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FEI (NASDAQ:FEIC)

Q4 2013 Earnings Call

February 05, 2014 5:00 pm ET

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

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

Amanda Murphy - William Blair & Company L.L.C., Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

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

Ryan Weikert - Goldman Sachs Group Inc., Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

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

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Jairam Nathan - Sidoti & Company, LLC

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the FEI Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is be recorded today, Wednesday, February 5, 2014. And at this time, I'd like to turn the conference over to Fletcher Chamberlin. Please go ahead, sir.

Fletcher Chamberlin

Thank you, Vince. 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 CFO. We appreciate your interest in FEI. We have again posted slides under the Events & Presentations section in the Investor Relations part of our website, fei.com. We will refer to these slides during today's call. We will focus our comments on the significance of the numbers rather than a recitation of the data that's available in the release or on the slides. We also welcome your comments on whether the slides are helpful and suggestions for improvements in the slides or the call, if you have them.

While you're pulling up the slides, and before we get to the presentations, we also have the 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, including projected R&D expense, capital spending, restructuring expense, our tax rate and earnings, or growth expectations for particular parts of the business, expectations for growth due to new products, new applications for our products or acquisitions, potential penetration of new markets, government spending for research tools worldwide, as well as other future events or plans. These statements are considered forward-looking, subject to risks and uncertainties that could cause our actual results to differ from the forward-looking statements. Risk factors that could affect these forward-looking statements are cited in today's press release, on Slide 2 of the slides posted for 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 these documents. Copies of the SEC filings are available free of charge on the commission's website at sec.gov or 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 is the property of FEI Company. It'll be archived in the Investor Relations section of our corporate website at www.fei.com.

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

Raymond A. Link

Thank you, Fletcher, and good afternoon, everyone. You can see on Slide 3 that we delivered a solid fourth quarter to end another good year. Bookings, revenue earnings and cash flow from operations set all-time records. The operating margin in the fourth quarter was a record for any quarter since we went public in 1995. The gross margin for the year improved over 2012 and was the best annual result in over a decade. We have now recorded 31 consecutive quarters of GAAP profits.

Moving to Slide 4. Fourth quarter revenue of $265.3 million was 21% higher than the third quarter and 15% higher than Q4 a year ago, with growth in both segments.

And on Slide 5, revenue for the year was up 4% with a breakdown between segments and the components of the chain shown on the slide.

Looking in more detail at our reporting segments on Slide 6, Science revenue was up 3.3% compared with last year's fourth quarter. Compared with the third quarter, Q4 Science revenue was up 25.3%. Industry revenue was up 32% compared with last year's fourth quarter and up 17% compared with the third quarter on strength in the semiconductor market for both periods. For the full year on Slide 7, Science revenue was up 9% with organic growth at 7.3%. For the year, industry revenue was down 1.3%.

Turning to Slide 8. Revenue showed our geographic diversity with ongoing strength in Asia, which was up 42% from the third quarter and 44% from a year ago and made up 48% of the total.

Now looking at Slide 9. Gross margin in the quarter was 47% compared with 47.9% in the third quarter from 47.2% a year ago. That's frankly somewhat disappointing given our big sequential increase in revenue. The primary driver is product mix. We had a record quarter for TEM revenue with a significant portion of that coming from our older products. The new TEM products we introduced in August are getting good response from our customers but they will not have significant revenue and margin impact until later this year. We also shipped fewer high-margin wafer level DualBeams in the quarter than we did in Q3 or in last year's Q4 and that lowered overall margin. Despite the dip in the quarter, we are committed to our 50% goal by mid-2015. For the first quarter, we expect gross margins will be above 47%.

Turning to Slide 10 and moving down the income statement, operating expenses were $74.4 million, up from $70.7 million in the third quarter. R&D was 9.9% of sales in the quarter and 11% for the year. Going forward, we expect it'll be around 10.5% to 11%. We are estimating operating expenses before restructuring in Q1 will be similar to the fourth quarter, including the impact of the acquisition announced today.

Our tax rate was 16.2% for the fourth quarter and 16.4% for the year. We expect the tax rate will be around 19% for the first quarter. GAAP net income was $41.3 million and GAAP EPS was $0.97 per diluted share. EBITDA was $57.8 million for the quarter and $185.5 million for the year compared with $43.7 million in Q4 last year and $172.8 million for all of last year.

As you can see on Slide 11, our balance sheet continues to strengthen. Total cash, investments and restricted cash at the end of the quarter was $591.2 million, an increase of $82.3 million from the end of the third quarter and $174.2 million from the end of last year. We spent $16.2 million on dividends in the year. Cash per share at the end of the year climbed to $14.03.

