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Executives

Fletcher Chamberlin - Investor Relations and Communications Director

Raymond A. Link - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Don R. Kania - Chief Executive Officer, President and Director

Analysts

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Mark S. Miller - Noble Financial Group, Inc., Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

FEI (FEIC) Q3 2013 Earnings Call October 29, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the FEI Third Quarter Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to our host, Mr. Fletcher Chamberlin. Please go ahead.

Fletcher Chamberlin

Thank you, operator. Good afternoon, ladies and gentlemen. As the operator said, I'm Fletcher Chamberlin, FEI's Investor Relations and Communications Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO; and Ray Link, EVP and Chief Financial Officer. We appreciate your interest in FEI.

We have again posted some slides under the Events & Presentations section in the Investor Relations part of fei.com. We will refer to these slides during today's call. We hope having these slides will make it easier for you to listen to our comments rather than just focusing on getting the numbers recorded. We also welcome your comments on whether the slides are helpful and suggestions for improvements, if you have them.

While you're pulling up the slides, and before we get to the presentations, we also have regular housekeeping matters to address. This call contains forward-looking statements. To the extent that we discuss expectations about future orders, revenue, gross margins, operating expenses, nonoperating income, our tax rate and earnings, or growth expectations for particular segments of our business, expectations for growth due to new products or new applications for our products, potential penetration of new markets, government spending on research tools worldwide, as well as other future events and plans. Those statements are considered forward-looking, subject to risks and uncertainties that could cause the actual results to differ from the forward-looking statements made. These and other risk factors are cited in today's press release on Slide 2 of the slides posted with this call and in FEI's most recent 10-K, 10-Q and 8-K documents and other filings with the SEC.

Investors are urged to read those documents. Copies of the SEC filings are available free of charge at the commission's website at sec.gov, on our website or from our Investor Relations department at (503) 726-7710. The company assumes no duty to update forward-looking statements set out in those documents or made on this call. This call's the property of FEI Company. It'll be archived in the Investor Relations section of the corporate website at www.fei.com.

I'll now turn the call over to Ray to go through the financials. Don will then discuss the business and the outlook, and then we'll be glad to take questions.

Raymond A. Link

Okay. Thank you, Fletcher, and good afternoon, everyone. We delivered a solid third quarter within our guidance range. Bookings, again, set an all-time record, and our backlog is at record level. The book-to-bill ratio for the quarter is 1.15:1. Year-to-date bookings are up 9.8% compared with the first 3 quarters of 2012. Gross margin was up from last year and just below the second quarter. Cash flow from operations for the quarter was $48.7 million. For the first 3 quarters, cash flow is greater than in any full year in our history. We have now recorded 30 consecutive quarters of GAAP profits.

Moving to Slide 4. Revenue of $218.5 million was essentially flat with Q2 and Q3 a year ago. Revenue growth has lagged order growth for the last couple of quarters due to customer shipment timing, and we expect them to be more aligned in the fourth quarter. Compared with the year ago, organic revenue growth in the quarter was negative 2.7%, and the impact of foreign exchange rates increased revenue by 0.9%, and the acquisition of our Australian distributor added 0.3% to revenue.

Looking at our reporting segments on Slide 5. Science revenue was up 5.4% compared with last year's third quarter on strength in Materials Science and VSG, our 3D visualizations software subsidiary. Organic growth is a meaningful measure in the Science segment, and it was positive 3.3%. The acquisition added 0.5%, and foreign exchange movements increased growth by 1.6%. Industry revenue was down 8.1% compared with the last year on declines in both Electronics and Natural Resources. Sequentially, industry revenue was level with growth in Electronics, offsetting decline in Natural Resources.

Turning to Slide 6. Revenue showed our geographic diversity with ongoing strength in Asia and continued weakness in the U.S. Japan and Asia together were in level with the second quarter, up 10% from a year ago and made up 41% of the total.

Now looking at Slide 7. Gross margin in the quarter was 47.9% compared with 48% in the second quarter and 47% a year ago. Industry margins increased compared with the last year's third quarter and with this year's second quarter, offsetting a modest sequential decline in Science. In light of the revenue for the quarter, we are pleased with the gross margin and believe we are on track towards our 50% goal by mid-2015. For the fourth quarter, we expect gross margins will be above 47.5%.

