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Article by DailyStocks_admin    (11-12-08 09:57 AM)

BTU International Inc. CEO PAUL J VAN DER WANSEM bought 60000 shares on 11-04-2008 at $4.75

BUSINESS OVERVIEW

Overview

BTU International, founded in 1950 and headquartered in Billerica, Massachusetts, is a supplier of advanced thermal processing equipment to the electronics manufacturing and energy generation markets. We manufacture reflow furnaces for printed circuit board assembly as well as semiconductor wafer-level and die-level packaging equipment. In addition, we participate in the fast growing alternative energy market for which we provide thermal process equipment for the manufacturing of solar cells, fuel cells and nuclear fuels.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. 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. Our customers in the energy generation market use our thermal systems to process silicon, ceramics and metal alloys which are used in solar cell, fuel cell and nuclear fuel manufacturing applications.

Industry Background

Electronics Markets

Demand for increasingly sophisticated electronic devices continues, and we expect that new technologies such as wireless networks, next generation cellular phones and personal digital assistants will drive future growth. Other types of electronic equipment are becoming more complex, including data communications equipment such as switches, routers and servers, broadband access products such as cable modems and Ethernet wireless accessories and consumer products such as automobile electronics and digital cameras. Integral to the growth in electronics are advances in technology that result in smaller, lighter and less expensive end products by increasing performance and reducing cost, size, weight and power requirements of electronic assemblies, printed circuit boards and semiconductors. In response to these developments, manufacturers are increasingly employing more sophisticated production and assembly techniques requiring more advanced manufacturing equipment.

Printed Circuit Board Assembly. In the printed circuit board assembly process, semiconductor and discreet-devices plus other components are attached to printed circuit boards. The attachment process, which creates a permanent physical and electrical bond, is called solder reflow or surface mount reflow. Industry observers estimate that the printed circuit board assembly market is growing at approximately 8% per year. In recent years, several of our markets have been implementing legislation that requires lead free solder processing of printed circuit boards and semiconductors. Japan’s lead free implementation deadline went effective in January 2006, while the implementation deadline for the European Union occurred in July 2006. As manufacturers have been replacing older thermal processing equipment which cannot process lead free solders, these market segments have seen an increased growth rate.

Wafer Level and Die Level Semiconductor Packaging. Semiconductor packaging processes include precision thermal processing steps. In advanced semiconductor packaging, processing takes place at both the wafer level and die level. At the wafer level, deposited solder must be thermally treated to form perfectly spherical “bumps.” At the die level, these bumps allow the integrated circuits to be bonded to the semiconductor package using precise thermal processes. Advancements in the semiconductor industry toward higher chip speeds, smaller form factors and reduced costs are driving the transition to wafer level packaging from the traditional wire bonding technique. Industry observers estimate that the semiconductor packaging market for thermal processing systems is growing at approximately 8% per year.

Alternative Energy Markets

The processing of advanced materials used in non-fossil fuel power generation applications is a significant target market. The rising cost of fossil fuels and environmental concerns have increased demand for power generation without the use of fossil fuels. For power generation applications, we serve the photovoltaic, fuel cell and nuclear fuel markets. We support our worldwide energy customers through our global sales and service network.

Photovoltaics. We offer continuous furnaces for solar cell manufacturing. Processes for this application include diffusion, anti-reflective coatings and thick film silver contact firing. Our Quartz muffle furnaces are used for phosphorus diffusion. Our Atmosphere Pressure Chemical Vapor Deposition furnaces are used in the deposition of anti-reflective coatings. These systems generally range in price from $180,000 to $600,000.

Fuel Cells. We offer a range of products used primarily in the manufacturing of Solid Oxide Fuel Cells (SOFCs). Typical processes performed by our equipment in this market are drying, sintering, co-firing and glass to metal sealing. In addition to supplying individual systems, we offer complete turnkey systems for the manufacture of fuel cell components. Drying applications are processed in our CHT series convection drying systems. Sintering and co-firing applications can be in excess of 1500°C. Our Convection Batch and Pusher furnaces are used for these processes. These systems generally range in price from $175,000 to $1.0 million.

Nuclear Fuel. We offer systems for sintering nuclear fuel. These processes operate at temperatures in the range of 1750°C in a hydrogen reduction atmosphere. Our most important product for this market is our patented Walking Beam system designed for high volume manufacture of nuclear fuels. It uses a walking beam transport system to eliminate friction associated with advanced thermal processing systems that use pusher technology. Walking Beam systems are used to sinter gadolinium and uranium pellets used for nuclear fuel generation. These systems generally sell for up to $2.4 million.

Across all markets, the need for more versatile, more reliable and more advanced capital equipment persists. In addition, the continued globalization of manufacturing and the shift to low cost regions such as China, particularly by electronics producers, has driven the demand for equipment with a lower cost of ownership.

Technological Challenges

Thermal processing systems present significant engineering challenges related to temperature control, atmosphere control, product handling, flux containment and disposal, and high system up time. Thermal processing systems must maintain accurate and uniform temperatures within their process chambers. The temperature within the process chamber is influenced by the rate at which components are moved through the system and the weight and density of the product. In addition, the thermal processing system’s heat convection rate must be varied and controlled as components and materials are processed. The chamber must also dispense heat uniformly across the product at precise temperatures to ensure maximum process uniformity. Also, products must be heated and cooled at closely preset rates in order to avoid damage caused by thermal stress. With the increasing use of lead free solder processes, the control window for temperature uniformity has become significantly more critical.