We had very strong cash flow from operating activities. It was positive $97.7 million in the quarter and $238 million for the year, more than double our previous full year record. Free cash flow defined as operating cash flow, less capital expenditures, was $175.5 million or $4.12 per share. Improving our cash cycle has been an area of focus for us and we had notable success in the fourth quarter. The cash cycle improved by a remarkable 55 days compared with last year's fourth quarter. Days sales outstanding at 67 days was the lowest on record for the company, and inventory turns improved from 1.8x in Q3 to 2.2x in the fourth quarter.

Addition to property plan and equipment were $9.8 million for the quarter and $63.4 million for the year, and depreciation expense was $6.3 million and $23.7 million for the quarter and the year. For 2012, we expect capital spending to be approximately $70 million as we finish the fit-out of our new lease facility in the Czech Republic and make other investments to support our growth. The new facility will begin operating in the second half of the year. As a result, we expect a restructuring charge of approximately $4 million in the second half for moving expenses and exit cost related to the old facility.

In addition to our capital spending and our investments in the business, today, we announced the $68 million acquisition of Lithicon and the concurrent licensing agreement with the Australian National University, which we paid for with offshore cash.

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

Don R. Kania

Thank you, Ray, and good afternoon, everyone. FEI had another solid quarter and a good year. Along with the strong improvement in cash flow and other financial records that Ray described, we continue to lay the foundation for growth and margin expansion. I'll talk about our orders, our view of the markets and the outlook for the quarter and the year. In particular, I'll discuss today's acquisition.

Looking at Slide 12. Orders for the fourth quarter were $256.8 million, an all-time record. That's up 11% from last year's fourth quarter and up 2% from the third quarter, which was the prior record. Of the increase in the quarter from last year, organic growth contributed 9.9%. For the year, on Slide 13, orders were up 10% compared with 2012, with organic growth contributing 10.3%. For the quarter, Science orders made up 55% of the total compared with 56% for the year. In the context of the last few years, orders have grown at a compound annual rate of 12.9% from 2009 through 2013. We believe we can continue to grow in 2014 and achieve our long-run target growth of 12% given the recent bookings, substantial new product releases from last year, our market strategies and ongoing investment in global expansion.

Moving now to review the quarter, on Slide 14, we saw a continued strength in Asia, which made up 40% of the total. We saw strong orders from China, Korea, Japan and Taiwan. Europe was down both sequentially and year-over-year but saw strength in the United Kingdom and France. We had orders totaling $2 million or more from 16 countries in the quarter. The U.S. was up substantially from Q3 and flat year-over-year. The Science part of the U.S. business remains muted. Orders funded in whole or in part by the U.S. Government in the quarter made up a little over 3% of the total. Orders for our science tools from China were once again significantly higher than science orders from the United States for the quarter and the year.

Turning to Slide 15. Science bookings of $142.1 million were up 3% from last year's fourth quarter and down 7% from the record level of the third quarter. The book-to-bill ratio in the quarter was 0.99:1. You can see on the slide the year-over-year organic growth was 17%.

Within the Science Group, orders for Material Science research in the fourth quarter were up both sequentially and year-over-year and set an all-time record. Orders in the U.S. and in Asia were up. Europe was level with last year's fourth quarter. The quarter included orders for Talos and the Titan Themis TEMs and for the Stylus SEM, all of which were introduced in the second half last year. The pipeline continues to grow, driven by the launch of new products, continued growth in emerging markets and expansion of our served market to new applications such as our ETEM for chemistry and catalyst research. Orders from Life Science customers were down from the record level of the third quarter, but up over 20% for 2013 after several flat years. We anticipate another year of growth in 2014. Growth is driven by the Structural Biology segment where we are having success at expanding our served available market. Non-EM-centric structural biologists are shifting their spending to cryo electron microscopy. This adoption has been driven by the convergence of the Titan Krios' new camera technology and software advances that have resulted in important scientific results being published in prestigious journals. Our customers have reduced important research on membrane proteins, monoclonal antibodies and the function of the HIV virus. One customer was quoted recently as saying, "The most exciting area of structural biology right now is electron microscopy."

Industry orders on Slide 16 were $114.7 million, up 23% from last year's fourth quarter and 16% from the third quarter. The book-to-bill ratio for this segment was 0.95:1. The strength within the semiconductor equipment piece, where we received orders for all major -- from all major memory, logic and foundry customers. For the year, semiconductor bookings were the highest for any 12-month period in our history. Notably, our business was up 39% from a cyclical peak in 2006 and '07 while the semiconductor capital equipment business as a whole was up single digits.