Turning to Slide 8 and moving down to income statement. Operating expenses were $70.7 million, up from $68.4 million in the second quarter. R&D was $25.4 million or 11.6% of sales. That's slightly above our long-run targets as we invest heavily in new products, including the ones we announced during the third quarter. We are estimating operating expenses, and Q4 will be up modestly from the third quarter due to added marketing spending to support the new product introductions and higher commissions due to higher planned revenue.

We do not have any restructuring costs in Q3. GAAP operating income for the quarter was $34 million compared with $38.5 million in the second quarter and $38.3 million in last year's third quarter. Nonoperating expense was $660,000 in the third quarter, down from the second quarter and last year's third quarter due to lower foreign exchange cost and lower interest expense now that our convertible notes have matured.

Our tax rate for the third quarter was 14.2% due to a favorable settlement with taxing authorities. We expect the tax rate will be approximately 18% for the fourth quarter. GAAP net income was $28.6 million, and GAAP EPS was $0.67 per diluted share. The weighted average share count was 42.5 million shares.

As you can see on Slide 9, our balance sheet remains very strong. Total cash investments and restricted cash at the end of the quarter was $508.9 million, an increase of $44.6 million from the end of the second quarter. Cash per share at the end of the quarter climbed to $12.19.

We continue to have very strong cash flow from operating activities. It was a positive $48.7 million in the quarter and $140.2 million through the first 9 months of the year. Our previous full-year record was $102.7 million in 2011. Our cash cycle improved by 15 days compared with the third quarter a year ago, and it continues to be an area of focus for improvements.

Spending on property plan and equipment was $11 million for the quarter and depreciation expense was $6 million. For the fourth quarter, we expect capital spending to be relatively high, as we continue to build out our previously announced new factory in the Czech Republic, as well as continuing to invest capital in R&D and other parts of our business to support our growth. EBITDA for the quarter was $41.6 million compared to $45.4 million in Q2.

With that, I'll turn the call over to Don, for with comments about our orders market and our outlook.

Don R. Kania

Thank you, Ray. Good afternoon, everyone. FEI had another solid quarter. We had record orders, strong margins, excellent cash generation and growth in our backlog. Orders were up sequentially and year-over-year for Science, with particular strength in Life Sciences. Material science business was solid and Electronics continued its cyclical recovery. In the quarter, we have the largest release of new products in our history and have announced 2 more today.

Looking at Slide 10. Orders were $251 million. That's up 12.4% from last year's third quarter and up 5.6% from our record second quarter. For the first 9 months of the year, orders were up 9.8% compared with the same period of 2012. Recall that our 2012 orders were up 12.8% from 2011, and they grew at a compound annual rate of 13.8% from 2009 through 2012. We believe we can continue on this trajectory and achieve our long run revenue growth rate of 12%, given the bookings for the year, our substantial new product releases and our ongoing global expansion.

Of the increase in the quarter from last year, organic growth contributed 10%. The Australian acquisition added 1.8%, and the impact of foreign exchange added 0.6%. The reevaluation of the Q2 backlog added $4.6 million. Science orders made up 61% of the total, and Industry made up 39%. Service orders were again strong in the quarter. Science bookings of $152.2 million were up 33.4% from last year's third quarter and up 16.4% from the second quarter. The book-to-bill ratio was 1.32 to 1. You can see the year-over-year impact of organic growth, the Australian acquisition and foreign exchange rates on Slide 11.

Within the Science Group, Life Sciences orders were a record, more than double the total from either the second quarter or last year's third quarter. The strength was in the Structural Biology segment, with a record number of Life Science Titan-class TEMs booked. Geographically, Life Science orders were diverse with significant orders from the United States, Eastern and Western Europe, the Middle East, China, and Australia. Within these orders and in our pipeline, we are seeing non-EM-centric structural biologists shift their spending to cryo electron microscopy, demonstrating the expansion of our served available market. While orders in Life Sciences will fluctuate from quarter-to-quarter, we expect them to stay strong into the new year.

In addition to the success in Structural Biology, although it's still early, we are gaining traction in the correlative microscopy segment. Materials Science was down slightly from last year's third quarter, but remains relatively strong. We had another good quarter for Titan TEM systems, with all but one of the orders from outside the United States. Our order pipeline is up significantly, driven by the launch of new products and continued growth in emerging markets.

