10-Q

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 2, 2011

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 November 3, 2011: 9,481,014 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
Notes to Unaudited Condensed Consolidated Financial Statements	5-9
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	15
Item 4. Controls and Procedures	15
PART II. OTHER INFORMATION
Item 1. Legal Proceeding	15
Item 6. Exhibits	15
Signatures	16

Explanatory Note: As described below in Note 2 “Subsequent Events”, on November 4, 2011, one of the Company’s European customers announced plans to initiate a preliminary process to file for bankruptcy in the French courts. As a result, the Company considered its estimates of collectability of accounts receivable for this customer and determined that certain amounts may not be collectible and recorded an additional $211,000 of expense for the three months ended October 2, 2011. The unaudited condensed consolidated financial statements reflect the impact of this event and accordingly differ from the results that the Company announced previously.

PART I. FINANCIAL STATEMENTS

Item 1. Financial Statements

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	October 2, 2011			December 31, 2010
Assets
Current assets
Cash and cash equivalents	$	19,389		$	22,753
Accounts receivable, net		14,284			17,895
Inventories, net		22,358			19,274
Other current assets		1,235			1,091
Total current assets		57,266			61,013
Property, plant and equipment, net		5,995			6,148
Other assets, net		126			484
Total assets	$	63,387		$	67,645
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	374		$	359
Accounts payable		6,346			10,116
Deferred revenue, current		2,693			3,398
Accrued expenses		4,574			5,603
Total current liabilities		13,987			19,476
Long-term debt, less current portion		8,050			8,329
Total liabilities		22,037			27,805
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; 10,848,981 shares issued and 9,481,014 shares outstanding at October 2, 2011 and 10,718,398 shares issued and 9,350,431 shares outstanding at December 31, 2010		108			107
Additional paid in capital		50,308			48,764
Accumulated deficit		(6,065	)		(5,666	)
Treasury stock, at cost, 1,367,967 shares at October 2, 2011 and December 31, 2010		(4,990	)		(4,990	)
Accumulated other comprehensive income		1,989			1,625
Total stockholders’ equity		41,350			39,840
Total liabilities and stockholders’ equity	$	63,387		$	67,645

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 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
Net sales	$	16,865		$	19,011		$	61,250		$	54,235
Costs of goods sold		10,506			10,845			36,509			31,281
Gross profit		6,359			8,166			24,741			22,954
Operating expenses:
Selling, general and administrative		6,013			5,758			17,921			16,533
Research, development and engineering		1,914			1,618			5,545			4,813
Restructuring		352			—			352			—
Operating income (loss)		(1,920	)		790			923			1,608
Interest income		21			21			54			62
Interest expense		(119	)		(155	)		(372	)		(466	)
Foreign exchange loss		(23	)		(114	)		(172	)		(9	)
Other income (loss)		6			(5	)		231			5
Income (loss) before provision for income taxes		(2,035	)		537			664			1,200
Provision for income taxes		179			557			1,063			1,258
Net loss	$	(2,214	)	$	(20	)	$	(399	)	$	(58	)
Loss per share:
Basic	$	(0.23	)	$	(0.00	)	$	(0.04	)	$	(0.01	)
Diluted	$	(0.23	)	$	(0.00	)	$	(0.04	)	$	(0.01	)
Weighted average number of shares outstanding:
Basic shares		9,462,281			9,285,002			9,418,708			9,269,047
Effect of dilutive options		—			—			—			—
Diluted shares		9,462,281			9,285,002			9,418,708			9,269,047

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 2, 2011

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In		Retained Earnings/ (Accumulated			Treasury Stock					Accumulated Other Comprehensive
	# of shares		$		Capital		Deficit)			# of shares		$			Income		Total
Balance at December 31, 2010		10,718	$	107	$	48,764	$	(5,666	)		1,368	$	(4,990	)	$	1,625	$	39,840
Net loss		—		—		—		(399	)		—		—			—		(399	)
Exercise of stock options		123		1		519		—			—		—			—		520
Issuance of common stock		8		—		50		—			—		—			—		50
Stock-based compensation		—		—		975		—			—		—			—		975
Translation adjustment		—		—		—		—			—		—			364		364
Balance at October 2, 2011		10,849	$	108	$	50,308	$	(6,065	)		1,368	$	(4,990	)	$	1,989	$	41,350

	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	October 2, 2011						October 3, 2010
Comprehensive income (loss) is calculated as follows:
Net loss	$	(2,214	)	$	(399	)	$	(20	)	$	(58	)
Other comprehensive income:
Foreign currency translation adjustment		71			364			150			124
Comprehensive income (loss)	$	(2,143	)	$	(35	)	$	130		$	66

