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FEI Company (NASDAQ:FEIC)

Q4 2010 Earnings Conference Call

February 3, 2011 05:00 PM ET

Executives

Fletcher Chamberlin – IR and Treasurer

Raymond Link – EVP and CFO

Don Kania – President and CEO

Analysts

Jim Ricchiuti – Needham & Co

James Ricchiuti – Jim Ricchiuti

David Duley – Steelhead Securities

Stephen Hill

Thomas Diffely

Patrick Ho – Stifel Nicolaus

Mark Miller

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the FEI Fourth Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Thursday, February 3, 2011.

I’d now like to turn the conference over to Mr. Fletcher Chamberlin. Please go ahead, sir.

Fletcher Chamberlin

Thank you, Elisa. Good afternoon, ladies and gentlemen. As the operator said, I’m Fletcher Chamberlin, FEI’s Treasurer and Communications Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO and Ray Link, Executive Vice President and CFO.

We’ve made a couple of changes to the way we present information this quarter and we hope that it will help you understand our results and operations better. On the supplemental table of the company is our press release and financial statements we’ve added year-to-date information and divided the data into clearly defined categories make it easier to locate. We’ve also posted some slides under events and presentations in the Investor Relations part of our website fei.com. We will refer to these slides during today’s call. We hope that having those slides will make it easier for you to listen to the comments rather than just focusing on getting the numbers recorded. You’re welcome to direct any comment to me after this call on these changes and any other suggestions you have on how to improve our presentation.

In addition, we have one calendar item to mention. We’re planning our annual New York Investor Meeting for Thursday, June 2 this year. Please mark to your calendars if you would like to attend, more details will follow over the next few weeks.

While you’re pulling up the slide 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 discussed expectations about future corporate financial performance and goal, future customer orders, planned shipments schedules, performance by product and market, the outlook for margins and revenue, market developments and opportunities, future product and technological developments, the effects of future movement in exchange rates, future hiring plans, expected government spending for research tools, planed cost savings and restructuring, our expected effective tax rate or other future events and 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 made.

These and other risk factors are cited in today’s press release on slide two as the slide is posted on 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 commissions website at sec.gov on our website or from FEI’s 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 will be archived in the Investor Relations section of our website at www.fei.com.

I’ll now turn the call over to Ray for a review of the financials and then Don will comment on our markets and the business environment.

Raymond Link

Thanks, Fletcher, and good afternoon, everyone. I’ll go through the financial report and guidance in detail, and then turn the call over to Don.

We had an excellent quarter. Orders were very strong had grown for the fifth quarter in a row giving us a record backlog. Revenue increased significantly to record levels. Gross margins improved by 150 basis points from the third quarter and over 650 basis points from last year’s fourth quarter. EPS was the highest in our history, well, ahead of guidance and consensus estimates more than triple the year ago quarter and 73% above last quarter. We now have recorded 19 consecutive quarters of GAAP profitability.

Turning now to the details on slide three, if you’re following along. Net bookings for the fourth quarter were a record $218.4 million, up 15% from the third quarter and up 34% from last year. Net bookings were reduced by just $3 million due to the revaluation of the backlog for currency movement. The backlog at the end of the quarter was $471.9 million, another record high and the book-to-bill ratio for the quarter was 1.17 to 1. Don will talk more in a moment about the composition of our bookings and our market outlook.

Sales of $186.1 million were up 22% compared with the third quarter and 20% compared with last year’s fourth quarter.

Moving to slide four. Electronics revenue of $80.7 million was up 83% from the third quarter and up 144% from last year’s fourth quarter, and made up 43% of the total. That’s the highest level of Electronics revenue in any quarter in the last five years when we began our reporting of segments in the current format.

Life science revenue of $17.6 million made up 9% of the total, it was down from the third quarter and last year’s fourth quarter largely due to the timing of planned shipments. The book-to-bill ratio for life science was 1.34 to 1 during the quarter and we expect growth for our life science business from 2011.

Research and Industry revenue of 47.3 million, made up 25% of this total and was down from the third quarter and last year’s fourth quarter. The book-to-bill ratio for this segment was 1.64 to 1 and was above 1 to 1 for the third straight quarter, so we are planning for Research and Industry growth in the New Year.

Service and Components revenue of $40.5 million for the quarter up 2% from the third quarter and up 12% from last year’s fourth quarter continuing the steady growth of this segment.

Turning to slide five. We continued our geographic diversification with North America making up about 37% of revenue for the quarter, Europe and the Middle East making up 33%, and Asia, Japan and the rest of the world making up 30%. For the full year we were nearly evenly balanced with North America making up 32% of the revenue, Europe and Middle East making up 33% and Asia, Japan and rest of the rest of world making up 35% of the total. That’s the first year in our history that Asia and Japan have been our largest geographic region. That change reflects both in market opportunity and our successful execution in Asia.

