Summary of K TRON INTERNATIONAL INC

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview of Business

We are engaged in one principal business segment - material handling equipment and systems. 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 business lines ("business lines"), which are our process and size reduction business lines.

We are an industrial capital goods supplier, and many of the markets for our products are cyclical. During periods of economic expansion, when capital spending normally increases, we generally benefit from greater demand for our products. During periods of economic contraction, when capital spending normally decreases, we generally are adversely affected by declining demand for our products, and the credit worthiness of our customers is a greater concern.

Our process business line designs, produces, markets, sells and services both feeding and pneumatic conveying equipment. We believe, based in part on independent market studies, that we are the global leader in the design, production, marketing and servicing of high-quality industrial feeders for the handling of bulk solids in manufacturing processes. Markets served include the plastics compounding, base resin production, food, chemical and pharmaceutical industries. The plastics compounding and base resin production markets represent the largest markets for our process business line, and they are generally sensitive to changes in U.S. and global economic conditions, especially as they relate to the use of plastics in housing and automotive products. The food and pharmaceutical markets for our process business line tend to be less cyclical than the plastics compounding and base resin production markets. The majority of the revenues and profits of the feeding equipment portion of our process business line is generated by equipment and systems sales, with a lesser amount attributable to service, parts and repairs. Feeding equipment is sold under the K-Tron Feeders brand name, both domestically and in other countries around the world.

On October 5, 2006, we significantly expanded the scope of our process business line with the acquisition of Premier Pneumatics, Inc. ("Premier"), a leading manufacturer of pneumatic conveying components and systems for the U.S. market. Our pneumatic conveying equipment is sold under the K-Tron Premier brand name, primarily in North America, but we have recently started to sell this equipment elsewhere in the world using many of the channels used for our K-Tron Feeders brand. Factors affecting the sale of our pneumatic conveying equipment are similar to those that affect the sale of our feeding equipment.

On March 27, 2007, we purchased certain assets of Wuxi Chenghao Machinery Co., Ltd. ("Wuxi Chenghao"), a privately-owned company in the People's Republic of China ("China"). The purchased assets were transferred from the seller to a newly-created Wholly Foreign-Owned Enterprise which we established in connection with this transaction that conducts its business under the name Wuxi K-Tron Colormax Machinery Co., Ltd. ("Wuxi K-Tron Colormax"). Following this acquisition, we established a third brand within our process business line, the K-Tron Colormax brand, which is targeted at the domestic plastics compounding and injection molding markets in China.

Management looks at trends in what it believes to be relevant indicators, such as the Purchasing Managers' Index ("PMI") for U.S. manufacturing published by the Institute of Supply Management and similar foreign indices, to help it better understand the prospects for capital equipment spending as it may affect our process business line. A PMI reading above 50 indicates that manufacturing is expanding and below 50 indicates that manufacturing is contracting. In 2008, the PMI fluctuated throughout the first three quarters of the year slightly above and below 50. In the last quarter of 2008, the PMI dropped significantly below 50, indicating a significant contraction of manufacturing. Historically, increases and decreases in our feeding equipment sales generally have lagged movements in these indicators, in some cases by as much as six to twelve months.

Our size reduction business line was established with the purchase of Pennsylvania Crusher Corporation ("Penn Crusher") and its wholly-owned subsidiary, Jeffrey Specialty Equipment Corporation ("Jeffrey"), on January 2, 2003. Our acquisition of J.M.J. Industries, Inc., now Gundlach Equipment Corporation ("Gundlach"), on March 3, 2006 expanded our size reduction business by including a leading provider of size reduction equipment to the coal mining industry. Penn Crusher, Jeffrey and Gundlach sell equipment primarily into the U.S. market, with some sales into foreign countries, particularly in South America and China. The main industries served are the

power generation, coal mining, pulp and paper, wood and forest products and biomass energy generation industries, and a majority of the revenues and profits are generated from replacement part sales instead of from the sale of new equipment.

On September 14, 2007, we expanded the scope of our size reduction business line with the acquisition of Rader Companies, Inc. ("Rader"), which manufactures screening equipment, pneumatic and mechanical conveying systems, storage/reclaim systems and size reduction equipment for the handling of biomass, wood chips and waste wood products such as tree bark. Rader's equipment is used primarily in the pulp and paper and biomass energy generation industries in North America and Europe. Rader also manufactures a feeder/delumper used by manufacturers of polyethylene and polypropylene. Penn Crusher, Jeffrey, Gundlach and Rader have developed and currently maintain an extensive digital database of previously sold equipment, including equipment specifications and drawings, that enables them to respond quickly and efficiently to fill customers' spare parts orders.

