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  **SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-Q**(Mark One)   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended September 30, 2006****OR**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****Commission file number****0-9576****K-TRON INTERNATIONAL, INC.**(Exact Name of Registrant as Specified in Its Charter)   New Jersey 22-1759452 (State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)or Organization)     Routes 55 & 553, P.O. Box 888, Pitman, New Jersey 08071-0888 (Address of Principal Executive Offices) (Zip Code)(856) 589-0500Registrant’s Telephone Number, Including Area CodeNot Applicable(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)Indicate by check mark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during thepreceding 12 months (or for such shorter period that the Registrant was required to file suchreports) and (2) has been subject to such filing requirements for the past 90 days.Yes þ       No oIndicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer ora non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):Large Accelerated Filer o      Accelerated Filer o      Non-Accelerated Filer þIndicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o       No þThe Registrant had 2,611,549 shares of Common Stock outstanding as of November 6, 2006.  
 

 
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIESINDEX           Page No. PART I. FINANCIAL INFORMATION                Item 1. Financial Statements.             Consolidated Balance SheetsSeptember 30, 2006 (Unaudited) and December 31, 2005  1          Consolidated Statements of Income and RetainedEarnings (Unaudited) for the Three and Nine MonthsEnded September 30, 2006 and October 1, 2005  2          Consolidated Statements of Cash Flows (Unaudited)for the Nine Months Ended September 30, 2006 andOctober 1, 2005  3          Notes to Consolidated Financial Statements (Unaudited)  4 – 15             Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations.  16 – 23             Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.  23 – 24             Item 4. Controls and Procedures.  24 – 25        PART II. OTHER INFORMATION                Item 6. Exhibits.  26        SIGNATURES    27  CHIEF EXECUTIVE OFFICER CERTIFICATION CHIEF FINANCIAL OFFICER CERTIFICATION CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350
 

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**PART I. FINANCIAL INFORMATION****Item 1****.****Financial Statements****.**K-TRON INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollars in Thousands except Per Share Data)           (Unaudited)      September 30,  December 31,   2006  2005 ASSETS        CURRENT ASSETS:        Cash and cash equivalents $12,876  $15,051 Restricted cash  701   — Accounts receivable, net of allowance fordoubtful accounts of $814 and $682  21,637   18,168 Inventories, net  22,915   15,235 Deferred income taxes  1,457   1,033 Prepaid expenses and other current assets  3,563   2,019        Total current assets  63,149   51,506                 PROPERTY, PLANT AND EQUIPMENT, net  26,082   22,271 PATENTS, net  1,479   1,577 GOODWILL  3,779   2,053 OTHER INTANGIBLES, net  13,116   9,739 NOTES RECEIVABLE AND OTHER ASSETS  1,914   1,852 DEFERRED INCOME TAXES  457   112        Total assets $109,976  $89,110                 LIABILITIES AND SHAREHOLDERS’ EQUITY        CURRENT LIABILITIES:        Current portion of long-term debt $392  $4,316 Accounts payable  8,816   6,025 Accrued expenses and other current liabilities  8,663   6,526 Accrued commissions  2,590   2,297 Customer advances  6,257   1,704 Income taxes payable  4,179   3,421 Deferred income taxes  1,652   1,652        Total current liabilities  32,549   25,941                 LONG-TERM DEBT, net of current portion  14,214   12,675 DEFERRED INCOME TAXES  3,418   974 SERIES B JUNIOR PARTICIPATING PREFERRED SHARES,$.01 par value – authorized 50,000 shares; none issued  —   — SHAREHOLDERS’ EQUITY:        Preferred stock, $.01 par value – authorized 950,000shares; none issued  —   — Common stock, $.01 par value – authorized 50,000,000 shares;issued 4,614,123 shares and 4,578,166 shares  46   46 Paid-in capital  20,006   19,082 Retained earnings  64,794   56,383 Accumulated other comprehensive income  2,463   1,523           87,309   77,034 Treasury stock, 2,002,574 shares – at cost  (27,514)  (27,514)       Total shareholders’ equity  59,795   49,520        Total liabilities and shareholders’ equity $109,976  $89,110        See Notes to Consolidated Financial Statements
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K-TRON INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS(Dollars in Thousands except Per Share Data)(Unaudited)                   Three Months Ended  Nine Months Ended   September 30,  October 1,  September 30,  October 1,   2006  2005  2006  2005 REVENUES:                Equipment and parts $32,720  $28,900  $97,334  $83,741 Services and freight  2,166   1,903   6,427   5,838              Total revenues  34,886   30,803   103,761   89,579                  COST OF REVENUES:                Equipment and parts  18,957   16,464   54,369   46,751 Services and freight  2,010   1,784   6,057   5,486              Total cost of revenues  20,967   18,248   60,426   52,237                               Gross profit  13,919   12,555   43,335   37,342                  OPERATING EXPENSES:                Selling, general and administrative  9,027   8,500   28,218   25,903 Research and development  568   633   1,741   1,984                 9,595   9,133   29,959   27,887                               Operating income  4,324   3,422   13,376   9,455                  INTEREST EXPENSE, net of interest income  153   281   519   803              Income before income taxes  4,171   3,141   12,857   8,652                  INCOME TAX PROVISION  1,433   1,151   4,446   3,103                               NET INCOME  2,738   1,990   8,411   5,549                  RETAINED EARNINGS:                Beginning of period  62,056   52,660   56,383   49,101              End of period $64,794  $54,650  $64,794  $54,650                               EARNINGS PER SHARE:                Basic $1.05  $0.77  $3.24  $2.18              Diluted $0.97  $0.73  $3.01  $2.05                               Weighted average common shares outstanding (basic)  2,612,000   2,569,000   2,595,000   2,551,000                               Weighted average common and common equivalentshares outstanding (diluted)  2,820,000   2,736,000   2,793,000   2,708,000              See Notes to Consolidated Financial Statements
