Btu International (BTUI) 10-Q 2013 Q2 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 June 30, 2013

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (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 August 1, 2013: 9,544,864 shares.

BTU INTERNATIONAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
Unaudited Condensed Consolidated Balance Sheets		3
Unaudited Condensed Consolidated Statements of Operations		4
Unaudited Condensed Consolidated Statements of Comprehensive Loss		5
Unaudited Condensed Consolidated Statement of Stockholders’ Equity		5
Unaudited Condensed Consolidated Statements of Cash Flows		6
Notes to Unaudited Condensed Consolidated Financial Statements		7-11
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	16
Item 4.	Controls and Procedures	16
PART II. OTHER INFORMATION
Item 6.	Exhibits	17
Signatures		18

PART I. FINANCIAL STATEMENTS

Item 1. Financial Statements

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	June 30, 2013			December 31, 2012
Assets
Current assets
Cash and cash equivalents	$	15,283		$	20,218
Accounts receivable, less allowance of $1,372 and $1,583 at June 30, 2013 and December 31, 2012		11,286			9,623
Inventories		10,611			9,547
Other current assets		5,896			4,131
Total current assets		43,076			43,519
Property, plant and equipment, net		3,858			4,669
Other assets, net		538			481
Total assets	$	47,472		$	48,669
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	411		$	400
Accounts payable		7,298			5,185
Deferred revenue		1,375			893
Accrued expenses		4,535			5,147
Total current liabilities		13,619			11,625
Long-term debt, less current portion		7,357			7,564
Total liabilities		20,976			19,189
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; 10,912,831 shares issued and 9,544,864 shares outstanding at June 30, 2013 and 10,898,939 shares issued and 9,530,972 shares outstanding at December 31, 2012		109			109
Additional paid in capital		51,882			51,545
Accumulated deficit		(22,771	)		(19,385	)
Treasury stock, at cost, 1,367,967 shares at June 30, 2013 and December 31, 2012		(4,990	)		(4,990	)
Accumulated other comprehensive income		2,266			2,201
Total stockholders’ equity		26,496			29,480
Total liabilities and stockholders’ equity	$	47,472		$	48,669

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

3

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Net sales	$	14,244		$	14,598		$	24,747		$	30,870
Costs of goods sold		8,850			9,916			16,623			20,965
Gross profit		5,394			4,682			8,124			9,905
Operating expenses:
Selling, general and administrative		4,355			5,336			9,009			10,749
Research, development and engineering		1,017			1,306			2,151			2,788
Operating income (loss)		22			(1,960	)		(3,036	)		(3,632	)
Interest income		11			16			23			36
Interest expense		(107	)		(114	)		(220	)		(232	)
Foreign exchange gain (loss)		(38	)		10			(114	)		(52	)
Other income		5			1			46			1
Loss before provision for income taxes		(107	)		(2,047	)		(3,301	)		(3,879	)
Provision for income taxes		154			102			85			277
Net loss	$	(261	)	$	(2,149	)	$	(3,386	)	$	(4,156	)
Loss per share:
Basic	$	(0.03	)	$	(0.23	)	$	(0.36	)	$	(0.44	)
Diluted	$	(0.03	)	$	(0.23	)	$	(0.36	)	$	(0.44	)
Weighted average number of shares outstanding:
Basic shares		9,532,140			9,503,203			9,531,559			9,502,462
Effect of dilutive options		—			—			—			—
Diluted shares		9,532,140			9,503,203			9,531,559			9,502,462

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

4

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2013			July 1, 2012			June 30, 2013			July 1, 2012
Comprehensive loss is calculated as follows:
Net loss	$	(261	)	$	(2,149	)	$	(3,386	)	$	(4,156	)
Other comprehensive income (loss):
Foreign currency translation adjustment		59			(66	)		65			2
Comprehensive loss	$	(202	)	$	(2,215	)	$	(3,321	)	$	(4,154	)