During 2008, we integrated the U.S. operations of our Jeffrey and Rader subsidiaries at Jeffrey's office and manufacturing facility in Woodruff, South Carolina. Rader had previously conducted its U.S. business from a leased facility in Alpharetta, Georgia. Rader was subsequently merged with and into Jeffrey on January 1, 2009, and Jeffrey changed its name to Jeffrey Rader Corporation ("Jeffrey Rader") in connection with the merger.

Significant indicators that management uses to judge prospects for our size reduction business line in the U.S. include the level of electricity consumption, the financial health of the electric utility industry, and the demand for coal, paper, forest products and biomass energy generation. Historically, the markets for our size reduction business line related to power generation and coal mining have been less cyclical than have the pulp and paper and wood and forest products markets. Our size reduction business line's exposure to economic swings is moderated by the fact that a majority of its sales is for replacement parts needed by customers to keep their machines operating.

The following provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and accompanying notes. All references to 2008, 2007 and 2006 mean the fiscal years ended January 3, 2009, December 29, 2007 and December 30, 2006.

Critical Accounting Assumptions and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and follow our significant accounting policies as described in the notes to our consolidated financial statements. The preparation of these financial statements requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from those estimates.

Judgments and estimates of uncertainties are required in applying our accounting policies in certain areas. Areas that require significant judgments and estimates to be made include determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the realizability of deferred tax assets, determinations of the adequacy of reserves for inventory obsolescence and warranty costs, and legal contingencies.

There are a number of critical assumptions that may influence accounting estimates in these and other areas. We base our critical assumptions on historical experience, third-party data and other factors we believe to be reasonable under the circumstances. We believe that the most critical assumptions made in arriving at our accounting estimates are the following:

Depreciable Lives of Plant and Equipment

Each asset included in plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of such asset from earnings every year over such asset's estimated economic useful life. As a result of these estimates of economic useful lives, net plant and equipment at year-end 2008 totaled $26,701,000, which represented 13.4% of total assets. Depreciation expense during 2008 totaled

$4,813,000, which represented 2.3% of total operating expenses. Given the significance of plant and equipment and associated depreciation to our financial statements, the determination of an asset's economic useful life is considered to be a critical accounting estimate.

Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Management's assumptions regarding the following factors, among others, affect the determination of estimated economic useful life: changes in technology, wear and tear and changes in market demand.

The estimated economic useful life of an asset is monitored to determine its continued appropriateness, especially in light of changed business circumstances. For example, technological advances, excessive wear and tear or reduced estimates of future demand for a product may result in a shorter estimated useful life for an asset than originally anticipated. In such a case, we would depreciate the remaining net book value of the asset over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Over the past three years, changes in economic useful life assumptions have not had a material impact on our reported results.

Allowance for Doubtful Accounts

We encounter risks in connection with sales and the collection of the associated accounts receivable. We record a provision for accounts receivable that are considered to be uncollectible, including those associated with customers that have become insolvent. In order to estimate the appropriate provision, management analyzes the credit worthiness of specific customers and the aging of customer balances. Management also considers contractual rights and obligations and general and industry specific economic conditions.

Since we cannot predict with certainty future changes in the financial condition of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, a larger allowance may be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.

Management believes that the accounting estimate related to the allowance for doubtful accounts is a critical accounting estimate because the underlying critical assumptions used to establish the allowance can change from time to time, and uncollectible accounts could potentially have a material impact on our results of operations.

Asset Impairment Determinations

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are our two main business lines based on our organizational structure and the financial information that is provided to and reviewed by management. Goodwill is tested for impairment by comparing the estimated fair value of each of our two reporting units to the respective carrying value of the net assets assigned to each of those reporting units. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is not considered impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is considered impaired and further testing is required to determine the amount of the goodwill reduction. To derive the fair value of a reporting unit, an income approach is used. Under the income approach, the fair value of a reporting unit is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the Company. Estimated future cash flows are based on our internal projection model.

Our annual impairment test, which was completed during the fourth quarter of 2008, indicated that the fair values of our two reporting units exceeded their carrying values and, therefore, the goodwill amounts were not impaired for either of our two reporting units.