Another technological challenge for thermal processing systems is achieving precisely controlled atmospheric conditions within the process chamber. In order to facilitate thermal processing without contamination of or damage to the product, many thermal processing systems use a substantially oxygen-free atmosphere of nitrogen or hydrogen in their process chambers. If such gases are used, the entry of contaminating air must be minimized, even though the product enters and exits the system continuously from the ambient atmosphere. Maintaining a pure, safe and controlled atmosphere in the process chamber, while minimizing the consumption of nitrogen or hydrogen gases in order to reduce operating costs, presents significant engineering challenges.

Handling products in thermal processing systems requires highly reliable conveyance systems that can easily be converted to process a wide variety of products having different specifications, sometimes on side-by-side tracks through the process chamber. The product handling system must also fully support a wide variety of product sizes.

The mechanical components in thermal processing systems must operate almost continuously in a demanding, elevated temperature environment with frequent thermal cycles. The use of materials that are resistant to high temperature and thermal stress is important to achieving high reliability.

In applications using flux, the volatile compounds that are vaporized during the thermal processing cycle must be contained and collected so that they do not condense in the system or damage the environment. The efficient containment, collection and disposal of the flux are important factors in achieving high system up time, high throughput and reliability.

Our Solution

We deliver a broad range of thermal processing systems to serve the needs of manufacturers that require high throughput, process yields and reliability with tightly controlled process parameters. Our systems are designed to enable our customers to increase throughput and yield for printed circuit board assembly, advanced semiconductor packaging, and energy generation by providing precise atmospheric and temperature control. In addition to the expected high performance of our products, we believe maintaining the quality standards of our organization and our worldwide service and support are important to our success with industry leading global manufacturers.

We believe our customers continue to choose our products because of the following factors:

Accurate and Uniform Temperature. Our systems use convection, radiation and infrared heating technologies. Our high rate convection and fully enclosed coil heating modules are designed to provide controlled heating capacities across many different applications, thereby enabling our customers to maximize process uniformity and throughput. In addition, our systems are designed to apply heat uniformly across the product load, which is critical to ensure optimum processing. Heat up and cool down profiles are also closely controlled for process consistency and the protection of product.

Atmosphere Uniformity and Control. Our thermal processing systems are designed to provide precision control over atmospheric conditions within their process chambers by integrating our gas and physical curtain technologies. Our systems are designed to be capable of excluding virtually all oxygen from the critical process steps to maintain the safety and integrity of the process chamber atmosphere. In addition, our systems are intended to minimize the consumption of nitrogen or hydrogen, thereby reducing the operating cost of maintaining the atmosphere.

Repeatability from System to System. We design our systems with a goal of providing a high degree of repeatability from system to system through our atmospheric and temperature controls and the expected reliability of our systems. This repeatability is achieved through our industry leading closed loop convection technology that is intended to ensure the same convection rate regardless of change in altitude or temperature. This is a critical attribute because our customers must achieve uniform manufacturing performance in plants located throughout the world.

Processing Flexibility. Major electronics manufacturers process many sizes of printed circuit boards and often need rapid product changeover capabilities. Our systems can process printed circuit boards of different sizes with minimal or no reconfiguration. Rapid changeover reduces down time and increases manufacturing volume. In addition, our other thermal products can be configured for multiple process applications allowing for versatility in materials manufacturing.

Reliability. Our customers place a high premium on reliability. Reliability is a major contributor to low cost of ownership because high up time can increase the productivity and efficiency of an entire production line. We believe our systems are the most reliable advanced thermal processing systems in the world.

Systems Integration. We provide fully integrated systems that include automated handling of our products, as well as full software integration with our customers’ factory management systems. This allows our customers to monitor and analyze the process in real time from a central location.

Worldwide Customer Support. Our goal is to provide our customers with global technical service support, in depth process engineering support and rapid delivery of our systems and parts. We provide our customer support through our on-site direct service organization and our independent sales and service representatives, supplemented with twenty-four hours a day, seven days a week telephonic support and extensive customer training programs.

Our Strategy

Our objective is to be the leading provider of thermal processing systems to the electronics and energy generation markets. To achieve this goal and maximize value for our shareholders, our strategy is comprised of the following elements:




Further penetrate existing markets and customers by developing innovative products with a low cost of ownership and by offering exceptional customer support;




Continue to focus on cost reduction initiatives, including the improvement of our global supply chain and reduction in materials costs;




Expand our low-cost manufacturing and engineering operations in China;




Deepen relationships with key partners to facilitate product development for next generation technologies, particularly in the rapidly growing energy generation market.

Products

We supply a broad range of thermal processing systems for the electronics and energy generation markets. Our products are used for such applications as printed circuit board assembly, semiconductor packaging and advanced material processing of products used in energy generation. In addition, we have custom product engineering capabilities that allow us to design specific products for unique applications, typically involving high temperatures.

Electronics Markets

Printed Circuit Board Assembly. We currently sell thermal processing systems used in the solder reflow and curing stages of printed circuit board assembly. Our printed circuit board assembly products are used primarily in the advanced high-density segments of the market, which utilize surface mount technology.

Our Pyramax family of convection reflow systems is designed on a single platform to be rapidly configurable, which is intended to reduce the product build cycle and allow us to meet customer demands for shorter delivery lead times. We believe Pyramax products offer our customers reduced capital cost, lower nitrogen consumption and reduced scheduled maintenance cycles.

Pyramax provides increased process flexibility due to its ability to process printed circuit boards up to 24 inches wide. Rated up to 400°C, these products are designed to be capable of operating in air or nitrogen atmospheres and to have increased convection flow for greater performance and lead free processes. Pyramax utilizes impingement technology to transfer heat to the substrate. These systems are offered in 7-zone and 10-zone heated lengths and are capable of processing lead free solder. They generally range in price from $40,000 to $150,000.