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In Capital		Accumulated Deficit			Treasury Stock					Accumulated Other Comprehensive Income		Total
	shares		$							shares		$
Balance at December 31, 2012		10,899	$	109	$	51,545	$	(19,385	)		1,368	$	(4,990	)	$	2,201	$	29,480
Net loss		—		—		—		(3,386	)		—		—			—		(3,386	)
Issuance of common stock		14		—		17		—			—		—			—		17
Stock-based compensation		—		—		320		—			—		—			—		320
Translation adjustment		—		—		—		—			—		—			65		65
Balance at June 30, 2013		10,913	$	109	$	51,882	$	(22,771	)		1,368	$	(4,990	)	$	2,266	$	26,496

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

5

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND JULY 1, 2012

($ in thousands)

(unaudited)

	June 30, 2013			July 1, 2012
Cash flows from operating activities:
Net loss	$	(3,386	)	$	(4,156	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		965			830
Provision (recovery) for bad debts		(188	)		36
Provision for inventory obsolescence		1,256			1,319
Gain on sale of property, plant and equipment		(51	)		—
Stock-based compensation		320			510
Deferred taxes		(64	)		(162	)
Net change in operating assets and liabilities:
Accounts receivable		(1,430	)		(1,440	)
Inventories		(2,245	)		(410	)
Other current assets		(1,697	)		(1,299	)
Deferred revenue		483			1,481
Other assets		(8	)		—
Accounts payable		2,039			4,199
Accrued expenses		(631	)		(40	)
Net cash provided by (used in) operating activities		(4,637	)		868
Cash flows provided by (used in) investing activities:
Proceeds from sale of property, plant and equipment		57			—
Purchases of property, plant and equipment		(125	)		(115	)
Net cash used in investing activities		(68	)		(115	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements		(196	)		(185	)
Issuance of common stock		17			29
Proceeds from the exercise of stock options		—			9
Net cash used in financing activities		(179	)		(147	)
Effects of exchange rates on cash		(51	)		24
Net increase (decrease) in cash and cash equivalents		(4,935	)		630
Cash and cash equivalents, beginning of period		20,218			18,948
Cash and cash equivalents, end of period	$	15,283		$	19,578
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	196		$	196
Income taxes		428			130

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

6

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 December 31, 2012 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of June 30, 2013 and the related condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2013 and July 1, 2012 are unaudited. The condensed consolidated statement of stockholders’ equity and consolidated statements of cash flows for the six months ended June 30, 2013 and July 1, 2012 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, 2012, together with the auditors’ report, included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC).

(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, 2012 as filed with the SEC.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, that requires entities to disclose items reclassified out of accumulated other Comprehensive Income (AOCI) and into net income in their entirety, the effect of the reclassification on each affected net income line item and for AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. This consolidated standard is effective for annual periods beginning after December 15, 2012 and interim periods within those years. The application of this standard did not have a material impact on the Company’s consolidated financial statements.

Subsequent Events - The Company evaluated subsequent events through the time of issuance of these condensed consolidated financial statements. We are not aware of any events that occurred subsequent to the balance sheet date, but prior to the filing of this report that would have a material impact on the Company’s condensed consolidated financial statements.

(3) Inventories

	June 30, 2013			December 31, 2012
	($ in thousands)
Raw materials and manufactured components	$	5,991		$	4,772
Work-in-process		3,350	��		1,905
Finished goods		1,270			2,870
Total inventory	$	10,611		$	9,547

7

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(4) Accrued Expenses

	June 30, 2013		December 31, 2012
	( $ in thousands)
Accrued commissions	$	990	$	935
Accrued warranty		356		393
Accrued taxes		1,716		1,817
Accrued audit		294		388
Accrued legal		270		240
Accrued bonus		15		87
Payroll and payroll taxes		605		793
Accrued cost of sales		122		300
Accrued restructuring costs		70		111
Other		97		83
	$	4,535	$	5,147

Warranty

The Company provides standard warranty coverage for labor for 12 months and special extended material-only coverage on certain 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 six months ended June 30, 2013 (in thousands):

	Six Months Ended June 30, 2013
Beginning balance, December 31, 2012	$	393
Plus: accruals related to new sales		191
Less: warranty claims incurred and reserve adjustment		(228	)
Ending balance, June 30, 2013	$	356

Restructuring

In April 2013, the Company eliminated 12 positions. Accordingly, the Company recorded a restructuring charge of $176,000 in the three months ended June 30, 2013. The decision to eliminate 12 positions was taken due to the continued slowdown in the solar industry. The Company eliminated 31 positions and recorded restructuring charges of $424,000 in the year ended December 31, 2012.

