##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended April 2, 2006ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 
  BTU INTERNATIONAL, INC.
  DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
    
    04-2781248
(I.R.S. Employer
Identification Number)23 Esquire Road, North Billerica, Massachusetts
(Address of principal executive offices)
    
    01862-2596
(Zip Code)
  S £
   Large accelerated filer £
    
    Accelerated filer £
    
    Non-accelerated filer S
 o S




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##### 



PART I. FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statement of Stockholders Equity and Comprehensive Income
    
    
    3Condensed Consolidated Statements of Cash Flows
    
    
    4-5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12-15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15-16PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    17-20Item 6. Exhibits
    
    
    20Signatures
    
    
    21EX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O.EX-32.2 SECTION 906 CERTIFICATION OF THE C.F.O.




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##### Table of Contents



(Unaudited)
    
    
    (Audited)April 2,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    18,207
    
    
    $
    15,460Accounts receivable, net
    
    
    20,916
    
    
    
    16,519Inventories
    
    
    15,488
    
    
    
    13,933Other current assets
    
    
    447
    
    
    
    489Total current assets
    
    
    55,058
    
    
    
    46,401Property, plant and equipment, net
    
    
    2,402
    
    
    
    2,343Other assets, net
    
    
    1,973
    
    
    
    161Total assets
    
    $
    59,433
    
    
    $
    48,905Liabilities and stockholders equityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    302
    
    
    $
    183Accounts payable
    
    
    6,888
    
    
    
    6,069Accrued expenses
    
    
    4,777
    
    
    
    4,781Total current liabilities
    
    
    11,967
    
    
    
    11,033Long-term debt, less current portion
    
    
    9,714
    
    
    
    5,106Long-term deferred compensation
    
    
    283
    
    
    
    283Total liabilities
    
    
    21,964
    
    
    
    16,422Commitments and contingenciesStockholders equityPreferred 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; 10,250,258 shares issued and 9,101,248
shares outstanding at April 2, 2006 and 10,039,759
shares issued and 8,890,749 shares
outstanding at December 31, 2005
    
    
    102
    
    
    
    100Additional paid in capital
    
    
    41,961
    
    
    
    39,746Deferred compensation
    
    
    
    
    
    
    (49
    )Accumulated deficit
    
    
    (735
    )
    
    
    (3,356
    )Treasury stock, at cost
    
    
    (4,177
    )
    
    
    (4,177
    )Accumulated other comprehensive income
    
    
    318
    
    
    
    219Total stockholders equity
    
    
    37,469
    
    
    
    32,483Total liabilities and stockholders equity
    
    $
    59,433
    
    
    $
    48,905
  1




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Three Months EndedApril 2, 2006
    
    
    April 3, 2005Net sales
    
    $
    20,935
    
    
    $
    12,792Costs of goods sold
    
    
    12,903
    
    
    
    8,277Gross profit
    
    
    8,032
    
    
    
    4,515Operating expenses:Selling, general and administrative
    
    
    4,405
    
    
    
    3,444Research, development and engineering
    
    
    928
    
    
    
    772Operating income
    
    
    2,699
    
    
    
    299Interest income
    
    
    91
    
    
    
    1Interest expense
    
    
    (70
    )
    
    
    (133
    )Other loss, net
    
    
    (45
    )
    
    
    Income before provision for income taxes
    
    
    2,675
    
    
    
    167Provision for income taxes
    
    
    (54
    )
    
    
    Net income
    
    $
    2,621
    
    
    $
    167Income per share:Basic
    
    $
    0.29
    
    
    $
    0.02Diluted
    
    $
    0.28
    
    
    $
    0.02Weighted average number of shares outstanding:Basic shares
    
    
    9,009,347
    
    
    
    7,218,624Effect of dilutive options
    
    
    398,100
    
    
    
    71,996Diluted shares
    
    
    9,407,447
    
    
    
    7,290,620
  2




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##### Table of Contents



Retained
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Earnings
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Deferred
    
    
    (Accum.
    