The market need for lead free solder reflow presents a unique problem by raising the process temperature critically close to the destruct temperature of the components that are being attached. Pyramax’s unique closed loop convection control is designed to provide a repeatable tight temperature window optimized for lead free solder reflow.

The solder reflow process requires the thermal processing system to manage flux residues eliminated during the processing of the printed circuit boards. Pyramax thermal processing systems are equipped with a patented flux management system structured to isolate the flux outside the main process chamber, thereby helping to maintain the integrity of the atmosphere and facilitate easy disposal.

Wafer Level and Die Level Semiconductor Packaging. We sell several systems for the thermal processes used in advanced semiconductor packaging.

Flip chip reflow provides the physical and electronic bond of the semiconductor device to its package. The Paragon and Pyramax families of convection reflow systems, utilizing our closed loop convection technology, rate at up to 400°C and operate in air or nitrogen atmospheres. These products utilize impingement technology to transfer heat to the substrate. Using thermal power arrays of five-kilowatt heaters, it can process substrates in dual track configurations, thereby enabling our customers to double production without increasing the machine’s footprint. These products are available in three models based on the heated lengths of thermal processing chambers. Heated length is based on the required production rate and loading requirements. The products generally range in price from $70,000 to $180,000.

Our TCAS series of continuous belt thermal processing systems is rated up to 800°C and is designed for wafer bump reflow. It can operate in a variety of controlled atmospheres including hydrogen, using patented gas barrier technology designed to achieve a safe and high purity hydrogen atmosphere. Our TCAS systems generally range in price from $300,000 to $1.2 million for a fully integrated 300mm system.

We offer fully integrated systems for flux coating and reflow of 200mm and 300mm wafers. The 300mm systems are designed to be fully compliant with I300i protocol and with SEMI S2 and S8 standards. These integrated systems include commercial robotics with FOUP handling, fluxing stations, reflow soldering systems and generally range in price from $500,000 to $1.2 million.

Alternative Energy Markets

The processing of advanced materials used in non-fossil fuel power generation applications is a significant target market. The rising cost of fossil fuels and environmental concerns have increased demand for power generation without the use of fossil fuels. For power generation applications, we serve the solar cell, fuel cell and nuclear fuel markets. We support our worldwide energy customers through our global sales and service network.

Solar Cells. We offer continuous furnaces for solar cell manufacturing. Processes for this application include diffusion, anti-reflective coatings and thick film silver contact firing. Our Quartz TQ Series muffle furnaces are used for phosphorous diffusion. Our Atmosphere Pressure Chemical Vapor Deposition furnaces are used in the deposition of anti-reflective coatings. Our Infrared IR Series tungsten lamp furnaces are used for rapid thermal processing of silver contact applications. These systems generally range in price from $180,000 to $600,000.

Fuel Cells. We offer a range of products used primarily in the manufacturing of SOFCs. Typical processes performed by our equipment in this market are drying, sintering, co-firing and glass to metal sealing. In addition to supplying individual systems, we offer complete turnkey systems for the manufacture of fuel cell components.

Drying applications are processed in our CHT Series convection drying systems. Sintering and co-firing applications can be in excess of 1500°C. Our Convection Batch and Pusher furnaces are used for these processes. These systems generally range in price from $175,000 to $1.0 million.

Nuclear Fuels. We offer both walking beam and pusher systems for sintering fuel. These processes operate at temperatures in the range of 1750°C in a hydrogen reduction atmosphere. Our most important product for this market is our patented Walking Beam system designed for high volume manufacture of nuclear fuels. It uses a walking beam transport system to eliminate friction associated with advanced thermal processing systems that use pusher technology. Walking Beam systems are used to sinter gadolinium and uranium pellets used for nuclear fuel generation. These systems generally sell for up to $2.4 million.

Customers

Many of our principal customers are large-volume global manufacturers that use our products in multiple facilities worldwide. Our top revenue generating customers in 2007 included Long Manufacturing , BP Solar, IBM, Suzhou Kaifa, Solectron, Nanosolar, Westinghouse, Guanjie, Intel, ASE, Motorola, Inner Mongolia Tendering, Transcend Information, Powertech Technologies, Compal Kunshan and M-Flex. In 2007, no customer accounted for more than 10% of net sales.

Sales, Marketing and Support

We market and sell our products primarily through our direct sales force and independent sales representatives throughout the world. Our sales and marketing team is responsible for evaluating the marketplace, generating leads and creating sales programs and literature. Our on-site direct service organization and our independent sales representatives provide ongoing support to customers using our products. These services include implementing continuous improvement tools related both to the cost of our products and to their technical performance. Our strong global support infrastructure allows us to market future sales within our current customer base and contributes to our competitive position. Our management and sales teams participate in periodic trade conventions, through which we market our products to potential customers.

Research, Development and Engineering

Our research, development and engineering efforts are directed toward enhancing existing products and developing our next generation of products. Research, development and engineering expense in 2007 was focused on the development of new products and improved furnace applications for thermal solutions for energy generation application processes; the expansion of our Pyramax solder reflow platform with the completion of the mid-sized Pyramax 100 offerings, which was developed jointly by BTU engineers in China and the U.S.A. The AtmoPlas development team is doing basic research on a different heating technology using microwave to create plasma. Our research, development and engineering costs for the years ended December 31, 2007, 2006 and 2005 can be found on our Consolidated Statements of Operations, contained herein.

We have a license and joint development agreement with Boston University focused on optimizing processes and materials used to manufacture solid oxide fuel cells (SOFCs). This program targets challenges that affect planar SOFC manufacturing costs, such as one-step co-firing, lower sintering temperatures and faster binder removal. We believe that this process development program, if successful, will help drive our thermal processing systems solutions for the SOFC market.