Now looking at slide six. Gross margin in the quarter was 45%, the highest level in over eight years and above the 43.5% level for the third quarter and 38.4% in last year’s fourth quarter. This is the fourth consecutive quarter of improving gross margins. That also is equal to our previous long-term target for gross margins, which we have reached about a year ahead of our plans.

A number of factors contributed to the margin improvement, the largest of those is product mix as we had a high percentage of high margin electronics shipments in the quarter. Other contributors to gross margin improvement included higher volumes especially of newer products, increasing contribution from our operations and supply chain improvements, and an improved pricing environment as most of the narrow margin orders that we took in 2009 to keep our volumes up and move to revenue by the middle of 2010.

Service margins were down slightly from the third quarter in line with their historical pattern, but again contributed a solid margin quarter.

We expect gross margins to be above 43.5% as our product mix shifts in the next couple of quarters. That level is well above our performance in recent years, but it’s below the fourth quarter primarily because of market and product mix and currency changes. Our newer long-term goal is to move gross margins to 47.5% by the end of 2012. We’ll continue with the initiative, that have improved margins in recent quarters including higher volume, a greater percentage of application specific products and further operations and improvements.

I’ll also note that in the fourth quarter, we only sell part of the benefit we expect from last year’s announced move to the small DualBeam manufacturing from the Netherlands and Czech Republic. We are on-track to have the full benefits of that move in place in Q2.

Turning to slide seven and moving down the income statement. Operating expenses excluding restructuring were $54.4 million compared with $48.4 million in Q3 and $49.5 million in the last year’s fourth quarter. Increased volume, incentive compensation and currency contributed to the growth and expenses.

Operating expense were up 12% sequentially where our revenue was up 22% given us some additional operating leverage. We’ve begun some selective hiring for customer facing and production roles, but we’re maintaining tight control of that head count. We had 1,813 permanent and temporary employees at the end of the year, essentially flat for the quarter and up only 2% for the year.

Restructuring expenses were 562,000 in the quarter compared with 536,000 from the third quarter, they reduced earnings per share by $0.01. The increase in revenue significantly improved gross margin and leverage and our operating expense led to a very large increase in operating income for the fourth quarter to 28.7 million compared to 17.6 million in the third quarter and 9 million in the last year’s fourth quarter. That’s the highest quarterly dollar total in the company’s history and beats our stated goal of 15% operating margins. Below the operating income line, total other expenses was about 600,000 compared with $1 million in the third quarter and $1.3 million a year ago. We expect non-operating expense will remain around $1 million for the next several quarters. The tax rate for the quarter was 24%.

This lead the GAAP net income of $21.3 million or $0.52 per diluted share for the quarter, that compares with earnings in the third quarter of $11.9 million or $0.30 per diluted share and $6.6 million or $0.17 per diluted share a year ago. The diluted share count was 41.7 million in the quarter that includes 3 million shares attributable to our 2.78% convertible note, which are included in the count because they are dilutive at this income level. For people building models, there was an interest add-back to net income of approximately 500,000 net of tax to calculate diluted EPS and we’ve included that amount to the top section of our supplemental table attached to the press release.

We expect our diluted share count to be about the same in Q1 and the interest add-back again will be approximately $500,000. Changes in foreign exchange rate had a modest impact on our results for the quarter. If the average rates have stayed the same in the fourth quarter as the third quarter, our revenue would have been slightly lower, but our gross margin and operating income would have been slightly higher. As we have said before, a weak dollar has a negative impact on our results unlike many U.S. companies. We achieved over Q4 results despite the modest negative impact of currency changes.

As you can see on slide eight, our balance sheet and cash flow remain very strong. Total cash and investments at the end of the quarter, including restricted cash and long-term investments was $423.8 million and net cash after subtracting debt was $334.8 million, up $41.3 million in the quarter. Net cash at end of the quarter was $8.75 per share.

Days sales outstanding and inventory turnover improved in the third quarter and were stable compared to year ago. Operating cash flow in the quarter was $52.5 million positive and $75 million positive for the year. Net capital expenditures were $3.6 million for the quarter and depreciation expense of $4.5 million. Subtracting annual capital spending from operating cash flow, free cash flow for the full year was $66.1 million, or $1.73 a share compared with $1.44 a share in 2009.

We bought back just over 200,000 shares during the quarter under our newly authorized share repurchase program and we will continue to be opportunistic in purchases in 2011.

