Btu International (BTUI) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 3, 2010

OR

¨ 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	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.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files.)    Yes  ¨     No  ¨ (Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this time)

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

Large Accelerated Filer	¨	Accelerated Filer	¨
Non-Accelerated Filer	¨	Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, as of the latest practicable date: As of November 2, 2010: 9,289,630 shares.

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)
Unaudited Condensed Consolidated Balance Sheets	1
Unaudited Condensed Consolidated Statements of Operations	2
Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)	3
Unaudited Condensed Consolidated Statements of Cash Flows	4-5
Notes to Unaudited Condensed Consolidated Financial Statements	6-11
Item  2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-16
Item 3.Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.Controls and Procedures	17
PART II. OTHER INFORMATION
Item 1A.Risk Factors	18
Item 5.Other Information	18
Item 6.Exhibits	18
Signatures	19
EX-10.2 Loan Modification Agreement
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 and per share data)

(unaudited)

	October 3, 2010			December 31, 2009
Assets
Current assets
Cash and cash equivalents	$	21,813		$	25,397
Accounts receivable, net		17,635			10,333
Inventories, net		17,493			14,533
Other current assets		1,058			1,283
Total current assets		57,999			51,546
Property, plant and equipment, net		5,917			6,332
Other assets, net		617			916
Total assets	$	64,533		$	58,794
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	325		$	310
Accounts payable		9,196			5,527
Other current liabilities		9,663			8,577
Total current liabilities		19,184			14,414
Long-term debt, less current portion		8,446			8,687
Total liabilities		27,630			23,101
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; 10,655,967 shares issued and 9,288,000 shares outstanding at October 3, 2010 and 10,619,589 shares issued and 9,251,622 shares outstanding at December 31, 2009		107			106
Additional paid in capital		48,197			47,054
Accumulated deficit		(7,905	)		(7,847	)
Treasury stock, at cost, 1,367,967 shares at October 3, 2010 and December 31, 2009		(4,990	)		(4,990	)
Accumulated other comprehensive income		1,494			1,370
Total stockholders’ equity		36,903			35,693
Total liabilities and stockholders’ equity	$	64,533		$	58,794

The accompanying notes are an integral part of these unaudited 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 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Net sales	$	19,011		$	12,409		$	54,235		$	33,023
Costs of goods sold		10,845			8,548			31,281			24,093
Gross profit		8,166			3,861			22,954			8,930
Operating expenses:
Selling, general and administrative		5,758			4,697			16,533			13,397
Research, development and engineering		1,618			1,411			4,813			5,286
Operating income (loss)		790			(2,247	)		1,608			(9,753	)
Interest income		21			68			62			214
Interest expense		(155	)		(206	)		(466	)		(504	)
Foreign exchange loss		(114	)		(4	)		(9	)		(239	)
Other income (expense)		(5	)		7			5			41
Income (loss) before provision for income taxes		537			(2,382	)		1,200			(10,241	)
Provision for income taxes		557			238			1,258			419
Net loss	$	(20	)	$	(2,620	)	$	(58	)	$	(10,660	)
Loss per share:
Basic	$	(0.00	)	$	(0.29	)	$	(0.01	)	$	(1.16	)
Diluted	$	(0.00	)	$	(0.29	)	$	(0.01	)	$	(1.16	)
Weighted average number of shares outstanding:
Basic shares		9,285,002			9,194,502			9,269,047			9,222,723
Effect of dilutive options		—			—			—			—
Diluted shares		9,285,002			9,194,502			9,269,047			9,222,723

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 (LOSS)

FOR THE NINE MONTHS ENDED OCTOBER 3, 2010

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In Capital		Retained Earnings/ (Accumulated Deficit)			Treasury Stock					Accumulated Other Comprehensive Income		Total
	# of shares		$							# of shares		$
Balance at December 31, 2009		10,620	$	106	$	47,054	$	(7,847	)		1,368	$	(4,990	)	$	1,370	$	35,693
Net loss		—		—		—		(58	)		—		—			—		(58	)
Exercise of stock options		25		—		76		—			—		—			—		76
Issuance of common stock		11		1		55		—			—		—			—		56
Stock-based compensation		—		—		1,012		—			—		—			—		1,012
Translation adjustment		—		—		—		—			—		—			124		124
Balance at October 3, 2010		10,656	$	107	$	48,197	$	(7,905	)		1,368	$	(4,990	)	$	1,494	$	36,903

