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 September 29, 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 November 4, 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	17
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	18
Item 6.	Exhibits	18
Signatures		19

Item 1. Financial Statements

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	September 29, 2013			December 31, 2012
Assets
Current assets
Cash and cash equivalents	$	16,672		$	20,218
Accounts receivable, less allowance of $1,378 and $1,583 at September 29, 2013 and December 31, 2012		9,168			9,623
Inventories		10,260			9,547
Other current assets		2,067			4,131
Total current assets		38,167			43,519
Property, plant and equipment, net		3,604			4,669
Other assets, net		491			481
Total assets	$	42,262		$	48,669
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	363		$	400
Accounts payable		6,416			5,185
Deferred revenue		263			893
Accrued expenses		5,691			5,147
Total current liabilities		12,733			11,625
Long-term debt, less current portion		7,307			7,564
Other long-term liabilities		620			—
Total liabilities		20,660			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 September 29, 2013 and 10,898,939 shares issued and 9,530,972 shares outstanding at December 31, 2012		109			109
Additional paid in capital		52,039			51,545
Accumulated deficit		(27,845	)		(19,385	)
Treasury stock, at cost, 1,367,967 shares at September 29, 2013 and December 31, 2012		(4,990	)		(4,990	)
Accumulated other comprehensive income		2,289			2,201
Total stockholders’ equity		21,602			29,480
Total liabilities and stockholders’ equity	$	42,262		$	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						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Net sales	$	12,014		$	14,137		$	36,761		$	45,007
Costs of goods sold		8,480			10,018			25,103			30,983
Gross profit		3,534			4,119			11,658			14,024
Operating expenses:
Selling, general and administrative		6,228			4,925			15,237			15,674
Research, development and engineering		1,276			1,333			3,427			4,121
Operating loss		(3,970	)		(2,139	)		(7,006	)		(5,771	)
Interest income		13			10			36			47
Interest expense		(103	)		(114	)		(323	)		(346	)
Foreign exchange loss		(33	)		(3	)		(147	)		(56	)
Other income		17			1			63			2
Loss before provision for income taxes		(4,076	)		(2,245	)		(7,377	)		(6,124	)
Provision for income taxes		998			153			1,083			430
Net loss	$	(5,074	)	$	(2,398	)	$	(8,460	)	$	(6,554	)
Loss per share:
Basic	$	(0.53	)	$	(0.25	)	$	(0.89	)	$	(0.69	)
Diluted	$	(0.53	)	$	(0.25	)	$	(0.89	)	$	(0.69	)
Weighted average number of shares outstanding:
Basic shares		9,544,864			9,515,967			9,536,010			9,506,926
Effect of dilutive options		—			—			—			—
Diluted shares		9,544,864			9,515,967			9,536,010			9,506,926

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						Nine Months Ended
	September 29, 2013			September 30, 2012			September 29, 2013			September 30, 2012
Comprehensive loss is calculated as follows:
Net loss	$	(5,074	)	$	(2,398	)	$	(8,460	)	$	(6,554	)
Other comprehensive income:
Foreign currency translation adjustment		23			47			88			49
Comprehensive loss	$	(5,051	)	$	(2,351	)	$	(8,372	)	$	(6,505	)

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2013

(in thousands)

(unaudited)

	Common Stock				Additional Paid-In		Accumulated			Treasury Stock					Accumulated Other Comprehensive
	shares		$		Capital		Deficit			shares		$			Income		Total
Balance at December 31, 2012		10,899	$	109	$	51,545	$	(19,385	)		1,368	$	(4,990	)	$	2,201	$	29,480
Net loss		—		—		—		(8,460	)		—		—			—		(8,460	)
Issuance of common stock		14		—		17		—			—		—			—		17
Stock-based compensation		—		—		477		—			—		—			—		477
Translation adjustment		—		—		—		—			—		—			88		88
Balance at September 29, 2013		10,913	$	109	$	52,039	$	(27,845	)		1,368	$	(4,990	)	$	2,289	$	21,602

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 NINE MONTHS ENDED SEPTEMBER 29, 2013 AND SEPTEMBER 30, 2012

($ in thousands)

(unaudited)