In addition to the Talos and the Titan Themis TEMs, the Velox software that we announced with these products at M&M is generating significant interest, as our customers see the potential to easily create application-specific workflows. We anticipate a strong seasonal finish for Materials Science orders in the fourth quarter.

Industry orders were $98.8 million, down from the second quarter and last year's third quarter. The book-to-bill ratio for this segment is 0.95:1. Electronics orders were flat in Q2 and more than 40% above the Q4 2012 trough. Electronics saw significant orders from all major memory, foundry and logic customers. Conversations with these customers indicate a positive outlook for the next few quarters.

The combination of the Electronics industry cycle and the move to smaller nodes, new materials, 3D structures increases the challenges in manufacturing and accelerates demand for our workflows. We have active engagement with all our major customers on the implementation of our near-line strategy and have executed beta agreements with several of them.

The Metrios TEM announced in August and the ExSolve sample prep tool announced today are important milestones. They combine automated sample preparation and metrology capability, yielding higher throughput and faster time to data and lower cost per sample. We have already booked beta units for both products, and we'll be starting shipments in the fourth quarter.

Natural Resources orders were down year-over-year, but up sequentially from Q2, and we expect the further sequential increase in Q4. A significant portion of the quarter's orders came from geoscience. And we see the purchase of -- in these labs as part of an adoption cycle in both mining and oil and gas. Orders from the mining side of the business continue to be slow due to reduced commodity prices and a cautious outlook on global growth. However, we have recently seen accelerating interest in our mine site product and have 5 beta sites signed up and several more in process. These beta sites will cover multiple minerals and geographies. Our goal is to demonstrate how our customers can achieve significant returns on their investment with the mine site products.

In oil and gas, we continue to see near term opportunities to support shale production and research. I attended a recent oil shale event, where it was clearly articulated that this industry is hungry for a deeper understanding of the rock physics to increase extraction efficiency and reduce cost. We have brought on more industry expertise to this group in addition to the new General Manager from oil and gas industry who joined us in the spring.

Looking at geographic bookings on Slide 12, we saw continued strength in Asia, which made up 43% of the total. We had orders totaling $2 million or more from 12 different countries in the quarter. Orders from China were up significantly from the second quarter, and we again saw strong orders from Korea and Taiwan. Europe was up significantly on a sequential basis and flat year-over-year with particular strength in Germany and France. We also saw good business in the Middle East, South Asia and Eastern Europe. The U.S. was down sequentially and flat year-over-year. While the Science part of our U.S. business remains muted, we saw significant improvement from the second quarter, which was up from the first quarter.

Orders funded in whole or in part by the U.S. government in the quarter made up about 2% of total orders, up slightly from the second quarter. Sequestration and uncertainty from Washington's budget battles continues to hamper investment. Although the recent government shutdown did not significantly affect our business in Q3, it may create some drag on order timing in Q4. Meanwhile, the company has set quarterly order records based on business outside the United States and funding from state and private sources in the United States.

Today we announced 2 more new products. The Tecnai Femto enables scientists to explore events and processes that occur on the atomic scale at time spent as short as a femtosecond or 10^-15 seconds. It brings the total number of new TEMs that we have introduced since last summer to 7. It continues our research leadership and exemplifies our strategy of bringing leading technology to the new workflows, expanding our served available market in the process.

The second announcement today is the ExSolve TEM prep tool. It is a key element of our near-line strategy. ExSolve is a fab ready, wafer DualBeam that prepares site-specific samples in a fully automated process. This gives our customers more samples and better information than conventional approaches, while reducing cost of ownership. As I mentioned earlier, the workflow combines the Metrios TEM with the ExSolve delivers faster time to data and clinical metrology information. This capability is unique to FEI and should allow us to continue our leadership position with our semiconductor customers.

We have received initial orders for our new products, including the Metrios, the Talos and the new Helios DualBeams. More importantly, these products have added substantially to our pipeline is the last quarter.

We appreciate those of you who took the time to come to the M&M show in Indianapolis in August, and we hope that you got a sense of the excitement generated by these new products and our leadership position in the market place. We expect an accelerating effect on orders, revenue and margins in 2014.

Turning now to our guidance on Slide 13. We built significant backlog in the second and third quarters as customer timing muted revenue growth. We now expect a significant increase in Q4 revenue and earnings. For the fourth quarter, we forecast orders to be greater than $250 million. We expect revenue to be in the range of $250 million to $260 million. GAAP earnings per share expected to be in the range of $0.87 to $0.97. Included in our EPS estimates is some headwind from the weakness of the dollar in foreign exchange markets. The weaker dollar compared to the European currencies increases our expenses at a faster rate than our revenue, putting some downward pressure on earnings.