Slide nine is the summary of our guidance. Although our revenue was normally down on a seasonal basis from the fourth quarter to the first quarter, we expect revenue in Q1 to be in the range of $180 million to $190 million, with Electronics revenue projected to be down in the fourth quarter, while research and life science revenue is projected to be up sequentially.

Earnings per share are expected to be in the range of $0.43 to $0.49. The tax rate is expected to be around 27%. Restructuring charges are estimated to be under $500,000 or $0.01 per share and are including in the GAAP EPS guidance. EPS guidance is slightly lower than Q4 total primarily because of product mix, higher tax rate and currency assuming a euro rate of a $1.40. We are guiding Q1 bookings in the range of $175 million to $195 million, which if achieved would be the highest level ever for our first quarter.

With that, I will turn the call over to Don for some additional comments.

Don Kania

Thank you, Ray, and good afternoon, everyone. We had a good year and an excellent fourth quarter. For the year, bookings were up 25% compared with 2009. Electronics bookings were very strong compared with last year and we also saw double-digit bookings growth in life sciences and service.

Research and industry bookings were essentially flat for the year, but accelerated significantly in the third and fourth quarters. New products powered much of the recent growth. Helios DualBeam unit bookings more than doubled, Magellan SEM unit orders tripled. Titan Krios APSs grew along with units and Tecnai Osiris TEM bookings were up sharply. We entered 2011 with a backlog of $472 million, giving us an excellent foundation for growth in the New Year.

In 2010, we generated record revenue of $634 million, up 10% from last year. The increased volume, a better pricing environment and our operational improvements led to 42.5% gross margin up 270 basis points for the year. Combined with good controls in our expenses that led to record annual operating income. 2010 was the year of steadily building momentum as our orders climbed each quarter, with second half bookings up 19% over the first half, fueled by an 83% increase in our Research and Industry segment.

Second half gross margins increased by 400 basis points and earnings more than double excluding unusual items. We closed the year with an excellent fourth quarter. Quarterly orders were over to $200 million dollars for the first time in our history, capping five quarters of sequential growth and marking a 34% year-over-year growth. We are seeing strength in all our markets, a result of an improved global environment, strength of our product line, our strategies to expand our customer base and the investment in our sales and service capabilities worldwide.

Those of you who follow us closely know that we set an interim goal of 42% gross margin for the fourth quarter of this year and a longer-term goal of 45% for the end of 2011. Last quarter, we reached the interim goal ahead of schedule and this quarter we hit the 45% target a year ahead of schedule. It’s very gratifying to all of us to reach that target early.

Ray outlined the reasons we expect that mix will provide some variation in the gross margin going forward. We are continuing to push to sustain the 45% level as we exit 2011 and to drive the target higher in 2012.

Turning to our market segments in slide 10. Our record fourth quarter orders showed strength in the U.S. and Asia. Europe was down slightly, but remained at a very high level. Orders were almost split equally among the major regions of the world, with 37% of the bookings from North America, 27% from Europe and the Middle East and 36% from Asia including Japan.

Looking at slide 11, you can see the largest booking segment of our business in the quarter was Research and Industry with total bookings of $77.6 million up 6% from the third quarter and 33% from last year’s fourth-quarter. This business continues to benefit from both established economies and increasingly from emerging parts of the globe.

Fourth-quarter growth was broad-based with particular strength in Asia and did not include any large bundled orders. We have a large backlog in our research business and that will give us meaningful revenue growth in the first half of 2011. Our pipeline of potential business remains substantial, so ending 2010 with a very strong second half, we enter 2011 with good momentum in research. We do expect the normal seasonal drop-off in orders in Q1.

As we look at 2011, we expect modest growth in developed countries, but we expect this to be boosted by continued stronger growth in the emerging world particularly in our fastest growing regions China, the Middle East and Eastern Europe.

Orders in Life Sciences of $23.5 million were up 28% from Q3 and up 52% from last year’s fourth quarter. During the quarter we announced the life science version of our Magellan SEM. Continuing our focus of providing application specific solutions to targeted market segments. We continue to expect – continued significant growth from life sciences market as we move from early adopters to the broader market.

Electronic bookings of $76.2 million, were a new record for that business unit as with the $263.8 million totaled for the full year. We continue to lead the industry’s expanding demand for TEM and DualBeams to support process development, RAMs and excursion control and manufacturing, a trend that we have discussed for several years.

Demand continues to be strong across the product line including the new Helios 450, Helios 1200, Magellan SEM, the Tecnai Osiris and the Titan TEM. We have been expanding our manufacturing capacity to meet customer’s requirements and our electronics revenue reflected that in the fourth quarter.

Looking forward, prospects remain good as the technical demands are shrinking, devices continue to increase demand for FEIs products. As new factors become a reality and competition intensifies in the foundry space for leading-edge capacity.

