FEI Company Q3 2009 Earnings Call Transcript

FEI Company (FEIC) Q3 2009 Earnings Call November 3, 2009 5:00 PM ET

Executives

Fletcher Chamberlin - Treasurer and IR Director
Ray Link - EVP and CFO
Don Kania - President and CEO

Analysts

Bill Ong - Merriman
JoAnne Feeney - FTN Equity Capital
Steve O'Rourke - Deutsche Bank
Matt Petkun - DA Davidson & Company
David Duley - Stillhead Securities
Peter Wright - GC Research
Patrick Ho - Stifel Nicolaus
Bill Dezellem - Tieton Capital Management

Operator

Welcome to the FEI Third Quarter Earnings Conference Call. (Operator Instructions).

I would now like turn the conference over to Mr. Fletcher Chamberlin, please go ahead, sir.

Fletcher Chamberlin

As the operator said, I'm Fletcher Chamberlain, FEI's Treasurer and Communications Director. With me today at our headquarters in Oregon are Don Kania; our President and CEO; and Ray Link; EVP and Chief Financial Officer.

Before we begin our presentation, we have the regular housekeeping matters to take care of. This call contains forward-looking statements. To the extent that we discuss expectations about future corporate performance and guidance, customer orders, revenue growth, performance by product and market, margin improvement, market developments and opportunities, competitive landscape, product and technological developments, product introductions and shipment schedules, facts of future movements and exchange rate, cost savings and restructuring, changes in our effective tax rate and other future events or plans, those statements are considered forward-looking subject to risks and uncertainties that could cause our actual results to differ from the forward-looking statements made. The risk factors cited are in more detail in today's press release and 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 are available free of charge on the SEC's website, at www.sec.gov, and at 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 corporate 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.

Ray Link

We had a good quarter with bookings above our forecast, revenue near the top end of guidance and net income well ahead of guidance last year's third quarter and this year's second quarter. FEI has done a good job through the worse of the recession holding our top-line, while our gross margin came in as expected.

Operating expenses were down in spite of recent negative foreign exchange trends, and we benefited this quarter from a lower tax rate as profit improved in the US. As a result, earnings were up over 50% compared with both last year's third quarter and this year's second quarter. This was our 14th consecutive quarter of positive GAAP earnings and we generated $20 million in cash in the quarter.

Turning now to the details, net bookings for the third quarter were $149.7 million, down 5% from the second quarter and 15% from last year's third quarter. Remember, however, that last year's record third quarter orders included the KAUST order for over EUR20 million.

The Q3 net bookings total was increased by $6.3 million due to the reevaluations of backlog for currency movement. The euro finished the quarter at 1.46 compared with 1.40 at the end of the second quarter and 1.34 million at the end of the first quarter. Backlog at the end of the quarter was $345.7 million, a record high with approximately 90% scheduled for delivery within a year. Don will talk more in a moment about the composition of the bookings and our market outlook.

Net sales at $140.8 million were up slightly compared with second quarter sales and down less than 1% from last year's third quarter. Currency changes increased revenue by about 3% compared with the second quarter and reduced revenue by about 1% compared with last year's third quarter.

Research and industry revenue of $61.6 million made up 44% of the total and was up 12% from the second quarter and up 29% from last year's third quarter.

Electronics revenue of $31.7 million was down 2% from the second quarter and down 10% from last year's third quarter. Electronics made up 23% of revenue in the current quarter compared with 25% in the third quarter of 2008 and 41% two years ago at the cyclical peak in the second quarter of 2007.

Life science revenue of $12.3 million made up 9% of the total and was down from $19.6 million in the second quarter and $23.4 million in last year's third quarter. We said for sometime that we expect significant quarter-to-quarter variability in life sciences' bookings and revenue because it tends to have a smaller number of large value transactions and the latest quarter happen to have fewer shipments scheduled. We expect life science revenues to rebound in the fourth quarter and have significant long-term growth for FEI.

Geographically, revenue was split almost exactly in thirds among North America, Europe and Asia, as the US and Europe recover from lower levels in the second quarter. Our Asian revenue was down compared with record levels in the second quarter, but remain well above our historical long-term share. We are pleased with the results of our strategic emphasis on that part of the world.