	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	October 3, 2010						September 27, 2009
Comprehensive income (loss) is calculated as follows:
Net loss	$	(20	)	$	(58	)	$	(2,620	)	$	(10,660	)
Other comprehensive income:
Foreign currency translation adjustment		150			124			1			148
Comprehensive income (loss)	$	130		$	66		$	(2,619	)	$	(10,512	)

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 NINE MONTHS ENDED OCTOBER 3, 2010 AND SEPTEMBER 27, 2009

(in thousands)

(unaudited)

	October 3, 2010			September 27, 2009
Cash flows from operating activities:
Net loss	$	(58	)	$	(10,660	)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization		1,683			1,588
Provision (recovery) for bad debts		(40	)		(7	)
Provision for inventory obsolescence		990			1,522
Stock-based compensation		1,012			915
Net change in operating assets and liabilities:
Accounts receivable		(7,115	)		4,076
Inventories		(3,832	)		2,257
Other current assets		134			477
Other assets		23			(9	)
Accounts payable		3,599			(1,109	)
Accrued expenses		1,055			(659	)
Net cash used in operating activities		(2,549	)		(1,609	)
Cash flows used in investing activities:
Purchases of property, plant and equipment		(887	)		(479	)
Net cash used in investing activities		(887	)		(479	)
Cash flows from (used in) financing activities:
Principal payments under loan and capital lease agreements		(226	)		(210	)
Issuance of common stock		56			49
Purchase of treasury stock		—			(599	)
Proceeds from the exercise of stock options		76			17
Net cash used in financing activities		(94	)		(743	)
Effects of exchange rates on cash		(54	)		159
Net decrease in cash and cash equivalents		(3,584	)		(2,672	)
Cash and cash equivalents, beginning of period		25,397			27,464
Cash and cash equivalents, end of period	$	21,813		$	24,792

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 NINE MONTHS ENDED OCTOBER 3, 2010 AND SEPTEMBER 27, 2009

(in thousands)

(unaudited)

	October 3, 2010		September 27, 2009
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	404	$	322
Income taxes		887		424

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

5

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation

The condensed consolidated balance sheet, financial information and related disclosures as of and for the year ended December 31, 2009 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of October 3, 2010 and the related condensed statements of operations and comprehensive income (loss) for the three and nine months ended October 3, 2010 are unaudited. The condensed consolidated statements of stockholders’ equity and consolidated statements of cash flows for the nine months ended October 3, 2010 and September 27, 2009 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 any other period or 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, 2009, 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) Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited condensed consolidated financial statements are those set forth in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission.

Subsequent Events — The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. We are not aware of any significant events that occurred subsequent to the balance sheet date, but prior to the filing of this report that would have a material impact on our condensed consolidated financial statements.

(3) Inventories, net

	October 3, 2010		December 31, 2009
	(in thousands)
Raw materials and manufactured components	$	8,057	$	6,051
Work-in-process		7,748		5,970
Finished goods		1,688		2,512
Total Net Inventory	$	17,493	$	14,533

6

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(4) Other Current Liabilities

	October 3, 2010		December 31, 2009
		(in thousands)
Accrued commissions	$	808	$	1,176
Accrued warranty		565		486
Accrued income taxes		647		774
Accrued audit		340		366
Accrued legal		281		265
Accrued bonus		471		305
Accrued Atmoplas acquisition-related royalties		—		600
Payroll and payroll taxes		778		836
Accrued royalties		23		179
Accrued cost of sales		521		157
Customer deposits		5,151		3,310
Other		78		123
Other current liabilities	$	9,663	$	8,577

Warranty

The Company provides standard warranty coverage for labor for 12 months and special extended material-only coverage on certain other products. The Company estimates and records an accrual for anticipated warranty claims based on sales. The accrual for warranty covers the estimated costs of material, labor and travel. Actual warranty claims incurred are charged to the accrual. 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 3, 2010:

	Nine Months Ended October 3, 2010
	(in thousands)
Beginning balance, December 31, 2009	$	486
Plus: accruals related to new sales		707
Less: warranty claims incurred and reserve adjustment		(628	)
Ending balance, October 3, 2010	$	565

7

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(5) Debt

Long-term debt at October 3, 2010 and December 31, 2009 consisted of:

	October 3, 2010		December 31, 2009
	(in thousands)
Mortgage note payable, interest rate of 5.50%	$	8,771	$	8,997
Less: current maturities		325		310
	$	8,446	$	8,687

On March 30, 2006, the Company entered into a mortgage note that is secured by our real property in Billerica, Massachusetts, in the amount of $10 million. This mortgage note payable has a balloon payment of $6.7 million due and payable at maturity on December 23, 2015. On September 9, 2010, the Company signed a Loan Modification Agreement relating to the mortgage note. The modifications resulted in a reduction of the annual interest rate from 6.84% to 5.50% and a reduction in the monthly payment from $76,280 to $69,000.