	September 29, 2013			September 30, 2012
Cash flows from operating activities:
Net loss	$	(8,460	)	$	(6,554	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,307			1,255
Provision (recovery) for bad debts		(181	)		339
Provision for inventory obsolescence		1,706			2,718
Gain on sale of property, plant and equipment		(51	)		—
Stock-based compensation		477			698
Deferred taxes		825			(143	)
Net change in operating assets and liabilities:
Accounts receivable		692			1,659
Inventories		(2,327	)		651
Other current assets		1,409			(1,579	)
Deferred revenue		(629	)		743
Other assets		(154	)		—
Other long-term liabilities		620			—
Accounts payable		1,142			3,212
Accrued expenses		486			(566	)
Net cash provided by (used in) operating activities		(3,138	)		2,433
Cash flows provided by (used in) investing activities:
Proceeds from sale of property, plant and equipment		57			—
Purchases of property, plant and equipment		(208	)		(198	)
Net cash used in investing activities		(151	)		(198	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements		(294	)		(277	)
Issuance of common stock		17			29
Proceeds from the exercise of stock options		—			9
Net cash used in financing activities		(277	)		(239	)
Effects of exchange rates on cash		20			85
Net increase (decrease) in cash and cash equivalents		(3,546	)		2,081
Cash and cash equivalents, beginning of period		20,218			18,948
Cash and cash equivalents, end of period	$	16,672		$	21,029
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest	$	293		$	299
Income taxes		484			230

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 September 29, 2013 and the related condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 29, 2013 and September 30, 2012 are unaudited. The condensed consolidated statement of stockholders’ equity and consolidated statements of cash flows for the nine months ended September 29, 2013 and September 30, 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. On October 4, 2013, the Company settled previously disclosed litigation regarding allegations made by one of its overseas customers that furnaces such customer had purchased from the Company in 2006 had not functioned properly. The settlement constitutes a full and final settlement and release of all rights and obligations of each party. The $1.5 million payable as a result of the settlement has been recognized in the Company’s consolidated statement of operations for the three months ended September 29, 2013.

We are not aware of any other 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

	September 29, 2013		December 31, 2012
	($ in thousands)
Raw materials and manufactured components	$	5,684	$	4,772
Work-in-process		2,918		1,905
Finished goods		1,658		2,870
Total inventory	$	10,260	$	9,547

7

BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(4) Accrued Expenses

	September 29, 2013		December 31, 2012
	( $ in thousands)
Accrued commissions	$	1,014	$	935
Accrued warranty		385		393
Accrued taxes		1,791		1,817
Accrued audit		378		388
Accrued legal		1,261		240
Accrued bonus		15		87
Payroll and payroll taxes		479		793
Accrued cost of sales		246		300
Accrued restructuring costs		3		111
Other		119		83
	$	5,691	$	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 claims 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 accrual 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 September 29, 2013 (in thousands):

	Nine Months Ended September 29, 2013
Beginning balance, December 31, 2012	$	393
Plus: accruals related to new sales		300
Less: warranty claims incurred and reserve adjustment		(308	)
Ending balance, September 29, 2013	$	385

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 nine months ended September 29, 2013 (in thousands):

	Nine Months Ended September 29, 2013
Beginning balance, December 31, 2012	$	111
Plus: charges to costs and expenses		176
Less: reduction of accrual		(71	)
Less: cash payments		(213	)
Ending balance, September 29, 2013	$	3

(5) Debt

Long-term debt consisted of:

	September 29, 2013		December 31, 2012
	($ in thousands)
Mortgage note payable, interest rate of 4.43% and 5.50% at September 29, 2013 and December 31, 2012, respectively	$	7,670	$	7,964
Less - current portion of long-term debt		363		400
Long-Term debt, less current portion	$	7,307	$	7,564

On March 30, 2006, the Company entered into a $10 million mortgage note secured by its real property in Billerica, Massachusetts, which had an initial maturity date of December 23, 2015. On September 9, 2010, the Company signed a First Loan Modification Agreement relating to the mortgage note, which reduced the annual interest rate from 6.84% to 5.50% and the monthly payment from $76,280 to $69,000.