Close working relationships between our key customers and our product engineering teams enable us to incorporate our customers’ feedback and needs into our product development efforts. We have integrated our product design, manufacturing, engineering and after sales support documentation in support of the new product introduction process and lowered research, development and engineering costs.

Manufacturing and Suppliers

Our principal manufacturing operations consist of final assembly, systems integration and testing at our facilities in North Billerica, Massachusetts and Shanghai, China. We outsource the manufacture of many of our subsystems to a number of key suppliers and maintain close relationships with them while also maintaining qualified alternative suppliers and to maintain a cost down focus in the event we exceed the capacity of our key suppliers or otherwise lose access to these suppliers. In 2004, we established an engineering and manufacturing facility in Shanghai, China for our printed circuit board products as well as local sourcing of materials.

In the past two years, we have substantially improved our global supply chain and reduced our material costs. These efforts have resulted in a major improvement in gross margins in the Pyramax product line. We have upgraded and reorganized our operations organization in the U.S. In addition, we have broadened our supply base in China. We have leveraged our presence there to widen the base of suppliers for the Pyramax family of reflow soldering equipment.

Continuous improvement in the supply chain is a key strategic imperative. We have established a global sourcing organization, based in China, to further develop high quality, cost effective suppliers throughout the world.

We continue to invest in software and capital equipment related to our information technology infrastructure and customer support. We have made a major investment in and are in the process of installing a new business operations and management system in Shanghai and at the Company’s headquarters in Billerica, MA.

We have outsourced the manufacture of most of our significant component systems thereby reducing cycle time and increasing our inventory turnover. We seek to adhere closely to the principles of total quality management and have been ISO 9001 certified since 1998 and converted to ISO 9000:2000 in October 2003. Our customers, suppliers and employees are strongly encouraged to provide feedback and suggestions for improvements in products and services.

Intellectual Property

We seek to protect our intellectual property by filing patents on proprietary features of our advanced thermal processing systems and by challenging third parties that we believe infringe on our patents. We also protect our intellectual property rights with nondisclosure and confidentiality agreements with employees, consultants and key customers and with our trademarks, trade secrets and copyrights. As a global supplier of equipment, we recognize that the laws of certain foreign countries may not protect our intellectual property to the same extent as the laws of the U.S.

We license software programs from third party developers and incorporate them into our products. Generally, these agreements grant us non-exclusive licenses to use the software and terminate only upon a material breach by us. We believe that such licenses are generally available on commercial terms from a number of licensors.

Backlog

Backlog as of December 31, 2007, was $11.5 million, compared to $8.9 million as of December 31, 2006. As of December 31, 2007, we expected to ship our year-end backlog within 40 weeks. Most of our backlog for solder reflow systems is expected to be shipped within 3 to 8 weeks. The backlog of our custom systems is expected to be shipped within 12 to 40 weeks. We include in backlog only those orders for which the customer has issued a purchase order. Due to possible changes in delivery schedules, lead time variations and order cancellations, our backlog at any particular date is not necessarily representative of sales for any subsequent period.

Competition

Several companies compete with us in selling thermal processing systems. Although price is a factor in buying decisions, we believe that technological leadership, process capability, throughput, environmental safeguards, uptime, mean time-to-repair, cost of ownership and after-sale support have become increasingly important factors. We compete primarily on the basis of these criteria, rather than on the basis of price.

Our principal competitors for printed circuit board assembly equipment and advanced semiconductor packaging vary by product application. Our principal competitors for solder reflow systems are Vitronics-Soltec, Heller, Furakawa, ERSA, Rehm and Electrovert. Our principal competitors for advanced semiconductor packaging are Sikama, SEMIgear and Heller. Our systems for the energy generation markets and other applications compete primarily against products offered by Despatch, SierraTherm, Centrotherm and Harper. We also face competition from emerging low cost Asian manufacturers and other established European manufacturers.

Employees

As of December 31, 2007, we had 351 employees, of whom 69 are engaged in sales, marketing and service, 40 in research, development and engineering, 39 in finance and administration and 203 in operations. Of these 351 employees, 188 reside outside of the U.S. None of our employees are represented by a collective bargaining agreement, and we believe that we have satisfactory relations with our employees.

CEO BACKGROUND

Paul J. van der Wansem
President, Chief Executive Officer (1979-2002) of the Company; returned to position in October 2004. Chairman of the Board of Directors of the Company (1979-present).
68
1979


J. Chuan Chu
Director; Chairman of Columbia International Corporation, an engineering firm; Senior Advisor, Office of the President of SRI International, an international consulting firm.
88
1991


Joseph F. Wrinn
Director; Vice President, Business Development of Teradyne, Inc. (2004-present); Vice President, Platform Engineering of Teradyne, Inc. (2000-2004).
54
1999


John E. Beard
Director; Of Counsel, Ropes & Gray LLP, a law firm; Partner 1967-2000.
75
2002


G. Mead Wyman
Director; Director, Grupo Guayacan, Inc., a Puerto Rico based non-profit private equity management company; Director, Strategic Lumber Resources Inc., a private company. Retired Senior Vice President, Treasurer and Chief Financial Officer, Mercury Computer Systems Inc.
67
2004


J. Samuel Parkhill
Director; President and Chief Executive Officer, The Hall Corporation, a privately held company (1995-present).
71
2004

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

BTU International, founded in 1950 and headquartered in Billerica, Massachusetts, is a supplier of advanced thermal processing equipment to the electronics manufacturing and energy generation markets. We manufacture reflow furnaces for printed circuit board assembly as well as semiconductor wafer-level and die-level packaging equipment. In addition, we participate in the fast growing alternative energy market, for which we provide thermal process equipment for the manufacturing of solar cells, fuel cells and nuclear fuels.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. 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. Our customers in the energy generation market use our thermal systems to process silicon, ceramics and metal alloys which are used in solar cell, fuel cell and nuclear fuel manufacturing applications.