The gross profit margin for the latest quarter was as forecast at 39.3% compared with 40% in the second quarter and last year's third quarter. The small sequential decline in gross margin was caused mainly by a less favorable product mix and foreign exchange rates. As we had forecast sales of initial units of certain products and strategic initiatives for regional penetration also affected margins negatively in the third quarter. Service margins improved again in the quarter. Looking forward, we expect overall gross margins for the fourth quarter to improve and to be 40% or higher.

Moving down the income statement, the sum of R&D and SG&A expenses was $46.9 million, down 3% from Q2 and down 5% from last year's third quarter. These reductions occurred despite the stronger euro, which increased operating expenses 3% compared with the second quarter. We see these results as an indication of improving operational effectiveness and continued strict controls on headcount, travel, consulting and other discretionary expenses. Operating expenses are expected to increase modestly in the fourth quarter due to a weaker dollar and higher Asian commissions.

Restructuring expenses were $600,000 in the quarter compared with $1.1 million in the second quarter. The bulk of the restructuring expenses in Q3 related to requalification of vendors as we shift some of our supply chain from a European base to Asia to reduce cost and to attain a better currency balance. We expect this line item to increase to around $1 million in the fourth quarter due to severance charges and further vendor requalification cost.

Operating income, which is a key measure for how we manage the business, increased to $7.9 million compared to $6.6 million in the second quarter and $6.2 million in last year's third quarter. The operating margin was 5.6% compared with 4.7% and 4.4% in Q2 '09 and Q3 '08 respectively.

Below the operating income line, total other expense was $800,000 compared with $1.5 million in the second quarter and $600,000 a year ago. Substantially lower interest income due to very low market interest rates continued to depress non-operating income and is likely to keep the non-operating expense around $1 million for the next several quarters.

The tax rate was 14.5% for the quarter compared with 28.4% in the second quarter. The rate declined due to the allocation of income by legal entity and settlement of some outstanding tax issues in various jurisdictions around the world. The lower tax rate contributed $0.02 per share to the third quarter results. We expect the fourth quarter rate to be approximately 25%.

All of this leads to GAAP net income of $6.1 million or $0.16 per share for the third quarter, above our guidance range and compared to $3.7 million in the second quarter and $3.9 million a year ago. The fully diluted share count was 38.1 million in the quarter and we expect this share count will grow only modestly in the next few quarters.

Our balance sheet remains very strong and we increased our liquidity in the current quarter. Total cash and investments at the end of the quarter, including restrictive cash and long-term investments, was $403.9 million, up $19.9 million from the end of Q2. Total cash and investments net of short-term debt was $8.75 per share.

Operating cash flow was positive $20 million and our EBITDA was positive $13.1 million. Receivables and inventories were generally level during the quarter. They both would have declined slightly, excluding the effects of currency. Capital expenditures in the third quarter were $3.8 million compared to depreciation expense of $4.4 million.

Now, turning to our guidance that assumes a euro rate of $1.45, the fourth quarter is normally stronger for us on a seasonal basis and we expect revenue for Q4 to be in the range of $145 million to $152 million. Bookings are expected to be above $150 million. GAAP earnings per share for the fourth quarter are expected to be in the range of $0.16 to $0.21, including restructuring charges of approximately $0.03 per share.

With that, I'll turn the call over to Don for additional comments.

Don Kania

As Ray said, we had a good quarter. Orders were solid and our pipeline continues to build in all markets. Our geographic and market diversity was once again crucial to our results, as European and US bookings were strong, following the second quarter strength in Asia and Japan.

We were pleased to see that US bookings benefited from initial stimulus funding. We also saw very strong business in our research and industry markets, offsetting lower bookings in both life sciences and electronics.

Gross margin was 39.3%, in line with expectations. Reduction of our operating expenses, which we managed despite renewed weakness of the dollar during the quarter, allowed operating margins to increase. We expect gross margin to rebound in the fourth quarter along with further improvement in operating margins.