The move to smaller nodes, new materials and 3D structures and our emerging near-line strategy give us confidence that we will see further growth in the coming year. The top 4 wafer producers in the semiconductor industry have all purchased tools for near-line workflows, which consists of an in-fab wafer DualBeam like the ExSolve or the Helios 1200AT for TEM prep plus the Metrios TEM. Orders from Natural Resources customers were down significantly year-over-year and modestly from Q3. Orders from the mining industry remain muted but we are encouraged by the beta testing activity with multiple customers for a mine site product.

In oil and gas, we have refocused our business from the well site to reservoir characterization for the information provided by our workflow as substantial value. Furthermore, characterization is where oil companies quantify the content and distribution of oil in a given field and then develop and monitor the most economic approach to extract the hydrocarbons. In addition to other data, these customers need to know such parameters as the porosity, permeability, flow characteristics and mineralogy of the rock. Determining those parameters using detailed rock analysis is an emerging field in the industry.

We are extremely excited today about the announcement of the acquisition of Lithicon along with a concurrent licensing agreement with the Australian National University, or ANU. Lithicon provides digital rock services to oil and gas companies worldwide. The workflow utilizes microCT, DualBeam equipment and software under license from ANU. Their customers include the majors like Exxon Mobil, Shell and Statoil, plus national oil companies like Saudi Aramco and Petrobras and a range of other industry participants. Lithicon operates in Trondheim, Norway, which has developed unique multiphase flow modeling software and in Canberra, Australia, which has powerful microCT technology and 3D image processing expertise.

As shown on Slide 17, we'll integrate both Lithicon and the microCT product with our automated mineralogy capabilities, our advanced 3D visualization expertise and our electron microscopy leadership to provide a unique and powerful workflow solution for both conventional and unconventional oil and gas markets. These transactions complete our digital rock and reservoir characterization workflow.

In summary, with today's announcement, FEI now has a new tool technology, microCT, which will grow into a new product line. This tool delivers 3D images on the micron scale and is complementary to FEI's current nanoscale 3D imaging technologies. In addition to oil and gas applications, microCT will be sold into our other markets. We now have software to connect electron microscope and microCT data to characterize rock samples or any other material over a broad range of spatial scales in a seamless workflow.

Today's announcement brings new software tools to enhance our Avizo 3D modeling software. In addition, we significantly increased our oil and gas customer relationships and domain expertise with the excellent team at Lithicon.

In total, this agreement provides digital rock workflow for reservoir characterization that can add up to $1 billion in served available market in the next few years. We paid $68 million for the transactions. We expect a 1% to 2% increase in the revenue in 2014, with slight dilution to GAAP EPS, with significant growth after that. We look forward to telling you more about this opportunity at our investor meeting in New York in June.

Shifting back to our financials. As we look at our guidance for Q1 and the outlook for 2014, we expect some moderation in the first quarter based on seasonal factors and the timing of shipments as requested by our customers. For the first quarter, we forecast orders to be greater than $250 million and we expect revenue to be in the range of $228 million to $238 million. Each would be a record for a first quarter. For the first half of the year, we expect revenue to be around $500 million. GAAP earnings per share for the first quarter expected to be in the range of $0.60 to $0.70, including our Q1 EPS -- included in our Q1 EPS estimate is approximately $0.03 per share in restructuring costs and $0.03 cost for the Lithicon acquisition and the ANU licensing agreement.

Looking to the full year for 2014, in Science, we expect continued steady growth driven by emerging regions and our new products. As we have noted, we are tracking new customers in Structural Biology, which will drive strong growth during the year. In parallel, we will continue to develop our correlative microscopy business, an industry we are strategically well-aligned to the key technology drivers of the semiconductor business, and we expect 2014 to be a growth year for that business as well. In oil and gas, we will integrate the Lithicon platform to establish our capability and reservoir characterization for conventional and unconventional oil and gas. We expect 2014 revenue to grow by 10% to 14% over 2013. We are confident in our ability to grow FEI. We have a solid backlog, excellent strategic positions in all our markets and a portfolio of powerful new products and workflows to expand our served available market. In addition, we will continue to expand margins as we continue to see gains from our infrastructure investments. We look forward to giving you an update on the progress through the year at our annual investor meeting in New York on June 5 of this year. You'll be getting more details from Fletcher between now and then. With that, operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tycho Peterson with JPMorgan.

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

First, can you give us a sense of either percentage or dollar amount of orders this quarter that came from the new products you introduced at M&M earlier in the year?

Don R. Kania

Yes. It's a modest amount. The buy cycle on those will -- the time from release to people getting their money to order a placement will really accelerate through the first 2, 3 quarters of the year. And then we'll start to see some revenue acceleration towards the end of the year into '15.

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

Okay. Are you seeing orders yet from Metrios?

Don R. Kania

Yes, sir. For every single new product, we have had orders, initial orders for the product. But the integral of the volume relative to all the other business is still at a modest level.