In 2004, we began manufacturing and material sourcing operations in a leased facility in Shanghai, China. During 2005, we began construction of additional leased facilities in Shanghai, which became fully operational in the second quarter of 2006. These additional facilities were needed for further expansion into the Asia Pacific region. In addition, we expanded our product development capability to China, creating a global engineering team. This team has developed and commercially introduced our latest Pyramax product and continues to collaborate with our U.S. headquarters on additional product initiatives.

In the past few years, we have substantially improved our U.S. and global supply chain and reduced our materials costs. These efforts have resulted in a major improvement in gross margins primarily in our Pyramax product line, manufactured in both our U.S. and China factories.

Critical Accounting Policies

The following is a discussion of those accounting policies that we deem to be “critical” — that is, they are important to the portrayal of our financial condition and results of operations, and they reflect management’s reliance on estimates regarding matters that are inherently uncertain.

Revenue Recognition. We recognize revenue in accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” as updated by SAB No. 104, “Revenue Recognition.” Under these guidelines, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services rendered, the price is fixed or determinable and payment is reasonably assured. Under these requirements, we recognize revenue upon acceptance when the terms of sale include customer acceptance provisions and compliance with those provisions has not been previously demonstrated. Furthermore, we recognize revenue upon completion of installation for products that require installation for which the installation is essential to functionality or is not inconsequential or perfunctory. Revenue for products sold where installation is not essential to functionality and is deemed inconsequential or perfunctory are recognized upon shipment with estimated installation and warranty costs accrued.

Applying the requirements of SAB No. 101 and SAB No. 104 to future sales arrangements used in our equipment sales may result in the deferral of the revenue for some equipment sales.

We also have certain sales transactions for products which are not completed within the normal operating cycle of the business. It is our policy to account for these transactions using the percentage of completion method for revenue recognition purposes when all of the following criteria exist: (1) we received the purchase order or entered into a legally binding contract, (2) the customer is credit worthy and collection is probable or customer prepayments are required at product completion milestones or specific dates, (3) the sales value of the product to be delivered is significant in amount when compared to our other products, and (4) the costs can be reasonably estimated, there is no major technological uncertainty and the total engineering, material procurement, product assembly and test cycle time extend over a period of six months or longer.

Under the percentage of completion method, revenue and gross margins to date are recognized based upon the ratio of costs incurred to date compared to the latest estimate of total costs to complete the product as a percentage of the total contract revenue for the product. Revisions in costs and gross margin percentage estimates are reflected in the period in which the facts causing the revision become known. Provisions for total estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined.

Inventory Valuation. Our inventories consist of material, labor and manufacturing overhead costs. We determine the cost of inventory based on the first-in, first-out method. We regularly review the quantity of inventories on hand and compare these quantities to the expected usage of each applicable product or product line. Our inventories are adjusted in value to the lower of costs and/or net realizable value. Since the value of our inventories depends in part on our estimates of each product’s net realizable value, adjustments may be needed to reflect changes in valuation. Any adjustments we are required to make to lower the value of the inventories are recorded as a charge to cost of sales.

Stock Based Compensation. Effective January 1, 2006, we adopted the provisions of the SFAS No. 123R, Share-Based Payment (SFAS No. 123R). Under SFAS No. 123(R), we are required to record compensation cost for all share-based payments granted after the date of adoption based on the grant date fair value, estimated in accordance with the provisions of SFAS No. 123R, and for the unvested portion of all share-based payments previously granted that remain outstanding based on the grant date fair value, estimated in accordance with the original provisions of SFAS No. 123. We expense share-based compensation under the straight-line method.

The choice of a valuation technique, and the approach utilized to develop the underlying assumptions for that technique, involve significant judgments. These judgments reflect management’s assessment of the most accurate method of valuing the stock options we issue, based on our historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. Our judgments could change over time as additional information becomes available to us, or the facts underlying our assumptions change over time, and any change in our judgments could have a material effect on our financial statements. We believe that our estimates incorporate all relevant information and represent a reasonable approximation in light of the difficulties involved in valuing non-traded stock options.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2006

Net Sales . In 2007, net sales declined quarter to quarter for the first half of 2007 and increased in each of the quarters in the second half of 2007. Overall for the year 2007, net sales decreased by $14.6 million or 18.6% vs. 2006, from $78.3 million in 2006 to $63.7 million in 2007. For 2007 the electronics assembly business was down by 30 percent compared to 2006 while there was strong growth in our alternative energy business in 2007. In solar photovoltaics for 2007, the Company was able to double our revenues for the year and bookings increased by more than two and a half times.

As compared to 2006, the percentage of net sales attributable to our customers in the United States stayed the same in 2007, net sales attributable to our customers in Europe decreased by 5%, net sales attributable to our Asia Pacific customers increased by 7% and net sales attributable to our customers in the other Americas decreased by 1%.

Gross Profit . The increase in the gross profit percentage to 43.0% for 2007 versus 40.5% 2006 was principally the result of a favorable product mix, lower material costs in our U.S. operations and improvements in our China assembly and China material sourcing for global operations.

Selling, General and Administrative . SG&A costs increased by 10.9% from $17.1 million to $19.0 million in 2007 versus 2006. The increase in selling, general and administrative expenses in 2007 versus 2006 is reflective of the Company’s expansion in the alternative energy markets and the continuing increased costs associated with government regulations on United States public companies with global operations. The increased selling, general and administrative costs in 2007 versus 2006 are due to added sales, service and marketing expenses for our alternative energy products and added administrative costs associated with the expensing of stock options, Sarbanes-Oxley compliance, tax consulting and legal costs.