Assuming we achieve our fourth quarter revenue guidance, growth for the year will be in the 2% to 3% range, in line with our 1% to 5% forecast at the end of Q2. Assuming we reach the threshold for our Q4 bookings guidance, orders for the year will be up at least 9%. With that, operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from line of Tycho Peterson with JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

First, just on some of the momentum with the new product introductions. Are you able to talk at all about how much of the 3Q order book came from the new products that you highlighted at M&M? And then any color on anticipated 4Q orders from some of the new introductions, including ExSolve?

Don R. Kania

Yes, we're not going to comment quantitatively on the effect. I think we're also early in the process, so it's a countable number of each of the products. What's encouraging is that, in fact, we have closed orders on each of the products. Looking forward, as I commented, the pipeline is extremely encouraging. And inflection points -- and the way FEI seems to work, inflection points in the pipeline are usually very positive future indicators, and that's the situation that we're in. So I think you have to stay tuned for another quarter or 2, and we can give you a little more detailed information on how those products are moving forward. I think at this point in time, the customer seem enthusiastic, the pipeline is growing, we've got the first orders and some shipments in place, and so we're very encouraged for the prospects for '14.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Can you maybe just on ExSolve talk about how you think it's going to be paired up with the new NanoLab, DualBeams? And any color you want to give us on pricing?

Don R. Kania

The ExSolve is very much a semiconductor tool only. It's a wafer-level tool, so it uses full wafers. It's designed with very specific automation to address the issues associated with the large wafers. And in fact, it's probably the first tool that we've designed from the ground up to be a semiconductor piece of equipment. And so it's actually defeatured with respect to the more universal, the Swiss Army knife-type tools that we sell in the 4 and 600 series of the Helios. But I think this really marks an important milestone in our semiconductor business, where we introduced technology that can be managed by operators, linked up with the TEM tools that can produce the right kind of information in a quick time at a lower cost than any other technology similar or different to FEI's in the world.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay. And then 2 other quick ones. Capital deployment, you talked about potentially larger deals at the Analyst Day, any updated thoughts? And then for Electronics bookings, I think you said logic, memory and foundry all did well, but just wondering if there's any -- out of the subtleties you could call out Electronics booking?

Don R. Kania

On the first one, it's like with all these comments, that there are things moving and timing is capricious, and we're prudent bidders, so stay tuned on the M&A front. But it certainly is front-end center in our day-to-day activities. And I didn't quite catch the whole question on Electronics.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Electronics bookings, I think you said you had good momentum with logic, memory and foundry customers. Just wondering any other kind of nuances there you can call out as we think about the fourth quarter?

Don R. Kania

Yes, the thing I would highlight, I think, primarily, right now, is anything that touches 3D and the semiconductor space, whether it's 3D memory, FinFETs. And down the road, we see potentially some packaging. Interest is extremely strong in the products. The manufacturing challenge is there, are daunting, and the benefits of, obviously, making either the 3D transistors or the memory devices work have tremendous competitive benefits to the customers. And so we think we're in the right spot, with the right capability as these technologies are driven forward.

Raymond A. Link

And Tycho, by the way, congratulations on your name in Institutional. That's a big deal.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Yes, it's very cool.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

On the strength that you saw on the Life Sciences market, so it's not a case where this is the new products kicking in and generating orders. You -- it sounds like you expect that to come. This is just some underlying strength that you're seeing in that market?

Don R. Kania

Yes, exactly. I think we've been in on it. It got tedious for us too. We kept telling you that this is going to get traction, this is going to get traction, the pipeline looks great. And I think what we're seeing right now is the Krios starting a real move from the EM-centric world that we're always very comfortable with, to the broader world of Structural Biology, as people generate publication, show that there's value, show that you can do things, and that we've really continued to work on the workflow to make it easier for nonexperts to use. So we're pretty gratified by that move. And then, yes, we think that the optical, the correlative microscopy is just outside early in its life cycle, but that's going to be more of a '14 event.

James Ricchiuti - Needham & Company, LLC, Research Division

Got it. And Ray, can you talk a little bit about the margin improvement, service and component that, that line kind of jumps out? How should we think about that going forward?