We also announced today that we have sold the Phenom product line to Phenom-World, a new entity that is controlled and majority owned by our manufacturing partner. NTS Group of Holland. NTS is a private company that will take over marketing, sales and service of the product. As natural resources has emerged as the number one opportunity for top-line growth and margin expansion in our industry division, displacing the Phenom opportunity overall.

Phenom is an excellent product with good potential, but it's not achieved the volume levels necessary for impact in profitability. We retain the intellectual property, a minority interest in Phenom-World and access to the product. This transaction will have very modest impact on the fourth quarter and will have a positive impact on operating income in 2010.

Another key development in the quarter has been the orders originating from the US stimulus funding, driving over 10% of our total bookings. We received orders from DoE and NIST, including high end Titan systems and a range of other products. In fact, the quarter tied our record for the most Titans booked in a single quarter. We estimate that less than 15% of the relevant science-based stimulus funding has been spent so far.

NIH and NSF are scheduled to release additional funds in the fourth quarter and into next year. Orders will follow in the next three to six months. We have quoted on numerous systems that could be funded by these agencies. In addition to the timing, we are watching the grant size. Larger grants are more favorable to electron microscopy and FEI. Early grants from the NIH were small and spread widely, but the announcement for larger equipment grants should be forthcoming.

Overall, we continue to expect to get our unfair share of stimulus purchases, while the mix may include more competitive midrange systems than we had originally anticipated.

In summary, only a relatively small amount of stimulus funding has been released so far. We expect additional stimulus-related bookings in Q4 and further order flow in 2010. Also, as we watch agency funding for 2010, we are pleased to note that budget increases for NIST and NSF are targeted to be above 7%. The Obama administration is pushing forward with its strategy for American innovation.

In Japan, we received several orders in the second quarter that were funded by stimulus, but in the latest quarter, that source temporarily dried up for us and our competitors as the new government reassessed their stimulus plan. Most funding has been restored and we expect to see additional orders from Japan in the next two quarters.

Turning now to our market segments, research and industry had a very strong quarter. It remained our largest single segment with bookings of $80.4 million, making up just over half of the total and up over 40% from the second quarter and nearly 20% from last year's strong third quarter. The order strength was global with notable performance from Eastern and Western Europe and good demand from US national laboratories.

Governments around the world are continuing their investment in science infrastructure as a way to build their economies. We expect worldwide demand in the research market to continue to be strong in the fourth quarter.

During the quarter I attended the opening of KAUST, the new King Abdullah University of Science and Technology in Saudi Arabia. The university made a substantial investment in FEI equipment to create a new future for Saudi Arabia. It's a grand demonstration of our theme that our equipment is seeing as infrastructure investment to develop leading edge industries, create jobs and educate a workforce. We expect the visibility and success of this investment to motivate continual global investment in science in the region and around the globe.

Life sciences followed its record second quarter with a sequential design-in orders of $11.4 million or 8% of the total. We believe we have the right product at the right time with our Titan Krios. Looking forward for life science, we expect continued growth building on the 32% compound annual revenue growth we have seen since 2006, but with continued variability from quarter-to-quarter.

The early adopters of the Krios are beginning to generate important scientific results. I recently attended a Krios electron microscopy symposium at UCLA that we co-sponsored where our customers wowed the audience with 3D images of biologically relevant molecules, achieving a new milestone in electron microscopy resolution using the Krios. As the system's capabilities penetrate the research community and more of the stimulus funding is released, we see ongoing opportunity as we continue to increase our investment in this market.

Electronics bookings of $22.5 million were down 36% from the second quarter and down 56% from last year's unusually strong third quarter. The order rate in the last three quarters has averaged $30 million or about 55% of the peak in 2007. This quarter's orders were lower because semiconductor customers focused on capacity purchases. We did not receive orders from many of the major industry participants as a result.

We expect the industry will turn to investment in next-generation tools over the next couple of quarters. Because of our focus on laboratory tools, we benefit when major device makers invest in new nodes. We see these investments coming in the next few quarters at 22 nanometers.