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

Okay. And then I wanted to get into the guide for a minute because the sequential decline, I think, you're talking about down over $30 million from 4Q despite good bookings, I don't think you see a big a step-down as that. Can you maybe just talk to why that is for the first quarter? And then, also, if we think about the '14 revenue guide, you're essentially saying 10% to 14% all-in. Your long-term guidance is obviously 12% but you didn't grow that in 2012 and '13. So maybe just talk to some of the drivers that give you conviction that you can still grow 12% longer term and then some of the variables for 1Q in '14.

Don R. Kania

Okay. So starting with the sequential decline in revenue. One, we always see that seasonally. That's a tradition with the company, look over history, and that has to do with flush at the end of the previous year. And then as we look into the new year, we're starting to see -- I would say, we're taking some look at the fall of maybe a little larger than we expected as well. That comes down to customer timing but I think part of this also is attributable to the rotation to Asia. And certainly, China, in particular, slows down significantly in the first quarter and, as you know, that's been a growing part of our business. So the initial contribution from that but if we just go by the book, look at the backlog, look when our customers wanted revenue. Obviously, in our guidance, you can see that a lot of it's piled into the second quarter as opposed to the first. The customer comes first. So the investment then follows through, which is in addition why we decided to give a little more insight to what we thought the first half was going to be like so the investment community would have an understanding.

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

But I guess if we look at the range of your -- like your organic growth guidance X the deal is, what, 9 that to 12 effectively? That's still below...

Don R. Kania

From 9 to 13.

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

9 to 13, organic? Okay.

Don R. Kania

Yes. I don't think we have the ability to foresee it any finer than a point level at this point. Thus, we give a range.

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

Okay. But you're still comfortable that you can do 12% kind of longer-term as you've laid out before?

Don R. Kania

Well, I think the guidance we've given is pretty consistent with that.

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

Okay. And then last one for Ray. Just quickly on margins, I think you called out kind of fewer high-margin wafer DualBeams. Can you maybe just talk about some of the dynamics? Are these transitory issues that should blow over? How do we think about that?

Raymond A. Link

I'm sorry, could you repeat the second part of that question?

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

I'm just trying to factor in -- you called out on the margin commentary fewer high-margin DualBeams. How long do you think this issue kind of lasts?

Raymond A. Link

It's really a quarter-by-quarter situation. Q4 was really a bit of an anomaly. We had a big shift in -- we had a lot more revenue, that's true. But we also had a big shift in terms of what we actually revenued in the quarter where we had a lot of our older product and mid-range TEMs, where we shipped those. Those, traditionally, have had lower margins than we had a lower amount of revenue from our wafer level DualBeams even though we had a strong quarter in our semiconductor business overall. It was not so much in the wafer level DualBeams and those are some of our highest-margin products. Those are the 2 main factors that really drove margins to be lower than what we would have anticipated with that level of revenue. We really think that's sort of a one quarter anomaly and we're guiding Q1 margin to be above 47%.

Operator

Our next question comes from the line of Joe Maxa with Dougherty & Company.

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

A follow-up on the last question. The DualBeams, are you expecting to return to more normal revenue patterns in 2014, those wafer level high-margin?

Don R. Kania

I wouldn't say we had an abnormal revenue pattern. These are large-ticket items that cost somewhere around $3 million. So if you have a couple of revenue, one quarter versus 1 or 2 the next quarter or none, you're going to have a quarter-by-quarter difference. But in terms for the full year, I think our expectation is Electronics outlook, particularly for our products, looks pretty robust.

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

With the uptick in the semi side, do you expect that

-- I'm just thinking of the overall growth, that 10% to 14%, are you seeing relatively balanced between the 2 segments or do you think you'll have -- Life Sciences drive that higher? Just give us a little outlook of what you're thinking there.

Don R. Kania

Well, if we take a look at Science and industry, I think industry will have little more acceleration in the year because of the semi business but the Life Science customers will certainly be driving the Science segment, that's going to be the big winner there. So let's let it play out but, yes, I think we'll see a little bit of a rotation after last year with the strength in the Science segment, we'll see a bit of a rotation as we go through '14.

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

And then lastly, for me. Just a little more on the new acquisition, the area you expect to bring the technology and where you think you can see some synergies?

Don R. Kania

Yes, sure. First and foremost, oil and gas, I mean, that's front and center. But a big part of the acquisition, for us, will be complicated but the relationship with ANU and the ability to get a microCT product, which, whether it's in a rock workflow or whether it's any Materials Science workflow or a Life Science workflow, allows you to synthesize the data, look over multiple spatial scales at a given sample. So probably Materials Science will be -- have the first impact and some Life Science after that. So stay tuned, let us progress, let us absorb the product but I think we see multiple benefits to owning that product line. And then oil and gas is the area we've been targeting. This really glues together all of our learning and thought and we'll stick all that together, give some top line benefit this year and I think top line and profitability benefit in '15.