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 2, 2011 AND OCTOBER 3, 2010

($ in thousands)

(unaudited)

	October 2, 2011			October 3, 2010
Cash flows from operating activities:
Net loss	$	(399	)	$	(58	)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization		1,377			1,683
Provision (recovery) for bad debts		155			(40	)
Provision for inventory obsolescence		685			990
Stock-based compensation		975			1,012
Net change in operating assets and liabilities:
Accounts receivable		3,628			(7,115	)
Inventories		(3,906	)		(3,832	)
Other current assets		(135	)		134
Deferred revenue		(710	)		1,839
Other assets		200			23
Accounts payable		(3,934	)		3,599
Accrued expenses		(1,115	)		(784	)
Net cash used in operating activities		(3,179	)		(2,549	)
Cash flows used in investing activities:
Purchases of property, plant and equipment		(620	)		(887	)
Net cash used in investing activities		(620	)		(887	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements		(264	)		(226	)
Issuance of common stock		50			56
Proceeds from the exercise of stock options		520			76
Net cash provided by (used in) financing activities		306			(94	)
Effects of exchange rates on cash		129			(54	)
Net decrease in cash and cash equivalents		(3,364	)		(3,584	)
Cash and cash equivalents, beginning of period		22,753			25,397
Cash and cash equivalents, end of period	$	19,389		$	21,813
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	307		$	404
Income taxes		1,213			887

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

4

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, 2010 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of October 2, 2011 and the related condensed statements of operations and comprehensive income (loss) for the three and nine months ended October 2, 2011 are unaudited. The condensed consolidated statements of stockholders’ equity and consolidated statements of cash flows for the nine months ended October 2, 2011 and October 3, 2010 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, 2010, 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, 2010 as filed with the SEC.

Subsequent Events — The Company evaluated subsequent events through the time of issuance of these condensed consolidated financial statements. On November 4, 2011, one of the Company’s European customers announced plans to initiate a preliminary process to file for bankruptcy in the French courts. As a result, the Company considered its estimates of collectability of accounts receivable for this customer and determined that certain amounts may not be collectible and recorded an additional $211,000 of expense for the three months ended October 2, 2011. We are not aware of any significant events that occurred subsequent to the balance sheet date, but prior to the filing of this report other than the aforementioned $211,000 bad debt expense that would have a material impact on our condensed consolidated financial statements.

(3) Inventories, net

	October 2, 2011		December 31, 2010
	($ in thousands)
Raw materials and manufactured components	$	9,438	$	9,459
Work-in-process		7,625		8,053
Finished goods		5,295		1,762
	$	22,358	$	19,274

(4) Accrued Expenses

	October 2, 2011		December 31, 2010
	($ in thousands)
Accrued commissions	$	1,129	$	875
Accrued warranty		492		512
Accrued taxes		686		961
Accrued audit		411		299
Accrued legal		307		327
Accrued bonus		145		1,036
Payroll and payroll taxes		743		1,060
Accrued cost of sales		265		467
Accrued restructuring costs		352		—
Other		44		66
	$	4,574	$	5,603

5

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 nine months ended October 2, 2011:

	Nine Months Ended October 2, 2011
Beginning balance, December 31, 2010	$	512
Plus: accruals related to new sales		433
Less: warranty claims incurred and reserve adjustment		(453	)
Ending balance, October 2, 2011	$	492

Restructuring

In September 2011, the Company eliminated 17 positions. Accordingly, the Company recorded a restructuring charge of $352,000 in the three months ended October 2, 2011. The decision to eliminate 17 positions was taken due to the slowdown in orders from customers in the solar industry. The Company expects to incur an additional $52,000 charge in the fourth quarter of 2011 related to this restructuring action.

The restructuring charge was primarily severance and benefits. As of October 2, 2011, no payments were made regarding the reduction in force.

(5) Debt

Long-term debt at October 2, 2011 and December 31, 2010 consisted of:

	October 2, 2011		December 31, 2010
	($ in thousands)
Mortgage note payable, interest rate of 5.50%	$	8,424	$	8,688
Less - current maturities		374		359
	$	8,050	$	8,329

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 2, 2011, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $225,140. This restricted cash value is included in the Company’s balance sheet in other current assets.

6

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(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. Due to their anti-dilutive effect, approximately 681,605 and 331,900 options to purchase common stock were excluded from the calculation of diluted income (loss) per share for the three and nine months ended October 2, 2011, respectively, and 495,162 and 493,414 options were excluded for the three and nine months ended October 3, 2010, respectively. These options could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $314,969 and $974,795 for the three and nine months ended October 2, 2011, respectively, and $380,015 and $1,012,268 for three and nine months ended October 3, 2010, respectively.