Based on discussions with customers, we expect a significant increase in electronics bookings in the fourth quarter and a more positive first half of 2010. As customers move to new, smaller nodes and more complex structures, they will continue to need more of our tools to meet the requirements of development, qualification, ramp and excursion control.

Our service and components bookings were up slightly from the second quarter and up over 15% from last year's third quarter. We saw increased parts orders in the US in a number of customers who had held off signing new contracts earlier in the year decided to move forward in the third quarter, giving us the revenue boost. Both are signs of an improving economy. Our service business is showing resilience in the current environment along with improving margins.

Looking at next quarter, we expect growth in orders and revenue in Q4 as we continue to make progress on reducing costs in our purchase material and shifting the supply chain out of the euro zone. We are thus guiding to higher earnings in Q4.

As we are building our plans for 2010, we expect increased earnings. We are being cautious to assure we control expenses, but we also see opportunity for growth and potential upside due to a number of factors, including a full year of operating improvements, higher revenue supported by our solid backlog, continued stimulus spending, some recovery in the electronics market and revenue from new products.

We are pleased that FEI has done well and grown market share through severe economic downturn We have continued to see the benefits in our investment in global distribution in new products. We also continue to be optimistic about FEI's future based on the combination of continued worldwide investment in scientific infrastructure, ongoing US and global stimulus spending, our steady flow of leading edge products that are changing the competitive landscape, ongoing operational improvements and cost reductions, and our strategy of technology leadership, providing our customers with integrated solutions and investment in high margin, high growth opportunities such as life sciences and natural resources. Our global team has responded well to the challenges of the last year and I want to acknowledge and thank them all.

With that operator, we are now ready for questions.

Questions-and-Answers Session

Operator

(Operator Instructions). Our first question comes from the line of Bill Ong with Merriman.

Bill Ong - Merriman

When you look at your quarterly bookings run rate since the beginning of 2007, $150 million plus bookings run rate appears to be sustainable in 8 out of the 12 quarters with an occasional spike and dip from time to time. Looking out over the next three years and giving your market penetration rate of your tools, what kind of quality bookings run rate can we expect? In other words, can you sustain, let's say, $170 million quarterly booking run rate years out and what would be driving that?

Don Kania

As we look out over that three-year horizon, we view the company in a couple of major pieces when we look at growth. One is our core businesses, electronics and research and service. We think that those pieces of the puzzle in more normal economic circumstances can grow at high single digits growth rate average over that period of time with some potential upside in the research marketplace. That has been growing at a relatively higher rate during that period during the last few years.

Then as we look at our higher growth segments, life sciences, which has been growing robustly at 36%, and we think natural resources, over that period will start to have a meaningful contribution to the growth of the company and those will grow, in our view, greater than a 15% growth rate over that period. So, you can certainly envision as the world evolves between '10 and '12 that, in fact, $170 million is achievable at some point during that period on a quarterly run rate basis.

You want to spin that back. The way we've been running, as you highlighted, flat over the past couple of years, what's really happened during that period is semiconductor has gone into a relative secular decline from the peak in '07 to-date. We've grown our other businesses significantly during that period to offset that decline. So, the other piece of the puzzle underneath it all is, as semi picks up, that would just be a plus for us overall relative to performance over the past multiple quarters.

Operator

Our next question comes from the line of JoAnne Feeney with FTN Equity Capital.

JoAnne Feeney - FTN Equity Capital

If I could ask about the order outlook for this quarter and perhaps your visibility through stimulus funding, I think we may have been expecting a little bit higher guidance for the current quarter's order outlook. Is it the case that what you've done is look now at timing of the different grant work processes out there and have noticed perhaps that, as you were saying, the larger grants are being pushed off a little bit? Is that why the orders seem a little light this quarter?

Don Kania

I think there's probably two factors in there, JoAnne. That's certainly one of them. We're watching the flow of the stimulus monies, and as we highlighted, some of the next tranches of money coming out of NIH and NSF will be announced in this quarter, but the orders won't flow from that till a little bit later. We have taken a conservative view of the usual end of year bump-up just because of the uncertainties given the time as we talk in the past, some of the ebb and flow associated with stimulus showing up, not showing up in different places. So, we've decided to take a relatively conservative and achievable view for Q4 overall.