On September 26, 2013, the Company signed a Second Loan Modification Agreement relating to the mortgage note, which extended the maturity date from December 23, 2015 to September 26, 2023. The modification also reduced the annual interest rate from 5.50% to 4.43% through September 26, 2018, at which time the interest rate will be adjusted to a per annum fixed rate equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points. The current monthly payment was reduced from $69,000 to $57,997. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

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 September 29, 2013, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $252,566. 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 shares and potentially dilutive securities outstanding during the period, using the treasury stock method. Potentially dilutive securities include outstanding stock options and unvested restricted stock units. Due to their anti-dilutive effect, approximately 1,315,670 and 1,291,326 options to purchase common stock were excluded from the calculation of diluted loss per share for the nine months ended September 29, 2013 and September 30, 2012, respectively. However, these potentially dilutive securities could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

Stock Options

The Company’s stock option compensation expense was $140,027 and $436,984 for the three and nine months ended September 29, 2013, respectively, and $180,321 and $678,577 for the three and nine months ended September 30, 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:

	Nine months ended
	September 29, 2013			September 30, 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 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 long-standing history of not issuing dividends and management’s current expectation of the same.

The following table summarizes the stock option activity during the nine months ended September 29, 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		(150,404	)	$	9.69
Outstanding at September 29, 2013		1,315,670		$	5.47		3.59	$	212,109
Exercisable at September 29, 2013		862,852		$	6.29		2.70	$	5,543

The weighted-average grant date fair values of options granted during the nine-month periods ended September 29, 2013 and September 30, 2012 were $1.21 and $1.54, respectively. The aggregate fair values of options exercised during the nine-month periods ended September 29, 2013 and September 30, 2012 were $0 and $6,179, respectively.

As of September 29, 2013, there was $622,685 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 1.43 years. The total fair value of options vested during the nine-month period ended September 29, 2013 was $326,401.

Restricted Stock Units

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 $27,913 and $4,633 during the nine-month period ended September 29, 2013 and September 30, 2012, respectively, related to restricted stock units. As of September 29, 2013, there was $60,610 of unrecognized compensation costs related to these grants. These grants have a remaining life of 1.38 years.

(8) Revenue Recognition

For the three and nine months ended September 29, 2013, there was no revenue recognized using the percentage of completion method. For the three and nine months ended September 30, 2012, there was $794,990 and $1,173,427, 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 their 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 4.43% 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:

	September 29, 2013		December 31, 2012
	($ in thousands)
United States	$	3,071	$	3,936
Asia Pacific		533		733
	$	3,604	$	4,669

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 is headquartered in North Billerica, Massachusetts, is a global supplier of, and technology leader with respect to, 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 September 29, 2013 compared to the three months ended September 30, 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
	September 29, 2013						September 30, 2012
	( $ in thousands)
				% of Net Sales						% of Net Sales			Percent Change
Net sales	$	12,014			100.0	%	$	14,137			100.0	%		(15.0	)%
Cost of goods sold		8,480			70.6	%		10,018			70.9	%		(15.4	)%
Gross profit		3,534			29.4	%		4,119			29.1	%		(14.2	)%
Selling, general and administrative expenses		6,228			51.8	%		4,925			34.8	%		26.5	%
Research, development and engineering expenses		1,276			10.6	%		1,333			9.4	%		(4.3	)%
Operating loss		(3,970	)		(33.0	)%		(2,139	)		(15.1	)%		85.6	%
Loss before provision for income taxes		(4,076	)		(33.9	)%		(2,245	)		(15.9	)%		81.6	%
Provision for income taxes		998			8.3	%		153			1.1	%		552.3	%
Net loss	$	(5,074	)		(42.2	)%	$	(2,398	)		(17.0	)%		111.6	%

Net Sales. Net sales for the third quarter of 2013 were $12.0 million representing a decrease of $2.1 million, or 15.0%, as compared to the same period in the prior year. Net sales of electronic market systems decreased by $0.8 million, or 7.6%, as compared to the same period in the prior year. Net sales of alternative energy systems decreased by $1.1 million, or 48.6%, 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 $0.3 million, or 14.5%, as compared to the same period in the prior year. The electronic market systems decrease represents a decrease in demand for Semi-Packaging systems and high-end Surface Mount Technology systems, particularly in Asia. The decrease in alternative energy sales is mainly due to lower nuclear product sales. 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, parts and service is due to the cyclical nature of the parts and service business.

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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
	September 29, 2013					September 30, 2012
	($ in thousands)
	$		% of Revenues			$		% of Revenues
United States	$	2,357		19.6	%	$	1,377		9.8	%
Europe, Near East		2,007		16.7	%		3,355		23.7	%
Asia Pacific		6,118		50.9	%		9,107		64.4	%
Other Americas		1,532		12.8	%		298		2.1	%
Total Revenue	$	12,014				$	14,137

Gross Profit. In the third quarter of 2013, gross profit was $3.5 million, a decrease of $0.6 million, compared to the third quarter of 2012 due primarily to the 15.0% decrease in net sales. In the third quarter of 2013, gross profit as a percentage of sales remained relatively flat at 29.4% as compared to 29.1% in the same period in 2012.