Finally our services bookings were up 5% sequentially and 3% year-over-year, reflecting our growing installed base and solid operating performance.

Looking at the full year 2011, our order pipeline is strong and we’re seeing the benefit of our investments in new products, reducing costs and ramping revenue. Our record backlog gives us excellent visibility for revenue in the first half of the year. Our geographic diversity continues to be a strength, especially with our research and life sciences customers. Although we expect some cyclically in electronics demand, we expect it to remain strong in 2011. We’d also expect increasing contributions from our faster growing opportunities in life sciences and natural resources.

While we expect operating expenses as a percent of revenue to decrease in 2011, we’re increasing our investment in R&D and market development with the goal of continuing our growth in 2012 and beyond, as we generate a continued flow of new products, expand our solutions and accelerate penetration into new and larger served available markets.

Based on the backlog and our order pipeline, we expect that revenue for the full year 2011 will be in the range of $730 million to $750 million, up over 15%. When we hold our Annual Investors Meeting in New York on June 2nd, we’ll provide more depth on our long run initiative to a continued revenue growth and margin improvement. We will provide more details on that meeting, as we get closer to that day.

Thank you all for your interest. This is an exciting time for FEI and we appreciate your support. With that, operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Jim Ricchiuti. Please go ahead.

Jim Ricchiuti – Needham & Co

Thank you. Good afternoon. Question on your gross margin targets, this new longer-term gross margin target. I am wondering if you could give us a sense of the range of revenues you might need to see in order to get to that 47.5% level. Thank you.

Raymond Link

Jim, this is Ray. Sort of a new character for FEI, it’s very exciting 186 million this past quarter. To get there 47.5%, we probably need to pump it up this from there, but I don’t think we need to go to 50 million or anything like that. If you look at the trend, I’m just trying to pull the number the exact number in front of me. The trend of our revenue margin products versus service, you’ll see that in Q4 margin from our products was 48.4%. So we’re already above the 47.5% target model from that standpoint, we were brought down by our service business, which is a wonderful business by the way with that mix has the tendency to bring us down as we increase revenue and we saw this particularly even in Q4, while we jumped up some $33 million in revenue, virtually all of it was product revenue. So if we grow product revenue and continue to grow that and continue at our path on improving our supply chain and moving products to more efficient geographies and improving our product margin. You don’t need a ton more revenue, we need more revenue but not, not ton more, I hit the specific number on that, but I will encourage you to look at the trend into growth and margin expansion in our products.

James Ricchiuti – Jim Ricchiuti

That’s helpful, Ray. And just turning to bookings, in terms of the bookings guidance you’re giving for Q1 other than the, I guess the normal seasonal slowing, you would see in research. Is there any other color you could provide all the bookings that you’re anticipating this quarter?

Don Kania

Yeah, sure. Jim, this is Don.

Jim Ricchiuti – Needham & Co

Hi Don.

Don Kania

Hi. I think overall Electronics is coming of a record. We still think as we said going to be strong year, just trying to come off a little bit of that real strength. I think our research industry will be seasonally down, life science will be okay, that’s pretty lumpy in the sense of the large unit price their and service will be strong. That’s the pretty traditional pattern and I think our view is we’re going to stick with the that right now.

Jim Ricchiuti – Needham & Co

Okay. I’ll jump back in the queue. Thanks a lot. Congratulations on the quarter.

Raymond Link

Thank you very much, Jim.

Operator

And our next question comes from the line of David Duley, please go ahead.

David Duley – Steelhead Securities

Yeah, congratulations on a nice quarter.

Don Kania

Thanks.

David Duley – Steelhead Securities

I was wanted to just talk again we’ll start out of the shoot with the gross margin question. As far as you long term gross margin target, do we – does that contemplate the mix of Electronics being at this above 40% level that you just produced or can you achieve that target with the lower mix of Electronics?

Don Kania

I believe it does not require that we run at the 40% level. No, obviously, that was a good thing for the fourth quarter, but I think our goal overtime if you measure it overtime to be in a range of little bit (ph) around third in the Electronics segment and so that’s our view. You should think about it that way. Third in Electronics and (inaudible).

David Duley – Steelhead Securities

So with the higher revenue levels in the mix of Electronics about third you can hit this target?

Don Kania

Yeah. I will remind you, we talked only a little bit about this natural resource growth for the business, it’s actually our highest gross margin segment. And so that contribution will grow. And we’ll talk about that more in the next couple of meetings, probably certainly by our Investor Day. So that contribution becomes more substantial that will accelerate the product margin expansion.