Research, Development and Engineering . In 2007 the Company increased its spending on RD&E versus 2006 primarily for our development efforts towards new products for our alternative energy markets and enhancements to our electronics market products.

Operating Income . The decrease in operating income was primarily the result of decreased revenues and partially due to increases in SG&A and RD&E expenses, which were partially offset by improved gross margin percentages.

Interest Income (Expense), Net. The change in net interest income/expense decreased from $307,000 of income in 2007 to $105,000 of income in 2006.

Foreign Exchange (Loss). Foreign Exchange loss increased from a $232,000 loss in 2006 to a $478,000 loss in 2007 primarily due to the continued reduction in the valuation of the US dollar against the Chinese RMB.

Income Taxes . In 2007 the government of China approved a tax equalization law for foreign and domestic companies that impacts BTU. 2007 is the first year that the Company is taxable in China. This event plus the recording of China withholding taxes on royalty charges are the primary elements of the 2007 tax provision. In the USA, the Company has federal and state net operating loss carry forwards of approximately $6 million. The Company has recorded a full valuation allowance to offset the deferred tax asset arising as a result of these loss carry forwards because of uncertainty surrounding realization. Our statutory federal income tax rate is 34.0%.

Earnings per Share. Note that the total year diluted earnings per share (EPS) in this 10-K rounds to $0.20 vs. the Company’s Press Release of February 26, 2008 which reported total year diluted EPS of $0.21. The reason for the difference was an adjustment in the 123R calculation which increased the diluted shares by 59,961 shares. The impact is from $0.2054 to $0.2041 or $0.0013 adjustment. This adjustment had no impact on any quarter or on any year to date diluted EPS during 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


RESULTS OF OPERATIONS

In the first nine months of 2008 as compared to the same period in 2007, total revenue has increased in the United States and in Asia Pacific, and has declined in the European/Near Eastern and Other Americas markets. The largest geographical increase is in our Asia Pacific region where the increase was primarily from the Company’s alternative energy products.

Gross Profit . For the three and nine months ended September 28, 2008, as compared to the same periods in 2007, gross margin has improved primarily due to the increase in net sales. The gross margin as a percentage of net sales for the first nine months of 2008 compared to 2007 is relatively unchanged.

Selling, General and Administrative (SG&A). In the third quarter of 2008 as compared to the same period in 2007, SG&A costs as a percentage of net sales remained steady at 31.0%. The increased spending for SG&A was in support of the third quarter year over year increase in revenue, along with the announced intention to increase service, sales, marketing and administrative support for our continued expansion into the alternative energy markets. The increase in the nine month year to date SG&A expense for 2008 as compared to the same period in 2007 is for the same reasons as stated above for the third quarter.

Research, Development and Engineering.(RD&E) In the third quarter and first nine months of 2008 the Company has increased its spending on RD&E as compared to the same periods in 2007 primarily due to development efforts towards new products for our alternative energy markets.

Operating Income. Despite the increase in operating costs, operating income, for the third quarter and first nine months of 2008, as compared with the same periods of 2007, increased principally as a result of the increased revenue.

Foreign Exchange (loss). The $0.2 million foreign exchange loss for the third quarter of 2008 was primarily related to a foreign currency forward contract. The $0.4 million foreign exchange loss for the nine months ended September 28, 2008 is primarily the result of losses recorded at the Company’s China operations on U.S. dollar denominated balance sheet accounts.

Income Taxes . In the third quarter and for the first nine months of 2008 , we estimated our annual effective income tax rate for each corporate entity and applied this rate to the year-to-date profits before income tax for each of our profitable corporations. In addition, we calculated the estimated withholding tax on royalty and other taxable corporate services charged in the first nine months of 2008 to our China operations. The sum of the income taxes plus the withholding taxes were recorded as our tax provisions.

The effective income tax rate was 23% for the three months ended September 28, 2008, compared to 15% for the three months ended September 30, 2007. The effective income tax rates for the nine months ended September 28, 2008 and September 30, 2007 were 36% and 12%, respectively.

The significant fluctuations in the Company’s quarterly tax rate, as a percent of consolidated pre-tax income, are the result of the varying ratio of the consolidated pre-tax profit or loss by corporate tax entity to the consolidated tax provision. The majority of the third quarter and year-to-date consolidated tax provisions are China withholding taxes, which are not related to pre-tax income. The China withholding taxes primarily result from corporate royalty charges based on our China subsidiary net sales.

The Company has federal and state net operating loss carry forwards of approximately $6 million against which it has recorded a full valuation allowance because of uncertainty surrounding realization. Our statutory federal income tax rate is 34.0%.

LIQUIDITY AND CAPITAL RESOURCES

As of September 28, 2008, the Company had $29.0 million in cash and cash equivalents.

Cash Generated by Operations:

During the nine months ended September 28, 2008, the Company generated net cash resources of approximately $5.8 million from operating activities. This source of cash was primarily the result of an increase in accounts payable and accrued expenses of $5.1 million, net profit of $1.1 million, non-cash stock-based compensation of $0.9 million, depreciation and amortization of $1.3 million, and was offset by increases in inventories of $1.1 million, accounts receivable of $1.3 million, and other current assets of $0.2 million.

Cash Used in Investing Activities:

For the nine months ended September 28, 2008, the Company used $2.1 million in investing activities. Approximately $2.1 million was related to capital expenditures, compared to $1.5 million in the same period in 2007. Offsetting the capital expenditures in the first half of 2008 was $60 thousand received in settlement of a foreign currency forward contract in the first quarter of 2008.