Operator

Our next question comes from the line of Amanda Murphy with William Blair & Company.

Amanda Murphy - William Blair & Company L.L.C., Research Division

I just had a quick question on the Life Sciences segment. So can you just frame out where we're at in terms of penetration. I know it's relatively early with the nontraditional customers adopting electron microscopy in Structural Biology. I mean, is this something that -- can you kind of give us the inning or -- with that adoption? And then also just curious in terms of your guidance, if you're assuming anything at all from correlative in -- for the year?

Don R. Kania

Okay. We're in the very early adoption phase for our nontraditional customers. But again, in this space, for us, with a multimillion dollar product, it starts to move the needle pretty quickly. But overall, if we look at the potential market, sort of available market and where we're at, it's a very, very small share in that newly acquired market space for us. And then this will be a year of acceleration in the correlative microscopy segment, but the dominant thing that's going to move the financials this year is going to be Structural Biology. Big ASPs, few units makes it move, we've got bigger backlog coming, we have 20% growth in orders last year. So that's the story for revenues in '14 and we'll give you some more color on correlative microscopy as we go through the year and more substantial contribution from that in '15.

Amanda Murphy - William Blair & Company L.L.C., Research Division

Got it. And then just in terms of the bookings for Q4 relative to Q3. Obviously, you had a big Q3 for the Life Sciences segment but just given the end of your budget dynamics, could you just talk a little bit more about why -- just the Q3 relative to Q4 dynamics would that being?

Don R. Kania

We'd like to see 100% growth every quarter but that's a bit daunting. And so I -- there's no message other than we had a killer Q3 and we had good results in Q4 and as we highlighted 20% order growth on the year with good momentum both on the order and the revenue front coming into '14. So I mean, Life Sciences to us is a good story. Let's let the data continue to flow but we think we've turned the corner with penetration into a market which we have not been traditionally. So there's new customers out there and they're in line to buy the product.

Operator

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

James Ricchiuti - Needham & Company, LLC, Research Division

I just wanted to ask you a few questions, one relating to the ramp that you're anticipating in Q2. If you can give us a little bit more context, is that coming from industrial, is that the timing of deliveries into semiconductor market or perhaps is there something more in the research market? Just trying to get some feel for what drives that Q2 ramp.

Don R. Kania

I think it's a bit of both, actually. You've got the semi -- we see some semiconductor business clearly coming our way and if you watch our backlog at all, I mean, our backlog for the Science segment has grown in a meaningful way over last year with a big order growth that we saw. And so the other part of this is relief of particularly the large -- the Titan class systems flowing through that into the -- in Q2 as opposed to Q1. So it's -- for us, we'd like to look at what's the beginning backlog and at this point, the beginning backlog in a quarter out is significantly larger than it is for the current quarter. So we feel pretty confident and thus we're -- permitted ourselves to give you guys a little bit of a view what we think the first half is going to look like. So that's -- and then the arithmetic just falls out of what we have in backlog, what we'll turn in the quarter. And that's why margin's a little low to who's going to be significantly better and we'll just have to let the arithmetic play out but we feel confident with the envelope that we presented you with.

James Ricchiuti - Needham & Company, LLC, Research Division

And research is -- just more of timing of the deliveries of the part of the customers?

Don R. Kania

Yes. And I think as I tried to highlight a little bit earlier, I think we're seeing a bit of effect of Asia, particularly China in the new year. One of our executives commented that Chinese New Year is just like the Europeans in the summer. Everybody disappears and so transacting business gets a little more difficult, and that's been growing steadily as a significantly larger fraction of our business. And so when we look transactionally, it has contributed to the timing of revenue. I don't know if it's a trend, let's look at it next year and maybe have a better feel for that.

James Ricchiuti - Needham & Company, LLC, Research Division

Yes. And just because of all the sensitivity around China, Don, I mean, this -- you feel fairly certain from a macro standpoint, you're not seeing an impact? I don't want to read more into it and put words in your mouth but how would you just consider China from the standpoint of the business outlook relative to, well, some of the headlines we're seeing?

Don R. Kania

China for us is almost exclusively a science-based business, which has proven over time to be extremely resilient to any changes in macroeconomic actuality or outlook if we spin back to the Great Recession and China remained steady and on course. And in our interactions with relief funding officials in the country and our customers, we feel confident that business will continue.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay. And one question, if I may, on Lithicon. When would you anticipate having a fully integrated product and is that more second half of the year and do you anticipate -- can you give us some sense, just the kind of the sales cycle we might see from this product offering into fully integrated?