Our analysis uses significant assumptions by reporting unit, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as

changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could result in an impairment charge which could materially impact our reported financial results by decreasing operating income and lowering asset values on our consolidated balance sheet. We test for goodwill impairment annually or when circumstances suggest, as for example when our market capitalization significantly declines for a sustained period, which could cause us to do interim impairment testing that might result in an impairment to goodwill.

With respect to our other long-lived assets, we are required to test for asset impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. We apply SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", in order to determine whether or not an asset has been impaired. This standard requires an impairment analysis when indicators of impairment are present. If such indicators are present, the standard indicates that if the sum of the future expected cash flows from the asset, undiscounted and without interest charges, is less than its carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment charge recorded is the difference between the fair value of the asset and the carrying value of the asset. No indicators of impairment with respect to our other long lived assets were present in 2008.

In analyzing the future cash flows of various assets, the critical assumptions we make include the following:

� The intended use of assets and the expected cash flows resulting directly from such use;

� Industry specific economic conditions;

� Customer preferences and behavior patterns; and

� The impact of applicable regulatory initiatives, if any.

We believe that accounting estimates relating to goodwill and other long-lived asset impairments are critical accounting estimates because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our consolidated financial statements. We will continue to monitor current economic trends that might affect asset impairments in the future. Over the past three years, we have not recognized any asset impairments.

Income Taxes

We use the liability method to account for income taxes. Under this method, deferred tax liabilities and assets are recognized for the tax effects of temporary differences between the financial reporting and tax bases of liabilities and assets measured using the enacted tax rate. Our income tax expense for 2008 was $11,215,000 with a 30.3% effective tax rate. A one percentage point increase in our effective tax rate for 2008 from 30.3% to 31.3% would have decreased reported net income by approximately $362,000.

Significant management judgment is required in determining income tax expense and the related balance sheet amounts. Assumptions are required concerning the ultimate outcome of tax positions and the realization of deferred tax assets. We have accrued our estimate of potential tax liability in accordance with the Financial Accounting Standards Board (the "FASB") Interpretation 48, "Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109", as discussed below.

Actual income taxes paid by us may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for the probable outcome of these assessments. Deferred tax assets are recorded for deductible temporary differences, operating losses and tax credit carryforwards. However, when there may be insufficient sources of future taxable income to realize the benefit of these items, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of a deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.

In July 2006, the FASB issued FASB Interpretation 48, which clarified SFAS No. 109, "Accounting for Income Taxes", and established the criterion that an individual tax position has to meet for some or all of the benefits of that position to be recognized in the Company's financial statements. FASB Interpretation 48 was effective for fiscal years beginning after December 15, 2006, and was adopted by the Company effective December 31, 2006. On initial application, FASB Interpretation 48 was applied to all tax positions for which the statute of limitations remained open. Only tax positions that met the more-likely-than-not recognition threshold at the adoption date were recognized and, with respect to later dates, only those that met or meet the threshold on those later dates have been or will be recognized at those dates. The Company is subject to income taxes in the U.S. federal jurisdiction and also in various state, local and foreign jurisdictions. Tax laws and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years before 2006. The Company recognizes interest accrued related to uncertain tax liabilities in interest expense and recognizes penalties in operating expenses. The adoption of FASB Interpretation 48 in 2007 did not have a material impact on the Company's consolidated financial statements.

Inventory Reserve

We record an inventory reserve for obsolete, excess and slow-moving inventory. In calculating our inventory reserve, management analyzes historical data regarding customer demand, product changes, market conditions and assumptions about future product demand. We will continue to monitor current economic trends that might adversely affect inventory reserves in the future. Management believes that its accounting estimate related to inventory obsolescence is a critical accounting estimate because customer demand can be variable and changes in our reserve for inventory obsolescence could materially affect our financial results.

Warranty Reserve

We provide for the estimated warranty cost of a product at the time revenue is recognized. Warranty expense is normally accrued as a percentage of sales based upon historical information on a monthly basis, and this provision is included in accrued expenses and other liabilities. There is an exception to this accrual method for certain products within the size reduction business line for which we use a combination of historical information and management judgment. We offer a one-year warranty on a majority of our products, and we engage in extensive product quality programs and processes, including the active monitoring and evaluation of the quality of our component suppliers in an effort to minimize warranty obligations. These warranty obligations are affected by actual product failures and by material usage and service costs incurred in correcting these product failures. Our warranty provision takes into account our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty provisions are adequate and that the judgments applied are appropriate, the ultimate cost of product warranty could differ materially from our estimates. When our actual cost of product warranty is lower than we originally anticipated, we adjust downward the recorded reserve, and if the cost of warranty repairs and service is higher than anticipated, we increase the reserve.