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 stock-based compensation expense was recorded 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%.

Calculation of Fair Value - Assumptions Used:

	Nine months ended
	October 2, 2011			October 3, 2010
Expected Volatility		63.03	%		66.81	%
Expected Life (in years)		4.53			4.63
Risk-Free Interest Rate		1.58	%		1.87	%
Expected Dividend Yield		0			0

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. The expected dividend yield is based upon the Company’s history of having never paid a dividend and management’s current expectation to retain any excess cash for use in the business.

The following table summarizes the stock option activity during the nine months ended October 2, 2011:

	Shares			Weighted- Average Exercise Price		Average Remaining Contractual Term		Aggregate Intrinsic Value
Options
Outstanding at December 31, 2010		1,277,264		$	6.56
Granted		94,455		$	8.70
Exercised		(122,220	)	$	4.26
Forfeited/Cancelled		(5,042	)	$	10.80
Outstanding at October 2, 2011		1,244,457		$	6.93		4.48	$	158,133
Exercisable at October 2, 2011		571,578		$	7.91		3.49	$	99,526

The weighted-average grant date fair values of options granted during the nine-month periods ended October 2, 2011 and October 3, 2010 were $4.49 and $2.98, respectively. The aggregate fair value of options exercised during the nine-month periods ended October 2, 2011 and October 3, 2010 was $381,534 and $49,711, respectively.

7

As of October 2, 2011, there was $1,769,729 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 2.16 years. The total fair value of options vested during the nine-month period ended October 2, 2011 was $958,717.

(8) Revenue Recognition

For the three and nine months ended October 2, 2011, there was $831,179 and $2,285,094, respectively, of revenue recognized using the percentage of completion method. 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 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 8, 2011 with the SEC.

(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.

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:

	October 2, 2011		December 31, 2010
	($ in thousands)
United States	$	4,999	$	5,504
Asia Pacific		996		644
	$	5,995	$	6,148

8

(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 a surveyor to examine allegations that furnaces it had purchased from the Company in 2006 had not functioned properly. The Company is preparing 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. Each party has nominated an arbitrator and these two arbitrators are in the process of appointing a neutral arbitrator. The Company strongly believes that the equipment the customer purchased met all applicable specifications, that there is no basis for a valid warranty claim and that the risk that a loss has occurred with respect to this matter is not probable. An estimate or a range of any possible loss cannot be made at this juncture due to the early stage of the proceedings. However, litigation is inherently uncertain and an adverse result in this matter could have an adverse effect on the Company’s results of operations and financial condition.

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. In addition, we expanded our product development capability in China, creating a global engineering team. This team 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 2, 2011, compared to the three months ended October 3, 2010.

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.

9

Summary Condensed Consolidated Statement of Operations

	Three Months Ended
	October 2, 2011						October 3, 2010
				($ in thousands)
				% of Net Sales						% of Net Sales			Percent Change
Net sales	$	16,865			100.0	%	$	19,011			100.0	%		(11.3	)%
Cost of goods sold		10,506			62.3	%		10,845			57.0	%		(3.1	)%
Gross profit		6,359			37.7	%		8,166			43.0	%		(22.1	)%
Selling, general and administrative expenses		6,013			35.7	%		5,758			30.3	%		4.4	%
Research, development and engineering expenses		1,914			11.3	%		1,618			8.5	%		18.3	%
Restructuring		352			2.1	%		—			0.0	%		0.0	%
Operating income (loss)		(1,920	)		(11.4	)%		790			4.2	%		(343.0	)%
Income (loss) before provision for income taxes		(2,035	)		(12.1	)%		537			2.8	%		(479.0	)%
Provision for income taxes		179			1.1	%		557			2.9	%		(67.9	)%
Net loss	$	(2,214	)		(13.1	)%	$	(20	)		(0.1	)%		10970.0	%

Net Sales. Net sales for the third quarter of 2011 were $16.9 million representing a decrease of $2.1 million, or 11.3%, as compared to the same period in the prior year. Net sales for the Company’s electronic market systems decreased by $2.0 million, or 17.3%, as compared to the same period in the prior year. Net sales for the Company’s alternative energy systems decreased by $0.8 million, or 15.0% as compared to the same period in the prior year, while net sales for the Company’s parts and service sales business increased by $0.7 million, or 34.5%. The Company’s alternative energy systems third quarter 2011 sales decrease as compared to the same period in the prior year is due to the broad weakening of the worldwide solar marketplace which started in the second quarter of 2011. The electronic market systems decrease represents a leveling off of demand for Surface Mount Technology systems, particularly in China. The increase in sales in the parts and service business was the result of improved parts and service revenue in non-Asian regions.