Don R. Kania

I feel a little bit like Bill Clinton by what you mean by fully. Can we make an offering to customers today? The answer is yes. Will we improve that offering over the year? The answer is also yes. And so we'll see modest revenue, modest order and revenue contribution. You have to give us time to get the engine going. There is -- obviously, they've had a flow of business but I think this is -- in the second half, we should see the benefits of bringing together FEI and Lithicon, particularly on the orders side, we'll see some revenue. And as we commented, as we get into '15 I think if we're correct, we'll see some nice growth in that year.

Operator

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

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

Don, first on the semi side, the kind of a big picture and something that I know you have expertise in on the EUV front. Given the struggles that are going on in that area, how do some of the technology inflection points that are occurring, whether it's double patterning, you mentioned some of the other inflection points. How is that driving some of the potential increased capital intensity for your types of tools as EUV is pushed out?

Don R. Kania

I think first and foremost, 3D is the big driver for us, whether it's in memory or in logic, any kind of transistor situation because the customers that are being successful in getting those into production have been big adopters of our technology to enable that to happen, and it hasn't permeated the whole industry yet. So that's driver #1. I think the materials aspect follows with that generally and then when we get to the EUV world, certainly that anything introduces more complexity or more defect potential into a process flow, is clearly is advantageous to us. But in the context of the transition to real 3D, it's a secondary effect. That's the big driver overall is 3D and anything that adds complexity, certainly multiple patterning can have some additions with the overlay and defects that can be additionally generated, particularly of detecting those defects under the additional complexity that, that introduces. It's all good for us. And then as we've had in our conversations, EUV will come maybe -- if it comes, if it's economic but we don't rely on that.

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

Great. Maybe as a follow-up to that. You mentioned that you're starting to see the adoption of your new line tools with the leading chip makers. Given that there's several big fab projects out there, can we assume that a lot of these new line products are being driven by some of the changes you just made and we should continue to see that adoption as 2014 progresses into 2015?

Don R. Kania

Yes.

Operator

Our next question comes from the line of Isaac Ro with Goldman Sachs.

Ryan Weikert - Goldman Sachs Group Inc., Research Division

This is actually Ryan Weikert in for Isaac. Just one more on the Lithicon acquisition. I was just wondering how you look at the margin contribution for those products. Medical CT isn't the highest margin but obviously this is much more of a nascent market. So I was wondering just on the applied CT side what that might look like.

Don R. Kania

Yes. Number one, if we look historically what they've done when there have been product transactions, there are high-margin and that has something to do with the market and something to do with the technology. They have a proprietary thought, patented approach using the helical scan that I won't bore you with all the technological details. So we don't win here is not in the natural resource base, is not the sale of particular pools, it's the service that can be provided by the linkage of the microCT, the electron microscopy in conjunction with the software that sticks it all together that provides the 3D information for people to characterize their reservoirs.

Ryan Weikert - Goldman Sachs Group Inc., Research Division

Got it. That's very helpful. And then just one, the emerging market [ph] currencies have been fluctuating a lot this quarter. I was just wondering if you've seen the impact so far, if you expect any impact on first quarter results.

Raymond A. Link

I don't really think so, Ryan. The main areas that we deal in China, Japan, Europe, those have all been fine. The areas of concern, Turkey is a country that the orders there are so sporadic so that's not an area we really count on near term.

Don R. Kania

Koruna is a good thing.

Raymond A. Link

Yes. The Czech koruna has done -- actually, has been a little bit weaker, which is a beneficial thing for FEI.

Operator

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

Derik De Bruin - BofA Merrill Lynch, Research Division

So could you give us a little bit more color on the organic revenue growth guidance, 9% to 13% for the full year. Can you bucket that? Obviously, industrial is going to be up more than science, I'm just trying to get a sense on how to sort of model that a little bit clearer.

Don R. Kania

Yes, I think we're not going to -- I think the color that we've given is probably all we're going to give at this point, which is the industry should outrun the science and obviously, there are some margin contribution that will come from that. But I think we'd also like to give ourselves the freedom, let the year play out and watch the timing and the dynamics on that.

Derik De Bruin - BofA Merrill Lynch, Research Division

Yes, but it's also -- I guess, it's a good illustration of the fact that last year, '13 was a year for science doing better. '14, a year that industry is going to do better. So it's a nice balance mix between them and hopefully they'll both line up sooner. Just -- I'm going to ask this another way, you have $473 million in backlog. I guess how much of that do you expect to convert in the first half of the year?

Don R. Kania

That's a good question. Ray -- I'm looking at Ray right now.

Raymond A. Link

Yes. We don't really disclose that per se, Derik. Generally, our backlog -- a traditional portion of our backlog, if we had $400 million, just to make the math easy, is that something north of $150 million or so with revenue in the first quarter and then $100 million in the second quarter and then it would scale down from there. Here, we have sort of the inverse where we have more slotted for delivery in Q2 than Q1.