Raymond A. Link

Clearly, that's an area that we're pretty happy about. If you recall, going back about 5, 6 years ago. That was a 25%, 26% margin business, and it's really broken through nicely. Part of it is volume driven. We are seeing that business now as -- quarter after quarter now as well in excess of $50 million. We have -- when you look at the new tool sets that we put in place over the past couple of years, they're generally a little bit more sophisticated, more higher end, so it generates a little bit higher service margin. And frankly, we're just doing a better job of just managing that overall business on a lot of different fronts. So I think as we look forward, it's a business that's not going to move up radically quarter-over-quarter, but we're happy with just top line revenue growth and continued upward movement on the gross profit margins.

James Ricchiuti - Needham & Company, LLC, Research Division

But nothing unusual that's skewed at this quarter, we potentially could see at these levels or around these levels?

Raymond A. Link

I would say around these general levels is what we're comfortable with.

Operator

Our next question comes from the line of Patrick Ho with Stifel, Nicolaus.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Another nice quarter. Going into the Natural Resources side of things for a second, I know you talked about mining the past as exceeding some of the expectations you had early on, but being muted right now because of market conditions. Don, would you say a market turnaround in that segment will drive increasing traction once again? Or are there still, I guess, early adoption issues from mine site that you're still waiting upon?

Don R. Kania

The way I would describe it is if you could spin back a few quarters -- last few quarters, you can even have a conversation with the mining customers, because their business conditions were severe, and they react abruptly to any sort of changes in the business environment. Now, we found relatively quickly with the same story that we've been carrying to these customers that now they're very, very attentive. And I think part of it's the economics, part of it that they feel like the worst is behind them in the commodities marketplace. And now they're willing to listen to stories where, "Gee, we can make more money if you use FEI's products." So is it a turn? Let's give it another quarter to get better. Is there clearly more interest, and do we believe we can describe and demonstrate economic benefit to these customers? Absolutely. And does that turn into business over time? Yes. It's still probably a bit of a question on timing.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Okay. great. Going to the Life Sciences segment, particularly, the cell biology correlative microscopy front, what are some of the key milestones that we should be looking for, for that segment, given that on the Structural Biology side, we saw the new product introduction, the traction you're getting, and, obviously, the orders were exhibited this quarter. What should we keep an eye for on the correlative microscopy front as we head into 2014?

Don R. Kania

I think the important milestones here are those non-financial milestones that relate to key practitioners in the marketplace, demonstrating areas of well-defined utility, which is really the experience when we look back on the Structural Biology that we saw. So you can either read the scientific literature or wait for us to give you those updates on -- here are specific -- in fact, that's the internal milestones for ourselves. It's supposed to make sure that we're seeing, what I like to call the killer app in the space or apps that will attract additional practitioners to buy the equipment. So that's -- we see it, we see the right people buying, now they need to use, now they need to publish. This is the cycle of adoption and growth for this business segment. The other piece of the puzzle is we do have a competitor here, Zeiss, who's pretty active in the space. We feel we have a better solution but it certainly doesn't hurt to have another evangelist out there pushing this solution into that space.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Great. And final question from me in terms of the semi side of things. You, obviously, seen some pickup related to the overall market trends. I guess, separating both the foundry, logic transition to FinFET, as well as the memory side to 3D, can you characterize, I guess, the increasing dollar content on both of those fronts of using FEI's tools? What's kind of the capital intensity increase versus the prior generations of each of those 2 transitions?

Don R. Kania

All right. I think we have to be a little careful, because the strategies vary. And we're down to a countable number of customers. But it's -- I don't want to over -- it's higher intensity, and it could be at over 50% level, at least some of the indications we're seeing now. But we have to let this play out to really understand what the ultimate strategies of deployment are, but it is higher. It moves higher, faster as you get to certainly the 1x class nodes on either foundry -- on either logic or memory or foundry.

Operator

Our next question comes from the line of Derik De Bruin with Bank of America.

Derik De Bruin - BofA Merrill Lynch, Research Division

So I was intrigued by you comments about your seeing evidence of expanding the total addressable market, in -- particularly, in the Life Sciences space. And, basically, same people are making decisions by cryo electron microscopy. Can you give us examples of that? And I guess, in terms of what technologies people did. Do they write specific grants for cryo? Or they make a last-minute decision? Just some color on that comment?

