FEI Company Reports Results for First Quarter of 2006

Bookings and Backlog at Record Levels

Earnings Excluding Charges Improve Substantially From Recent Quarters

May 03, 2006, 01:00 ET from FEI Company

    HILLSBORO, Ore., May 3 /PRNewswire-FirstCall/ -- FEI Company (Nasdaq:  
 FEIC) reported results for the first quarter of 2006. Bookings increased
 substantially and were the highest in the company's history for a single
 quarter. Compared with the fourth quarter of 2005, revenue increased, gross
 margins improved and operating expenses excluding charges declined. While
 the company recorded a loss for the latest quarter due to restructuring and
 other charges, income excluding those charges increased significantly. The
 company is entering the second quarter of 2006 with a record backlog and
 expects higher revenue and improved earnings for the remainder of 2006.
     Net sales for the quarter ended April 2, 2006 of $113.8 million are up
 12% compared to net sales of $101.6 million in the fourth quarter of 2005.
     Bookings in the first quarter totaled $150.2 million, resulting in a
 book-to-bill ratio of 1.32 to 1.00 and a record-high backlog of $222.7
 million at the end of the quarter. Bookings were up 30% from the fourth
 quarter of 2005.
     The net loss on the basis of accounting principles generally accepted
 in the United States (GAAP) was $5.2 million for the first quarter of 2006,
 compared with a net loss of $30.7 million in the fourth quarter of 2005.
 The loss per share in the latest quarter was $0.15, compared with a loss
 per share of $0.91 in the fourth quarter of 2005.
     "The record bookings, record backlog, improved gross margins and lower
 operating expenses in the first quarter reflect our solid market
 opportunities, exciting new products and the early results of the major
 restructuring and reorganization we undertook in the second half of 2005,"
 said Ray Link, CEO and CFO. "Led by the world's most powerful commercially
 available electron microscope, the Titan(TM), our bookings reached record
 levels despite the fact that first quarter bookings are usually below
 fourth quarter levels. We also lowered our quarterly break-even revenue
 rate to our goal of below $100 million."
     Restructuring, asset impairment, refinancing and related charges in the
 first quarter of 2006 were $12.9 million, including:
     -- $9.3 million of severance charges for the company's former CEO,
 including $2.2 million of cash payments and a non-cash charge of $7.1
 million for stock-based compensation expense, as a result of a modification
 to his stock options in accordance with his 2002 severance agreement (the
 modified options are required to be valued and expensed under SFAS 123R and
 were valued using the Black-Scholes option pricing model);
     -- $2.2 million of additional restructuring, reorganization and
 relocation charges, primarily for severance, lease termination and
 relocation expenses related to the previously-announced consolidation of
 European sales and administrative offices;
     -- $0.5 million for legal and other costs in connection with potential
 merger negotiations, which were terminated by FEI in February;
     -- $0.5 million for asset impairments related to the
 previously-announced decision to discontinue implementation of a new
 enterprise resource planning system and pursue less costly alternatives;
     -- $0.4 million related to the repurchase and retirement of $24.9
 million face value of the company's 5.5% convertible notes (included in
 interest expense).
     The latest quarter also included $1.25 million of stock-based
 compensation expense, included in cost of sales and operating expenses, in
 accordance with the implementation of SFAS 123R. Stock option expense is
 expected to be approximately $1.5 million in the second quarter of 2006,
 and a slightly higher amount for the last two quarters of the year. In the
 first quarter, $197,000 of this expense is included in cost of sales and
 the balance is included in operating expenses.
     Excluding the charges noted above and assuming a 35% tax rate and 41
 million outstanding shares, non-GAAP earnings for the latest quarter were
 $6.7 million or $0.16 per share. Readers should refer to the attached table
 for a reconciliation of the GAAP loss before taxes to the non-GAAP income
 before taxes, how management uses the non-GAAP results and the reasons why
 management believes the presentation of these non-GAAP financial measures
 provides useful information to investors.
     As previously announced, the company has now organized its business
 around three major markets: NanoResearch and Industry, NanoElectronics and
 NanoBiology. Bookings for NanoResearch and Industry in the first quarter of
 2006 increased 28% compared with the fourth quarter of 2005. Bookings for
 NanoElectronics increased 12% compared with the fourth quarter of 2005.
 Bookings for NanoBiology increased 77% compared with the fourth quarter of
 2005. Revenue comparisons for the three market segments are included in the
 attached supplementary information.