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K-TRON INTERNATIONAL, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in Thousands)(Unaudited)           Nine Months Ended   September 30,  October 1,   2006  2005 OPERATING ACTIVITIES:        Net income $8,411  $5,549 Adjustments to reconcile net income to net cash provided by operating activities:        Depreciation and amortization  3,386   2,975 Non-cash compensation  257   125 Deferred income taxes  (89)  — Changes in assets and liabilities, net of business acquired:        Accounts receivable, net  (520)  1,114 Inventories, net  (4,896)  (627)Prepaid expenses and other current assets  (1,122)  (686)Other assets  66   187 Accounts payable  1,944   (3)Accrued expenses and other current liabilities  4,908   (1,136)       Net cash provided by operating activities  12,345   7,498                 INVESTING ACTIVITIES:        Business acquired net of cash received  (7,116)  — Capital expenditures  (1,992)  (1,072)Restricted cash  (701)  — Other  (39)  (15)       Net cash used in investing activities  (9,848)  (1,087)                FINANCING ACTIVITIES:        Net repayments under lines of credit  (804)  (1,125)Principal payments on long-term debt  (14,399)  (3,503)Proceeds from issuance of long-term debt  9,801   — Net issuance costs  (63)  — Proceeds from issuance of common stock  398   473        Net cash used in financing activities  (5,067)  (4,155)                EFFECT OF EXCHANGE RATE CHANGES ON CASH ANDCASH EQUIVALENTS  395   (1,596)                NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  (2,175)  660                 CASH AND CASH EQUIVALENTS:        Beginning of period  15,051   12,443        End of period $12,876  $13,103        See Notes to Consolidated Financial Statements
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K-TRON INTERNATIONAL, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(Unaudited)1. Basis of Presentation   The accompanying unaudited consolidated financial statements have been prepared inaccordance with the instructions for Form 10-Q and do not include all of theinformation and footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements. The consolidatedfinancial statements include the accounts of K-Tron International, Inc. and itssubsidiaries (“K-Tron” or the “Company”). All intercompany transactions have beeneliminated in consolidation. In the opinion of management, all adjustments(consisting of a normal recurring nature) considered necessary for a fair presentationof results for interim periods have been made. All references to the third quarter orfirst nine months of 2006 or 2005 mean the fiscal 13-week or 39-week period endedSeptember 30, 2006 or October 1, 2005.   The unaudited financial statements herein should be read in conjunction with theCompany’s annual report on Form 10-K for the fiscal year ended December 31, 2005which was previously filed with the Securities and Exchange Commission (the “SEC”).   Certain reclassifications were made to the prior year’s consolidated financialstatements to conform them to the current year presentation. 2. Subsequent Event   On October 5, 2006, the Company purchased all of the outstanding stock of PremierPneumatics, Inc. (“Premier”). The purchase price was $27,565,000, all of which waspaid in cash, including a $2,000,000 escrow. The purchase price is subject toadjustment based on Premier’s net working capital on the closing date.   The $27,565,000 purchase price for Premier was borrowed under a new credit facilitythat the Company entered into on September 29, 2006 (see Note 9 – Long Term Debt). 3. Acquisition   On March 3, 2006, the Company purchased all of the outstanding stock of J.M.J.Industries, Inc., which operated its business under the tradename Gundlach, and theresults of that company, now known as Gundlach Equipment Corporation, have beenincluded in the Company’s consolidated financial statements since that date. Thepurchase price was $9,154,500, of which $6,154,500 was paid in cash and $3,000,000by delivery of an unsecured promissory note bearing interest at 5% per annum andpayable in three equal, annual installments of $1,000,000 on March 3 in each of2008, 2009 and 2010. The Company also paid off all of the acquired company’s bankdebt, which amounted to approximately $1,347,000. The Company did not borrow anymoney in connection with either the acquisition or the payoff of the bank debt. Theexcess of the
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  purchase price over the carrying value of the identifiable net assets acquired was$6,723,000, which was allocated as follows:         Useful Life (in thousands) Property, plant and equipment      Various $1,347 Goodwill      Indefinite  1,726 Customer relationships      15 Years  1,500 Drawings      25 Years  1,430 Tradenames      Indefinite  720           $6,723         The total purchase price of $10,501,500 (including the payoff of bank debt) wasallocated as follows:       (in thousands) Cash $389 Accounts receivable  2,476 Inventories  2,313 Other current assets  175 Property, plant and equipment  4,287 Goodwill  1,726 Customer relationships  1,500 Drawings  1,430 Tradenames  720 Accounts payable  (502)Accrued expenses and other current liabilities  (2,248)Deferred taxes  (1,764)      $10,502       Customer relationships, drawings and tradenames are included in other intangibles inthe consolidated balance sheet. 4. New Accounting Pronouncements   In December 2004, the Financial Accounting Standards Board (the “FASB”) issued thefinal revised version of Statement of Financial Accounting Standards (“SFAS”) No.123(R), “Share-Based Payment”, which requires companies to recognize in the incomestatement the grant-date fair value of stock options and other equity-basedcompensation issued to employees. In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107, “Share-Based Payment”, regarding the interaction betweenSFAS No. 123(R) and certain SEC rules and regulations. Effective January 1, 2006,the Company adopted SFAS No. 123(R). Since January 1, 2006, the Company hasrecognized compensation expense related to share-based payments on a straight-linebasis over the requisite service period for share-based payment awards granted on orafter January 1, 2006. For unvested awards granted prior to the effective date ofthe Company’s adoption of SFAS No. 123(R), the Company has recognized compensationexpense in the same manner as it did in its income statement or for pro formadisclosures prior to the effective date of its
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  adoption of SFAS No. 123(R). See Note 11 for more information regarding theadoption of SFAS No. 123(R).   In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment ofAccounting Research Bulletin (“ARB”) No. 43, Chapter 4”. SFAS No. 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handling costsand wasted material and requires that such items be recognized as current-periodcharges regardless of whether they meet the “so abnormal” criterion outlined in ARBNo. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requiresthe allocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. Unallocated overheads must be recognized asan expense in the period incurred. SFAS No. 151 is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. The Company adoptedSFAS No. 151 effective January 1, 2006. The adoption did not have a material impacton its consolidated financial statements.   In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets —an amendment of APB Opinion No. 29”. Accounting Principles Board (“APB”) Opinion No.29 requires a nonmonetary exchange of assets to be accounted for at fair value,recognizing any gain or loss, if the exchange meets a commercial substance criterionand fair value is determinable. The commercial substance criterion is assessed bycomparing the entity’s expected cash flows immediately before and after theexchange. SFAS No. 153 eliminates the “similar productive assets exception”, whichaccounted for the exchange of assets at book value with no recognition of gain orloss. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company adopted SFAS No. 153 effectiveJanuary 1, 2006. The adoption did not have a material impact on its consolidatedfinancial statements.   In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”, which replaces APBOpinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changesin Interim Financial Statements”, and changes the requirements for the accountingfor and reporting of a change in accounting principle. SFAS No. 154 applies to allvoluntary changes in accounting principle, and also applies to changes required byan accounting pronouncement in the unusual instance that the pronouncement does notinclude specific transition provisions. SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. SFAS No. 154 does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as of theeffective date of SFAS No. 154. The Company adopted SFAS No.154 effective January 1,2006. The adoption did not have a material impact on its consolidated financialstatements.   In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109”. This Interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS No. 109, “Accounting forIncome Taxes”. It also prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position taken orexpected to be taken in
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  a tax return, and it provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.Interpretation No. 48 is effective as of the beginning of the first fiscal yearbeginning after December 15, 2006. The Company is currently evaluating the impactof this Interpretation on its consolidated financial statements.   In September 2006, the SEC staff issued SAB No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year FinancialStatements”, to address quantifying the financial statement effects ofmisstatements. The SEC believes that registrants and auditors must quantify theeffects on the current year financial statements of correcting all misstatements,including both the carryover and reversing effects of uncorrected prior yearmisstatements. After considering all relevant quantitative and qualitative factors,if a misstatement is material to either the income statement or the balance sheet, aregistrant’s financial statements must be adjusted. SAB No. 108 is effective forfiscal years ending after November 15, 2006. The Company is currently evaluatingthe impact of SAB No. 108 on its consolidated financial statements for the yearending December 30, 2006. 5. Supplemental Disclosures of Cash Flow Information   The Company considers all highly liquid short-term investments purchased with anoriginal maturity of three months or less to be cash equivalents.   Cash paid for interest expense in the nine-month periods ended September 30, 2006and October 1, 2005 was $658,000 and $863,000 and for income taxes was $4,333,000and $3,241,000.   As part of the acquisition discussed in Note 3 above, the Company issued $3,000,000in an unsecured promissory note for the benefit of the sellers of the stock ofJ.M.J. Industries, Inc. 6. Inventories   Inventories consist of the following:           September 30,  December 31,   2006  2005   (in thousands) Components $17,782  $13,216 Work-in-process  6,550   2,850 Finished goods  —   81 Inventory reserves  (1,417)  (912)         $22,915  $15,235        
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7. Intangible Assets   Intangible assets consist of the following:                   September 30, 2006  December 31, 2005   Gross      Gross      Carrying  Accumulated  Carrying  Accumulated   Amount  Amortization  Amount  Amortization   (in thousands) Amortized intangible assets                Patents $2,852  $1,373  $2,815  $1,238 Drawings  4,980   495   3,550   355 Customer relationships  6,398   377   4,898   244                $14,230  $2,245  $11,263  $1,837                               Unamortized intangible assets                Trademarks and tradenames $2,610      $1,890                      The amortized intangible assets are being amortized on the straight-line basis(half-year expense in the year of acquisition) over the expected periods of benefit,which range from 15 to 50 years. The weighted average life of the amortizableassets is 32 years. The amortization expense of intangible assets for thenine-month periods ended September 30, 2006 and October 1, 2005 was $408,000 and$314,000. 8. Accrued Warranty   The Company offers a one-year warranty on a majority of its products. Warranty isaccrued as a percentage of sales on a monthly basis and otherwise as believedneeded, and is included in accrued expenses and other current liabilities. Thefollowing is an analysis of accrued warranty for the nine-month periods endedSeptember 30, 2006 and October 1, 2005:           Nine Months Ended   September 30,  October 1,   2006  2005   (in thousands) Beginning balance $989  $1,257 Accrued warranty of acquired business  150   — Accrual of warranty expense  1,212   954 Warranty costs incurred  (843)  (1,013)Foreign exchange adjustment  21   (55)       Ending balance $1,529  $1,143        
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9. Long-Term Debt   Long-term debt consists of the following, with the annual interest rates shown beingthose in effect on September 30, 2006:           September 30,  December 31,   2006  2005   (in thousands) U.S. revolving line of credit at 7.25% $9,801  $— U.S. mortgage, interest at 6.45%  1,599   1,731 U.S. line of credit  —   805 U.S. term notes, interest at 5.00%  3,000   14,266 Other  206   189           14,606   16,991 Less current portion  (392)  (4,316)         $14,214  $12,675          On September 29, 2006, the Company and its U.S. subsidiaries entered into a loanagreement with Citizens Bank of Pennsylvania. The credit facility provides theCompany and these subsidiaries until September 29, 2011 with a $50,000,000 unsecuredrevolving line of credit. On September 29, 2006, the Company borrowed $9,801,000under the new facility, primarily to refinance all of its other U.S. bankindebtedness, except for a mortgage note with a principal balance of $1,600,000, andthose other U.S. debt facilities were terminated. The $27,565,000 purchase price forPremier, discussed in Note 2 – Subsequent Events, was borrowed under this newfacility on October 5, 2006. Between September 29 and October 5, 2006, the Companyrepaid $4,000,000 of the September 29 borrowing, so that at October 5, 2006 the totalborrowing under the Citizens Bank facility was $33,366,000.   Revolving loans under the Citizens Bank loan agreement can be either primerate-based loans or LIBOR rate-based loans. Prime rate-based loans bear interest ata fluctuating rate per annum equal to the prime rate of interest less a percentageranging from 1.00% to 0.25% depending on the level of the ratio of funded debt toadjusted earnings before interest expense, tax expense, and depreciation andamortization expenses for such period (the “Debt Ratio”). LIBOR rate-based loansbear interest at a fluctuating rate per annum equal to LIBOR for the relevant timeperiod chosen by the Company (1,2,3 or 6 months) plus a percentage ranging from0.875% to 1.625%, depending on the level of the Debt Ratio.   The Citizens Bank loan agreement contains financial and other covenants, includingcovenants relating to the Company’s consolidated fixed charge coverage ratio, networth and total debt to EBITDA ratio. 10. Earnings Per Share   The Company previously adopted SFAS No. 128, “Earnings Per Share”, which requiresthat the Company report Basic and Diluted Earnings Per Share. Basic Earnings PerShare represents net income less preferred dividends divided by the weighted average