JoAnne Feeney - FTN Equity Capital

Could you perhaps then give us an update on traction you're seeing, if you can, on the new tools that were announced over the summer, and in particular, perhaps an update on the Magellan that was announced before that, that sort of fell into place right when the recession hit? Do you still feel like you have the same lead over the competition and are you seeing any interest on semiconductor or physical science side for that on your tools?

Don Kania

I'll take Magellan first. The initial introduction that was into the semiconductor marketplace, and as we've highlighted in the past, we've done well in becoming the tool of record at multiple major manufacturers. As we wait for that transition to move and staffing their labs, we expect good momentum behind that product. I think that's part of our optimism as we look into the next few quarters in the semiconductor marketplace.

The other new products that we had talked about at the last call really won't have much significant impact in the short term because they are newly introduced products. That's the Osiris which is that new high-speed analytical tool, the next-generation Titan and some of the other accessories, cameras, that we had described before. So, those are really going to be '10 events. They're not really going to be fourth quarter '09 events in terms of impacting booking significantly.

JoAnne Feeney - FTN Equity Capital

One last follow-up on the backlog, could you give us a sense of the timing? Last quarter you were talking about unusually long delivery schedules, and so I'm wondering if you can shape for us the backlog and when you think it will ship.

Ray Link

JoAnne, this is Ray. The backlog is shaping up fairly nicely, particularly for 2010. We saw a bit of change from what we booked in the current quarter versus what we booked in the prior quarter. So we're getting a little bit more smoothness in the backlog, most of what we have in backlog, the $347 million. Obviously, we got a chunk of that coming off for Q4, but the balance of that is for 2010.

The way it's shaken out right now, it's a little bit more aged, meaning that there's more backlog in out quarters than we've had historically. Basically what has happened is that as we've increased backlog, it's gone to more of the out quarters. So, I personally feel pretty comfortable about that because it's making 2010 numbers look more certain as we build more and more backlog for that period. So there really isn't any significant backlog. There's a little bit that spills into 2011, but about 90% of backlog is shippable in a year.

Operator

Our next question comes from Steve O'Rourke with Deutsche Bank.

Steve O'Rourke - Deutsche Bank

In your prepared remarks I think regarding stimulus-related orders you had commented that mix may include a greater percent of midrange competitive products than you originally thought. Can you explain what that means for ASP for how orders look over the next couple of few quarters?

Don Kania

What we're watching is, and it's been a little cautious because the early releases from NIH were smaller quantities, though they expect to release the larger ones later, is we're going to try to be sensitive of the political aspect of trying to spread the money around more. So, therefore, if the average grant size does moves down a little bit, then the ASPs will moves down a little bit, and that moves our product from the highest end to more of the low high end, mid end range in terms of what we would target in terms of opportunities for FEI. That's what we are trying to get at there. So, that mix, which we don't control and we don't have a lot of visibility to it, is something we're watching very closely. Doesn't change the aggregate of the amount of money that we expect to be available to us. We just want to make sure that we're tracking closely to where those orders will show up.

Steve O'Rourke - Deutsche Bank

Is it fair to characterize the stimulus spending is coming through a bit slower than maybe you had originally expected?

Don Kania

I would say if it's anything, only a bit. If we go back to when we first talked about this in Q1, we said it would be second half. We got a good bump this quarter from stimulus. We expect more in four, but overall, I would say the peak period of spend is we were hoping would be closer to Q4 and it's probably moving into early '10.

Steve O'Rourke - Deutsche Bank

On the new products that you introduced in 2009 and it is a half dozen or so it seems, how much revenue will they generate both this year and as we look out to 2010? Is there a way to characterize the percentage of total revenue?

Don Kania

We don't like to actually talk about that aspect of it, but I'll just share with you we have internal metrics, our expectations for each of the product lines and any aggregate what new product should be generating in terms of revenues for the company. So I think that's really probably the fair characterization.

Operator

Our next question comes from the line of Matt Petkun with DA Davidson & Company.