On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank. The bank agrees, at the Company’s request, to issue letters of credit in the bank’s name and the Company agrees to cash collateralize letters of credit via restricted cash deposits at the bank. As of October 3, 2010, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $479,648. This restricted cash value is included in the Company’s balance sheet in other current assets.

(6) Net Loss Per Share (EPS)

Basic EPS is computed by dividing net loss 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. Due to their antidilutive effect, approximately 495,162 and 493,414 options to purchase common stock were excluded from the calculation of diluted earnings per share for the three and nine months ended October 3, 2010, respectively, and 338,360 and 681,610 options were excluded for the three and nine months ended September 27, 2009, respectively. However, these options could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $380,015 and $1,012,268 for the three and nine months ended October 3, 2010 and $303,027 and $911,598 for the three and nine months ended September 27, 2009, respectively. These amounts do not include expense related to restricted stock awards issued in 2009. No restricted stock has been issued during the first nine months of 2010.

8

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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. Accordingly, awards ultimately expected to vest have been reduced by annualized estimated forfeiture rates of 4% and 5% for the three and nine month periods ended October 3, 2010 and September 27, 2009, respectively. We used the following assumptions for options granted in the following periods:

Calculation of Fair Value - Assumptions Used:

	Nine months ended
	October 3, 2010			September 27, 2009
Expected Volatility		66.81	%		65.57	%
Expected Life		4.63			4.67
Risk-Free Interest Rate		1.87	%		2.17	%
Expected Dividend Yield		0			0

Expected volatilities are based on the historical volatility of the Company’s common stock. 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 United 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 following table summarizes the stock option activity during the nine months ended October 3, 2010

	Shares			Weighted- Average Exercise Price		Average Remaining Contractual Term		Aggregate Intrinsic Value
Options
Outstanding at December 31, 2009		1,177,028		$	6.55
Granted		150,044		$	5.46
Exercised		(25,250	)	$	3.31
Forfeited		(73,363	)	$	7.94
Outstanding at October 3, 2010		1,228,459		$	6.40		4.68	$	2,603,508
Exercisable at October 3, 2010		503,019		$	7.58		3.23	$	989,441

The weighted-average grant date fair values of options granted during the nine month periods ended October 3, 2010 and September 27, 2009 were $2.98 and $4.06, respectively. The aggregate fair value of options exercised during the nine-month period ended October 3, 2010 and September 27, 2009 was $49,711 and $17,337, respectively

As of October 3, 2010 there was $2,193,582 of total unrecognized compensation cost related to non-vested options granted under the Company’s option plans. That cost is expected to be recognized over a weighted average period of 2.27 years. The total fair value of options vested during the nine-month period ended October 3, 2010 was $723,249.

9

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(8) Revenue Recognition

For the three and nine months ended October 3, 2010, there was $292,600 and $1,848,012, respectively, of revenue recognized using the percentage of completion method. For the three and nine months ended September 27, 2009, there was $1,053,778 and $3,943,391, respectively, of revenue recognized using the percentage of completion method. For additional information on the Company’s revenue recognition policies, please see Note 1 in the notes to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed March 4, 2010 with the Securities and Exchange Commission.

(9) Fair Value of Financial Instruments

In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

• Level 1 – Valuation is based upon quoted market price for identical instruments traded in active markets.

• Level 2 – Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. Valuation techniques include use of discounted cash flow models and similar techniques.

In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases, where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

a. Cash and Cash Equivalents-The carrying amount of these assets on the Company’s consolidated balance sheets approximates their fair value because of the short maturities of these instruments.

b. Receivables, Payables and Accruals—The recorded amounts of financial instruments, including accounts receivable, accounts payable, and accrued liabilities, approximate their fair value because of the short-term maturity of these instruments.

c. Long-term Debt—The fair value of long-term indebtedness as of October 3, 2010, was approximately $8.8 million. The current market interest rate approximates the rate of the mortgage note payable of 5.5%.

