic earnings per share	$	0.27	$	0.01	$	0.26	$	0.93	$	0.02	$	0.90
Diluted earnings per share	$	0.26	$	0.01	$	0.25	$	0.90	$	0.02	$	0.87

7

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

Stock-based compensation for the three and nine month period ended October 2, 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 123R:

	Three months ended			Nine months ended
	October 2, 2005			October 2, 2005
Net Income, as Reported		1,591			2,528
Value of Stock-Based Comp Exp Under Fair Value-Based Method		(114	)		(341	)
Pro Forma Net Income		1,477			2,187
Basic EPS — as Reported	$	0.22		$	0.35
Basic EPS — Pro Forma	$	0.20		$	0.30
Diluted EPS — as Reported	$	0.20		$	0.34
Diluted EPS — Pro Forma	$	0.19		$	0.29

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. The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. We used the following assumptions for options issued in the following period:

	Nine months ended
	October 1, 2006			October 2, 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.

8

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

The following table summarizes stock option activity during the nine month period ended October 1, 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		(119,365	)		3.78
Forfeited		(14,962	)		2.96
Outstanding at October 1, 2006		598,971		$	6.61		6.63	$	3,246,019
Exercisable at October 1, 2006		159,357		$	2.96		5.91	$	1,446,130

The weighted-average grant-date fair value of options granted during the nine month period ended October 1, 2006 and October 2, 2005 was $7.26 and $1.91, respectively. The total intrinsic value of options exercised during the nine month period ended October 1, 2006 and October 2, 2005 was $838,284 and $702,001, respectively.

A summary of the status of the Company’s nonvested options as of October 1, 2006, and changes during the nine month period ended October 1, 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		(53,170	)		1.93
Forfeited		(14,962	)		1.82
Nonvested at October 1, 2006		439,614		$	4.43

As of October 1, 2006, there was $1,413,602 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 nine month period ended October 1, 2006 was $112,915.

As of October 1, 2006, there was $37,500 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.

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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				Nine Months Ended
	October 1,		October 2,		October 1,		October 2,
	2006		2005		2006		2005
United States	$	4,428	$	2,647	$	9,490	$	7,975
Europe, Near East		3,583		5,214		14,377		12,263
Asia Pacific		8,733		9,849		31,107		24,130
Other Americas		1,510		833		6,752		2,773
	$	18,254	$	18,543	$	61,726	$	47,141

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

	October 1,		December 31,
	2006		2005
North America	$	5,705	$	2,156
Asia Pacific		614		348
	$	6,319	$	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.

The Company also has certain sales transactions for projects that are not completed within the normal

10

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

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 nine months ended October 1, 2006, there was $0 and $1,211,000 respectively, of revenue recognized using the percentage of completion method. For the three and nine months ended October 2, 2005, there was $1,639,000 and $2,338,000 respectively, 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 nine months ended October 1, 2006 (in thousands):

	Nine Months Ended
	October 1, 2006
Beginning balance, December 31, 2005	$	1,036
Plus: accruals related to new sales		827
Less: warranty claims incurred		(434	)
Less: reversal of excess requirements		(481	)
Balance, end of period	$	948

(9) Recent Accounting Pronouncements

FAS No. 151,Inventory Costs — An Amendment of ARB No. 43, Chapter 4(SFAS 151) was issued in November 2004. SFAS 151 reinforces that abnormal levels of idle facility expense, freight, handling costs and spoilage are required to be expensed as incurred and not included in overhead. The statement also requires fixed production overheads be allocated to conversion costs based on the production facility’s normal capacity. The provisions in SFAS 151 are effective prospectively for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS 151 did not have a material impact on our consolidated financial statements.

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

11

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

SFAS No. 154 if such a change arises after the effective date of January 1, 2006.

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 on our financial statements of adopting FIN 48.