Don R. Kania

So that's [indiscernible] Ray's comments are without the service.

Raymond A. Link

Our total backlog goes out just a little beyond the year. Virtually all the products are shipped within a year. We have some situations where a customer will buy a multiyear service contract when they buy a tool. So that dragged some service revenue out beyond the year. But when we look at an absolute amount of backlog over the next 2 quarters, clearly weigh more than half, 60%, 65% would be slotted.

Derik De Bruin - BofA Merrill Lynch, Research Division

So I'm looking at your year-over-year order bookings by geography. I'm sort of struck by the fact that year-over-year, the U.S. is flat, Europe is down and Asia, rest of the world is up pretty dramatically. I guess anything we should kind of read into sort of like the lumpiness of that? I mean, I assume your comments about, I guess, the U.S. improvement maybe not going to be helping you as much, the economic improvement is there. And Europe still is -- the euro is poor, being down, is that more of the -- that you had some really strong demand from science in Eastern Europe last year? Can you just -- a little bit more about the year-over-year order booking, order dynamic?

Don R. Kania

Yes. I think -- which is a part of what you see in Asia is also the semiconductor business coming back and so that's predominantly Asia-centric and if you think about Taiwan and Korea in particular. So that's one component there, which makes -- inflates Asia, if you like, over the period. I think science overall, when we look at -- Europe had a very, very healthy Q3 in the materials, the science business in that period was quite strong. So you kind of see these, I don't want to call them random fluctuations but they move. It's hard to predict in a given period which region is going to contribute most significantly. There's nothing to read in and we've been trying to be very clear about Europe. I think Europe is still going to be fine and I think as we look at the pipeline, particularly for Eastern Europe, as we go into next year, it looks good. The U.S., we've taken a very conservative approach, particularly on our outlook for '14, which is we expect the U.S. to remain muted. Is there upside to that? Maybe. And I think it's kind of -- let's see how the budgets flow-through and what the timing is, whatever increases that have shown up. And some people's budgets actually make it to purchases because I think that's going to take some time as well for high-ASP products. For lower ASP products, different dynamic, people will probably see that more quickly than we would.

Derik De Bruin - BofA Merrill Lynch, Research Division

Great. That is actually quite helpful. And then just one final question. X today's acquisition, you said about $12 a share in cash, I think? I guess any more little tuck-ins on the way or share buybacks opportunities going forward?

Don R. Kania

We're going to stick to our guns on our capital approach, invest in FEI and do acquisitions and, yes, we have a pipeline. And as you know, their -- timing is not out of our control and it's capricious. Dividend and then share buybacks at the bottom of that pile.

Operator

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

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

You guided in terms of OpEx similar to the last quarter, yet your sales are significantly lower. Is this due to the acquisition of Lithicon impacting SG&A primarily?

Raymond A. Link

That's the primary difference, Mark. If we strip out Lithicon, we would have lower. We do have some structural things that flow into at the start of the new year. We have -- a lot of our employees around the world have salary increases. They're somewhat automatic the first of the year. We also have, with the benefit of a higher stock price, we have a little bit higher stock comp charges hitting our P&L as well.

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

Can you provide any insights or rough estimates for what SG&A will run you as a percent of sales for the year?

Raymond A. Link

Well, our model is to have total SG&A of somewhere around about 18% to 19%. And then overlay that R&D, it's somewhere around 11% for about 30% total OpEx, and that's a number we're comfortable with and that's going to move around, obviously, a bit quarter-by-quarter depending on what revenue is because you can't move those items that quickly in one particular quarter. For example, Q4, it was 28% in change so it was very favorable with a higher revenue.

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

Okay. And just was wondering, you seem to be up about semi CapEx but compared to 3 months ago, we've heard that the big 3: Samsung, Intel and Taiwan Semiconductor projecting flat CapEx spending. We've heard from other firms about pushouts, about EUV being pushed out to the 0.7-nanometer node -- I'm sorry 7-nanometer node. I'm just wondering what gives you such optimism compared to what appears to be forecast that are coming down for semi CapEx spending.

Don R. Kania

Well, I think number one is conversations with customers but clearly, how our solutions intersect with the demands of the industry no matter how they go to 3D transistors, with change materials, all those drivers are requiring a greater investment in FEI's equipment. So irrespective of certain expansion timing, the -- our indications are that the dollars spend will increase on FEI product next year.

Operator

Our next question comes from the line of Weston Twigg with Pacific Crest Securities.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

I'm really curious about the microCT piece of this Lithicon acquisition. I'm wondering, you mentioned there are other market opportunities. I'm just wondering if you could help size those a little bit for us and maybe just how quickly you could enter new markets with new product?