8

The following table reflects changes in the reserves for restructuring charges for the six months ended June 30, 2013 (in thousands):

	Six Months Ended June 30, 2013
Beginning balance, December 31, 2012	$	111
Plus: charges to costs and expenses		176
Less: reduction of accrual		(71	)
Less: cash payments		(146	)
Ending balance, June 30, 2013	$	70

(5) Debt

Long-term debt consisted of:

	June 30, 2013		December 31, 2012
	($ in thousands)
Mortgage note payable, interest rate of 5.50%	$	7,768	$	7,964
Less - current portion of long-term debt		411		400
Long-Term debt, less current portion	$	7,357	$	7,564

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 modification 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 June 30, 2013, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $272,282. This restricted cash value is included in the Company’s balance sheet in other current assets.

(6) Net Loss Per Share

Basic EPS is computed by dividing net income (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. Potentially dilutive securities include outstanding stock options and unvested restricted stock units (RSUs). Due to their anti-dilutive effect, approximately 1,335,721 and 1,306,616 instruments to purchase common stock were excluded from the calculation of diluted loss per share for the six months ended June 30, 2013 and July 1, 2012, respectively. However, these potentially dilutive securities could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $137,764 and $296,957 for the three and six months ended June 30, 2013, respectively and $191,617 and $498,256 for the three and six months ended July 1, 2012, respectively. These amounts do not include expense related to restricted stock awards or the employee stock purchase plan.

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 is 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 an annualized estimated forfeiture rate of 4%.

9

Calculation of Fair Value - Assumptions Used:

	Six months ended
	June 30, 2013			July 1, 2012
Expected Volatility		66.84	%		66.85	%
Expected Life (in years)		4.21			4.21
Risk-Free Interest Rate		0.79	%		0.59	%
Expected Dividend Yield		—			—

Expected volatilities are based on the historical volatility of the Company’s common stock. The Company had used 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 with a term approximating the expected life of the options. 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 six months ended June 30, 2013:

	Shares			Weighted- Average Exercise Price		Average Remaining Contractual Term		Aggregate Intrinsic Value
Options
Outstanding at December 31, 2012		1,353,141		$	6.20
Granted		112,933		$	2.35
Forfeited/Cancelled		(130,353	)	$	10.45
Outstanding at June 30, 2013		1,335,721		$	5.46		3.84	$	44,603
Exercisable at June 30, 2013		874,428		$	6.28		2.96	$	—

The weighted-average grant date fair value of options granted during the six-month periods ended June 30, 2013 and July 1, 2012 were $1.21 and $1.54, respectively. The aggregate fair value of options exercised during the six-month periods ended June 30, 2013 and July 1, 2012 was $0 and $6,179, respectively.

As of June 30, 2013, there was $789,446 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 1.57 years. The total fair value of options vested during the six-month period ended June 30, 2013 was $326,401.

In June 2013, the Company granted 20,250 restricted stock units to various employees. The fair value of the restricted stock units at the date of the grant was $2.35. These stock units vest over a two-year term. The Company has recorded compensation expense of $15,599 and $1,085 during the six-month period ended June 30, 2013 and July 1, 2012, respectively, related to restricted stock units. As of June 30, 2013, there was $72,873 of unrecognized compensation costs related to these grants. These grants have a remaining life of 1.60 years.

(8) Revenue Recognition

For the three and six months ended June 30, 2013, there was no revenue recognized using the percentage of completion method. For the three and six months ended July 1, 2012, there was $76,751 and $378,437, respectively, of revenue recognized using the percentage of completion method.

(9) Fair Value of Financial Instruments

In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the 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.

10

• 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.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the instruments’ short-term nature. Long-term debt is also reported at carrying value and approximates fair value as the interest rate on the mortgage note payable of 5.5% approximates the current market interest rate.