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  number of common shares outstanding. Diluted Earnings Per Share is calculatedsimilarly, except that the denominator includes the weighted average number ofcommon shares outstanding plus the dilutive effect of options, warrants, convertiblesecurities and other instruments with dilutive effects if exercised.   The Company’s Basic and Diluted Earnings Per Share are calculated as follows:               For the Three Months Ended September 30, 2006   Net Income Available        *(Dollars and Shares in Thousands* To Common      Earnings *except Per Share Data)* Shareholders  Shares  Per Share Basic $2,738   2,612  $1.05              Common Share Equivalentof Outstanding Options  —   208   (0.08)          Diluted $2,738   2,820  $0.97                          For the Three Months Ended October 1, 2005   Net Income Available        *(Dollars and Shares in Thousands* To Common      Earnings *except Per Share Data)* Shareholders  Shares  Per Share Basic $1,990   2,569  $0.77              Common Share Equivalentof Outstanding Options  —   167   (0.04)          Diluted $1,990   2,736  $0.73                          For the Nine Months Ended September 30, 2006   Net Income Available        *(Dollars and Shares in Thousands* To Common      Earnings *except Per Share Data)* Shareholders  Shares  Per Share Basic $8,411   2,595  $3.24              Common Share Equivalentof Outstanding Options  —   198   (0.23)          Diluted $8,411   2,793  $3.01           
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               For the Nine Months Ended October 1, 2005   Net Income Available        *(Dollars and Shares in Thousands* To Common      Earnings *except Per Share Data)* Shareholders  Shares  Per Share Basic $5,549   2,551  $2.18              Common Share Equivalentof Outstanding Options  —   157   (0.13)          Diluted $5,549   2,708  $2.05           The Company’s Diluted Earnings Per Share values shown in the preceding table are basedon the weighted average number of common and common equivalent shares outstandingduring a given time period. Such average shares include the weighted average number ofcommon shares outstanding plus the shares issuable upon the exercise of stock optionsafter the assumed repurchase of common shares with the related proceeds at the averagemarket price during the period.11. Share-Based CompensationThe Company adopted SFAS No.123(R) effective January 1, 2006. SFAS No. 123(R)requires the Company to recognize expense related to the fair value of stock-basedcompensation awards, including employee stock options.Prior to the adoption of SFAS No. 123(R), the Company accounted for stock optionsusing the intrinsic value method of APB Opinion No. 25, and it did not recognizecompensation expense in its income statement for options granted that had an exerciseprice equal to or greater than the market value of the underlying common stock on thedate of grant. However, the Company did record compensation expense related torestricted stock grants based on the market value of its stock at the date of grantand the vesting period of the grant. As required by SFAS No. 123, the Company alsoprovided certain pro forma disclosures for stock option awards as if the fairvalue-based approach of SFAS No. 123 had been applied.The Company has elected to use the modified prospective transition method as permittedby SFAS No. 123(R) and therefore has not restated its financial results for priorperiods. Under this transition method, the Company will apply the provisions of SFASNo. 123(R) to new awards and to awards modified, repurchased or cancelled afterDecember 31, 2005. Additionally, for unvested awards granted prior to the effectivedate of the Company’s adoption of SFAS No. 123(R) which have not been fully expensedin prior years, either in the Company’s income statement or in pro forma disclosuresin the notes thereto, the Company will recognize compensation expense in the samemanner as was used in its income statement or for pro forma disclosures prior to theeffective date of its adoption of SFAS No. 123(R).The pre-tax cost for stock option employee compensation was approximately $62,000($38,000 after tax) for the first nine months of 2006. There was no pre-tax cost forstock option employee compensation for the third quarter of 2006. As a result of theadoption of
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SFAS No. 123(R), the Company’s financial results were lower than under the previousaccounting method for share-based compensation by the following amounts:           Three Months Ended Nine Months Ended  September 30, 2006 September 30, 2006  (in thousands, except per share)Income from continuing operationsbefore income taxes $0  $62          Net income $0  $38          Basic earnings per share $0  $0.01          Diluted earnings per share $0  $0.01 As of September 30, 2006, the Company did not have any remaining prospective pre-taxcost of unvested stock option employee compensation to be expensed.The following table illustrates the effect on net income and net income per commonshare as if the Company had applied the fair value recognition provisions of SFAS No.123 to stock option employee compensation for the three and nine-month periods endedOctober 1, 2005:           Three Months Ended  Nine Months Ended   October 1,  October 1,   2005  2005   (in thousands, except per share) Net income — as reported $1,990  $5,549 Deduct stock option employeecompensation expense determined,net of related tax effect  (20)  (102)       Net income — pro forma $1,970  $5,447                 Basic earnings per share — as reported $0.77  $2.18 Basic earnings per share — pro forma  0.77   2.14 Diluted earnings per share — as reported  0.73   2.05 Diluted earnings per share — pro forma  0.72   2.01 There were no employee stock options granted in the first nine months of 2006.12. Comprehensive IncomeComprehensive income is the total of net income, the change (net of tax) in theunrealized gain or loss on a foreign exchange hedge and an interest rate swap,the effect (net of tax) of the termination of the interest rate swap, and thechange in foreign currency translation adjustments, all for a given period, whichare the Company’s only non-owner changes in