David Duley – Steelhead Securities

Okay. And just a couple of housekeepings here. Usually, I thought the historical pattern on the Research & Industry business was, you had a spike in bookings in Q3 and then you had a kind of an up revenue quarter in Q4, and it seems revenue was down this year in Q4. Was there a specific reason for that or is my recollection of the seasonal pattern incorrect?

Don Kania

Well, on the bookings side, it’s always spikes and (inaudible) the year budget kind of flush activity. On the revenue side, I think part and parcel, I’m actually looking around the table here. I’m not sure that there is generally a seasonal pattern of higher revenues in the fourth quarter. But I also will say that we clearly focus some of the revenue in some of the newer products towards our electronics customers because their timelines are much more aggressive than our research customers. So you have some of that going on. But other than that, I don’t think there is a pattern there or any other action going on.

David Duley – Steelhead Securities

Okay. One final question from me. I think, Ray, you mentioned that the impact of the small DualBeam manufacturing move. Could you help us understand how – what the positive impact of that is going forward? What’s left to come from that?

Raymond Link

Essentially, what we – John (ph), as we moved our higher and small groupings that were being manufactured in Holland to the Czech Republic. We were still manufacturing a vast majority of that in the second half in Holland. That switch is moved over or the vast majority of them will now be manufactured in the Czech Republic. And by the time we exit Q2, all of them will be manufactured in the Czech Republic. Margin swing on that north of four point maybe a little bit more – pretty significant.

Don Kania

For that product.

Raymond Link

For that product.

David Duley – Steelhead Securities

Okay. For the total company–

Raymond Link

No, no. That product.

Don Kania

That’s a very important product.

David Duley – Steelhead Securities

Okay. All right. So it still has a nice positive event to the future gross margin.

Raymond Link

Right.

David Duley – Steelhead Securities

Okay. Thank you and congratulations on a great quarter.

Operator

Our next question comes from the line of Stephen Hill. Please go ahead.

Stephen Hill

Hi, guys, great quarter. I like that gross margin guidance. What about operating costs though you made a reference to incremental investment in R&D for 2011. I guess you didn’t quantify it. How should I think of operating cost increasing next year over this?

Don Kania

Let me give you – this is Don and then maybe Ray will help you a little bit more. So we want to be clear, we expect this as a percentage of revenue that the operating then will come down actually – and if you really look at our numbers, if I remember correctly, we end up like 10.4% for the year on R&D where we’ve been running around 11 – our target closer to 11 or 11 and change. And that’s really what we wanted you is keep that percentage up and let the other pieces of the operating spending not grow at the same rate as revenues. So we’re not going to give the specific number right now, but you should expect, again, as we said as a percentage of revenue or operating – the operating spending that go down year-to-year.

Stephen Hill

So should I think of the non-R&D OpEx or the SG&A is being largely fixed or mostly fixed?

Raymond Link

There will be a little investment there, because some of the investment will be in the marketing area and a little bit in expanding our channel. So there will be some additional spend there. And commissions, of course, will be with the revenue as well.

Stephen Hill

And here is a separate question and I get back into the queue. As I recall you don’t comment on specific customers, but conceptually should I think of your machines as being used in something like Intel’s Haswell project, which is a next step after CND Ridge or is that sort of like the long end market altogether or just a long timing, would you be more CND Ridge, could you just help me understand that?

Raymond Link

Right. Okay. I think the best way to think about our electronics driver in terms of the customer like Intel or Samsung or IMAX or whoever, in orderly driven first and foremost. So when Intel makes a transition from to 22 that’s in advance of that they buy FEI product similarly with Samsung and whatever 2X or 1X they are driving toward a particular point in time. So I don’t want to be judgmental by Intel, because I don’t remember which is their tick or talk here. So but it’s really when they are shrinking or making more complicated devices which if you go to a Sunset configuration versus the final configurations. That’s good for us. That drives the acquisition of our equipment.

Stephen Hill

Okay. All right. Thank you very much. Great quarter.

Operator

And our next question comes from the line of Tom Diffely. Please go ahead.

Thomas Diffely

Yeah, good afternoon. Quick question on the booking side. Initially, you gave guidance with the low end of about 170 million. So what was it during the quarter that drove mostly incremental upside – that 50 million above that?

Fletcher Chamberlin

Other than lower conservatives and that’s one of the things.

Thomas Diffely

Sure.

Fletcher Chamberlin

Okay. Let’s be clear on that. Electronics was particularly strong obviously in the quarter on the order front. (Inaudible) stronger we expect.

Don Kania

Yeah. They were strong.

Raymond Link

They were strong too. So I would say both a little bit above our expectations and we certainly had some visibility that might do that well but you got a factor in the – what closes in the quarter, what doesn’t so. But really those two pieces contributed higher run rate.