(10) 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:

	June 30, 2013		December 31, 2012
	($ in thousands)
United States	$	3,268	$	3,936
Asia Pacific		590		733
	$	3,858	$	4,669

(11) Legal Proceedings

On October 25, 2011, one of the Company’s overseas customers filed an appeal with the Grenoble Court of Appeals, Grenoble, France, seeking to overturn a decision of the lower court denying its request to nominate an expert to examine allegations that furnaces it had purchased from the Company in 2006 had not functioned properly. The Company has prepared a response to deny this customer’s allegations and is vigorously contesting this matter. On July 6, 2011, in a separate proceeding involving this customer, the Company filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce in Paris, France asking the arbitrators to certify that the customer is barred from receiving any remedy. In addition the Company has filed claims for reimbursements of work performed, as well as reimbursements of legal costs related to the arbitration proceedings. The customer has filed a counterclaim for damages. Each party has nominated an arbitrator and these two arbitrators have selected a neutral arbitrator who will act as the chairman of the tribunal. Although the Company strongly believes that the equipment the customer purchased met all applicable specifications and that there is no basis for a valid warranty claim, the Company believes the risk that a loss has occurred with respect to this matter is reasonably possible. An estimate or a range of any possible loss cannot be made at this juncture due to the early stage of the proceedings. However, because litigation is inherently uncertain and unpredictable and excessive outcomes do occur, we could incur a judgment or enter into a settlement or revise our estimate of the outcome of this matter in a way that could result in a material adverse effect on the Company’s results of operations and financial condition.

11

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

BTU International, Inc. (“BTU” or the “Company”), which was founded in 1950, incorporated as a Delaware corporation in 1981 and headquartered in North Billerica, Massachusetts, is a global supplier and technology leader of advanced thermal processing equipment and processes to the electronic manufacturing and alternative energy markets. BTU equipment is used in the production of printed circuit board assemblies and semiconductor packaging as well as in solar cell, nuclear fuel and fuel cell manufacturing.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. In electronics assembly, 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 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.

RESULTS OF OPERATIONS

Three months ended June 30, 2013 compared to the three months ended July 1, 2012.

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

Summary Condensed Consolidated Statements of Operations

	Three Months Ended
	June 30, 2013						July 1, 2012
	( $ in thousands)
				% of Net Sales						% of Net Sales			Percent Change
Net sales	$	14,244			100.0	%	$	14,598			100.0	%		(2.4	)%
Cost of goods sold		8,850			62.1	%		9,916			67.9	%		(10.8	)%
Gross profit		5,394			37.9	%		4,682			32.1	%		15.2	%
Selling, general and administrative expenses		4,355			30.6	%		5,336			36.6	%		(18.4	)%
Research, development and engineering expenses		1,017			7.1	%		1,306			8.9	%		(22.1	)%
Operating income (loss)		22			0.2	%		(1,960	)		(13.4	)%		(101.1	)%
Loss before provision for income taxes		(107	)		(0.8	)%		(2,047	)		(14.0	)%		(94.8	)%
Provision for income taxes		154			1.1	%		102			0.7	%		51.0	%
Net loss	$	(261	)		(1.8	)%	$	(2,149	)		(14.7	)%		(87.9	)%

Net Sales. Net sales for the second quarter of 2013 were $14.2 million representing a decrease of $0.4 million, or 2.4%, as compared to the same period in the prior year. Net sales of electronic market systems increased by $0.8 million, or 6.7%. Net sales of alternative energy systems remained relatively flat as compared to the same period in the prior year. Net sales for the Company’s other market systems, parts and service sales decreased by $1.2 million, or 45.3%, as compared to the same period in the prior year. The electronic market systems increase represents an increase in demand for Semi-Packaging systems, particularly in Asia. The Company’s alternative energy sales continue to be low due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The decrease in sales in the other market systems and parts and service is due to the cyclical nature of the parts and service business.

12

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

	Three Months Ended
	June 30, 2013					July 1, 2012
	($ in thousands)
	$		% of Revenues			$		% of Revenues
United States	$	1,836		12.9	%	$	2,423		16.6	%
Europe, Near East		867		6.1	%		1,606		11.0	%
Asia Pacific		10,810		75.9	%		10,311		70.6	%
Other Americas		731		5.1	%		258		1.8	%
Total Revenue	$	14,244				$	14,598

Gross Profit. In the second quarter of 2013, gross profit was $5.4 million, an increase of $0.7 million, compared to the second quarter of 2012. In the second quarter of 2013, gross profit as a percentage of sales increased to 37.9% as compared to 32.1% in the same period in 2012, due primarily to lower overhead absorption at our factories, combined with lower inventory write-downs. The Company assesses inventory at each period end and records inventory write-downs as appropriate based on market conditions.