    

Treasury
Stock
    
    
    Comprehensive# of shares
    
    
    $
    
    
    Capital
    
    
    Comp.
    
    
    Deficit)
    
    
    # of shares
    
    
    $
    
    
    Income
    
    
    TotalBalance at December 31, 2005
    
    
    10,040
    
    
    $
    100
    
    
    $
    39,746
    
    
    $
    (49
    )
    
    $
    (3,356
    )
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    219
    
    
    $
    32,483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,621Exercise of stock options
    
    
    52
    
    
    
    1
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Issuance of common stock
    
    
    158
    
    
    
    1
    
    
    
    2,057
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,058Reclass of
deferred compensation and compensation expense related to SFAS 123R
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    99Deferred compensation, net of
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Balance at April 2, 2006
    
    
    10,250
    
    
    $
    102
    
    
    $
    41,961
    
    
    $
    
    
    
    $
    (735
    )
    
    
    1,149
    
    
    $
    (4,177
    )
    
    $
    318
    
    
    $
    37,469
 Three Months Ended(In thousands)April 2,
    
    
    April 3,2006
    
    
    2005Comprehensive income is calculated as follows:Net income
    
    $
    2,621
    
    
    $
    167Other comprehensive gain/(loss)Foreign currency translation adjustment
    
    
    99
    
    
    
    (48
    )Comprehensive income
    
    $
    2,720
    
    
    $
    119
  3




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April 2,
    
    
    April 3,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,621
    
    
    $
    167Adjustments to reconcile net cash used in operating activities:Non-cash operating items:Depreciation and amortization
    
    
    232
    
    
    
    251Provision for bad debt
    
    
    100
    
    
    
    Provision for inventory
    
    
    399
    
    
    
    (15
    )Deferred compensation
    
    
    4
    
    
    
    Non-cash compensation cost
    
    
    56
    
    
    
    Net change in operating assets and liabilities:Accounts receivable
    
    
    (4,451
    )
    
    
    (1,001
    )Inventories
    
    
    (1,909
    )
    
    
    1,215Other current assets
    
    
    7
    
    
    
    (18
    )Other assets
    
    
    (713
    )
    
    
    21Customer deposits
    
    
    50
    
    
    
    182Accounts payable
    
    
    741
    
    
    
    (929
    )Accrued expenses
    
    
    396
    
    
    
    116Deferred compensation
    
    
    
    
    
    
    (60
    )Net cash used in operating activities
    
    
    (2,467
    )
    
    
    (71
    )Cash flows from investing activities:Acquisition of assets of Radiant Technology Corporation
    
    
    (500
    )
    
    
    Purchases of property, plant and equipment
    
    
    (177
    )
    
    
    (17
    )Net cash used in investing activities
    
    
    (677
    )
    
    
    (17
    )Cash flows from financing activities:Principal payments under loan and capital lease agreements
    
    
    (49
    )
    
    
    (41
    )Proceeds from bank loan
    
    
    4,705
    
    
    
    Net borrowings (payments) under revolving credit agreement
    
    
    
    
    
    
    105Issuance of common stock
    
    
    1,057
    
    
    
    Proceeds from the exercise of stock options
    
    
    148
    
    
    
    65Net cash provided by financing activities
    
    
    5,861
    
    
    
    129Effects of exchange rates on cash
    
    
    30
    
    
    
    (48
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,747
    
    
    
    (7
    )Cash and cash equivalents, beginning of period
    
    
    15,460
    
    
    
    372Cash and cash equivalents, end of period
    
    $
    18,207
    
    
    $
    365
  4




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April 2,
    
    
    April 3,2006
    
    
    2005Supplemental disclosures of cash flow information:Cash paid (received) during the periods for:Interest
    
    $
    (23
    )
    
    $
    133Income taxes
    
    
    25
    
    
    
    Non-cash disclosure:Issuance of
common stock in connection with acquisition
    
    $
    (1,091
    )
    
    $
    
  5




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April 2,
    
    
    December 31,2006
    
    
    2005Raw materials and manufactured components
    
    $
    9,598
    
    
    $
    8,491Work-in-process
    
    
    4,327
    
    
    