(10) Contingent Liabilities

As an equipment manufacturer, the Company generates and disposes of small quantities of solid waste that is considered hazardous under EPA Environmental Protection Agency regulations. Because the Company used a waste disposal firm that disposed the solid waste at a site that the EPA has designated as a Superfund site the Company has been named by the EPA as one of the entities responsible for a portion of the expected clean-up costs. Based on the Company’s proportional responsibility, as negotiated with and agreed to by the EPA, the Company’s liability related to this matter is $225,140. This amount is included in other current liabilities on the balance sheet as of October 3, 2010. On October 2, 2009, in accordance with the agreement, the Company established a letter of credit for $225,140 to the benefit of the EPA for potential cash payments as settlements for the Company’s proportional liability.

(11) Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06,Improving Disclosures about Fair Value Measurements. The ASU reports on new disclosure requirements -and clarifications of existing requirements -under ASC Subtopic 820-10 (originally issued as FAS 157). The new rules require companies to provide greater detail about the methods and inputs they use to measure the fair value of assets, bringing U.S. Generally Accepted Accounting Principles (GAAP) in line with International Financial Reporting Standards (IFRS) 7, which already requires similar disclosures. The adoption of this Standard has not had an impact on the Company’s consolidated financial statements.

10

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

(12) 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.

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, alternative energy, automotive and other industries. This business segment includes the supply of solder reflow systems used for surface mount applications in printed circuit board assembly. Thermal processing equipment is used in low temperature curing/encapsulation, hybrid integrated circuit manufacturing, integrated circuit packaging and sealing, and processing multi-chip modules. In addition, the thermal process equipment is used for solar cell processing, sintering nuclear fuel for commercial power generation, as well as brazing and the sintering of ceramics and powdered metals, and the deposition of precise thin film coatings. The business segment’s customers are multinational original equipment manufacturers and contract manufacturing companies.

Tangible long-lived assets by geographic location are as follows:

	October 3, 2010		December 31, 2009
	(in thousands)
United States	$	5,230	$	5,679
Asia Pacific		687		653
	$	5,917	$	6,332

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BTU International, Inc. (“BTU”), founded in 1950 and headquartered in North Billerica, Massachusetts, is a market-leading, global supplier of advanced thermal processing equipment to the alternative energy and electronics manufacturing markets. BTU equipment is used in the production of solar cells and nuclear fuel, as well as in printed circuit board assembly and semiconductor packaging.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. In the solar market, BTU offers processing equipment for both silicon and thin film photovoltaics. Also in alternative energy, our customers use our thermal systems for the processing of nuclear fuel. 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 circuits into a package.

In 2004, we began manufacturing and material sourcing operations in a leased facility in Shanghai, China. These additional facilities were needed for further expansion into the Asia Pacific region. In addition, we expanded our product development capability to China, creating a global engineering team. This team has developed and commercially introduced our latest PYRAMAX™ and TRITAN™ products and continues to collaborate with our U.S. headquarters on additional product initiatives.

RESULTS OF OPERATIONS

Three months ended October 3, 2010 compared to the three months ended September 27, 2009

The following table sets forth, for the periods indicated selected items in our statements of operations expressed as a percentage of net sales.

Summary Consolidated Statement of Operations

	Three Months Ended
	October 3, 2010						September 27, 2009
				($ in thousands)
				% of Net Sales						% of Net Sales			Percent Change
Net sales	$	19,011			100.0	%	$	12,409			100.0	%		53.2	%
Cost of goods sold		10,845			57.0	%		8,548			68.9	%		26.9	%
Gross profit		8,166			43.0	%		3,861			31.1	%		111.5	%
Selling, general and administrative expenses		5,758			30.3	%		4,697			37.8	%		22.6	%
Research, development and engineering expenses		1,618			8.5	%		1,411			11.4	%		14.7	%
Operating income (loss)		790			4.2	%		(2,247	)		(18.1	)%		(135.2	)%
Income (loss) before provision for income taxes		537			2.8	%		(2,382	)		(19.2	)%		(122.5	)%
Provision for income taxes		557			2.9	%		238			1.9	%		134.0	%
Net loss	$	(20	)		(0.1	)%	$	(2,620	)		(21.1	)%		(99.2	)%