Selling, General and Administrative (SG&A). SG&A second quarter 2013 expenses of $4.4 million decreased by $1.0 million compared to the same period in the prior year. The decrease is primarily due to the cost reductions taken in the Company’s service, marketing and administrative functions as well as a reduction of bad debt reserves of approximately $326,000. In the second quarter of 2013, management determined that certain accounts receivable balances that had been reserved for in prior quarters were deemed collectible, as the amounts were subsequently collected from customers.

Research, Development and Engineering (RD&E). RD&E second quarter 2013 expenses of $1.0 million decreased by $0.3 million, or 22.1%, from the same period in the prior year as a result of headcount reductions and expense reductions in the Company’s RD&E functions.

Interest Income (Expense). In the second quarter of 2013, net interest expense remained relatively flat at $0.1 million as compared to the same period in 2012.

Foreign Exchange Gain (Loss). The foreign exchange loss in the second quarter of 2013 was $38,000 as compared to a gain of $10,000 in the same period in the prior year. The net exchange gain (loss) is primarily the result of foreign currency transactions in the Company’s foreign operations for the applicable period.

Income Taxes. For the three months ended June 30, 2013, the Company recorded an income tax provision of $0.2 million as compared to an income tax provision of $0.1 million for the same period in 2012.

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 different statutory tax rates in each of the Company’s non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual 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 China manufacturing subsidiary net sales. U.S. taxes have had no impact to the rate fluctuation as the U.S. Company operates at a loss.

13

RESULTS OF OPERATIONS

Six months ended June 30, 2013 compared to the six months ended July 1, 2012.

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

Summary Condensed Consolidated Statements of Operations

	Six Months Ended
	June 30, 2013						July 1, 2012
	( $ in thousands)
				% of net sales						% of net sales			Percent change
Net sales	$	24,747			100.0	%	$	30,870			100.0	%		(19.8	)%
Cost of goods sold		16,623			67.2	%		20,965			67.9	%		(20.7	)%
Gross profit		8,124			32.8	%		9,905			32.1	%		(18.0	)%
Selling, general and administrative expenses		9,009			36.4	%		10,749			34.8	%		(16.2	)%
Research, development and engineering expenses		2,151			8.7	%		2,788			9.0	%		(22.8	)%
Operating loss		(3,036	)		(12.3	)%		(3,632	)		(11.8	)%		(16.4	)%
Loss before provision for income taxes		(3,301	)		(13.3	)%		(3,879	)		(12.6	)%		(14.9	)%
Provision for income taxes		85			0.3	%		277			0.9	%		(69.3	)%
Net loss	$	(3,386	)		(13.7	)%	$	(4,156	)		(13.5	)%		(18.5	)%

Net Sales. Net sales for the first six months of 2013 were $24.7 million representing a decrease of $6.1 million, or 19.8%, as compared to the same period in the prior year. Net sales of electronic market systems decreased by $1.4 million, or 6.1%, and net sales of alternative energy systems decreased by $3.4 million, or 89.8%, each as compared to the same period in the prior year. Net sales for the Company’s other market systems, parts and service sales decreased by $1.3 million, or 28.9%, as compared to the same period in the prior year. The electronic market systems decrease represents a decrease in demand for high-end Surface Mount Technology systems, particularly in Asia. The Company’s alternative energy systems sales decrease for the six months of 2013 as compared to the same period in the prior year is due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The decrease in sales in the other market systems and parts and service is due to the cyclical nature of the parts and service business.

14

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

	Six Months Ended
	June 30, 2013					July 1, 2012
	($ in thousands)
	$		% of revenues			$		% of revenues
United States	$	3,976		16.1	%	$	4,631		15.0	%
Europe, Near East		2,688		10.8	%		3,318		10.7	%
Asia Pacific		16,449		66.5	%		22,026		71.4	%
Other Americas		1,634		6.6	%		895		2.9	%
Total Revenue	$	24,747				$	30,870

Gross Profit. The first six months of 2013 gross profit of $8.1 million decreased by $1.8 million compared to the first six months of 2012 due primarily to the 19.8% decrease in net sales. In the first six months of 2013, gross profit as a percentage of sales increased to 32.8% as compared to 32.1% in the same period in 2012, due primarily to product mix and improved overhead under absorption at our factories combined with lower inventory write-downs in our products for the solar market. The Company assesses inventory at each period end and records inventory write-downs as appropriate based on market conditions.