In September 2006, the SEC issued Staff Accounting Bulleting No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary “correcting” adjustments to the carrying value of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method, and the Company had properly applied its method for assessing misstatements in the prior year. SAB 108 is effective for fiscal years ending on or after November 15, 2006. We are currently evaluating the impact on our financial statements of adopting SAB 108.

(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 and fourth years after the acquisition in an amount not less than $300,000 per year; 3) Royalty payments on any products using Atmoplas technology manufactured by the Company during the fifth, sixth and seventh years after the acquisition calculated on a percentage basis; and 4) Royalty payments on licensing revenues 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, the Company, founded in 1950 and headquartered in North 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

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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 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 net sales and percent change:

	Three Months Ended
	October 1, 2006					October 2, 2005
			% of					% of			Percent
	$ thousands		revenues			$ thousands		revenues			change
Net sales	$	18,254		100.0	%	$	18,543		100.0	%		(1.6	)%
Cost of goods sold		10,627		58.2	%		11,880		64.1	%		(10.5	)%
Gross profit		7,627		41.8	%		6,663		35.9	%		14.5	%
Selling, general and administrative expenses		3,871		21.2	%		4,031		21.7	%		(4.0	)%
Research, development and engineering		1,377		7.5	%		893		4.8	%		54.2	%
Operating income		2,379		13.1	%		1,739		9.4	%		36.8	%
Income before provision for income taxes		2,397		13.1	%		1,591		8.6	%		50.7	%
Net income	$	2,349		12.9	%	$	1,591		8.6	%		47.6	%

	Nine Months Ended
	October 1, 2006					October 2, 2005
			% of					% of			Percent
	$ thousands		revenues			$ thousands		revenues			change
Net sales	$	61,726		100.0	%	$	47,141		100.0	%		30.9	%
Cost of goods sold		37,047		60.0	%		30,375		64.4	%		22.0	%
Gross profit		24,679		40.0	%		16,766		35.6	%		47.2	%
Selling, general and administrative expenses		12,733		20.6	%		11,288		23.9	%		12.8	%
Research, development and engineering		3,559		5.8	%		2,532		5.4	%		40.6	%
Operating income		8,387		13.6	%		2,946		6.3	%		184.7	%
Income before provision for income taxes		8,373		13.6	%		2,528		5.4	%		231.2	%
Net income	$	8,205		13.3	%	$	2,528		5.4	%		224.6	%

Net Sales. In the third quarter of 2006 versus the third quarter of 2005, the alternative energy products sales growth offset the decrease in sales in our electronic markets.

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

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	Three Months Ended										Nine Months Ended
	October 1, 2006					October 2, 2005					October 1, 2006					October 2, 2005
			% of					% of					% of					% of
	$		revenues			$		revenues			$		revenues			$		revenues
United States	$	4,428		24.3	%	$	2,647		14.3	%	$	9,490		15.4	%	$	7,975		16.9	%
Europe, Near East		3,583		19.6	%		5,214		28.1	%		14,377		23.3	%		12,263		26.0	%
Asia Pacific		8,733		47.8	%		9,849		53.1	%		31,107		50.4	%		24,130		51.2	%
Other Americas		1,510		8.3	%		833		4.5	%		6,752		10.9	%		2,773		5.9	%
	$	18,254				$	18,543				$	61,726				$	47,141

In the third quarter of 2006 versus the third quarter of 2005, the Company experienced flat total sales, with a decrease in Asia offset by increases in the United States and the Other Americas. During the first nine months of 2006 versus the same period of 2005, the Company has experienced substantial sales growth. The geographical distribution of the percentage of sales has been relatively constant except for an increasing percentage for Other Americas.

Gross Profit. The increase in the gross profit percentage for the third quarter and the first nine months of 2006 versus the same periods in 2005 was principally the result of lower costs in our U.S. and China operations.

Selling, General and Administrative.In the first nine months, the increase in selling, general and administrative expense in absolute dollars was due to increased commission costs resulting from additional sales. However, selling, general and administrative expenses decreased as a percentage of net sales in 2006 versus 2005. Also, the Company increased its spending for customer service, sales, marketing and administration related costs in line with its business needs and new costs of compliance with Sarbanes Oxley and being a public company.