Net Sales. Net sales in the third quarter of 2010 increased by $6.6 million, or 53.2%, as compared to the same quarter in 2009. In the third quarter of 2010 versus the third quarter of 2009, net sales for the Company’s electronics market systems increased by $4.4 million, or 61.9%; for alternative energy systems, sales increased by $1.8 million, or 49.3%; and parts and service sales increased by $0.4 million, or 23.7%. The Company’s third quarter 2010 alternative energy systems sales growth versus the same period in 2009 is the result of increased demand for our solar products. The substantial growth in the third quarter of 2010 for the Company’s electronics market systems, as compared to the same period in 2009, represents the continuing recovery of demand for our electronic products from the economic recession, particularly in Asia.

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The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed in thousands of dollars and as a percentage of total revenues. The values shown represent the amount sold into each of the listed geographical areas.

	Three Months Ended
	October 3, 2010					September 27, 2009
	($ in thousands)
	$		% of Revenues			$		% of Revenues
United States	$	1,675		8.8	%	$	2,194		17.7	%
Europe, Near East		1,581		8.3	%		2,040		16.4	%
Asia Pacific		15,094		79.4	%		7,864		63.4	%
Other Americas		661		3.5	%		311		2.5	%
Total Revenue	$	19,011				$	12,409

The above geographical revenue breakdown reflects the magnitude of the recovery in Asia from the economic downturn with a nearly doubling of revenue in Asia for the comparative periods.

Gross Profit. The third quarter 2010 gross profit of $8.2 million increased by $4.3 million, or 111.5%, versus the third quarter of 2009 primarily as a result of the 53.2% revenue increase. In the third quarter of 2010 as compared to the same period of 2009, gross profit as a percentage of sales increased to 43.0% as compared to 31.1% reflecting increased revenues and improved factory utilization in both our China and USA facilities and reduced inventory write-downs.

Selling, General and Administrative (SG&A).SG&A expenses increased by $1.1 million, or 22.6%, as compared to the same quarter in 2009 which occurred primarily in commission expense as a result of increased revenue of 53.2% in the third quarter of 2010 as compared to 2009.

Research, Development and Engineering (RD&E). RD&E expenses increased by $0.2 million, or 14.7%, from $1.4 million in the third quarter of 2009 to $1.6 million in the third quarter of 2010. The increases relate principally development of our products for the solar industry.

Operating Income (Loss) The impact of the revenue increase and its associated increase in gross margin in the third quarter of 2010, resulted in operating income as compared to an operating loss, for the same period in 2009.

Interest Income (Expense). In the third quarter of 2010, as compared to the same period in 2009, net interest expense remained relatively stable.

Foreign Exchange loss.The foreign exchange loss for the third quarter of 2010 was $115,000 as compared to a loss of $4,000 in the third quarter of 2009. The Company’s primary exposure to foreign exchange losses result from U.S. dollar denominated balance sheet accounts recorded at the Company’s China and UK operations and Chinese RMB denominated balance sheet accounts recorded at the Company’s U.S. headquarters.

Income Taxes For the three months ended October 3, 2010, we recorded an income tax provision of $557,000 as compared to $238,000 for the three months ended September 27, 2009. The Company’s income tax provision primarily relates to income and withholding taxes related to our China operations.

The significant fluctuations in the Company’s quarterly tax rate, as a percent of consolidated pre-tax income or loss, are the result of the varying ratio of the consolidated pre-tax profit or loss by tax entity to the consolidated tax provision. A significant portion of the consolidated tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. China withholding taxes primarily result from corporate royalty charges based on our Chinese manufacturing subsidiary’s net sales.

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RESULTS OF OPERATIONS

Nine months ended October 3, 2010 compared to the nine months ended September 27, 2009.

The following table sets forth, for the periods indicated, selected items in our statements of operations expressed as a percentage of net sales.