Selling, General and Administrative (SG&A). SG&A first six months of 2013 expenses of $9.0 million decreased by $1.7 million compared to the same period in the prior year. The decrease is primarily due to the lower commission expense on reduced sales and cost reductions taken in the Company’s service, marketing and administrative functions as well as a reduction of bad debt reserves of approximately $277,000. In the second quarter of 2013, management determined that certain accounts receivable balances that had been reserved for in prior quarters were deemed collectible, as the amounts were subsequently collected from customers.

Research, Development and Engineering (RD&E). RD&E first six months of 2013 expenses of $2.2 million decreased by $0.6 million, or 22.8%, from the same period in the prior year as a result of headcount reductions and expense reductions in the Company’s RD&E functions.

Interest Income (Expense). In the first six months of 2013, net interest expense remained relatively flat at $0.2 million as compared to the same period in 2012.

Foreign Exchange Loss. The foreign exchange loss in the first six months of 2013 was $114,000 as compared to a loss of $52,000 in the same period in the prior year. The net exchange loss is primarily the result of foreign currency transactions in the Company’s foreign operations in the applicable period.

Income Taxes. For the six months ended June 30, 2013, the Company recorded an income tax provision of $0.1 million compared to a provision of $0.3 million in the same period in the prior year.

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 different statutory tax rates in each of the Company’s non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual 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 China manufacturing subsidiary net sales. U.S. taxes have had no impact to the rate fluctuation as the U.S. Company operates at a loss.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, we had $15.3 million in cash and cash equivalents, a decrease of $4.9 million, compared to $20.2 million at December 31, 2012.

During the six months ended June 30, 2013, the Company used net cash of approximately $4.6 million for operating activities. This use of cash was primarily the result of a net loss of $3.4 million, an increase in inventory of $2.2 million, an increase in accounts receivable of $1.4 million, an increase in other current assets of $1.7 million, a decrease in accrued expenses of $0.6 million; offset by an increase in accounts payable of $2.0 million and the adding back of non-cash expenses for depreciation and amortization of $1.0 million, stock-based compensation of $0.3 million and inventory provisions of $1.3 million.

15

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 June 30, 2013, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $272,282. 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 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 modification 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 on June 30, 2013 of approximately $7.8 million.

As of June 30, 2013, the Company has no material commitments relating to capital expenditures. There were no significant changes in the Company’s commitments from those that were outlined in the “Contractual Obligations” section of the Company’s 2012 annual report on Form 10-K.

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 six months ended June 30, 2013, 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, 2012.

RISK FACTORS

During the six months ended June 30, 2013, there have been no significant changes to the items that we disclosed as risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements, including statements about our expectation for minimal revenue from solar equipment in 2013 and the sufficiency of our cash position and cash flows. 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 and other reports we have filed with the SEC, 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 under the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have international subsidiaries in China, the United Kingdom, Singapore, 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 June 30, 2013 and December 31, 2012, all of our long-term debt obligations are fixed rate financial instruments. Therefore, we are not exposed to interest rate risk resulting from variable interest rates.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Operating Officer and Principal Financial and Accounting 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 Operating Officer and Principal Financial and Accounting 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 Operating Officer and Principal Financial and Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

16

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.

PART II. OTHER INFORMATION

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

Exhibit 101.INS - XBRL Instance Document.

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL - XBRL Taxonomy Calculation Linkbase Document.

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 101.LAB - XBRL Taxonomy Label Linkbase Document.

Exhibit 101.PRE - XBRL Taxonomy Presentation Linkbase Document.

17

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BTU INTERNATIONAL, INC.
DATE: August 8, 2013	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: August 8, 2013	BY:	/S/    PETER J. TALLIAN
		Peter J. Tallian
		Chief Operating Officer and Principal Financial and Accounting Officer (principal financial and accounting officer)

18