    3,571Finished goods
    
    
    1,563
    
    
    
    1,871$
    15,488
    
    
    $
    13,933
   April 2,
    
    
    December 31,2006
    
    
    2005Mortgage note payable
    
    $
    10,000
    
    
    $
    5,272Capital lease obligations, interest rate of 6.75%
    
    
    16
    
    
    
    1710,016
    
    
    
    5,289Less  current maturities
    
    
    302
    
    
    
    183$
    9,714
    
    
    $
    5,106
  6




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Share-Based Payment
   UsingPrevious
    
    
    SFAS 123RAccounting
    
    
    Adjustments
    
    
    As ReportedSFAS 123R Effect on Reported Income:Operating income
    
    $
    2,755,033
    
    
    $
    56,000
    
    
    $
    2,699,033Earnings before income taxes
    
    
    2,730,252
    
    
    
    56,000
    
    
    
    2,674,252Net income
    
    
    2,675,647
    
    
    
    55,060
    
    
    
    2,620,587Basic earnings per share
    
    $
    0.30
    
    
    $
    0.01
    
    
    $
    0.29Diluted earnings per share
    
    $
    0.29
    
    
    $
    0.01
    
    
    $
    0.28
 7




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Three Months EndedApril 3, 2005Net income, as reported
    
    $
    167Value of stock-based compensation expense under fair value-based method
    
    
    (95
    )Pro forma net income
    
    $
    72Basic earnings per share  as reported
    
    $
    0.02Basic earnings per share  pro forma
    
    $
    0.01Diluted earnings per share  as reported
    
    $
    0.02Diluted earnings per share  pro forma
    
    $
    0.01
  Three Months EndedApril 2, 2006
    
    
    April 3, 2005Expected volatility
    
    
    64
    %
    
    
    60
    %Expected lives
    
    4 yrs
    
    7 yrsRisk-free interest rate
    
    
    5.44
    %
    
    
    4.07
    %Expected dividend yield
    
    none
    
    none
  8




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Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOptionsOutstanding at December 31, 2005
    
    
    525,378
    
    
    $
    2.99Granted
    
    
    3,520
    
    
    
    14.26Exercised
    
    
    (52,999
    )
    
    
    2.76Forfeited
    
    
    (250
    )
    
    
    1.86Outstanding at April 2, 2006
    
    
    475,649
    
    
    $
    3.10
    
    
    
    6.39
    
    
    $
    6,340,432Exercisable at April 2, 2006
    
    
    222,098
    
    
    $
    2.90
    
    
    
    5.93
    
    
    $
    3,004,602
   Weighted-AverageGrant-DateShares
    
    
    Fair ValueNonvested optionsNonvested at December 31, 2005
    
    
    299,826
    
    
    $
    1.89Granted
    
    
    3,520
    
    
    
    7.45Vested
    
    
    (49,670
    )
    
    
    1.83Forfeited
    
    
    (125
    )
    
    
    1.14Nonvested at April 2, 2006
    
    
    253,551
    
    
    $
    1.98
     9




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Three Months EndedApril 2,
    
    
    April 3,2006
    
    
    2005United States
    
    $
    2,377
    
    
    $
    3,160Europe, Near East
    
    
    5,247
    
    
    
    4,294Asia Pacific
    
    
    10,451
    
    
    
    4,719Other Americas
    
    
    2,860
    
    
    
    619$
    20,935
    
    
    $
    12,792
  April 2,
    
    
    December 31,2006
    
    
    2005North America
    
    $
    3,699
    
    
    $
    2,156Asia Pacific
    
    
    676
    
    
    
    348$
    4,375
    
    
    $
    2,504
     10




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Three Months EndedApril 2, 2006Beginning balance, December 31, 2005
    
    $
    1,036Plus: accruals related to new sales
    
    
    200Less: warranty claims incurred
    
    
    (135
    )Less: reversal of excess requirements
    
    
    (5
    )Balance, end of period
    
    $
    1,096
  11




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Inventory Costs  An Amendment of ARB No. 43, Chapter 4
 Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3 . ,
Accounting Changes Reporting Accounting Changes in Interim Financial Statements
   