Matt Petkun - DA Davidson & Company

First, Don just on the life sciences business in the quarter, from a sales perspective, and maybe this is more of a question for Ray, but from a sales perspective given the last four, five quarters of your bookings, I would have expected a little bit more, but it looks like both your sales and bookings this quarter in life sciences were lower than we had forecasted. Were there just a few orders that slipped out? Do you see that revenue line item picking up for life sciences next quarter?

Don Kania

Let's start with the order side. On the order side, as you know, a couple of large systems moving north or south will affect the quarter significantly and we had a strong quarter before that. We do feel quite strongly that life sciences orders will pick up in the fourth quarter in a meaningful way. In terms of revenues, I'll let Ray comment.

Ray Link

Obviously, the revenues for life sciences in Q3 were low. We expected them to be low. We have several large shipments that are scheduled for Q4 and it was highly probable. So, we do see life sciences revenues bouncing back significantly in Q4.

Matt Petkun - DA Davidson & Company

Do you have any Krios systems revenue this quarter?

Ray Link

We don't get that granular.

Matt Petkun - DA Davidson & Company

We can try on our side. Speaking of granularity, at least to the sum of that granularity, gross margin, did I miss it, Ray, did you guys talk about a targeted margin range for next quarter?

Ray Link

What we said, Matt, was that margins are expected to improve and our target is 40% or better.

Matt Petkun - DA Davidson & Company

The euro has done a lot to work against what you guys have been doing over the last couple of years, but at your Analyst Day this summer and over the last year you guys have focused a lot on reducing your bill of materials, reducing the manufacturing cost and now you are taking some more manufacturing to Asia.

I am just wondering how we should be thinking about gross margin for next year, and I know you don't want to be specific, but you had talked about hoping for a 43% margin this quarter and I think with the euro everybody will give you a hall pass for that. What should we be looking for based on the reductions you've done in cost for next year assuming a EUR1.45?

Ray Link

We're still committed to long-term margin improvement and we still have a stated objective to get it to 45%. Now, that's obviously going to take some time with where we are with the euro. The main things that are really going to drive it, things that we can control internally are exactly as you talked about are improvements in our bill of material. We've been fairly successful so far in starting a process of moving supply chain and we expect to have somewhere around about $20 million of supply chain moved out of Europe into Asia in 2010 that would generate some significant cost savings and also a better currency balance.

The two headwinds that we face, obviously, are currency, in general, and if we can have any kind of stability, particularly something a little better than 1.40, it certainly helps our cause, and the other piece is the overall mix of electronics versus all the other businesses. Electronics, as you know, has been our higher margin business because we sell a lot of high end dual beam products into that . If we get any kind of improvement in that, it would also help.

The things that we can point to, if we look at how we did in Q3 versus Q2, and obviously, we were down in margin, but currency alone was about 1.5% impact. If currency just stayed exactly the same in Q3 as it was in Q2, we would have had a margin uplift, and the benefit of that is largely from the work we're doing in our manufacturing area and also in our service area. If you look at our service margin, they've been improving relatively steadily. It's slow, but they've been improving quarter-over-quarter and we expect further improvements as we get into 2010 there.

With all that said, the requirements for us to get to these higher levels would be some incremental revenues certainly would help, slightly better mix, little bit more electronics would help and further work in our manufacturing and in our service area are some things that we can control.

Matt Petkun - DA Davidson & Company

I would think the yen to a certain extent is helping. I don't know if you are able to raise prices, but how do you see the yen impacting your competitors?

Don Kania

Certainly, the yen is a big negative, perhaps in order the same as the euro is a negative for us over all. It does help us in Japan. It's probably the most significant influence. It allows us to have stronger pricing practices in Japan relative to our competitors there because of that effect of the strength of the yen. That's probably the biggest issue. I think our Japanese competitors behave like they always do almost irrespective of the exchange rates. So, I don't see it as a big impact outside of Japan.

Operator

Our next question comes from the line of [David Duley with Stillhead Securities].

David Duley - Stillhead Securities

I was wondering could you remind us what the typical seasonal pattern is in your first quarter and do you expect the stimulus money the way it flows through on bookings and revenues to impact that seasonal pattern?