Selling, General and Administrative (SG&A). SG&A third quarter 2013 expenses of $6.2 million increased by $1.3 million compared to the same period in the prior year. The increase is primarily due to the $1.5 million payable as a result of the legal settlement as disclosed below in Part II, Item 1 - Legal Proceedings.

Research, Development and Engineering (RD&E). RD&E third quarter 2013 expenses of $1.3 million remained relatively flat as compared to the same period in the prior year.

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

Foreign Exchange Loss. The foreign exchange loss in the third quarter of 2013 was $33,000 as compared to a loss of $3,000 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 for the applicable period.

Income Taxes. For the three months ended September 29, 2013, the Company recorded an income tax provision of $1.0 million as compared to an income tax provision of $0.2 million for the same period in 2012. The income tax provision recorded for the three months ended September 29, 2013 is primarily due to establishing a $1.1 million valuation allowance on all deferred tax assets related to the China manufacturing subsidiary. Accounting Standards require that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carryback and carryforward periods. According to those standards, a valuation allowance may be needed when the negative evidence includes cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. As a result of the review as of September 29, 2013, the Company concluded that it was appropriate to establish a full valuation allowance for net deferred tax assets in the China manufacturing subsidiary, where cumulative losses have been incurred during recent periods. The significant fluctuations in the Company’s quarterly tax rate, exclusive of the fluctuation related to the establishment of the valuation allowance, 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 the 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.

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RESULTS OF OPERATIONS

Nine months ended September 29, 2013 compared to the nine months ended September 30, 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

	Nine Months Ended
	September 29, 2013						September 30, 2012
	( $ in thousands)
				% of net sales						% of net sales			Percent change
Net sales	$	36,761			100.0	%	$	45,007			100.0	%		(18.3	)%
Cost of goods sold		25,103			68.3	%		30,983			68.8	%		(19.0	)%
Gross profit		11,658			31.7	%		14,024			31.2	%		(16.9	)%
Selling, general and administrative expenses		15,237			41.4	%		15,674			34.8	%		(2.8	)%
Research, development and engineering expenses		3,427			9.3	%		4,121			9.2	%		(16.8	)%
Operating loss		(7,006	)		(19.1	)%		(5,771	)		(12.8	)%		21.4	%
Loss before provision for income taxes		(7,377	)		(20.1	)%		(6,124	)		(13.6	)%		20.5	%
Provision for income taxes		1,083			2.9	%		430			1.0	%		151.9	%
Net loss	$	(8,460	)		(23.0	)%	$	(6,554	)		(14.6	)%		29.1	%

Net Sales. Net sales for the first nine months of 2013 were $36.8 million, representing a decrease of $8.2 million, or 18.3%, as compared to the same period in the prior year. Net sales of electronic market systems decreased by $2.1 million, or 6.6%, and net sales of alternative energy systems decreased by $4.5 million, or 74.5%, 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 $1.6 million, or 24.9%, as compared to the same period in the prior year. The electronic market systems decrease represents a decrease in demand for Surface Mount Technology systems, particularly in Asia. The alternative energy systems sales decrease for the nine 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 is due to lower sales of both solar and nuclear products. The decrease in sales in the other market systems, parts and service is due to the cyclical nature of the parts and service business.

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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.

	Nine Months Ended
	September 29, 2013					September 30, 2012
	($ in thousands)
	$		% of revenues			$		% of revenues
United States	$	6,333		17.2	%	$	6,008		13.3	%
Europe, Near East		4,695		12.8	%		6,673		14.8	%
Asia Pacific		22,567		61.4	%		31,133		69.2	%
Other Americas		3,166		8.6	%		1,193		2.7	%
Total Revenue	$	36,761				$	45,007

Gross Profit. The first nine months of 2013 gross profit of $11.7 million decreased by $2.4 million compared to the first nine months of 2012 due primarily to the 18.3% decrease in net sales. In the first nine months of 2013, gross profit as a percentage of sales remained relatively flat at 31.7% as compared to 31.2% in the same period in 2012.

Selling, General and Administrative (SG&A). SG&A first nine months of 2013 expenses of $15.2 million decreased by $0.4 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. Offsetting these decreases is the $1.5 million payable as a result of the legal settlement as disclosed below in Part II, Item 1 - Legal Proceedings.