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 2, 2011					October 3, 2010
	($ in thousands)
	$		% of Revenues			$		% of Revenues
United States	$	2,084		12.4	%	$	1,675		8.8	%
Europe, Near East		2,393		14.2	%		1,581		8.3	%
Asia Pacific		11,289		66.9	%		15,094		79.4	%
Other Americas		1,099		6.5	%		661		3.5	%
Total Revenue	$	16,865				$	19,011

Gross Profit. The third quarter of 2011 gross profit of $6.4 million decreased by $1.8 million compared to the third quarter of 2010 due primarily to the 11.3% decrease in net sales. In the third quarter of 2011, gross profit as a percentage of sales decreased to 37.7% as compared to 43.0% in the same period in 2011, due primarily to lower volume and underutilization at both our USA and China factories.

Selling, General and Administrative (SG&A). SG&A third quarter 2011 expenses of $6.0 million increased by $0.3 million compared to the same period in the prior year. The Company added resources over the past year to support our worldwide solar market customers. The increase in SG&A net spending period over period was partially offset by decreases in commission expense due to the decrease in net sales.

10

Research, Development and Engineering (RD&E). RD&E third quarter 2011 expenses of $1.9 million increased by $0.3 million, or 18.3%, from the same period in the prior year as a result of the Company’s development actions for new and improved products for both our alternative energy and electronic markets.

Restructuring. The Company recorded a restructuring charge of $352,000 in the three months ended October 2, 2011. This restructuring action was taken due to the slowdown in the Company’s solar market business. The Company expects to incur an additional $52,000 charge in the fourth quarter of 2011 related to its decision to further reduce head count as a result of the slowdown in the solar market business.

Operating Income (Loss). The 11.3% net sales decrease and its associated negative effect on gross margins combined with the RD&E expense increase and the restructuring charge resulted in an operating loss in the third quarter of 2011 of $1.9 million as compared to an operating profit of $790,000 for the same period in 2010.

Interest Income (Expense). In the third quarter of 2011 as compared to the same period in 2010, net interest expense decreased due to a lower interest rate for the mortgage on the Company’s headquarters building.

Foreign Exchange Loss. The foreign exchange loss in the third quarter of 2011 was $23,000 as compared to a loss of $114,000 in the same period in the prior year. The net exchange loss is primarily the result of foreign currency exposure in the Company’s foreign operations.

Income Taxes. For the three months ended October 2, 2011, we recorded an income tax provision of $179,000 as compared to an income tax provision of $557,000 for the three months ended October 3, 2010. The Company’s income tax provision primarily relates to income and withholding taxes generated from activities in 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 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.

RESULTS OF OPERATIONS

Nine months ended October 2, 2011 compared to the nine months ended October 3, 2010.

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.

11

Summary Condensed Consolidated Statement of Operations

	Nine Months Ended
	October 2, 2011						October 3, 2010
				($ in thousands)
				% of net sales						% of net sales			Percent change
Net sales	$	61,250			100.0	%	$	54,235			100.0	%		12.9	%
Cost of goods sold		36,509			59.6	%		31,281			57.7	%		16.7	%
Gross profit		24,741			40.4	%		22,954			42.3	%		7.8	%
Selling, general and administrative expenses		17,921			29.3	%		16,533			30.5	%		8.4	%
Research, development and engineering expenses		5,545			9.1	%		4,813			8.9	%		15.2	%
Restructuring		352			0.6	%		—			0.0	%
Operating income		923			1.5	%		1,608			3.0	%		(42.6	)%
Income before provision for income taxes		664			1.1	%		1,200			2.2	%		(44.7	)%
Provision for income taxes		1,063			1.7	%		1,258			2.3	%		(15.5	)%
Net loss	$	(399	)		(0.7	)%	$	(58	)		(0.1	)%		587.9	%

Net Sales. Net sales increased $7.0 million, or 12.9%, in the first nine months as compared to the same period in the prior year. The Company’s electronic market systems net sales decreased by $2.0 million, or 6.6%, as compared to the same period in the prior year; Alternative energy systems net sales increased by $5.4 million, or 27.4%, as compared to the same period in the prior year; Other market systems, parts and service net sales increased by $3.6 million, or 70.6%, as compared to the same period in the prior year. Alternative energy systems 2011 sales growth period over period is the result of increased revenue for in-line diffusion solar products. However, the solar market has slowed recently and we expect this slowdown to continue for the remainder of 2011. The electronic market systems decrease represents a leveling off of demand. The other market systems, parts and service 2011 sales increase period over period was the result of two large systems orders and improved parts and service revenue worldwide.