Thomas Diffely

Okay. So that where we – you should maybe look at the electronics business in nice slug during the quarter, it takes a little break and then maybe nice slug coming later on from the bookings we discussed?

Raymond Link

I’ve just call the quarters, right in that game. And that’s why we’re going to look ahead at ‘11, I would say it’s going to be a good year and call individual quarters is going be difficult. My expectation is going to be one slow quarter for some reason that we don’t even know right now. But nonetheless I think overall you’ve got the expansion going on, the relentless drive for shrinks and new technology. And I don’t think we should underestimate leased for FEI the impacted competition at leading-edge feature sizes in the foundry spice. Well, you got Samsung, you got CSMC, we really need to compete with each other over those emerging notes.

Thomas Diffely

Okay. Yeah, I mean, there is obviously lots of shrink in the semiconductor market right now. What about data storage, is that revitalized?

Raymond Link

No, it’s been. This quarter was actually quite slow municipal (ph) of 3 million, I think...

Unidentified Company Representative

3.5

Don Kania

Yeah, 3.5 million in terms of book of orders out of the 76.2 I think it was. But based are just difficult to forecast but I think we look year-on-year, there will be some investment at some point during the year. I think we are going through a little pass right now as the relentless desire for people to store things continues I think. And again there they have competition on feature side. So we have – we’ll have a good play, it will be an okay here at least maybe a good year (inaudible).

Thomas Diffely

Okay. And then we look at to the first quarter, is there some seasonality in the service bookings that impacts your bookings level.

Raymond Link

Exactly, yes. Service is always, with just annual renewals big in Q1.

Thomas Diffely

Okay. All right. And then finally as if any hint of a slowdown from the government as far as the government spending on some of these labs and fabs that it’s important to your business?

Raymond Link

I think the way to look at is we built that into our thinking that in the U.S. and Europe built is we’re not expecting big growth out of those and if we look at our pattern more and more this comes from the more newer emerging economies. So we cut that factored in, who knows where all this talk of investment goes and particularly in the U.S. We’re not planning on it at this point. Europe will still – the major parts of Europe will be okay because they maintained their investment, they have a historical record of that at least in major markets of Germany, France and Benelux areas. UK will slowdown, there’s no doubt about it Spain will slowdown, but they’ve never been big contributors anyway. So we think Europe is going to be okay, the U.S. will be okay. If we do better than that that will be more than we expect at this point, but places like China which is now bigger than Japan for FEI are the areas of the world that are really going to drive the growth in that segment.

Thomas Diffely

Okay. Great. Thank you for your time.

Operator

We have a question from the line of Patrick Ho. Please go ahead.

Patrick Ho – Stifel Nicolaus

Thanks a lot, and congratulations on a great quarter. Don, can you just give a little color on the life sciences bookings this quarter? Whether they were more timing-related or whether you finally started to see some of the, I guess, broader adoptions that you’ve been looking for at least on a going-forward basis?

Don Kania

I think the way to think about it is – again it’s going to be lumpy, because when you’re dealing with large ASPs, that are a large fraction of the quarterly bookings, we’re going to see it bump around. But overall, I think, we’re seeing that next generation of people start the early, early, early adopters, early-late adopters, I guess, the way to think about it. Starting to say, I can see what the equipment can do, I’ve seen the publications, I want to get on the bandwagon. And so that was a – some good points when you look at the individual purchasers of the equipment, you see that trend.

Patrick Ho – Stifel Nicolaus

Great. In terms of the Research Industry segment, I know we’ve had conversations about the mining and natural resources opportunity. One can give a little bit of an update where you stand right now and what your outlook is for 2011 in that segment? And secondly, for the Research & Industry segment as a whole, what, I guess, market segments within that do you see, I guess, the growth opportunity this year?

Don Kania

So, again, we’re not giving a lot of – other than just some color on the natural resources area right now. We’re not going to get overly specific on numbers. But we’re very pleased with the order rates now for the second half of last year, it really accelerated. Now we’re getting traction with the products that we positioned both in front of our mining customers and we’re starting to see the early engagement in oil and gas. I think you need to stay tuned on the oil and gas front, we’ll be talking a lot more about that in the near future. But that’s not a big contributor at this point in time. So it’s mostly the mining segment that’s contributing. We’ve seen good adoption. We’re seeing orders rates that please us though right now it’s still a small contributor to FEI overall, but we’re very happy also with the margin content when we look at that business. So I think the real answer here is stay tune, it’s a plus for FEI in ‘11 and I’m expecting around maybe we’ll talk more substantially about the opportunity.

Patrick Ho – Stifel Nicolaus

Any other segments on the – yeah?