Don R. Kania

Well, I can give -- I'll one example. I'm not sure I'm able to name the customer, so I won't. But this is a state-funded effort in your neighborhood, where there was actually a significant amount of money. It was the multiple tool order that came to us, and they're primarily practitioners of NMR and had decided that this was the time and place to add cryo electron to the stable of techniques that they use to do their science. I think we can point to those. And another example where XRD was a big piece as well, so -- and I think the current belief is, and we're still early in this track, is using the technologies together is better than using any single one alone. So I'm not sure it's totally a displacement, but I think this is, for us, a wonderful thing. And you probably, in the back of your mind is "Gee, am I going to see displacement in some of these other customers?" Remember in some of the -- our new competitors, well, we're still small potatoes relative to most of them right now. But give us a little more time, and I think we'll be more than a blip on the radar screen.

Derik De Bruin - BofA Merrill Lynch, Research Division

Great. And good progress on the gross margin, obviously, the euro's picking up again, getting a little bit stronger. So can you -- does that sort of change your trajectory on the gross margin targets for next year? And I guess, how much of a headroom was that to the quarter, the FX move?

Raymond A. Link

We really managed the business on a long-term basis, exclusive of FX, so we'll just have to deal do with that. In the short term, it's pretty negligible. You're talking 10, 20, 30 basis points, something of that nature. What really is driving margin from Q4 versus Q3 -- Q3 is a very good margin quarter, given the relative amount of revenue we have at 47.9%. And if you noticed in our guidance, we said that we expect Q4 to be above 47.5%, which means it could potentially be a little lower than Q3, even though we have substantially higher revenue. A lot of the revenue that we're pulling through in the Q4 is more in the Sciences as opposed to the industrial space. So that's really a bigger driver short-term on currency. As long as we stay in these relative bands, 135 plus or minus, we'll be okay. And we're just going have to manage that on a go-forward basis. There's just many other areas of upside to our margin story than the downside on currency. Our new factory in the Czech Republic, more workflow solutions, more movement into near-line and semiconductor. We talked about service and, of course, the new products at which we have a huge flow of. And a lot of those are designed specifically to take COGS out. So we're still very determined to hit that 40%, 50% mid-2015, and that's the objective, and that's unchanged.

Operator

Our next question comes from the line of Mark Miller with Noble Financial Capital Markets.

Mark S. Miller - Noble Financial Group, Inc., Research Division

I just had a question. Could you breakout for us, your existing backlog, the percentage of Science and the percentage of Industry?

Raymond A. Link

We actually don't break that out specifically, Mark. It is generally a little bit higher on the Sciences. And that's the function of the fact that those products generally have longer lead time, not only to manufacture, but also those customers often place the award when they're breaking ground in addition to a building or renovating the facility, so they generally do that earlier in the cycle that our Industry customer, so you can -- a safe number would be -- it's probably in the 60-40 range, something of that nature, more in the Sciences than in the Industrial side.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Is that a bump above in terms of the percentage of Sciences, because you have large orders in Sciences this quarter than it traditional is.

Raymond A. Link

Well, clearly, this quarter, we had a little bit higher in the Sciences, so that drove it a little bit. But I think if you looked at our backlog at any point in time over the past 5 years, it would generally have a bias towards the Sciences being a little bit higher percent.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Ray, I'm just going after -- is there any impact or constraint, because of the leaning now towards more Science on your future margins. Is that...

Raymond A. Link

No, not really. We have 3 different factories that manufacture different items, and that we're really well balanced between DualBeams, wafer level, high-end TEMs and mid- and low-end TEMs and SEMs. So it -- the fact that we have a little bit higher Science bookings doesn't really impact our ability to deliver those products. It's really a function of timing of when the customers want them.

Mark S. Miller - Noble Financial Group, Inc., Research Division

Talking about timing. Intel had a bump back, it's 40-nanometer FinFET chip. And I'm just wondering, is that having any impact on you, because some people are reporting it's impacting them -- continues to impact them?

Don R. Kania

Well, I would comment on -- I'm not commenting on a particular customer, but I would say that simply any challenges in shrinking are good for FEI in the long run, and, yes, we might be affected. I've always said by 1 or 2 quarters on some investments by our customers, but I think the message in a lot of -- any of these kinds of arguments is often technology-related, and that's always a strong leading indicator for us.