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 revenue. The values shown represent the amount sold into each of the listed geographical areas.

	Nine Months Ended
	October 2, 2011					October 3, 2010
	($ in thousands)
	$		% of revenues			$		% of revenues
United States	$	8,290		13.5	%	$	4,643		8.6	%
Europe, Near East		4,406		7.2	%		8,167		15.1	%
Asia Pacific		45,424		74.2	%		39,741		73.3	%
Other Americas		3,130		5.1	%		1,684		3.1	%
Total Revenue	$	61,250				$	54,235

Gross Profit. The gross profit of $24.7 million for the first nine months of 2011 increased $1.8 million, or 7.8%, as compared to the same period in the prior year. The gross profit as a percentage of sales for the first nine months of 2011 decreased to 40.4% from 42.3% for the first nine months of 2010. The gross margin percentage for the 2010 period was favorably impacted by significant revenue at high margins for several large orders.

Selling, General and Administrative (SG&A). SG&A expenses of $17.9 million increased by $1.4 million, or 8.4%, as compared to the same period for the prior year. About two thirds of the SG&A increase for the 2011 period, occurred in our service operations as we expanded our field service engineering presence around the world in support of our customers. The Company incurred increases in commission expense resulting from higher revenue, as well as increased marketing and administrative expenses.

Research, Development and Engineering (RD&E). In the first nine months of 2011, the Company recorded RD&E expenses of $5.5 million, an increase of $0.7 million, or 15.2%, as compared to the same period in the prior year. The increases are the result of the Company’s actions to develop new and improved products.

12

Restructuring. The Company recorded a restructuring charge of $352,000 in the three months ended October 2, 2011. This restructuring action was taken due to the slowdown in the Company’s solar market business. The Company expects to incur an additional $52,000 charge in the fourth quarter of 2011 related to its decision to further reduce head count in connection with the slowdown of the solar market business.

Operating Income. The favorable impact of the revenue increase has offset the spending increase and the restructuring charge in the first nine months of 2011. Operating income for the first nine months of 2011 was $0.9 million as compared to an operating income of $1.6 million in the same period in 2010.

Interest Income (Expense). In the first nine months of 2011 as compared to the same period in 2010, net interest expense decreased due to a lower interest rate for the mortgage on the Company’s headquarters building.

Foreign Exchange Loss. The foreign exchange loss for the first nine months of 2011 was $172,000 as compared to a loss of $9,000 for the same period in 2010. The net exchange loss is primarily the result of foreign currency exposure in the Company’s foreign operations.

Income Taxes. During the nine months ended October 2, 2011, we recorded an income tax provision of $1.1 million as compared to $1.3 million for the nine months ended October 3, 2010. 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 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.

Our statutory federal income tax rate is 34.0%. The Company’s statutory income tax rate for its China manufacturing subsidiary is 24.0% in 2011 and 22% in 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of October 2, 2011, we had $19.4 million in cash and cash equivalents, a decrease of $3.4 million, compared to $22.8 million at December 31, 2010.

During the nine months ended October 2, 2011, the Company used net cash of approximately $3.2 million in operating activities. This use of cash was primarily the result of a net loss of $0.4 million, an increase in net inventory of $3.2 million, a decrease in accounts payable of $3.9 million, a reduction in deferred revenue of $0.7 million, a decrease in accrued expenses of $1.1 million, an increase in other current assets of $0.1 million; offset by depreciation and amortization of $1.4 million, a decrease in net accounts receivable of $3.8 million, and stock-based compensation of $1.0 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 2, 2011, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $225,140. 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 October 2, 2011, of approximately $8.4 million.

As of October 2, 2011, 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 Company’s 2010 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 nine months ended October 2, 2011, 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, 2010.

13

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 forward-looking statements about 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.

14

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 October 2, 2011 and December 31, 2010, 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 rates.

Item 4. 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceeding

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 a surveyor to examine allegations that furnaces it had purchased from the Company in 2006 had not functioned properly. The Company is preparing 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. Each party has nominated an arbitrator and these two arbitrators are in the process of appointing a neutral arbitrator. The Company strongly believes that the equipment the customer purchased met all applicable specifications, that there is no basis for a valid warranty claim and that the risk that a loss has occurred with respect to this matter is not probable. An estimate or a range of any possible loss cannot be made at this juncture due to the early stage of the proceedings. However, litigation is inherently uncertain and an adverse result in this matter could have an adverse effect on the Company’s results of operations and financial condition.

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.