     "Our reorganization around our three key markets is off to a solid
 start," noted Link, "With good sequential bookings increases in each market
 and especially strong performance in the NanoResearch and Industry and
 NanoBiology markets. We look forward to further revenue growth and solid
 profitability for the remainder of 2006."
     Total cash and investments decreased in the quarter by $25.8 million,
 primarily as a result of the repurchase of $24.9 million of 5.5%
 convertible notes. Cash flow used in operations was $2.9 million. Capital
 spending for the quarter was $1.2 million, and depreciation expense was
 $3.4 million. Inventory turnover improved to an annual rate of 3.2 times in
 the first quarter compared with 3.1 times in the fourth quarter and in last
 year's first quarter. Accounts receivable increased by $12.3 million from
 the prior quarter due to increased sales, while days sales outstanding was
 89 days, compared with 88 days in the fourth quarter and 102 days in last
 year's first quarter. Cash and short- and long-term investments were $254.7
 million, convertible debt totaled $200.1 million (due in 2008) and
 shareholders' equity was $302.5 million as of April 2, 2006.
     Second Quarter Guidance and 2006 Outlook
     FEI currently expects net sales for the second quarter of 2006 to be in
 the range of $113 million to $117 million. Bookings are expected to be
 greater than sales for the quarter, further adding to the backlog. GAAP
 earnings per share in the second quarter, including stock compensation
 expense, are expected to be in the range of $0.07 to $0.11 per share,
 assuming a tax rate of approximately 35%.
     For the remainder of 2006, the company expects additional revenue
 growth, including further recovery in the NanoElectronics market and
 continued strength in the NanoResearch and Industry market. As a result of
 revenue growth and ongoing cost containment, earnings are expected to
 improve substantially over 2005 levels. For reasons why the company's
 actual results may differ from guidance, please see the section titled
 "Safe Harbor Statement" below.
     Investor Conference Call -- 2:00 p.m. PDT Wednesday, May 3, 2006
     Parties interested in listening to FEI's quarterly conference call may
 do so by dialing 1-800-240-2134 (domestic, toll-free) or 1-303-262-2190
 (international) and asking for the FEI Q1 Earnings call. The call can also
 be accessed via the web by going to FEI's Investor Relations page at
 http://www.feicompany.com, where the webcast will also be archived. A
 telephone replay of the call will also be accessible for one month by
 dialing 1-800-405-2236 (US) or 1-303-590-3000 (international) and entering
 the access code 11058537#.
     About FEI
     FEI's Tools for Nanotech(TM), featuring focused ion- and electron-beam
 technologies, deliver 3D characterization, analysis and modification
 capabilities with resolution down to the sub-Angstrom level. With R&D
 centers in North America and Europe and sales and service operations in
 more than 50 countries around the world, FEI is bringing the nanoscale
 within the grasp of leading researchers and manufacturers and helping to
 turn some of the biggest ideas of this century into reality. More
 information can be found on the FEI website at: http://www.feicompany.com .
     Safe Harbor Statement
     This news release contains forward-looking statements that include our
 guidance for the second quarter and the full year of 2006 and statements
 about future bookings, revenue, earnings, financial results, profitability,
 backlog growth, breakeven rates and cost containment, as well as
 restructuring plans and anticipated benefits. Factors that could affect
 these forward-looking statements include, but are not limited to, the
 continued growth in nanotechnology markets in general and more
 particularly, the strength of the NanoResearch and Industry,
 NanoElectronics and NanoBiology segments; cyclical changes in the data
 storage and semiconductor industries, which are the major components of the
 NanoElectronics market; fluctuations in foreign exchange and interest
 rates; our continued ability to maintain deferral accounting of hedge
 transactions; reduced profitability due to failure to achieve or sustain
 margin improvement or cost reductions; lower than expected customer orders;
 cancellation of customer orders; failure of customers to adopt new
 technologies; increased competition and new product offerings from
 competitors; lower average sales prices and reduced margins on some product
 sales due to increased competition; failure of the company's products and
 technology to find acceptance with customers; delays in shipping new
 products; changes in the mix of products sold in a quarter; unfavorable
 business conditions and lack of growth in the general economy, both
 domestic and foreign; failure to accurately estimate the amounts and timing
 of restructuring charges; timing of facilities closings, relocations,
 severance and other charges included in restructurings; restructurings and
 reorganizations not presently anticipated; reduced sales due to
 geopolitical risks; changes in trade policies and tariff regulations;
 additional research and development expenses; inability to overcome
 technological barriers; additional selling, general and administrative
 expenses; additional costs related to future merger and acquisition
 activity; and failure of the company to achieve anticipated benefits of
 current or future acquisitions, including failure to achieve financial
 goals and integrate the acquisitions successfully. Please also refer to our
 Form 10-K, Forms 10-Q, Forms 8-K and other filings with the U.S. Securities
 and Exchange Commission for additional information on these factors and
 other factors that could cause actual results to differ materially from the
 forward-looking statements. FEI assumes no duty to update forward-looking