     12




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Three Months EndedApril 2, 2006
    
    
    April 3, 2005% of
    
    
    
    
    
    
    % of
    
    
    %$ thousands
    
    
    revenues
    
    
    $ thousands
    
    
    revenues
    
    
    changeTotal revenues
    
    $
    20,935
    
    
    
    100.0
    %
    
    $
    12,792
    
    
    
    100.0
    %
    
    
    63.7
    %Cost of goods sold
    
    
    12,903
    
    
    
    61.6
    %
    
    
    8,277
    
    
    
    64.7
    %
    
    
    55.9
    %Gross profit
    
    
    8,032
    
    
    
    38.4
    %
    
    
    4,515
    
    
    
    35.3
    %
    
    
    77.9
    %Selling, general and administrative expenses
    
    
    4,405
    
    
    
    21.0
    %
    
    
    3,444
    
    
    
    26.9
    %
    
    
    27.9
    %Research, development and engineering
    
    
    928
    
    
    
    4.4
    %
    
    
    772
    
    
    
    6.0
    %
    
    
    20.3
    %Operating income
    
    
    2,699
    
    
    
    13.0
    %
    
    
    299
    
    
    
    2.4
    %
    
    
    802.7
    %Income before provision for income taxes
    
    
    2,675
    
    
    
    12.8
    %
    
    
    167
    
    
    
    1.3
    %
    
    
    1,502.0
    %Net income
    
    $
    2,621
    
    
    
    12.5
    %
    
    $
    167
    
    
    
    1.3
    %
    
    
    1,469.7
    %
 Total Revenues
  Three Months EndedApril 2, 2006
    
    
    April 3, 2005% of
    
    
    
    
    
    
    % of$
    
    
    revenues
    
    
    $
    
    
    revenuesUnited States
    
    $
    2,377
    
    
    
    11.3
    %
    
    $
    3,160
    
    
    
    24.7
    %Europe, Near East
    
    
    5,247
    
    
    
    25.1
    %
    
    
    4,294
    
    
    
    33.6
    %Asia Pacific
    
    
    10,451
    
    
    
    49.9
    %
    
    
    4,719
    
    
    
    36.9
    %Other Americas
    
    
    2,860
    
    
    
    13.7
    %
    
    
    619
    
    
    
    4.8
    %$
    20,935
    
    
    
    
    
    
    $
    12,792
  Gross Profit
 13




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Selling, General and Administrative.
 Research, Development and Engineering.
 Operating Income.
 Income Taxes.
             14




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Evaluation of Disclosure Controls and Procedures
         Changes in Internal Control Over Financial Reporting
  15




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
    
    With respect to the first significant deficiency, we have
selected an ERP
solution and our project plan has the new
ERP system being implemented in our Chinese subsidiary by late 2006 and in the United
States by mid 2007. Additionally, we have engaged consultants to help us determine if
additional controls can be placed around the current business system to minimize the
current systems inherent risks. We are taking the following actions related to out
current system:
 1.
    
    We have secured both hardware and software support currently and for
the foreseeable future.2.
    
    We have contracted with a third party to provide a warm-site
meaning a complete duplicate of our current system which will reside in a secure
remote location.3.
    
    In 2006, we will install a complete (hardware and software) redundant
version of our current system on-site. This redundant system will utilize the
last nightly data backup to restore the system in the event of a major hardware or
software failure on the current system.
 
    
    With respect to the second significant deficiency, we have begun to implement
and formally document a disaster recovery plan as it relates to information technology.
We have secured consultants to assist us in developing the disaster recovery plan as a
component of a larger business continuity plan. We anticipate this initiative to be
completed in 2006.
    
    With respect to the third significant deficiency, we have increased the
accounting staff to provide additional expertise in GAAP, taxation and SEC reporting
requirements. Additionally, we have engaged several consultants to assist us with complex
accounting and taxation related matters. Continued training of current staff and the need
for additional resources will be evaluated from time to time.
    