15

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 14, 2011	BY:	/ S /    PAUL J. VAN DER WANSEM
		Paul J. van der Wansem President, Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors
DATE: November 14, 2011	BY:	/ S /    PETER J. TALLIAN
		Peter J. Tallian Chief Financial Officer and Principal Accounting Officer (principal financial and accounting officer)

16

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Paul J. van der Wansem, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BTU International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

/s/ Paul J. van der Wansem

Paul J. van der Wansem

President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter J. Tallian, certify that:

1. I have reviewed this quarterly report on Form 10-Q of BTU International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

/s/ Peter J. Tallian

Peter J. Tallian

Chief Financial Officer and Principal Accounting Officer (principal financial and accounting officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President and Chief Executive Officer of BTU International, Inc. (the “Company”), does hereby certify that to his knowledge:

1. the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods covered by the Report.

/s/ Paul J. van der Wansem

Paul J. van der Wansem

President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer)

Dated: November 14, 2011

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer and Principal Accounting Officer of BTU International, Inc. (the “Company”), does hereby certify that to his knowledge:

1. the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 2, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods covered by the Report.

/s/ Peter J. Tallian

Peter J. Tallian

Chief Financial Officer and Principal Accounting Officer (principal financial and accounting officer)

Dated: November 14, 2011

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Oct. 02, 2011	Dec. 31, 2010
Preferred stock, par value	$ 1.00	$ 1.00
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	25,000,000	25,000,000
Common stock, shares issued	10,848,981	10,718,398
Common stock, shares outstanding	9,481,014	9,350,431
Treasury stock, shares	1,367,967	1,367,967

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Oct. 02, 2011	Oct. 03, 2010	Oct. 02, 2011	Oct. 03, 2010
Net sales	$ 16,865	$ 19,011	$ 61,250	$ 54,235
Costs of goods sold	10,506	10,845	36,509	31,281
Gross profit	6,359	8,166	24,741	22,954
Operating expenses:
Selling, general and administrative	6,013	5,758	17,921	16,533
Research, development and engineering	1,914	1,618	5,545	4,813
Restructuring	352		352
Operating income (loss)	(1,920)	790	923	1,608
Interest income	21	21	54	62
Interest expense	(119)	(155)	(372)	(466)
Foreign exchange loss	(23)	(114)	(172)	(9)
Other income (loss)	6	(5)	231	5
Income (loss) before provision for income taxes	(2,035)	537	664	1,200
Provision for income taxes	179	557	1,063	1,258
Net loss	$ (2,214)	$ (20)	$ (399)	$ (58)
Loss per share:
Basic	$ (0.23)	$ 0.00	$ (0.04)	$ (0.01)
Diluted	$ (0.23)	$ 0.00	$ (0.04)	$ (0.01)
Weighted average number of shares outstanding:
Basic shares	9,462,281	9,285,002	9,418,708	9,269,047
Effect of dilutive options
Diluted shares	9,462,281	9,285,002	9,418,708	9,269,047

XML

Document and Entity Information	9 Months Ended
	Oct. 02, 2011	Nov. 03, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Oct. 02, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Trading Symbol	BTUI
Entity Registrant Name	BTU INTERNATIONAL INC
Entity Central Index Key	0000840883
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		9,481,014

XML

Debt

9 Months Ended

Oct. 02, 2011

Debt

(5) Debt

Long-term debt at October 2, 2011 and December 31, 2010 consisted of:

	October 2, 2011		December 31, 2010
	($ in thousands)
Mortgage note payable, interest rate of 5.50%	$	8,424	$	8,688
Less - current maturities		374		359
	$	8,050	$	8,329

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 2, 2011, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $225,140. This restricted cash value is included in the Company’s balance sheet in other current assets.

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Segment Reporting

9 Months Ended

Oct. 02, 2011

Segment Reporting

(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:

	October 2, 2011		December 31, 2010
	($ in thousands)
United States	$	4,999	$	5,504
Asia Pacific		996		644
	$	5,995	$	6,148

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Basis of Presentation

9 Months Ended

Oct. 02, 2011

Basis of Presentation

(1) Basis of Presentation

The condensed consolidated balance sheet, financial information and related disclosures as of and for the year ended December 31, 2010 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of October 2, 2011 and the related condensed statements of operations and comprehensive income (loss) for the three and nine months ended October 2, 2011 are unaudited. The condensed consolidated statements of stockholders’ equity and consolidated statements of cash flows for the nine months ended October 2, 2011 and October 3, 2010 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, 2010, 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).

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Accounting for Stock-Based Compensation

9 Months Ended

Oct. 02, 2011

Accounting for Stock-Based Compensation

(7) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $314,969 and $974,795 for the three and nine months ended October 2, 2011, respectively, and $380,015 and $1,012,268 for three and nine months ended October 3, 2010, respectively.