Research, Development and Engineering (RD&E). RD&E first nine months of 2013 expenses of $3.4 million decreased by $0.7 million, or 16.8%, 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 nine months of 2013, net interest expense remained relatively flat at $0.3 million as compared to the same period in 2012.

Foreign Exchange Loss. The foreign exchange loss in the first nine months of 2013 was $147,000 as compared to a loss of $56,000 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 nine months ended September 29, 2013, the Company recorded an income tax provision of $1.1 million compared to a provision of $0.4 million in the same period in the prior year. The income tax provision recorded for the nine months ended September 29, 2013 is primarily due to establishing a $1.1 million valuation allowance on all deferred tax assets related to the China manufacturing subsidiary. Accounting Standards require that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carryback and carryforward periods. According to those standards, a valuation allowance may be needed when the negative evidence includes cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. As a result of the review as of September 29, 2013, the Company concluded that it was appropriate to establish a full valuation allowance for net deferred tax assets in the China manufacturing subsidiary, where cumulative losses have been incurred during recent periods. The significant fluctuations in the Company’s quarterly tax rate, exclusive of the fluctuation related to the establishment of the valuation allowance, 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 the 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 September 29, 2013, we had $16.7 million in cash and cash equivalents, a decrease of $3.5 million, compared to $20.2 million at December 31, 2012.

During the nine months ended September 29, 2013, the Company used net cash of approximately $3.1 million for operating activities. This use of cash was primarily the result of a net loss of $8.5 million and an increase in inventory of $2.3 million, offset by a decrease in accounts receivable of $0.7 million, an increase in accounts payable of $1.1 million, a decrease in other current assets of $1.4 million and the adding back of non-cash expenses for depreciation and amortization of $1.3 million, stock-based compensation of $0.5 million, deferred taxes of $0.8 million and inventory provisions of $1.7 million.

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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 September 29, 2013, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $252,566. This restricted cash value is included in the Company’s balance sheet in other current assets.

On March 30, 2006, the Company entered into a $10 million mortgage note secured by its real property in Billerica, Massachusetts, which had an initial maturity date of December 23, 2015. On September 9, 2010, the Company signed a First Loan Modification Agreement relating to the mortgage note, which reduced the annual interest rate from 6.84% to 5.50% and the monthly payment from $76,280 to $69,000.

On September 26, 2013, the Company signed a Second Loan Modification Agreement relating to the mortgage note, which extended the maturity date from December 23, 2015 to September 26, 2023. The modification also reduced the annual interest rate from 5.50% to 4.43% through September 26, 2018, at which time the interest rate will be adjusted to a per annum fixed rate equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points. The current monthly payment was reduced from $69,000 to $57,997. The mortgage note had an outstanding balance on September 29, 2013 of approximately $7.7 million. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

As of September 29, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

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 September 29, 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 nine months ended September 29, 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 without limitation 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 September 29, 2013 and December 31, 2012, all of our long-term debt obligations are fixed rate financial instruments. However, on September 26, 2018, the interest rate related to the mortgage note will be adjusted to a per annum fixed rate, to be applicable until the maturity date of September 26, 2023, equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points.

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Item 4. Controls and Procedures

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

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Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined by Rule 13a-15(f) of the Exchange Act), 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 Proceedings

On October 4, 2013, the Company settled previously disclosed litigation regarding allegations made by one of its overseas customers that furnaces such customer had purchased from the Company in 2006 had not functioned properly. The settlement constitutes a full and final settlement and release of all rights and obligations of each party. The $1.5 million payable as a result of the settlement has been recognized in the Company’s consolidated statement of operations for the three months ended September 29, 2013.

Item 1A. Risk Factors

During the nine months ended September 29, 2013, there have been no material 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.

Item 6. Exhibits

(a) Exhibits

Exhibit 10.1 -	Second Modification Agreement between the Company and Salem Five Cents Savings Bank, dated September 26, 2013, incorporated by reference from the Company’s Current Report on Form 8-K, filed on October 2, 2013
Exhibit 10.2 -	Second Amended and Restated Commercial Real Estate Promissory Note by the Company in favor of Salem Five Cents Savings Bank, dated September 26, 2013, incorporated by reference from the Company’s Current Report on Form 8-K, filed on October 2, 2013
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.

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SIGNATURES

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

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

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