Summary Consolidated Statement of Operations

	Nine Months Ended
	October 3, 2010						September 27, 2009
				($ in thousands)
				% of net sales						% of net sales			Percent change
Net sales	$	54,235			100.0	%	$	33,023			100.0	%		64.2	%
Cost of goods sold		31,281			57.7	%		24,093			73.0	%		29.8	%
Gross profit		22,954			42.3	%		8,930			27.0	%		157.0	%
Selling, general and administrative expenses		16,533			30.5	%		13,397			40.6	%		23.4	%
Research, development and engineering expenses		4,813			8.9	%		5,286			16.0	%		(8.9	)%
Operating income (loss)		1,608			3.0	%		(9,753	)		(29.5	)%		(116.5	)%
Income (loss) before provision for income taxes		1,200			2.2	%		(10,241	)		(31.0	)%		(111.7	)%
Provision for income taxes		1,258			2.3	%		419			1.3	%		200.2	%
Net loss	$	(58	)		(0.1	)%	$	(10,660	)		(32.3	)%		(99.5	)%

Net sales for the nine months year to date 2010 as compared to the nine months year to date 2009 increased by $21.2 million, or 64.2%. Net sales increases were $15.4 million, or 108.6%, for the Company’s electronics market systems; $5.6 million, or 40.1%, for alternative energy systems; and $0.2 million, or 4.7%, for parts, other market systems and service. The Company’s nine month 2010 alternative energy systems sales growth as compared to the same period in 2009 is the result of increased demand for both solar and nuclear products. The substantial growth in the first nine months of 2010, as compared to the same period in 2009, for the Company’s electronic market systems revenue, particularly in Asia, represents the continuing recovery in demand for our electronic products from the economic recession.

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The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed in thousands of dollars and as a percentage of total revenues. The values shown represent the amount sold into each of the listed geographical areas.

	Nine Months Ended
	October 3, 2010					September 27, 2009
	($ in thousands)
	$		% of revenues			$		% of revenues
United States	$	4,643		8.6	%	$	7,833		23.7	%
Europe, Near East		8,167		15.1	%		6,994		21.2	%
Asia Pacific		39,741		73.3	%		16,908		51.2	%
Other Americas		1,684		3.1	%		1,288		3.9	%
Total Revenue	$	54,235				$	33,023

The above geographical revenue breakdown for the first nine months of 2010 versus the same period in 2009, reflects the magnitude of the recovery in Asia, where revenues more than doubled over the comparative periods.

Gross Profit. Gross profit for the first nine months of 2010 increased to $23.0 million, or 157.0%, as compared to $8.9 million for the same period in 2009. The gross profit as a percentage of sales for the first nine months of 2010 increased to 42.3% from 27.0% for the first nine months of 2009. These increases are due primarily to the 64.2% revenue increase, improved factory utilization in both China and the USA and reduced inventory write-downs.

Selling, General and Administrative (SG&A.) SG&A expenses for the first nine months of 2010 as compared to the same period in 2009 increased by $3.1 million, or 23.4%, from $13.4 million to $16.5 million. This increase was primarily the result of increased commission expense from increased revenues of 64.2% for the first nine months of 2010 as compared to the same period in 2009.

Research, Development and Engineering (RD&E).RD&E expenses decreased by $0.5 million, or 8.9 %, to $4.8 million for the first nine months of 2010, compared to $5.3 million for the same period in 2009. The reduction in R&D is the result of the Company’s actions of reducing, Research and Development prototype model costs, as new products were introduced in 2010.

Operating Income (Loss). The impact of the revenue increase and the associated increase on gross margins in the first nine months of 2010 resulted in operating income as compared to an operating loss for the same period in 2009.

Interest Income (Expense). For the first nine months of 2010 as compared to the same period in 2009, interest expense remained relatively stable. Interest income is minimal for the first nine months of 2010 due to lower interest rates and lower cash balances.

Foreign Exchange loss.The foreign exchange loss for the first nine months of 2010 was $9,000 as compared to a loss of $239,000 for the same period in 2009. The Company’s primary exposure to foreign exchange losses result from U.S. dollar denominated balance sheet accounts recorded at the Company’s China and UK operations, and Chinese RMB denominated balance sheet accounts recorded at the Company’s U.S. headquarters.

Income Taxes.During the nine months ended October 3, 2010, we recorded an income tax provision of $1.3 million as compared to $0.4 million for the nine months ended September 27, 2009. The Company’s income tax provision primarily relates to income and withholding taxes related to our China operations.

The significant fluctuations in the Company’s quarterly tax rate, as a percent of consolidated pre-tax income or loss, are the result of the varying ratio of the consolidated pre-tax profit or loss by tax entity to the consolidated tax provision. A significant portion of the consolidated tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. China withholding taxes primarily result from corporate royalty charges based on our Chinese manufacturing subsidiary’s net sales.