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equity. For the three and nine-month periods ended September 30, 2006 and October 1,2005, the following table sets forth the Company’s comprehensive income:                   Three Months Ended  Nine Months Ended   Sept. 30,  Oct. 1,  Sept. 30,  Oct. 1,   2006  2005  2006  2005   (in thousands) Net income $2,738  $1,990  $8,411  $5,549 Unrealized loss on foreign exchangehedge, net of tax  (79)  —   (193)  — Unrealized gain on interest rate swap,net of tax  —   12   —   36 Termination of interest rate swap,net of tax  (46)  —   (52)  — Foreign currency translation gain (loss)  (503)  27   1,185   (3,924)             Comprehensive income $2,110  $2,029  $9,351  $1,661              13. Management Geographic InformationThe Company has adopted the provisions of SFAS No. 131, “Disclosures About Segments ofan Enterprise and Related Information”. SFAS No. 131 introduced a model for segmentreporting called the management approach. The management approach is based on the waythat the chief operating decision-maker organizes segments within a company for makingoperating decisions and assessing performance. The Company is engaged in one businesssegment, material handling equipment and systems. The Company operates in two primarygeographic locations, North and South America (the “Americas”) and Europe, the MiddleEast, Africa and Asia (“EMEA/Asia”).For the three and nine-month periods ended September 30, 2006 and October 1, 2005, thefollowing table sets forth the Company’s geographic information:                       EMEA/  Elimi-  Consoli-   Americas  Asia  nations  dated   (in thousands) THREE MONTHS ENDEDSeptember 30, 2006                September 30, 2006                Revenues                Sales to unaffiliated customers $23,767  $11,119  $—  $34,886 Sales to affiliates  966   756   (1,722)  —              Total sales $24,733  $11,875  $(1,722) $34,886                               Operating income $3,548  $772  $4  $4,324              Interest expense              (153)                Income before income taxes             $4,171                 
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                       EMEA/  Elimi-  Consoli-   Americas  Asia  nations  dated   (in thousands) THREE MONTHS ENDED                October 1, 2005                Revenues                Sales to unaffiliated customers $20,227  $10,576  $—  $30,803 Sales to affiliates  616   554   (1,170)  —              Total sales $20,843  $11,130  $(1,170) $30,803                               Operating income $3,060  $388  $(26) $3,422              Interest expense              (281)                Income before income taxes             $3,141                                        EMEA/  Elimi-  Consoli-   Americas  Asia  nations  dated   (in thousands) NINE MONTHS ENDED                September 30, 2006                Revenues                Sales to unaffiliated customers $69,213  $34,548  $—  $103,761 Sales to affiliates  2,438   2,392   (4,830)  —              Total sales $71,651  $36,940  $(4,830) $103,761                               Operating income $10,776  $2,636  $(36) $13,376              Interest expense              (519)                Income before income taxes             $12,857                                        EMEA/  Elimi-  Consoli-   Americas  Asia  nations  dated   (in thousands) NINE MONTHS ENDED                October 1, 2005                Revenues                Sales to unaffiliated customers $55,755  $33,824  $—  $89,579 Sales to affiliates  2,071   2,202   (4,273)  —              Total sales $57,826  $36,026  $(4,273) $89,579                               Operating income $7,882  $1,554  $19  $9,455               Interest expense              (803)                Income before income taxes             $8,652                 
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For the three and nine-month periods ended September 30, 2006 and October 1, 2005, thefollowing table sets forth revenues from external customers:                   Three Months Ended  Nine Months Ended   Sept. 30,   Oct. 1,  Sept. 30,  Oct. 1,   2006  2005  2006  2005   (in thousands) Americas                U.S $17,782  $16,756  $55,592  $46,708 All others  5,985   3,471   13,621   9,047              Total  23,767   20,227   69,213   55,755                               EMEA/Asia                France  765   1,020   2,352   3,406 Germany  2,135   2,313   6,447   6,031 South Korea  1,149   352   2,252   1,727 United Kingdom  1,713   1,439   4,820   5,992 All others  5,357   5,452   18,677   16,668              Total  11,119   10,576   34,548   33,824                $34,886  $30,803  $103,761  $89,579              
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**Item 2.****Management’s Discussion and Analysis of Financial Condition and Results of Operations****.****Introduction**     We are engaged in one principal business segment — material handling equipment andsystems. We operate in two primary geographic locations — North and South America (the“Americas”) and Europe, the Middle East, Africa and Asia (“EMEA/Asia”).     Within the material handling equipment and systems segment, we have two main businesslines, which are our process and size reduction business lines. The process business lineis a combination of our former feeder and pneumatic conveying business lines.     On March 3, 2006, we purchased all of the outstanding stock of J.M.J. Industries,Inc., which operated its business under the tradename Gundlach. The purchase price was$9,154,500, of which $6,154,500 was paid in cash and $3,000,000 by delivery of an unsecuredpromissory note bearing interest at 5% per annum and payable in three equal, annualinstallments of $1,000,000 on March 3 in each of 2008, 2009 and 2010. We also paid off allof the acquired company’s bank debt, which amounted to approximately $1,347,000. We didnot borrow any money in connection with either the acquisition or the payoff of the bankdebt. The Gundlach operation is part of our size reduction business line.     On October 5, 2006, we purchased all of the outstanding stock of Premier Pneumatics,Inc. (“Premier”). The purchase price was $27,565,000, all of which was paid in cash,including a $2,000,000 escrow. The purchase price is subject to adjustment based onPremier’s net working capital on the closing date.     On September 29, 2006, the Company and its U.S. subsidiaries entered into a loanagreement with Citizens Bank of Pennsylvania. The credit facility provides the Company andthese subsidiaries until September 29, 2011 with a $50,000,000 unsecured revolving line ofcredit. On September 29, 2006, the Company borrowed $9,801,000 under the new facility,primarily to refinance all of its other U.S. bank indebtedness, except for a mortgage notewith a principal balance of $1,600,000, and those other U.S. debt facilities wereterminated. The $27,565,000 purchase price for Premier was borrowed under this newfacility on October 5, 2006. Between September 29 and October 5, 2006, the Company repaid$4,000,000 of the September 29 borrowing, so that at October 5, 2006 the total borrowingunder the Citizens Bank facility was $33,366,000.     The following provides information that management believes is relevant to anassessment and understanding of our consolidated results of operations and financialcondition. The discussion should be read in conjunction with our consolidated financialstatements and accompanying notes. All references in this Item 2 to the third quarter orfirst nine months of 2006 or 2005 mean the fiscal 13-week or 39-week period ended September30, 2006 or October 1, 2005.