Mark S. Miller - Noble Financial Group, Inc., Research Division

And just one final thing, I just missed it, your comments in general about Natural Resources, how they went this quarter in terms of orders. You said mining, I know it's slow, but I missed the first part.

Raymond A. Link

Orders were up sequentially.

Don R. Kania

Sequentially, up a little bit, but down year-over-year. And we've seen 2 quarters in a row of increase -- sequential.

Operator

Our next question comes from the line of Tom Diffely with D.A. Davidson.

Thomas Diffely - D.A. Davidson & Co., Research Division

So, Ray, just one more question on the margin. So the drop in the Science gross margin, it sounds like that was mainly volume. Did mix have any play at all that?

Raymond A. Link

There was largely more mix in the quarter, in the Science piece.

Thomas Diffely - D.A. Davidson & Co., Research Division

Yes.

Raymond A. Link

And that's really driven -- we're still a deal-by-deal company and that can move around a bit on the number of high-end TEMs versus low-end TEMs. So that movement, it's fairly normal for the company.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then when you look at the kind of the delta, the gap between the Science and industry on the gross margin side, is there a similar large gap on the operating margin side? Or is there something different about the operation expenses between the groups?

Raymond A. Link

Not necessarily. It pretty much pulls through. And what we're seeing when we look at the difference between the margins, our Industrial group, and that's clearly part of our focus to have more user-specific ROI-based products and solutions. But our margin opportunity in the Science is quite strong, and that's really an area of focus for the company. When we look at the new product introductions, when we look at our order flow and we really like to look at our backlog, margin and specifically, what we booked in the current quarter, and we're continuing to see an improvement in the Sciences. So we don't see those 2 converging any time in the near future, but we do see the opportunity for margin improvement in the Sciences. And if you look at the product introductions over the past year, whether it's in the correlative microscopy, the Talos, a lot of these are really designed to drive up -- obviously, to serve customer needs, but to drive up overall gross profit margins.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. So that 50% goal for the middle of '15, that's somewhat mixed -- independent in your mind. You'll get there no matter what the mix is?

Raymond A. Link

Yes, it's some sort of a normal mix for the company that's roughly 1/3 of our businesses in the semiconductor space. But we're going to -- our goal is to get there through -- we have lots of ways to get there, and a little bit of mix change and a little bit of currency change is something we're just going to have to live with. And we're once again, focused with new products, more workflows, more software, taking COGS out and new factory, higher service margins. This is really the path to get there.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then, Don, when you look at the Life Sciences and some of the accelerating activity there, how much of that is driven by kind of the price sensitivity or the price point of some of your new tools being kind of more in the midrange or less expensive? I was kind of wondering if there's going to be elasticity of demand in that marketplace that wasn't in the Electronics part?

Don R. Kania

At this point in the Life Science segment, orders are driven by our highest and most expensive tools.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And last question, Don, I noticed that there's a subtle logo change for your company. I wonder if there's any story behind that?

Don R. Kania

Yes, there is. There's a story. You noticed. We're going through a branding campaign, both internally and externally. You may have even notice that the FEI website has been upgraded. So you should expect to see over time a lot of more emphasis from FEI in terms of how we present ourselves to customers, to Wall Street and to our employees around the delivery of these overflows, the delivery of quality and, really, the delivery on the promises that we make to our customers. And this is over the next few years, I think the next piece, what we add to our differentiation against our competition

Operator

[Operator Instructions] And our next question comes from the line of Joe Maxa with Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Just one question on the near-line solutions. I'm just wondering if you can talk a little bit about the market opportunity with those newer products.

Don R. Kania

Yes, well, we think it's a meaningful addition to where we are today, and should be measured over time in the hundreds of million of dollars of served available market opportunity for us. These are our first steps there, the customers seem excited, and this -- we don't want to hang ourselves out. I mean, obviously, we believe and we've made decisions of investments upon on this opportunity. Let's let it mature a little bit more before we get more specific about how deployment actually takes place.

Operator

And I'm showing no further questions at this time. Sir, please continue.

Fletcher Chamberlin

Thank you, all, very much for being interested and paying attention. This is Fletcher. I'll be available for the next few hours. Don and Ray have to run into an employee meeting pretty soon. But we'll be glad to talk to any of you over the next few days and weeks as you wish. Thanks very much.

Operator

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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