Legal Contingencies

We are currently involved in certain legal proceedings. We have accrued an estimate of the probable costs for the resolution of these claims in accordance with SFAS No. 5, "Accounting for Contingencies". This estimate has been developed by management and may be made in consultation with outside counsel handling our defense in these matters and also with our insurance broker, and it is based upon an analysis of potential results, including litigation and settlement strategies. We do not believe that these proceedings will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by litigation outcomes that are significantly different than our assumptions and estimates.

Results of Operations

Overview

2008 was a 53-week year and 2007 and 2006 were 52-week years. In 2008, 2007 and 2006, we reported revenues of $243,018,000, $201,677,000 and $148,127,000 and net income of $25,773,000, $21,321,000 and $12,872,000.

The increase in our revenues in 2008 compared to 2007 was primarily the result of a full year of contributions from Rader in 2008 compared to 15 weeks in 2007, increased spending by our process business line customers in EMEA/Asia, increased spending by customers in our size reduction business line in addition to Rader, and the positive effect of a weaker U.S. dollar in 2008 versus 2007 on the translation of the revenues of our foreign operations into U.S. dollars. The increase in our net income in 2008 compared to 2007 was primarily due to the full year contribution from Rader, increased spending by our customers in the rest of our size reduction business line, and the positive effect of a weaker U.S. dollar in 2008 versus 2007 on the translation of the earnings of our foreign operations into U.S. dollars. Our 2008 effective tax rate was 30.3%, up from 29.3% in 2007 due primarily to a higher proportion of our earnings coming from the United States, which earnings are taxed at an overall higher rate than are our earnings from EMEA/Asia.

The increases in our revenues and net income in 2007 compared to 2006 were primarily the result of generally stronger business conditions and increased spending by customers in our process business line, contributions in 2007 versus 2006 from the acquisitions of Gundlach on March 3, 2006, Premier on October 5, 2006 and Rader on September 14, 2007 and the positive effect of a weaker U.S. dollar in 2007 versus 2006 on the translation of the revenues and profits of our foreign operations into U.S. dollars. Our 2007 effective tax rate was 29.3%, down from 33.6% in 2006 due primarily to a second quarter 2007 income tax benefit of approximately $410,000 from the finalization of a Swiss tax audit for the years 2004 and 2005 and to a higher proportion of our earnings coming from EMEA/Asia in 2007, which earnings are taxed at an overall lower rate than are our earnings in the United States.

Acquisitions

On March 3, 2006, we purchased all of the outstanding stock of J.M.J. Industries, Inc., which operated its business under the Gundlach tradename. The purchase price was $9,154,500, of which $6,154,500 was paid in cash and $3,000,000 by delivery of an unsecured promissory note bearing interest at 5% per annum and payable in three equal, annual installments of $1,000,000 on March 3 in each of 2008, 2009 and 2010. The first and second $1,000,000 installments were paid on March 3, 2008 and March 3, 2009. In connection with the purchase, we also paid off all of the acquired company's bank debt, which amounted to approximately $1,347,000. We did not borrow any money in connection with either the acquisition or the payoff of the bank debt. Gundlach is part of our size reduction business line.

On October 5, 2006, we purchased all of the outstanding stock of Premier. The preliminary purchase price was $27,565,000, all of which was paid in cash, including $2,000,000 held in escrow which has now been released to the seller. The final purchase price of $27,453,000 included a $112,000 adjustment paid to us based on Premier's net working capital as of the closing date. In February 2007, we also made a preliminary payment of $1,567,000 to the seller in connection with our Internal Revenue Code section 338(h)(10) election (the "Premier 338(h)(10) election") with respect to this acquisition. The amount owed to the seller under the Premier 338(h)(10) election was finalized in April 2007 and reduced by $153,000 to $1,414,000, and the seller returned $153,000 to us. We financed the purchase price and related costs of the Premier acquisition under a five-year, $50,000,000 unsecured credit facility (the "Citizens Credit Facility") entered into on September 29, 2006 between Citizens Bank of Pennsylvania ("Citizens") and us and our U.S. subsidiaries. Premier is part of our process business line.

The Citizens Credit Facility, which matures on September 29, 2011, provides us . . .