Don Kania

You are talking about orders I assume?

David Duley - Stillhead Securities

Either orders or revenue, however you want to handle it.

Don Kania

Orders, typically we see a fall off from four to one. We like to get closer, but given what we understand today about when monies will be released, we would expect that the stimulus would represent a positive influence on orders in the first quarter of 2010.

David Duley - Stillhead Securities

I think you mentioned that you expected the electronics revenue to rebound significantly in the fourth quarter. Could you maybe give us a percentage. I'm sorry, I don't have all the numbers in front of me, what percentage do you think it bounces to roughly?

Don Kania

I was talking to orders, if you're referring to my comment. We don't give a particular number, but we think it's certainly a good characteristic.

David Duley - Stillhead Securities

Can you give us a handicap here based on what you think the stimulus package will do for your order number, how far are we along in the game? Are we in the second or third inning or are we halfway through?

Don Kania

We actually tried to be specific in the commentary that we think about 15% of the money that's relevant to FEI has been spent to-date. It's shown up in orders. So I guess we're in the second inning.

Operator

Next question comes from the line of Peter Wright with GC Research.

Peter Wright - GC Research

My first question is you made the comment that 15% of stimulus money has been spent. I was hoping you could elaborate on what you believe that number is, and also help us understand how much of it has been ordered.

Don Kania

We do a relatively detailed internal analysis on the stimulus funding and what we look at is the total going to the agencies, how much is towards capital equipment and how much we believe will segment into electron microscopy or related, things that we could garner. When I refer to that 15% number that was referring to the things that are very specific to FEI as an opportunity in terms of what's been spent to-date.

I don't want to get any more specific than that. This is pretty proprietary view of the world. If we look in terms of more granular view, say looking at total awards that impact capital equipment, that's at $1 billion level. We see that a similar percentage of that has probably been allocated to-date as well.

The other thing I'll comment on is we're very pleased with our win percentage in this first inning and a half that we've been in the stimulus package, and so we hope we're able to continue more than our fair share of wins through the process here.

Peter Wright - GC Research

Any commentary on how much has been ordered versus the 15% spent?

Don Kania

That's what I'm talking about. To be real clear, we're talking about what's been ordered. I'm not talking about allocated money, we are talking about monies that has flowed through the system.

Peter Wright - GC Research

So 15% has definitely not gone through your P&L yet?

Don Kania

None of this has gone through the P&L. We are only talking about orders right now. I'm not sure anything is revenued at this point.

Ray Link

I don't think so. I thought it would be small at this point.

Don Kania

Yes, it's small at this point. So this is all going in the backlog essentially.

Peter Wright - GC Research

Fantastic. The second question is looking out on a global scale, if there is an easy way to think of that that or how do you want us thinking about the impact that you framed for the US opportunity, how much does that represent in the global stimulus spend that you're expecting over the next couple of years?

Don Kania

The US is the biggest piece of the puzzle. Rough guess, it's probably a little more than half of what we expect over the next few years.

Peter Wright - GC Research

Perfect. Last question is on inventories, specifically if you could remind us what that long-term inventory is, and with Phenom going off, are they taking any inventories off your hands for that or should there be any movement of working capital other than that that we should be paying attention to?

Don Kania

Let me address Phenom first. It's a relatively small transaction for us, a relatively small amount of inventory. You won't be able to see a movement from that. The long-term inventory is generally our spare parts inventory related to our service business.

Peter Wright - GC Research

I guess with the ramp and with the outsource partners you have, is there any significant movement that we should expect either generating cash, I guess specifically I'm looking at generating as a source of cash over the next couple of quarters?

Don Kania

I would expect to see inventories to come down a little bit in Q4 assuming currency stays the same because that obviously can move the values around. We have a fair bit of finished goods inventory at the end of Q3. I believe with the expectation for higher shipments in Q4, we should be able to ramp down inventories in the fourth quarter a little bit.

Operator

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

Patrick Ho - Stifel Nicolaus

First, two quick housekeeping questions (inaudible) this quarter and what are you assuming for a tax rate in 2010?