Cash Provided by (used in) Financing Activities:

The Company used approximately $300 thousand in financing activities in the first nine months of 2008, compared to generating $100 thousand in the first nine months of the prior year. In the first nine months of 2008, approximately $500 thousand was related to principal payments on loans and capital leases, compared to approximately $200 thousand in 2007. In 2008, approximately $104 thousand was generated through the exercise of stock options by employees, compared to $290 thousand in the comparable period of 2007.

On March 30, 2006, the Company entered into a mortgage note that is secured by its real property in Billerica, MA. The amount of the mortgage note executed was $10 million. The mortgage note requires monthly payments of $76,280, which includes interest calculated at the rate of 6.84% per annum. This mortgage note payable has a balloon payment of $6.8 million due and payable at maturity on December 23, 2015. The mortgage note had an outstanding balance at September 28, 2008 of approximately $9.3 million.

On March 1, 2007, the Company entered into an amended revolving loan agreement with a bank that allows for unsecured aggregate borrowings, including letters of credit, up to a maximum of $15 million against a borrowing base of accounts receivable, inventory and fixed assets. The Company may elect to borrow at interest rates related to the bank’s prime rate or LIBOR. This loan agreement extends to December 31, 2010 and is subject to maintaining certain financial covenants, with which the Company is in full compliance. At September 28, 2008, the borrowing base would support the maximum borrowings of $15 million, and there were no borrowings outstanding under the loan agreement.

As of September 28, 2008, the Company has no material commitments relating to capital expenditures.

The Company’s business forecasts project that our cash position, cash flow and our working capital line of credit will be sufficient to meet our corporate, operating and capital requirements through 2009.

OTHER MATTERS

Given that the Company invoices the vast majority of its sales in U.S. dollars, that the Company has a substantial manufacturing presence in China and that sales into China are primarily in U.S. dollars, should the U.S. dollar decline in relation to the Chinese RMB the Company’s financial results will be adversely affected.

In the first three quarters of 2008, inflation had no material impact on our business.

CONF CALL

Paul J. Van der Wansem

Good afternoon everybody. I’m Paul van der Wansem, CEO of BTU International and it’s our pleasure to do this conference call for our fourth quarter and year end results for 2007. We are pleased that you all could join us. With me here today is Jim Griffin, Vice President of Global Sales; Tom Kealy, Vice President, Finance; and Doug Lawson, VP of Business Development to assist me in any issues you may want to bring to the table. This call will be in four parts. I’ll begin with a brief discussion of fourth quarter and year end results. After that I’ll have Jim talk about the markets and what he sees in the markets we are serving and I’ll take over again and talk about how plans and our actions regards the alternative energy sector as well as covering some of our outlook in the immediate future. After that we will have a chance to have a question and answer session.

Before we begin I’d like to note that statements made during this call will include forward-looking statements concerning our future financial and operating performance and our expectations regarding future orders for our products, future development for our products, the capabilities of our products and their ability to meet the needs of our customers, the company’s marketing and sales strategy and trends in the industry served by BTU. These forward-looking statements are not promises nor guarantees but are subject to risks and uncertainties that could cause actual results to differ materially from those described or implied in the forward-looking statements. Such factors are described in the company’s quarterly reports on the SEC Form 10Q for the quarter ended September 28, 2007 and in the press releases issued today regarding the company’s fourth quarter 2007 results and the formation of its Alternative Energy Group. Statements made during this call are current as of today only and the company undertakes no obligation to publicly update or revise these forward-looking statements unless required by law. A copy of our earnings release can be found on the BTU website at www.BTU.com or you may request a copy by calling 978-667-4111. Let’s begin.

BTU as most of you know is in the business of providing advanced thermal processing equipment for mostly electronics and manufacturing industry which really breaks down in printed circuit board assembly and semiconductor packaging as well as for alternative energy markets such as solar, nuclear fuel and hydrogen powered fuel cells. All of these applications require highest reports precise temperatures and atmosphere control in the manufacturing process for the devices which are critical.

Now let’s take a look at our fourth quarter 2007 results. As you may have been able to read in the press release our fourth quarter sales were $18.3 million which was up about 11% compared to $16.5 million in the preceding quarter and up about 10% compared to the same quarter of a year ago. Net income for the fourth quarter 2007 was $0.6 million or $0.06 per diluted share compared to a net income of $0.5 million or $0.06 per diluted share in the preceding quarter and compared to a net income of $1 million or $0.11 per diluted share in the fourth quarter of 2006. Net sales for the year 2007 were $63.7 million which was down about 19% compared to $78.3 million for the year 2006 and net income for 2007 is $1.9 million or about $0.21 per diluted share compared to a net income of $9.2 million or $0.98 per diluted share for the year 2006. Revenues for the quarter and income before tax were in line with our expectations. However, we had a bit of surprise on the per share earnings were negatively impacted by about $0.04 due to a higher than forecasted effective tax rate in one of our overseas subsidiaries and I’ll come back to that in a moment. Our balance sheet is in excellent shape. Cash flow for the year was neutral although we made major investments in a new ERP system and we started building off new laboratories and all in all our cash for the set was neutral for the whole year.

Talking about the little surprise on the tax side that happened in one of our overseas subsidiaries that was a little bit of a battle but we survived that and unfortunately it did give us a little bit more of a hit in Q4 and for the year than what we expected.

I also need to update the audience on a change on our auditing firm. Yesterday Vitale Caturano was our auditing firm and notified us and the company agrees that our auditors would not stand for reelection upon completion of the current year audit and 10K filings. There are no disagreements over accounting issues BTU is grateful for Vitale Caturano for six years of diligent service and we hope and wish to see them do well and BTU will be seeking a firm with broad capabilities to serve BTU worldwide and the company is filing or has filed by now an 8K on this topic. So I guess what I will do later on is comment specifically on the press release regarding the build up of our alternative energy group, the relation of the new people there and we have in mind. Before I do that I’d like to turn it over to Jim first of all to give us a quick update on what he sees in the markets. Good day. Go ahead Jim.