Research, Development and Engineering.In the first nine months of 2006, the Company increased its spending on RD&E versus the first nine months of 2005 to support its expanding product lines and its research efforts in the alternative energy markets.

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. 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. Our statutory federal income tax rate is 34.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of October 1, 2006, the Company had $20.1 million in cash and cash equivalents.

During the nine months ended October 1, 2006, the Company had net cash resources provided by operating activities of approximately $0.9 million. The Company’s cash provided was primarily the result of an increase in accounts receivable of $2.8 million, an increase of other assets of $0.4 million, a decrease of accounts payable of $2.3 million, and an increase in inventory of $2.8 million, and was offset by adding back depreciation and amortization of $0.9 million, stock based compensation of $0.1 million and a net profit of $8.2 million.

The Company’s accounts receivable balance decreased by $3.0 million in the third quarter ended October 1, 2006 versus the previous quarter. The Company has decreased its accounts receivable reserve balance in line with the decrease in its accounts receivables.

The Company has a 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

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loan agreement extends to May 31, 2007 and is subject to maintaining certain financial covenants. At October 1, 2006, there were no borrowings outstanding under this agreement.

We entered into a new mortgage note that is secured by our real property in Billerica, MA. The amount of the mortgage note executed on March 30, 2006 was $10 million. The mortgage note requires monthly payments of $74,733, which 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 October 1, 2006, the Company has no commitments relating to capital expenditures for a new ERP system. The 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.

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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.

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.

The fifth significant deficiency relates to the need for automating our financial consolidation process and the related accounting for currency translation adjustments. 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 nine 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 and in the United States by end of 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”, which is a complete duplicate of our current system residing in a secure remote location.
3.	In 2006, we 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. Actions we are taking include the following:

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1.	We have secured and evaluated our dedicated internal resources and have identified and secured various consultants to enhance areas of weakness.
2.	We have identified and have begun to document and test the key controls of 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 increased 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, 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. 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 manufacturers, which in turn depend on current and anticipated market demand for printed circuit boards and integrated circuits and the products that use them. The electronics semiconductor industries have historically been cyclical and have experienced periodic downturns that have had a material adverse effect on the demand for electronic semiconductor 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 volume of our products produced in China recently reached approximately a third of our total production. 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.

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In the last 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 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.

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 several countries. Failure to maintain such licenses or obtain new required licenses will limit our ability to expand our revenue from this market.

Fuel Cells.The developing fuel cell sector of the energy market 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.

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

We generated net income of $8.2 million for the nine months ended, October 1, 2006. Our year to year 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 improved procurement management worldwide 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 84.6% of our consolidated revenue for the nine months ended October 1, 2006. We expect to continue to generate a significant percentage of our revenue outside the

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United States for the foreseeable future. In addition, we have direct investments in a number of subsidiaries outside of 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 nine months ended October 1, 2006, 50.4% 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 operations are still being developed. If they are not 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. Even if our current system does not malfunction, it may not be sufficient to continue to support our operations.

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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.

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 31, 2006, and we have started to document and test 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 when we were recently incurring losses, 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.

Although we use numerous vendors to supply components for the manufacture of our products, not all are 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

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

Our officers and directors may be able to block proposals for a change in control.

Paul J. van der Wansem, our chairman and chief executive officer, beneficially owns approximately 16.6% of our outstanding common stock as of October 1, 2006. Due to this concentration of ownership, Mr. van der Wansem may be able to prevail on all matters requiring a stockholder vote, including:

• the election of directors;

• the amendment of our organizational documents; or

• the approval of a merger, sale of assets, or other major corporate transaction.

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: November 7, 2006	BY:	/s/ Paul J. van der Wansem
	Paul J. van der Wansem
	President, Chief Executive Officer
	(principal executive officer) and Chairman of the Board of Directors
DATE: November 7, 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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