                          FEI Company and Subsidiaries
                     Condensed Consolidated Balance Sheets
                                 (In thousands)
                                                   April 2,        December 31,
     ASSETS                                          2006              2005
       Cash and cash equivalents                    $74,835           $59,177
       Short-term investments in
        marketable securities                       113,066           156,049
       Short-term restricted cash                    31,103            20,138
       Receivables                                  110,655            98,330
       Inventories                                   81,487            84,879
       Deferred tax assets                            4,849             5,157
       Other current assets                          33,362            32,328
                Total current assets                449,357           456,058
     Non-current investments in marketable
      securities                                     33,284            44,602
     Long-term restricted cash                        2,411               519
     Property plant and equipment, net               58,531            59,011
     Purchased technology, net                        7,553             8,154
     Goodwill                                        41,417            41,402
     Deferred tax assets                              1,343             1,095
     Other assets, net                               46,112            45,190
     TOTAL                                         $640,008          $656,031
       Accounts payable                             $25,074           $26,186
       Current accounts with Philips                  1,512             1,964
       Accrued payroll liabilities                   13,539             9,205
       Accrued warranty reserves                      5,006             5,193
       Deferred revenue                              39,828            43,647
       Income taxes payable                           8,965             9,021
       Accrued restructuring,
        reorganization and relocation                 6,995             5,274
       Other current liabilities                     29,234            31,072
                Total current liabilities           130,153           131,562
     Convertible debt                               200,062           225,000
     Deferred tax liabilities                         2,101             1,947
     Other liabilities                                5,155             5,079
       Preferred stock - 500 shares
        authorized; none issued and
        outstanding                                       -                 -
       Common stock - 70,000 shares
        authorized; 33,902 and 33,800;
          shares issued and outstanding at
           April 2, 2006 and December 31,
           2005;                                    342,196           332,125
       Accumulated (deficit) earnings               (61,302)          (56,081)
       Accumulated other comprehensive
        income                                       21,643            16,399
                Total shareholders' equity          302,537           292,443
     TOTAL                                         $640,008          $656,031
                          FEI Company and Subsidiaries
                Condensed Consolidated Statements of Operations
                    (In thousands, except per share amounts)
                                                   Thirteen Weeks Ended
                                             April 2,  December 31,   April 3,
                                               2006        2005         2005
       Products                              $86,624      $75,121     $93,793
       Service and components                 27,145       26,500      27,200
                Total net sales              113,769      101,621     120,993
       Products                               45,965       50,935      52,117
       Service and components                 20,851       20,895      19,939
                Total cost of sales           66,816       71,830      72,056
                Gross profit                  46,953       29,791      48,937
       Research and development               14,001       14,388      16,187
       Selling, general and administrative    23,818       24,050      25,313
       Amortization of purchased
        technology                               641          640       1,342
       CEO severance                           9,324            -           -
       Restructuring, reorganization and
        relocation                             2,245        4,615           -
       Asset impairment                          465        8,607           -
       Merger costs                              452            -           -
                Total operating expenses      50,946       52,300      42,842
     OPERATING (LOSS) INCOME                  (3,993)     (22,509)      6,095
       Interest income                         2,244        2,233       1,814
       Interest expense                       (1,658)      (1,461)     (2,507)
       Other expense, net                       (383)      (6,701)       (216)
     Total other income (expense), net           203       (5,929)       (909)
     (LOSS) INCOME BEFORE TAXES               (3,790)     (28,438)      5,186
     INCOME TAX EXPENSE                        1,431        2,255       1,763
     NET (LOSS) INCOME                       $(5,221)    $(30,693)     $3,423
       Basic (loss) earnings per share        $(0.15)      $(0.91)      $0.10
       Diluted (loss) earnings per share      $(0.15)      $(0.91)      $0.09
       Basic                                  33,867       33,718      33,456
       Diluted                                33,867       33,718      39,878
      The following table reconciles the specific items excluded from U.S.