Fletcher Chamberlin

Segments in R&I (inaudible) grow next year. I think geographically it’s pretty clear, the emerging parts places like China. Okay. And then, in terms of sub segments of customers, we have some advanced products coming along in the chemistry environmental space that we think will be good growers that as we allow researchers to do the sophisticated imagery and analytics inside a more typical environment that the researchers are going to look in. So they can look at things in the – their working space, whether it would be catalysts or whether it would be wet sample. And then I think the last driver there is – they were still early in the game here with the Osiris technology that is this high-speed analytics. We’ve been pushing that hard with our semiconductor customers and very pleased and we think that the adoption in the research space will also accelerate in the year.

Patrick Ho – Stifel Nicolaus

Great. And the question – final question for Ray. In terms of your cash flow generations, obviously gotten a lot better over the last couple of years. What’s your thought about the debt position you guys have and whether it will be, I guess, open to retire it early?

Raymond Link

With lot to retire early, but it trades on a mark-to-market bases and it’s being trading well over 100 and my guess is going to be trading a little stronger tomorrow. So at this point, it matures in June of 2013. So (inaudible) right it would happen whether it converts – or convert to equity if not which is paid off.

Don Kania

It has no call provisions. So we cannot call it.

Patrick Ho – Stifel Nicolaus

Okay. Great. Thanks a lot, guys.

Operator

We have a question from the line (inaudible). Please go ahead.

Unidentified Participant

Hey, good afternoon, gentlemen. Question I have on some comments you made earlier. You talked about the early later adaptors kind of seeing the value in your equipment. Can you talk to us in terms of what you’re seeing within the customer base that is driven by new customers versus existing customers?

Don Kania

Okay. So it’s clear. We’re really looking to drive this product towards people who haven’t been users in the past of our equipment. And so that’s the group of customers which we grow the served available markets significantly with the products. Right now, we’re still seeing adoption generally by people if they are not users of the technology or close to the technology. I think that other piece comes on in ‘11 a little bit more. So right now, we’re moving in that direction, so we’re getting people that are familiar with, but perhaps not mainline users sort of efficient autos of transmission electron microscopy. But people that are closer to the life sciences space who have identified problems, they want to solve and they can see that they can solve that problem with FEI’s equipment.

Unidentified Participant

Okay. Fair enough. And then, just going back to the bookings line, can you speak to maybe the sustainability of the strength you’re seeing and ...

Don Kania

I’m sorry. I didn’t quite catch the –

Unidentified Participant

Sorry. I was trying to ask, can you comment on may be what your thoughts are around the sustainability of the bookings strength that you’re currently seeing, but maybe over a longer period of time?

Don Kania

Well, just look we’ll give some high-level view of next year, which is – we expect electronics to be a good year and that’s tough to call that too closely, but we’re not going to certainly – we don’t expect to see a significant – a huge falloff in orders in that space. I think that sentiment should clearly shift it and we’re seeing that when we look at the customers. Research and industry, we think we’ll be – will grow a bit next year, again, we’re balancing the fast growing out of regions with our expectations of slower growth in the established world. Life science should accelerate, we feel like been on that was up double-digit this year. I think it should continue to be a good business for us. And then service will continue its relentless march of high-single digits through ‘11 as well.

Unidentified Participant

Okay.

Don Kania

So a little bit – I think it’s probably the best we’ll do at this point in terms of guiding on the orders for next year.

Unidentified Participant

Okay. And then last question from me is, on the competitive front. I mean have you seen anything change market, I think earlier you mentioned something to be effect of pricing being kind of better or maybe the general pricing environment being better or maybe I miss write that?

Raymond Link

Bill, I think we’re seeing it of overtime skill, but if you certainly spend back to ‘09 and say as we enter ‘10 and clearly we were saying a difficult pricing environment from our struggling competitors. I think that’s both improved because FEI’s improved, its selling activity as well as some of the new products have highly differentiated and so that’s improve dollar pricing overall. And I think our competitors find that that activity is also not sustainable.

So on balance, when we look at the backlog, we’re very happy with marginal content of the backlog, it’s improved over that more difficult period we saw through ‘9 and may be little bit into ‘10.

Unidentified Participant

And then just to make sure on the pricing front, it’s not like you’re necessarily seeing prices – increases but you’re not having to maybe discount as much as you did in the past?

Don Kania

Yeah, I think that’s a fair way to look at it. So in some areas where – I’ll just say in selected areas, we are increasing prices because our technology is meaningfully differentiated and therefore it should command the higher price. So there is mixture of both going on.

Unidentified Participant

Okay. Thank you.

Operator

And we have a question from the line of Mark Miller. Please go ahead.

Mark Miller

You haven’t mentioned much and again my congratulations. You haven’t mentioned much about foreign currency effects. Are your hedges doing a lot better job there? Or was this a minimal impact over the last couple of quarters?