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**Critical Accounting Policies and Estimates; Recent Accounting Standards**     Management’s discussion and analysis of our financial condition and results ofoperations is based on the accounting policies used and disclosed in our 2005 consolidatedfinancial statements and accompanying notes that were prepared in accordance with accountingprinciples generally accepted in the United States of America and included as part of ourannual report on Form 10-K for the fiscal year ended December 31, 2005 (the “2005 Form10-K”). The preparation of those financial statements required management to make estimatesand assumptions that affected the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the dates of the financial statements and thereported amounts of revenues and expenses during the reporting periods. Actual amounts orresults could differ from those based on such estimates and assumptions.     Our critical accounting policies are described in Management’s Discussion and Analysisincluded in our 2005 Form 10-K. There have been no changes in these accounting policies.     Our significant accounting policies are described in Note 2 to our 2005 consolidatedfinancial statements. Information concerning our implementation and the impact of recentaccounting standards issued by the Financial Accounting Standards Board is included in thenotes to our 2005 consolidated financial statements and also in the notes to ourconsolidated financial statements contained in this quarterly report on Form 10-Q. We didnot adopt any accounting policy in the first nine months of 2006 that had a material impacton our financial condition, liquidity or results of operations.**Results of Operations***Overview*     For the third quarter and first nine months of 2006, we reported revenues of$34,886,000 and $103,761,000 and net income of $2,738,000 and $8,411,000, compared torevenues of $30,803,000 and $89,579,000 and net income of $1,990,000 and $5,549,000 for thesame periods in 2005. We believe that the increases in our revenues and net income in thethird quarter and first nine months of 2006 compared to the same periods in 2005 wereprimarily the result of the contribution from seven months of operations of our recentlyacquired Gundlach business, improved margins in our process business line in EMEA/Asia,which more than offset the negative effect of a stronger U.S. dollar in the first ninemonths of 2006 versus the same period in 2005 on the translation of the revenues andprofits of our foreign operations into U.S. dollars, and stronger business conditions andincreased spending by customers in the Americas. Our effective tax rates for the thirdquarter and first nine months of 2006 were 34.4% and 34.6% compared to and 36.6% and 35.9%for the same periods in 2005.*Foreign Exchange Rates*     We are an international company, and we derived 33.3% and 37.8% of our revenues forthe first nine months of 2006 and 2005 from products manufactured in, and servicesperformed from, our facilities located outside the United States, primarily in Europe.With our global operations, we are sensitive to changes in foreign currency exchange rates(“foreign exchange rates”), which can affect both the translation of financial statementitems into U.S. dollars as well as transactions where the revenues and related expenses mayinitially be accounted for in
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different currencies, such as sales made from our Swiss manufacturing facility incurrencies other than the Swiss franc.     Since we receive substantial revenues from activities in foreign jurisdictions, ourresults can be significantly affected by changes in foreign exchange rates, particularly inU.S. dollar exchange rates with respect to the Swiss franc, euro and British pound sterlingand, to a lesser degree, the Singapore dollar and other currencies. When the U.S. dollarweakens against these currencies, the U.S. dollar value of non-U.S. dollar-based salesincreases. When the U.S. dollar strengthens against these currencies, the U.S. dollarvalue of non-U.S. dollar-based sales decreases. Correspondingly, the U.S. dollar value ofnon-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when theU.S. dollar strengthens. Overall, we generally benefit from a weaker dollar and areadversely affected by a stronger dollar relative to major currencies worldwide, especiallythose identified above. In particular, a general weakening of the U.S. dollar against othercurrencies would positively affect our non-U.S. dollar revenues, gross profit and operatingincome as expressed in U.S. dollars (provided that the gross profit and operating incomenumbers from foreign operations are not losses, since in the case of a loss, the effectwould be to increase the loss), whereas a general strengthening of the U.S. dollar againstsuch currencies would have the opposite effect. In addition, our revenues and income withrespect to particular transactions may be affected by changes in foreign exchange rateswhere sales are made in currencies other than the functional currency of the facilitymanufacturing the product subject to the sale.     For the third quarter and first nine months of 2006 and 2005, the changes in certainkey foreign exchange rates affecting us were as follows:                           Three Months Ended Nine Months Ended  Sept. 30,     Oct. 1, Sept. 30,     Oct. 1,  2006     2005 2006     2005Average U.S. dollar equivalent ofone Swiss franc  0.809       0.786   0.796       0.814 % change vs. prior year      2.9%          -2.2%                             Average U.S. dollar equivalent ofone euro  1.276       1.221   1.247       1.263 % change vs. prior year      4.5%          -1.3%                             Average U.S. dollar equivalent ofone British pound sterling  1.879       1.786   1.822       1.841 % change vs. prior year      5.2%          -1.0%                             Average Swiss franc equivalent ofone euro  1.577       1.553   1.567       1.552 % change vs. prior year      1.5%          1.0%                             Average Swiss franc equivalent ofone British pound sterling  2.323       2.272   2.289       2.262 % change vs. prior year      2.2%          1.2%    
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*Presentation of Results and Analysis*     The following table sets forth our results of operations, expressed as a percentage oftotal revenues for the periods indicated:                   Three Months Ended Nine Months Ended  Sept. 30, Oct. 1, Sept. 30, Oct. 1,  2006 2005 2006 2005Total revenues  100.0%  100.0%  100.0%  100.0% Cost of revenues  60.1   59.2   58.2   58.3                   Gross profit  39.9   40.8   41.8   41.7  Selling, general and administrative  25.9   27.6   27.2   28.9  Research and development  1.6   2.1   1.7   2.2                   Operating income  12.4   11.1   12.9   10.6  Interest income (expense)  (0.4)  (0.9)  (0.5)  (0.9)                  Income before income taxes  12.0%  10.2%  12.4%  9.7%                      The following table sets forth our backlog at the end of the periods indicated:               Sept.30, 2006  Dec. 31, 2005  Oct. 1, 2005 Backlog (at Sept. 30, 2006foreign exchange rates, inthousands of dollars) $42,514  $25,351  $22,376                Total revenues increased by $4,083,000 or 13.3% in the third quarter of 2006 and by$14,182,000 or 15.8% in the first nine months of 2006 compared to the same periods in 2005.We believe that these increases were primarily attributable to the contribution from sevenmonths of operations of our recently acquired Gundlach business and stronger businessconditions and increased spending by customers in the Americas, which more than offset the$784,000 negative effect of a stronger U.S. dollar in the first nine months of 2006 on thetranslation of our foreign revenues into U.S. dollars. Foreign exchange had a positiveeffect of $345,000 on revenues in the third quarter of 2006 versus the same period lastyear, reflecting a somewhat weaker U.S. dollar in the third quarter this year.     Gross profit as a percentage of total revenues decreased to 39.9% in the third quarterof 2006 from 40.8% for the same period in 2005 and increased to 41.8% in the first ninemonths of 2006 from 41.7% for the same period last year. We believe that these changes ingross margin primarily reflected a change in the sales mix of the products and servicesthat we sold in these periods. Sales mix refers to the relative amounts of differentproducts sold and services provided. Gross margin levels vary with the product sold orservice provided. For example, sales of replacement parts in the size reduction businessline generally carry a higher gross margin than do sales of equipment within that line.