      GAAP in the calculation of Non-GAAP results for the periods indicated
      INCOME STATEMENT RECONCILIATION              Thirteen Weeks Ended
                                              April 2,  December 31,  April 3,
                                                2006        2005        2005
      U.S. GAAP (loss) income before taxes    $(3,790)    $(28,438)    $5,186
        Add back:
          CEO severance                         9,324            -          -
          Restructuring, reorganization
           and relocation                       2,245        4,615          -
          Asset impairment charges                465        8,607          -
          Inventory write-offs and
           adjustments                              -        5,388          -
          Write off of cost method
           investments                              -        5,638          -
          Merger costs                            452            -          -
          Stock based compensation expense      1,250            -          -
          Bond buy-back costs                     391            -          -
      Non-GAAP (loss) income before taxes     $10,337      $(4,190)    $5,186
      The following table summarizes stock
       compensation for the first quarter
       of 2006:
          Cost of sales                           197            -        -
          Research and development                228            -        -
          Selling, general and
           administrative                         825            -        -
          Total                                $1,250           $-       $-
     The press release and reconciliation table contain non-GAAP pre-tax net
 income information that excludes certain significant charges. These
 excluded items are:
     -- CEO severance, primarily related to the charges associated with
 stock based compensation and cash payments (included as a separate line
     -- Restructuring charges, primarily for severance, lease termination,
 and relocation expenses (included as a separate line item);
     -- Asset impairment charges, primarily related to the company's changed
 strategy for enterprise resource planning systems and the company's
 semiconductor products (included as a separate line item);
     -- Inventory write-downs, related to the previously announced closure
 of the company's facility in Peabody, Massachusetts and the company's
 decision to no longer invest in certain business lines (included in cost of
     -- Write-off of investments, primarily due to the impairment of cost
 based investments (included in other income/expense);
     -- Merger costs, primarily for due diligence costs (included as a
 separate line item).
     -- Stock based compensation expense, primarily for previously granted
 options, due to the adoption of SFAS 123R (included in operating expenses).
     -- Bond buy-back costs, primarily for the bond issuance (included in
 operating expenses).
     We generally use non-GAAP financial measures for assessing the
 company's performance against management targets, which do not account for
 charges or gains of this type, as a basis for making strategic and tactical
 decisions and as a means to evaluate period-to-period comparison. We
 believe that use of non-GAAP numbers is important as these figures ignore
 certain events that could obscure or enhance trends or other factors
 affecting our business. This is especially true when, as in this quarter,
 the GAAP financial information includes a number of charges that did not
 exist in the company's prior comparable reporting periods. For these
 reasons, we believe that these non- GAAP measures are also useful to
 investors. Further, we believe the financial analysts who regularly follow
 and report on our company or sector exclude items such as these when
 analyzing our performance relative to our guidance and the performance of
 other sector participants, and in projecting our future financial results.
     These non-GAAP measures should be considered as a supplement to, and
 not as a substitute for, or superior to, GAAP measures of earnings per
 share. Our non-GAAP numbers may be different from those of other companies
 and direct comparison should not be relied upon.