Don Kania

Yeah, I think, well at this time I think what’s happening this is now from CEO perspective. The foreign currency exchange effects are becoming, as we make the company more profitable, just a smaller effect overall. But we’ve also – and I’m going to turn it over to Ray to comment. I think we’ve got good strategies in place to continue to mitigate those effects.

Raymond Link

Yeah, in Q4, the currency has cooperated for the most part, we moved in a pattern of euro and we talk euro, but you have Czech koruna and other currencies. But the euro was pretty much in the 130 to 135 range, that’s a nice range for us. As we go into 2011, we are very well hedged, very happy with our hedged position to protect us, should be euro strengthened, much better than we were in previous years. So this concludes we don’t expect currency to have a meaningful impact as we look out, as Don pointed out, with some larger and more profitable, we have a $1 million or $2 million impact on currency, couple of pennies a share if you make $0.50 a share, it’s not such a big deal. But we are in a better hedged position than we have been.

Mark Miller

I apologize, I missed this. But with the larger increase you’ve seen over the last couple of quarters in your backlog, are there anything you’re going to have – and you might have added this. Are there anything you have to do about plant expansions or capacity additions?

Raymond Link

Right now we, obviously, stay within the facilities that we have. We are investing in people, which is the number one driver of our ability to increase revenues overall. So I think within the year, our view is we have the facilities to execute revenue. But I will comment if we see additional growth beyond our visibility then at that point, we may have to add some incremental space. Now, you have to realize for FEI, we were mostly an integrator. It’s – probably leasing some additional square footage and minor amount of capital (inaudible) the facility. But for us, a physical expansion is a pretty limited process. We’re not very capital-intensive. It’s people floor space and a little bit of equipment.

Raymond Link

We are expecting to spend more on capital in 2011 than 2010, but not that much but it’s really dedicated to manufacturing it’s for demo tools, it’s for some IT improvements and things of that nature. So if we do see some incremental spending, yes, there will be a bit for operations, but it’s largely in currency and sales marketing and IT.

Mark Miller

Just one last question that you’ve seen impressive gains and your electronics business is doing well. But can you give me a kind of a feeling in terms of your backlog and then what you’re seeing in terms of sales, in terms of the mix of technology versus capacity. It’s significantly more (inaudible).

Don Kania

In the electronics segment?

Mark Miller

Yes.

Raymond Link

Yeah, I think generally that’s just going to be FEI is going to look that way overall more technology oriented. Perhaps another trend we sort of alluded to, but haven’t talked specifically about is the increasing investment by the foundry, foundries and what we do. I would say that the share of spend that we are seeing in our forecasting is much higher than it has been historically, from that piece of the business and of course we find that quite attractive overall because the poultry are the players in that segment have substantial capital budgets and substantial spending plan for ‘11.

Mark Miller

Thank you.

Operator

And our next question is the repo question from the line of Steven (inaudible). Please go ahead.

Unidentified Participant

Hi, guys. I’m sorry if you already answered this, but I may have missed it. Did you say what your tax rate could be for 2011 already?

Raymond Link

It should be somewhere in the 27% range plus or minus a little bit.

Unidentified Participant

Okay. And you used to – well, I guess in the second half of last year, so few months ago you were seeing that, you thought you could see two down quarters in electronics in 2011, you just didn’t know when. Have you changed your view or you more bullish?

Don Kania

I would say – we were three quarter – three months ago, I think we’re little more bullish in electronics. That’s actually bolstered by the bookings data that we have in hand and by this time a lot of the public – you can go by the public announcement (inaudible) capital spending if you look at the New Year. So, yeah, I think we’re little more optimistic than we were three months ago.

Unidentified Participant

And then finally, I know it’s kind of a small item, but you were looking at leasing I guess some more again in manufacturing to UTC? How is that going?

Don Kania

I think the UTC activity is going fine, and we’re – this part of the year we’ll do an evaluation if whether we did more or less or whatever, but we’re very happy with the relationship, they build our wafer and silicon (ph) products and our customers are pleased with the quality and the speed of the output.

Unidentified Participant

Thanks, guys.

Operator

(Operator Instructions) Mr. Chamberlin, I show no further questions in the queue. Please continue.

Fletcher Chamberlin

Thanks very much, everyone for being on the call for listening to our story. We will be available – I’m mostly available as Ray and Don are going into some meetings, but give us a call if you have further question. Thanks for staying with us.

Operator

And ladies and gentlemen, that concludes our call for today. If you’d like to listen to a replay of today’s conference, please dial 1800-406-7325 and enter the access code of 4400158. ACT would like to thank you for your participation and you may now disconnect.

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