James M. Griffin

Thank you all for joining us this afternoon on the conference call. I‘ll take a few minutes looking at some of the highlights in Q4 starting with the alternative energy. In the solar market place our sales were up significantly quarter-over-quarter. In the silicone solar market we shipped a large repeat order for multiple in line phosphorous diffusion firing furnaces. These were large production volume units producing in the 25 megawatt capacity per line. This was with a key global customer for BTU. We have since received repeat orders from that customer and expect additional orders to follow along through the year. Also in Q4 we had our first integrated diffusion system with a BTU doper accepted by a leading China based manufacturer for their new process development line. This capability strengthens our position to address the market trend moving from batch to in line processing for the diffusion applications.

In Q4 we increased our order activity in the IR metallization area with strong bookings quarter-over-quarter. Bookings were global with China leading the way. Our China manufacturing and support capability has been a key factor in the sales wins. In March we will be holding a solar technical symposium coinciding with the opening of our Shanghia solar lamp. The focus is on both silicone and thin film technology and will include process presentations by key technologist in each area. The symposium is presented in conjunction with Dek our printer partner for a fully integrated metallization line. The solar lab will further increase our support capabilities for customers in China and for all the Asia Pacific area. In Q4 we also shipped an anti-reflective coating system and that unit will be going to a European research center. We also participate in the thin film market in the solar arena and in the thin film we shipped our first production system earlier this year and also bought another system for a second process with the same customer this year. We have targeted both the CIG and [CADTEL] technology markets as opportunities for BTU.

Our experience in designing large volume thermal processing equipment has positioned BTU as a value partner for thin film manufacturers as they address equipment challenges and scaling up production. In the electronics marketplace where we participate in the printer circuit board assessment and semiconductor packaging markets we did see as downturn in sales that coincided with market trends. We’re continuing to expand our product lines and added Paramax 100A to our Paramax product line in the printer circuit board assembly area. We’re also continuing to expand our customer base and we did see a large increase in new customers both in China and also in Brazil. In the semiconductor packaging area although it was down we did see a positive note in Q4 in that one of our key large OEM customers has returned with orders and the future looks a little brighter there, as we didn’t have to go through a period of about a year and a half where they were digesting inventory, so that seems to be heading in the right direction. So, overall, electronics sales expect a relative flat Q1, now I’ll hand it back to Paul, and he’ll give you some additional guidance.

Paul J. Van der Wansem

First of all I would like to make people aware, that the press release you got, we started to form a totally new business group for alternate energy. That group will drive primarily the solar part of the energy both [inaudible] as well as silicon based, and to that group we have found two key leaders. And the reason were setting it up as a separate group, is that we wanted to disentangle that group, and not be burdened by the other part of our business which is in electronics and in some custom made equipment. So, this group will have its prime focus to drive the alternate energy business, and for now that means that we will be doing a lot of activity in solar. We hired two key executives for that group, to run it first of all, John McCaffrey, he’s joined us as vice president of alternate energy and he’ll be in charge of all engineering and product development. And Jack has a law background, initially at Polaroid, but he also was in the Navy as a nuclear engineer and after this he was one of the key people to build Evergreen in designing and building their first US pilot plan and the initial manufacturing facilities. After that he moved to set up with Q-Cells and designed the initial 30 megawatts Ever-Q factory in Germany, he then moved to DayStar for [inaudible] technology where he was involved in CIGS and set up a pilot line foil and then the initial line for the 25 megawatt manufacturing facility which is being built in California. So Jack is going to be a key ingredient in driving our solar business into the future. Together with him we have also acquired Doug Lawson who joined us recently, Doug will be in charge of the business of development and marketing for the alternate energy group, and his prime responsibility will focus on drawing the company’s alternate energy with a special focus on solar most centered on the silicon based solar parts. Doug has an extensive background in rapidly growing company like PRI Automation and his background is also in the processing area where he used to work for Intel and Digital, so we welcome both of these new individuals, and we expect with the driving force of those two members to our executive team, that we will be on the rapid road to develop our business in the Solar area.

In addition, we are spending to open two new solar research labs, one in Billerica here which will be opening later on this year, and one in China in Shanghai, which will be opening next month. Those activities are key activities for us to change our strategy, to build what we see as a huge opportunity in solar, and to go after that with a vengeance and hire the right people for this. Now that obviously, will have somewhat of a negative impact on somewhat a meek year into 08, certainly the way were starting out the year, as you’ve seen in my outline for in the press release, we are looking as an outlook here in first quarter, we have kind of a fairly low revenue pattern, $15.8 to $16.8 million, and we expect the bottom line to be a little bit above the breakeven somewhat marginally profitable. So, as we move through this year and although we expect that we are going to double sola, again over last year, and with an outlook of the electronics business to be somewhat in line with last year meaning flat, we expect that we are going to growing somewhere for the whole year around 15 to 20 % at least but the pressure will be one the bottom line for two reasons, we are expanding fairly rapidly to build out our opportunity in solar, we have seen boasts in Silicon based as well as in thin film based. Huge opportunities where we can apply our technology, and we want to take advantage of it, but we are going to have to pay the piper a little bit in the mean time in order to really take advantage of those opportunities.

So, for this year we see some pressure on the bottom line in general, we’ll have higher expenses than normal, but we think its for a good cause because we want to double not only this year, but we expect we will be able to at least double also again next year in our solar energy business. We feel that for our low ball strategy, that it is incredibly important for us to build a different business there. So with that I’d like to turn it over to basically a Q&A session, and see what people are interested in and we tried to answer the questions. Gavin if you could take it from here to lead the Q&A.

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