Don R. Kania

Okay. The -- MicroCT has, we have a pretty broad range of estimates. There's a couple of hundred million, $100 million to $300 million depending on how you want to cut it for current market today outside of the oil and gas space and there are several players in there that we know pretty well. We think by mid-year to -- so let's just say by the fourth quarter, we should be having a product that's built on our factory and ready to be delivered into that space. We'll clearly start talking to customers relatively quickly about this. It won't be a big impact this year. The direct sales of microCT to non-oil and gas customers but nonetheless, we like how it rounds out our offering and clearly with our strategy of having workflows, it's the same darn workflow if you're looking at rocks, just looking at -- you pick your material, if you want to look at titanium or whatever it turns out to be on multiple length scales. This turns out to be a pretty powerful combination, we believe. It also applies to the Life Sciences as well. So it's a meaningful part of the deal but the main driver, just to be clear, was the oil and gas piece but this is really also interesting in and of itself in terms of rounding out and basically adding a whole new capability to FEI's product lines across all the markets.

Weston Twigg - Pacific Crest Securities, Inc., Research Division

Okay, good. That's really helpful context. And then just as a follow-up, looking at Lithicon, I'm not familiar with the company, but it looks like their competitors are iRock Technologies and ingrain. I just wonder if you could maybe just explain to us why Lithicon over the other ones, what did you find that was differentiated?

Don R. Kania

Well, I think partially was the ability to get the microCT thing in place but not only do they have differentiated near-term analytical capability for integrating the EM and the microCT together, they have what we consider to be probably the next-generation offering well along in development, which has to do with real flow calculation. So not just telling you what's there but actually being able to calculate how the oil and gas would flow through a system, which is obviously, at the end of the day, the most critical parameter for the oil and gas customers. So you've got today's answer and we think we've got tomorrow's answer as well.

Operator

Our next question is from the line of Jairam Nathan with Sidoti & Company.

Jairam Nathan - Sidoti & Company, LLC

Just on the structural bounds you've already said, which was pretty strong in 2013, can you give us some reasonable granularity? Was it strong across regions or was it -- you think any particular region was much more stronger than the other?

Don R. Kania

Yes. There's really 3 regions that will contribute meaningfully to this over time, which is Europe and the U.S., which are traditional strong regions for scientific activity and structural biology. And as we've highlighted in the past, China is the -- in our initial stages of having the product out, we were surprised on how much it had been adopted and now that we understand the strategy there to -- ultimately leads to building pharmaceutical businesses in a country with strong educated workforce, it fits perfectly into that. We now understand why that fits there all so well. So -- and we can expect those 3 regions to continue to be the driver. And then secondarily, we have seen business from places like Australia, Singapore, those regions that have desires to continue to develop in these Life Sciences areas. So -- but the big driver is U.S., Europe and China. And again, part of our optimism is also that we don't necessarily require growth in the market because we're entering an existing served market with a better solution, and so we think we can grow substantially just by displacing purchases on other technology and we consistently have identified NMR and X-ray diffraction as alternatives. Thus, we highlight customers from those disciplines now moving to acquire FEI technology. So the story we've been waiting to start to happen, I think we have a lot of data points that indicate that that's occurring as we speak.

Jairam Nathan - Sidoti & Company, LLC

Okay. And my last question was on -- you talked about the seasonal declines. In the first quarter, I understand the fourth quarter was a pretty strong in 2013 but generally, we kind of -- it looks like we see -- we don't see like a 12% decline, which the guidance would suggest for the March quarter. Is it just tough comps or is anything more to that?

Don R. Kania

Well, I think as we said, there's the usual seasonal decline in addition -- when we look at the order book, the timing of customers' requirements for the shipments are later, that's driven clearly by the great order book that we generated last year for large systems, which have longer delivery times typically driven by the customers' ability to have infrastructure to accept the product. But in addition, I think we're starting to sense that our growth in China and Asia and the effect of the new year period, that's just going to be a bit of a seasonal effect and we'll know better whether that substantive. We'll have the same call next year and we can talk -- we'll have another data point. But Asia is now 40% of our business, China is 12% of our business and growing and we just have to watch those seasonal dynamics as well.

Operator

[Operator Instructions] Gentlemen, I'm showing no further questions at this time. Please continue.

Fletcher Chamberlin

Okay. Thank you, everyone. We appreciate your interest. This is Fletcher, I'm going to be available for talks this afternoon. Ray and Don have to run into some employee meetings pretty quickly but we welcome calls and follow-up questions any time. Thanks very much.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the FEI Fourth Quarter Earnings Conference Call. Thank you very much for your participation. You may now disconnect.

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