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     Selling, general and administrative expenses increased by $527,000 or 6.2% in thethird quarter of 2006 and by $2,315,000 or 8.9% in the first nine months of 2006 comparedto the same periods in 2005. We believe that these increases were primarily the result ofthe inclusion of seven months of operations of our recently acquired Gundlach business,higher sales commissions related to increased revenues and a higher bonus accrual,partially offset by reduced expenses in our process business line, particularly inEMEA/Asia, reflecting cost reduction initiatives implemented in 2005 and, in the case ofthe nine month comparison, by the favorable effect of a stronger U.S. dollar on thetranslation of foreign costs into U.S. dollars.     Research and development (“R&D”) expense decreased by $65,000 or 10.3% in the thirdquarter of 2006 and by $243,000 or 12.2% in the first nine months of 2006 compared to thesame periods in 2005. These decreases were primarily due to reduced staff and, in the caseof the nine- month comparison, the favorable effect of a stronger U.S. dollar versus theSwiss franc on the translation of Swiss R&D costs into U.S. dollars.     Interest expense, net of interest income, decreased by $128,000 or 45.6% in the thirdquarter of 2006 and by $284,000 or 35.4% in the first nine months of 2006 compared to thesame periods in 2005. These decreases were the result of lower debt levels in 2006 and anincrease in interest income on cash equivalents, partially offset by higher interest rateson some of our debt in 2006. The third quarter decrease also included a $60,000 expensereduction related to the termination of an interest rate swap.     Income before income taxes increased to $4,171,000 in the third quarter of 2006 and$12,857,000 for the first nine months of 2006 compared to $3,141,000 and $8,652,000 for thesame periods in 2005. The increases of $1,030,000 for the third quarter of 2006 and$4,205,000 for the first nine months of 2006, compared to the same periods in 2005, wereprimarily the net result of the items discussed above.     The income tax provisions for the third quarters of 2006 and 2005 were $1,433,000 and$1,151,000, and the overall effective tax rates were 34.4% and 36.6%. The income taxprovisions for the first nine months of 2006 and 2005 were $4,446,000 and $3,103,000, andthe overall effective tax rates were 34.6% and 35.9%. The lower effective tax rates in2006 versus 2005 were primarily due to a higher proportion of foreign taxable income in thethird quarter and first nine months of 2006 as compared to the same periods in 2005.     Our backlog at constant foreign exchange rates increased by $17,163,000 or 67.7% atthe end of the third quarter of 2006 compared with year-end 2005, from $25,351,000 to$42,514,000. Our backlog at constant foreign exchange rates increased by $20,138,000 or90.0% at the end of the third quarter of 2006 compared to the end of the third quarter of2005, from $22,376,000 to $42,514,000. These increases were primarily the result of twolarge first quarter 2006 orders received by our process business line in EMEA/Asia(approximately $9,450,000) and the addition of the Gundlach business. While we normallyexpect a significant part of our backlog to be shipped within 120 days, one of the twolarge 2006 first quarter orders is not expected to be recorded as a sale until the firstquarter of 2007 with the other to be recorded as a sale in the fourth quarter this year.
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**Liquidity and Capital Resources***Capitalization*     Our capitalization at the end of the third quarter of 2006 and at the end of fiscal years2005 and 2004 is summarized below:               September 30,  December 31,  January 1, *(Dollars in Thousands)* 2006  2005  2005 Short-term debt, including currentportion of long-term debt $392  $4,316  $4,185 Long-term debt  14,214   12,675   18,598           Total debt  14,606   16,991   22,783 Shareholders’ equity  59,795   49,520   45,559           Total debt and shareholders’ equity(total capitalization) $74,401  $66,511  $68,342           Percent total debt to total capitalization  20%  26%  33%Percent long-term debt to equity  24%  26%  41%Percent total debt to equity  24%  34%  50%     The average annual interest rate on total debt at September 30, 2006 was 6.7%.     Total debt decreased by $2,385,000 in the first nine months of 2006 ($2,402,000 atconstant foreign exchange rates). As discussed above, on September 29, 2006, we enteredinto a new five-year $50,000,000 unsecured credit facility with Citizens Bank ofPennsylvania and borrowed $9,801,000 thereunder, primarily to refinance all of our otherU.S. bank indebtedness, except for a mortgage note with a principal balance of $1,600,000,and those other U.S. debt facilities were terminated. At September 30, 2006, we had$40,200,000 of unused borrowing capacity under our new facility (of which $27,565,000 wasborrowed on October 5, 2006 in connection with the Premier acquisition previouslydescribed), and $9,781,000 of unused borrowing capacity under our foreign loan agreements.Between September 29 and October 5, 2006, the Company repaid $4,000,000 of the September 29borrowing, so that on October 5, 2006 the total borrowing under the new Citizens Bankfacility was $33,366,000.*Other Items*     At September 30, 2006, working capital was $30,600,000 compared to $25,565,000 atDecember 31, 2005, and the ratio of current assets to current liabilities at those dateswas 1.94 and 1.99.     In the first nine months of 2006 and 2005, we utilized internally generated funds andour lines of credit to meet our working capital needs.     Net cash provided by operating activities was $12,345,000 in the first nine months of2006 compared to $7,498,000 in the same period of 2005. This $4,847,000 increase inoperating cash flow was primarily due to higher net income and an increase in accruedexpenses and accounts payable, partially offset by an increase in inventory and accountsreceivable, in each case in this year’s first nine months versus last year’s first ninemonths.
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     Net cash used in investing activities in the first nine months of 2006 was primarilyfor the acquisition of Gundlach, capital additions and restricted cash associated withletters of credit, while net cash used in investing activities in the first nine months of2005 was primarily for capital additions.     Net cash used in financing activities in the first nine months of 2006 and 2005 wasprimarily for net reductions in debt.     Shareholders’ equity increased $10,275,000 in the first nine months of 2006 comparedto year-end 2005, of which $8,411,000 was from net income, $924,000 was from the issuanceof common stock pursuant to restricted stock grants and the exercise of stock options, and$1,185,000 was from changes in foreign exchange rates, primarily the translation of Swissfrancs into U.S. dollars, between the beginning and the end of the nine-month period,partially offset by $193,000 from an unrealized loss, net of taxes, attributable to aforeign exchange hedge and the reversal of a $52,000 gain upon the termination of aninterest rate swap, net of tax.*Future Payments Under Contractual Obligations*     We are obligated to make future payments under various contracts such as debtagreements and lease agreements, and we are subject to certain other commitments andcontingencies. Since the end of 2005, we have had the following material changes to FuturePayments Under Contractual Obligations Related to Long-Term Debt: the $50,000,000unsecured credit facility with Citizens Bank of Pennsylvania entered into on September 29,2006 that is described above, under which $9,800,000 was borrowed primarily to repayexisting bank debt; the addition of a $3,000,000 unsecured promissory note related to theGundlach acquisition bearing interest at 5% per annum and payable in three equal, annualinstallments of $1,000,000 on March 3 in each of 2008, 2009 and 2010; the $1,700,000principal prepayment of bank term debt that was due in 2008; and the $804,000 reduction inthe balance that was due in 2007 under a revolving line of credit.     An update to the Future Payments Under Contractual Obligations Related to theLong-term Debt as of September 30, 2006 is as follows:                     *(Dollars in thousands)* Payment due by Period       Less than  1-3  3-5  More than Contractual Obligations Total  1 year  years  years  5 years Long-Term DebtObligations                     Debt Maturities $14,606  $392  $3,413  $10,801  $— Contractual Interest  4,173   970   1,761   1,442   —                   $18,779  $1,362  $5,174  $12,243  $—                 Refer to Notes 9 and 16 to the consolidated financial statements in the 2005 Form 10-K foradditional information on long-term debt and commitments and contingencies.**Risk Factors**     In addition to the other information set forth in this report, you should carefullyconsider the factors discussed in Part I, “Item 1A. Risk Factors.” in our 2005 Form 10-K,which could