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 stock-based compensation expense was recorded 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%.

Calculation of Fair Value - Assumptions Used:

	Nine months ended
	October 2, 2011			October 3, 2010
Expected Volatility		63.03	%		66.81	%
Expected Life (in years)		4.53			4.63
Risk-Free Interest Rate		1.58	%		1.87	%
Expected Dividend Yield		0			0

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. The expected dividend yield is based upon the Company’s history of having never paid a dividend and management’s current expectation to retain any excess cash for use in the business.

The following table summarizes the stock option activity during the nine months ended October 2, 2011:

	Shares			Weighted- Average Exercise Price		Average Remaining Contractual Term		Aggregate Intrinsic Value
Options
Outstanding at December 31, 2010		1,277,264		$	6.56
Granted		94,455		$	8.70
Exercised		(122,220	)	$	4.26
Forfeited/Cancelled		(5,042	)	$	10.80
Outstanding at October 2, 2011		1,244,457		$	6.93		4.48	$	158,133
Exercisable at October 2, 2011		571,578		$	7.91		3.49	$	99,526

The weighted-average grant date fair values of options granted during the nine-month periods ended October 2, 2011 and October 3, 2010 were $4.49 and $2.98, respectively. The aggregate fair value of options exercised during the nine-month periods ended October 2, 2011 and October 3, 2010 was $381,534 and $49,711, respectively.

As of October 2, 2011, there was $1,769,729 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 2.16 years. The total fair value of options vested during the nine-month period ended October 2, 2011 was $958,717.

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Revenue Recognition

9 Months Ended

Oct. 02, 2011

Revenue Recognition

(8) Revenue Recognition

For the three and nine months ended October 2, 2011, there was $831,179 and $2,285,094, respectively, of revenue recognized using the percentage of completion method. 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 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 8, 2011 with the SEC.

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Net Loss Per Share

9 Months Ended

Oct. 02, 2011

Net Loss Per Share

(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. Due to their anti-dilutive effect, approximately 681,605 and 331,900 options to purchase common stock were excluded from the calculation of diluted income (loss) per share for the three and nine months ended October 2, 2011, respectively, and 495,162 and 493,414 options were excluded for the three and nine months ended October 3, 2010, respectively. These options could become dilutive in future periods.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Oct. 02, 2011	Oct. 03, 2010	Oct. 02, 2011	Oct. 03, 2010
Comprehensive income (loss) is calculated as follows:
Net loss	$ (2,214)	$ (20)	$ (399)	$ (58)
Other comprehensive income:
Foreign currency translation adjustment	71	150	364	124
Comprehensive income (loss)	$ (2,143)	$ 130	$ (35)	$ 66

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Summary of Significant Accounting Policies

9 Months Ended

Oct. 02, 2011

Summary of Significant Accounting Policies

(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, 2010 as filed with the SEC.

Subsequent Events — The Company evaluated subsequent events through the time of issuance of these condensed consolidated financial statements. On November 4, 2011, one of the Company’s European customers announced plans to initiate a preliminary process to file for bankruptcy in the French courts. As a result, the Company considered its estimates of collectability of accounts receivable for this customer and determined that certain amounts may not be collectible and recorded an additional $211,000 of expense for the three months ended October 2, 2011. We are not aware of any significant events that occurred subsequent to the balance sheet date, but prior to the filing of this report other than the aforementioned $211,000 bad debt expense that would have a material impact on our condensed consolidated financial statements.

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Inventories, net

9 Months Ended

Oct. 02, 2011

Inventories, net

(3) Inventories, net

	October 2, 2011		December 31, 2010
	($ in thousands)
Raw materials and manufactured components	$	9,438	$	9,459
Work-in-process		7,625		8,053
Finished goods		5,295		1,762
	$	22,358	$	19,274

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Legal Proceedings

9 Months Ended

Oct. 02, 2011

Legal Proceedings

(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 a surveyor to examine allegations that furnaces it had purchased from the Company in 2006 had not functioned properly. The Company is preparing 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. Each party has nominated an arbitrator and these two arbitrators are in the process of appointing a neutral arbitrator. The Company strongly believes that the equipment the customer purchased met all applicable specifications, that there is no basis for a valid warranty claim and that the risk that a loss has occurred with respect to this matter is not probable. An estimate or a range of any possible loss cannot be made at this juncture due to the early stage of the proceedings. However, litigation is inherently uncertain and an adverse result in this matter could have an adverse effect on the Company’s results of operations and financial condition.