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LIQUIDITY AND CAPITAL RESOURCES

As of October 3, 2010, we had $21.8 million in cash and cash equivalents, a decrease of $3.6 million, compared to $25.4 million at December 31, 2009.

During the nine months ended October 3, 2010, the Company used net cash of approximately $2.5 million in operating activities. This use of cash was primarily the result of an increase in accounts receivable of $7.2 million and an increase in inventory of $2.8 million, offset by depreciation and amortization of $1.7 million, an increase in accounts payable of $3.6 million, stock-based compensation expense of $1.0 million, a decrease of other assets of $0.1million, and an increase in other current liabilities of $1.1 million.

On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank. The bank agrees, at the Company’s request, to issue letters of credit in the bank’s name and the Company agrees to cash collateralize the letters of credit via restricted cash deposits at the bank. As of October 3, 2010, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $479,648. This restricted cash value is included in the Company’s balance sheet in other current assets.

The Company has a mortgage note that is secured by its real property in Billerica, MA. The original amount of the note was $10 million. This mortgage note payable has a balloon payment of $6.7 million due and payable at maturity on December 23, 2015. On September 9, 2010, the Company signed a Loan Modification Agreement with the same bank that that the mortgage was entered into on December 23, 2003 and amended on March 30, 2006 (see below). The 2010 modifications resulted in lowering the annual interest rate from 6.84% to 5.50%, and lowering the monthly payment from $76,280 to $69,000. The mortgage note had an outstanding balance at October 3, 2010 of approximately $8.8 million.

As of October 3, 2010, the Company has no material commitments relating to capital expenditures. There were no significant changes in Company commitments that were outlined in the Company’s Form 10-K filing for 2009.

The Company’s business forecasts project that our cash position and cash flow will be sufficient to meet our corporate, operating and capital requirements for the next twelve months.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

During the nine months ended October 3, 2010, we believe that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in the “Critical Accounting Policies and Significant Estimates” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

OTHER MATTERS

Given that the Company invoices the vast majority of its sales in U.S. dollars, that the Company has a substantial manufacturing presence in China and that sales into China are primarily in U.S. dollars, should the U.S. dollar decline in relation to the Chinese RMB, the Company’s financial results will be adversely affected.

FORWARD LOOKING STATEMENTS

This Report contains express or implied forward-looking statements. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “may,” “intends,” “believes,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are neither promises nor guarantees but rather are subject to risks and uncertainties described in this report, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the “safe harbor” provisions established by the federal securities laws, and are based on the assumptions and expectations of our management at the time such statements are made. Important factors that could cause actual results to differ include, but are not limited to, the condition of the world economy, the timely availability and acceptance of new products in the electronics, semiconductor and alternative energy generation industries, manufacturing problems with our foreign operations in China, the impact of competitive products and pricing, particularly from companies in Asia, and other risks detailed above under “Risk Factors.” Actual results may vary materially. Unless otherwise required by law, we disclaim any obligation to revise or update this information in order to reflect future events or developments, whether or not anticipated. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have international subsidiaries in China, the United Kingdom, Singapore, the Philippines and Malaysia. These subsidiaries transact business in their functional or local currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition.

As of October 3, 2010 and December 31, 2009, all of our long-term debt obligations are fixed rate financial instruments. Therefore we are not exposed to interest rate risk resulting from the variable interest rate of our debt.

Item 4. Controls and Procedures

Controls and Procedures.

Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that 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 and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined by Rule 13a-15(f)), that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

Risk factors are disclosed in the Company’s 2009 Annual Report on Form 10-K. During the nine months ended October 3, 2010, there were no material changes to the risk factors for the business.

Item 5. Other Information

On September 9, 2010, the Company signed a Loan Modification Agreement relating to the mortgage note secured by it property in Billerica, MA. The modifications resulted in a reduction of the annual interest rate from 6.84% to 5.50% and a reduction in the monthly payment from $76,280 to $69,000.

Item 6. Exhibits

(a) Exhibits

Exhibit 10.2 - Loan Modification Agreement

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 4, 2010	BY:	/S/    PAUL J.VANDER WANSEM
		Paul J. van der Wansem
		President, Chief Executive Officer
		(principal executive officer) and Chairman of the Board of Directors
DATE: November 4, 2010	BY:	/S/    PETER J. TALLIAN
		Peter J. Tallian
		Chief Financial Officer and Principal Accounting Officer (principal financial and accounting officer)

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