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materially affect our business, financial condition or future results. The risks describedin our 2005 Form 10-K are not the only risks facing our Company. Additional risks anduncertainties not currently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition or operating results.**Forward-Looking Statements**     The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safeharbor for forward-looking statements made by us or on our behalf. We and ourrepresentatives may from time to time make written or oral statements that are“forward-looking”, including statements contained in this report and other filings with theSecurities and Exchange Commission, reports to our shareholders and news releases. Allstatements that express expectations, estimates, forecasts or projections areforward-looking statements within the meaning of the Act. In addition, other written ororal statements which constitute forward-looking statements may be made by us or on ourbehalf. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”,“estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similarexpressions are intended to identify such forward-looking statements. These statements arenot guarantees of future performance and involve certain risks, uncertainties andassumptions which are difficult to predict. Therefore, actual outcomes and results maydiffer materially from what is expressed or forecasted in or suggested by suchforward-looking statements. The forward-looking statements contained in this reportinclude, but are not limited to, statements regarding the effect of changes in foreignexchange rates and interest rates on our business and financial results and the expecteddates for recording the sales with respect to two large orders booked in the first quarterof 2006. We undertake no obligation to revise or update publicly any forward-lookingstatements, or to make any other forward-looking statements, whether as a result of newinformation, future events or otherwise.**Item 3****.****Quantitative and Qualitative Disclosures About Market Risk****.**     We are currently exposed to certain market risks related to (i) fluctuations inforeign exchange rates and (ii) interest rate changes.*Foreign Exchange Rate Risk*     The primary currencies for which we have exchange rate exposure are the U.S. dollarversus the Swiss franc, the U.S. dollar versus the euro, the U.S. dollar versus the Britishpound sterling, the Swiss franc versus the euro and the Swiss franc versus the Britishpound sterling. We do not, as a routine matter, use hedging vehicles to manage foreignexchange exposures; however, with respect to a large order received in the first quarter of2006 by our process business line in Switzerland which was priced in U.S. dollars insteadof Swiss francs, we subsequently entered into a currency hedge for cash flow purposes tofix the purchase price of that order in Swiss francs. Foreign currency debt is used asnecessary in Switzerland and the United Kingdom where we do business, thereby reducing anynet asset value exposure. In addition, foreign cash balances in currencies other than theSwiss franc are limited in amount in order to manage the transaction exposure caused by themarking to market of non-Swiss franc balances to Swiss franc values on the balance sheet ofour Swiss subsidiary.     As of September 30, 2006, a 10% unfavorable change in the foreign exchange ratesaffecting balance sheet transactional exposures would have resulted in a reduction in ourpre-tax
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income for the first nine months of 2006 of approximately $433,000, or 3.4%. Thishypothetical reduction on transactional exposures is based on the differences between theSeptember 30, 2006 actual foreign exchange rates and hypothetical rates assuming a 10%unfavorable change in foreign exchange rates on that date.     The translation of the balance sheets of our non-U.S. operations from local currenciesinto U.S. dollars is also sensitive to changes in foreign exchange rates. Thesetranslation gains or losses are recorded as translation adjustments (“TA”) within theaccumulated other comprehensive income component of shareholders’ equity on our balancesheet. Using the example above, a hypothetical change in TA would be calculated bymultiplying the net assets of our non-U.S. operations by a 10% unfavorable change in theapplicable foreign exchange rates. The result of this calculation shows that shareholders’equity would be reduced by approximately $2,231,000, or 3.7% of our September 30, 2006shareholders’ equity of $59,795,000.*Interest Rate Risk*     We have one major credit facility that requires us to pay interest on loans thereunderat annual rates that may change periodically. These variable rate obligations expose us tothe risk of increased interest expense if short-term interest rates rise. We limit ourexposure to increased interest expense from rising short-term interest rates by including inour debt portfolio various amounts of fixed rate debt. As of September 30, 2006, we hadtotal debt of $14,606,000, $4,805,000 of which was subject to fixed interest rates whichranged from 5.00% to 6.45% and $9,801,000 of which was variable rate debt with an interestrate of 7.25%. A 100 basis point increase in interest rates on the $9,801,000 of variablerate debt would increase annual interest expense by approximately $98,000.**Item 4****.****Controls and Procedures****.****Evaluation of Disclosure Controls and Procedures**     An evaluation of the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report was carried out by us under the supervision andwith the participation of our management, including our Chief Executive Officer and ChiefFinancial Officer. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures as of the end ofthe period covered by this report are functioning effectively to provide reasonableassurance that the information required to be disclosed by us in reports filed under theSecurities and Exchange Act of 1934 is (i) recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms and (ii) accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding disclosure. A controls system cannot provide absolute assurance, however, thatthe objectives of the controls system are met, and no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, within a companyhave been detected.
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**Change in Internal Control over Financial Reporting**     No change in our internal control over financial reporting occurred during our mostrecent fiscal quarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.
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**PART II. OTHER INFORMATION****Item 6****.****Exhibits****.** 2.1 Stock Purchase Agreement, dated as of October 5, 2006, by andamong Robert B. Korbelik, individually, The Robert B. Korbelik Trust datedDecember 14, 1995, as amended July 20, 2000, and Premier Pneumatics, Inc., aDelaware corporation (Filed as Exhibit 2.1 to our report on Form 8-K datedSeptember 29, 2006 and filed with the Securities and Exchange Commission onOctober 5, 2006 (“October 2006 Form 8-K”) and incorporated herein byreference)  10.1 Loan Agreement, dated as of September 29, 2006, among K-TronInternational, Inc., K-Tron Investment Co., K-Tron Technologies, Inc.,K-Tron America, Gundlach Equipment Corporation, Pennsylvania CrusherCorporation and Jeffrey Specialty Equipment Corporation, as Borrowers andthe Financial Institutions referred to on the signature pages as Lenders andCitizens Bank of Pennsylvania, individually as a Lender and as Agent (Filedas Exhibit 10.1 to the October 2006 Form 8-K and incorporated herein byreference)  31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or15d-14(a) of the Securities Exchange Act of 1934  31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a)or 15d-14(a) of the Securities Exchange Act of 1934  32.1 Chief Executive Officer and Chief Financial Officer Certificationpursuant to 18 U.S.C. Section 1350
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SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.      K-TRON INTERNATIONAL, INC.