                          FEI Company and Subsidiaries
                Condensed Consolidated Statements of Operations
                    (In thousands, except per share amounts)
                                              April 2,  December 31,   April 3,
                                                2006       2005         2005
       Products                                 76.1%       73.9%       77.5%
       Service                                  23.9%       26.1%       22.5%
                Total net sales                100.0%      100.0%      100.0%
       Products                                 40.4%       50.1%       43.1%
       Service                                  18.3%       20.6%       16.5%
                Total cost of sales             58.7%       70.7%       59.6%
                Gross profit                    41.3%       29.3%       40.4%
       Research and development                 12.3%       14.2%       13.4%
       Selling, general and administrative      20.9%       23.7%       20.9%
       Amortization of purchased
        technology                               0.6%        0.6%        1.1%
       CEO severance                             8.2%        0.0%        0.0%
       Restructuring, reorganization and
        relocation                               2.0%        4.5%        0.0%
       Asset impairment                          0.4%        8.5%        0.0%
       Merger costs                              0.4%        0.0%        0.0%
                Total operating expenses        44.8%       51.5%       35.4%
     OPERATING (LOSS) INCOME                    -3.5%      -22.1%        5.0%
       Interest income                           2.0%        2.2%        1.5%
       Interest expense                         -1.5%       -1.4%       -2.1%
       Other expense, net                       -0.3%       -6.6%       -0.2%
     Total other expense, net                    0.2%       -5.8%       -0.8%
     (LOSS) INCOME BEFORE TAXES                 -3.3%      -28.0%        4.3%
     INCOME TAX EXPENSE                          1.3%        2.2%        1.5%
     NET (LOSS) INCOME                          -4.6%      -30.2%        2.8%
                                  FEI COMPANY
                           Supplemental Data Table 1
                    ($ In Millions Except Per Share Amounts)
                                               Q1 Ended    Q4 Ended   Q1 Ended
                                               4/2/2006   12/31/2005  4/3/2005
     Income Statement Highlights
      Consolidated sales                        $113.8      $101.6      $121.0
      Gross margin                               41.3%       29.3%       40.4%
      R & D spending                             $14.0       $14.4       $16.2
      R & D (% of sales)                         12.3%       14.2%       13.4%
      SG&A                                       $23.8       $24.1       $25.3
      SG&A (% of sales)                          20.9%       23.7%       20.9%
      Net (loss) income - GAAP                   ($5.2)     ($30.7)       $3.4
      Diluted earnings (loss) per share -
       GAAP                                     ($0.15)     ($0.91)      $0.09
     Sales by Market Segment
      NanoElectronics                            $41.2       $26.4       $53.9
      NanoResearch & Industry                    $35.3       $40.8       $29.9
      NanoBiology                                $10.1        $7.9       $10.0
      Service and Components                     $27.2       $26.5       $27.2
     Sales by Geography
      North America                              $44.3       $33.8       $33.7
      Europe                                     $38.7       $31.4       $45.2
      Asia Pacific                               $30.8       $36.4       $42.1
      Total                                     $150.2      $116.1      $124.3
      Book to bill ratio                          1.32        1.14        1.03
      Backlog - total                           $222.7      $186.3      $163.3
      Backlog - Service                          $44.4       $36.8       $39.6
     Bookings by Market Segment
      NanoElectronics                            $41.2       $37.0       $38.6
      NanoResearch & Industry                    $56.2       $43.7       $47.0
      NanoBiology                                $19.7       $11.1        $2.9
      Service and Components                     $33.1       $24.3       $35.8
     Balance Sheet Highlights
      Cash, equivalents, investments,
       restricted cash                          $254.7      $280.5      $359.7
      Operating cash generated (used)            ($2.9)       $5.8       $26.4
      Accounts receivable                       $110.7       $98.3      $135.4
      Days sales outstanding (DSO)                  89          88         102
      Inventory turnover                           3.2         3.1         3.1
      Inventories                                $81.5       $84.9       $92.6
      Property, plant and equipment              $58.5       $59.0       $71.3
      Fixed asset investment (during
      quarter)                                    $1.2        $3.3        $4.4
      Depreciation expense                        $3.4        $3.3        $4.1
      Current liabilities                       $130.2      $131.6      $151.4
      Working Capital                           $319.2      $324.5      $426.1
      Shareholders' equity                      $302.5      $292.4      $374.6
      Headcount (permanent and temporary)         1646        1674        1787
                                  FEI COMPANY
                           Supplemental Data Table 2
                        ($ In Millions Except Per Share
                                           Q4 Ended  Q3 Ended Q2 Ended Q1 Ended
                                             12/31/   10/2/     7/3/     4/3/
                                              2005    2005      2005     2005
     Sales by Market Segment
        NanoElectronics                      $26.4    $29.7    $43.0    $53.9
        NanoResearch & Industry              $40.8    $30.9    $28.4    $29.9
        NanoBiology                           $7.9     $8.3     $9.2    $10.0
        Service and Components               $26.5    $28.2    $26.9    $27.2
        Total                               $101.6    $97.1   $107.5   $121.0
     Bookings by Market Segment
        NanoElectronics                      $37.0    $29.1    $29.1    $38.6
        NanoResearch & Industry              $43.7    $34.8    $49.3    $47.0
        NanoBiology                          $11.1     $9.3     $6.4     $2.9
        Service and Components               $24.3    $27.1    $28.0    $35.8
        Total                               $116.1   $100.3   $112.8   $124.3