    With respect to the fourth significant deficiency, we are aggressively securing
resources and technologies to comply with Sarbanes  Oxley and Regulation 404. Actions
we are taking include the following:
 1.
    
    We have secured and evaluated our dedicated internal resources and
have identified and secured various consultants to enhance areas of weakness.2.
    
    We have identified and have begun to document our significant
financial processes and are reviewing all relevant policies and procedures and
where appropriate, changes will be made to our internal controls over financial
reporting.3.
    
    We have committed to a new ERP system that, when fully implemented,
will provide increased controls over financial reporting by replacing our current
manual process.4.
    
    We are enhancing our core IT infrastructure to provide increase
access security to our networks and financial information.
 
    
    With respect to the fifth significant deficiency, we believe the successful
implementation of the new ERP system will remediate this issue. Our ERP selection criteria
evaluated the manufacturers financial consolidation program and we concluded that, when
fully tested in our environment, will provide accurate and repeatable financial information
in an automated process. We are reviewing our current process and will make changes to our
internal controls over financial reporting as required.
  16




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We are subject to cyclical downturns in the electronics and semiconductor industries. Recent
favorable financial trends in our business may not be sustained.
  We have shifted a significant and growing portion of our production capacity to a new and expanding
manufacturing facility in Shanghai, China. We may encounter manufacturing problems associated with
managing these operations.
  In the past year, we have substantially improved our global supply chain and reduced our material
costs. Failure to maintain these cost reductions would negatively affect our profit margins.
  Sales of our products to the energy generation markets are subject to substantial risks.
 Fuel Cells.
 Solar Energy.
 Nuclear Energy.
 If we are unable to increase sales and reduce costs, our profitability may be affected negatively.
 17




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Our future success will depend on our ability to effectively develop and market our products
against those of our competitors.
  Our international sales and operations are subject to the economic, political, legal and business
environments of the countries in which we do business, and our failure to operate successfully or
adapt to changes in these environments could cause our international sales and operations to be
limited or disrupted.
  
    
    fluctuations in currency exchange rates;
    
    the imposition of governmental controls;
    
    import and export license requirements;
    
    political instability;
    
    difficulties enforcing contractual and intellectual property rights;
    
    terrorist activities and armed conflict;
    
    restrictions on direct investments by foreign entities and trade restrictions;
    
    changes in tax laws and tariffs;
    
    costs and difficulties in staffing and managing international operations; and
    
    longer payment cycles.
   18




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A majority of our revenue is generated from sales in the Asia Pacific region. Our operations are
particularly vulnerable to instability in this region and competition from organizations based in
this region.
  Our business systems to manage our Chinese operations are still being developed. If they are not
developed and implemented, it could have a material adverse effect on our business.
    Some of the requirements of Sarbanes-Oxley affect us as a small company disproportionately, and we
may not be able to comply despite substantial effort and expense.
  If we fail to maintain positive relationships with key personnel, we may be unable to successfully
grow our business.
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Failure of critical suppliers to deliver sufficient quantities of parts in a timely and
cost-effective manner would adversely impact our operations.
  The occurrence of natural disasters in the Asia Pacific region may adversely impact our operations
and sales.
  Provisions in our organizational documents could prevent or frustrate attempts by stockholders to
replace our current management and could make acquisitions more difficult.
  Our officers and directors may be able to block proposals for a change in control.
  
    
    the election of directors;
    
    the amendment of our organizational documents; or
    
    the approval of a merger, sale of assets, or other major corporate transaction.
 
   
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BTU INTERNATIONAL, INC.DATE: May 12, 2006
    BY: /s/ Paul J. van der WansemPaul J. van der WansemPresident, Chief Executive Officer
(principal executive officer) and Chairman of the
Board of Directors DATE: May 12, 2006
    BY: /s/ Thomas P. KealyThomas P. KealyVice President, Corporate Controller and
Chief Accounting Officer (principal
financial and accounting officer) 21