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Accrued Expenses

9 Months Ended

Oct. 02, 2011

Accrued Expenses

(4) Accrued Expenses

	October 2, 2011		December 31, 2010
	($ in thousands)
Accrued commissions	$	1,129	$	875
Accrued warranty		492		512
Accrued taxes		686		961
Accrued audit		411		299
Accrued legal		307		327
Accrued bonus		145		1,036
Payroll and payroll taxes		743		1,060
Accrued cost of sales		265		467
Accrued restructuring costs		352		—
Other		44		66
	$	4,574	$	5,603

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 nine months ended October 2, 2011:

	Nine Months Ended October 2, 2011
Beginning balance, December 31, 2010	$	512
Plus: accruals related to new sales		433
Less: warranty claims incurred and reserve adjustment		(453	)
Ending balance, October 2, 2011	$	492

Restructuring

In September 2011, the Company eliminated 17 positions. Accordingly, the Company recorded a restructuring charge of $352,000 in the three months ended October 2, 2011. The decision to eliminate 17 positions was taken due to the slowdown in orders from customers in the solar industry. The Company expects to incur an additional $52,000 charge in the fourth quarter of 2011 related to this restructuring action.

The restructuring charge was primarily severance and benefits. As of October 2, 2011, no payments were made regarding the reduction in force.

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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings/ (Accumulated Deficit)	Treasury Stock	Accumulated Other Comprehensive Income
Beginning Balance at Dec. 31, 2010	$ 39,840	$ 107	$ 48,764	$ (5,666)	$ (4,990)	$ 1,625
Beginning Balance (in shares) at Dec. 31, 2010		10,718			1,368
Net loss	(399)			(399)
Exercise of stock options (in shares)		123
Exercise of stock options	520	1	519
Issuance of common stock (in shares)		8
Issuance of common stock	50		50
Stock-based compensation	975		975
Translation adjustment	364					364
Ending Balance at Oct. 02, 2011	$ 41,350	$ 108	$ 50,308	$ (6,065)	$ (4,990)	$ 1,989
Ending Balance (in shares) at Oct. 02, 2011		10,849			1,368

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	9 Months Ended
	Oct. 02, 2011	Oct. 03, 2010
Cash flows from operating activities:
Net loss	$ (399)	$ (58)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization	1,377	1,683
Provision (recovery) for bad debts	155	(40)
Provision for inventory obsolescence	685	990
Stock-based compensation	975	1,012
Net change in operating assets and liabilities:
Accounts receivable	3,628	(7,115)
Inventories	(3,906)	(3,832)
Other current assets	(135)	134
Deferred revenue	(710)	1,839
Other assets	200	23
Accounts payable	(3,934)	3,599
Accrued expenses	(1,115)	(784)
Net cash used in operating activities	(3,179)	(2,549)
Cash flows used in investing activities:
Purchases of property, plant and equipment	(620)	(887)
Net cash used in investing activities	(620)	(887)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements	(264)	(226)
Issuance of common stock	50	56
Proceeds from the exercise of stock options	520	76
Net cash provided by (used in) financing activities	306	(94)
Effects of exchange rates on cash	129	(54)
Net decrease in cash and cash equivalents	(3,364)	(3,584)
Cash and cash equivalents, beginning of period	22,753	25,397
Cash and cash equivalents, end of period	19,389	21,813
Cash paid during the periods for:
Interest	307	404
Income taxes	$ 1,213	$ 887

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Fair Value of Financial Instruments

9 Months Ended

Oct. 02, 2011

Fair Value of Financial Instruments

(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.

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.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Oct. 02, 2011	Dec. 31, 2010
Current assets
Cash and cash equivalents	$ 19,389	$ 22,753
Accounts receivable, net	14,284	17,895
Inventories, net	22,358	19,274
Other current assets	1,235	1,091
Total current assets	57,266	61,013
Property, plant and equipment, net	5,995	6,148
Other assets, net	126	484
Total assets	63,387	67,645
Current liabilities
Current portion of long-term debt	374	359
Accounts payable	6,346	10,116
Deferred revenue, current	2,693	3,398
Accrued expenses	4,574	5,603
Total current liabilities	13,987	19,476
Long-term debt, less current portion	8,050	8,329
Total liabilities	22,037	27,805
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; 10,848,981 shares issued and 9,481,014 shares outstanding at October 2, 2011 and 10,718,398 shares issued and 9,350,431 shares outstanding at December 31, 2010	108	107
Additional paid in capital	50,308	48,764
Accumulated deficit	(6,065)	(5,666)
Treasury stock, at cost, 1,367,967 shares at October 2, 2011 and December 31, 2010	(4,990)	(4,990)
Accumulated other comprehensive income	1,989	1,625
Total stockholders' equity	41,350	39,840
Total liabilities and stockholders' equity	$ 63,387	$ 67,645