Don Kania

Right now we are assuming probably around about a 28% rate if I had to come up with a number.

Patrick Ho - Stifel Nicolaus

Then the stock options for this quarter?

Don Kania

About $2.4 million is our cost for stock comp. I want to make it clear on that that the vast, vast majority of that charge is for restricted shares not options, but it all falls into the same bucket from an accounting standpoint. It is a non-cash charge and we would expect that number to be within that number, a couple of hundred thousand, plus or minus, quarter to quarter.

Patrick Ho - Stifel Nicolaus

Going back to the stimulus spending, you mentioned that 15% of that is coming in orders and you also mentioned some of the variabilities that could be involved. Is there a certain time limit where it's we use it or lose (inaudible) a flood of orders come in one quarter and then actually sharply decline because of that timing issue?

Don Kania

The way we understand the flow of the monies and the opportunity, the time scales to revenue, we don't expect that to happen. We monitor that pretty closely, so I don't think we'll see an avalanche and then a fall. I think what we will see a rising tide into next year, into the first couple of quarters and then let's just stay tuned after that.

Patrick Ho - Stifel Nicolaus

You guys have made inroads into new marketplaces like natural resources and mining.. Don can you discuss maybe at a very high level and I know you may not want to get specific, but what other type of marketplaces you are looking at with the current product portfolio that could expand your reach further?

Don Kania

Really we look at many other things we are doing in natural resources, what is an automated characterization of particles of some kind. So we have a stream of opportunities that we've identified. I'll throw one out, for example, cement. It's another area where understanding the mixtures of what goes into cement from an ecological point of view is, can you substitute for some of the materials in there that actually produce large amount of CO2 are very interesting today. So there is a whole series that we've identified, but what we've done is we've focused the team on two large and very present opportunities. One is in minerals, mineral resources, precious and base metals and then oil and gas. So you should expect to hear from use as we progress through the next year or so. It's a bit more color as those businesses mature and we can be a little more quantitative about how they are doing.

Patrick Ho - Stifel Nicolaus

Final question from me on the electronics business side of things. You mentioned that perhaps the next wave you will see on the R&D and engineering side is the 22-nanometer node. Given that the industry has just migrated to 32 nanometers at least for the really leading edge (inaudible) technology know behind you or do you still anticipate some of the lager chipmakers providing potentially some business for you at the 32-nanometer node?

Don Kania

We always get the lagers in, but the biggest flow of business for us and the folks we pay the most attention to are those cutting edge, both groups and cutting edge individual companies that invest in the next nodal. Those are the people who give us the strongest indication and they are the largest capital equipment spenders. So they get a lot of our attention, but clearly there's a tail on this whole thing of orders that we continue to see flowing from the industry.

Operator

Our next question comes from the line of Bill Dezellem with Tieton Capital Management.

Bill Dezellem - Tieton Capital Management

Thank you. I think you may have just cleared up the first question here, but in your opening remarks you made reference to natural resources being your biggest sales opportunity, but that was right real close to when you were talk being the Phenom and I wanted to make sure that you see that as the biggest sales opportunity for FEI, not for the Phenom.

Ray Link

Yes I will just say, I am sorry if there was any confusion there. Both the Phenom and the natural resources activities reside in one box, box we call industry. As we look at both of those opportunities, we made the evaluation that the natural resources opportunity far outstrips the opportunity we saw on the Phenom and we found a comfortable way to exit that business and still have access to things that we might need in the future from that business.

Bill Dezellem - Tieton Capital Management

So, you don't necessarily see it as your biggest opportunity for FEI, but it was bigger than Phenom and hence the exit from the Phenom opportunity?

Ray Link

Correct.

Bill Dezellem - Tieton Capital Management

The second item is relative to your supply chain movement. Given the currency changes that have happened recently, are you accelerating in any way that supply chain move or is this simply a continuation of what you previously had in place and you are on the same pace?

Ray Link

I would say there's, the pace does get accelerated each quarter. First of all, each quarter we incrementally move more stuff. Then secondly, and we just were meeting about that this morning in terms of trying to determine the budget and cost for that, because there's a cost for that. There's a vendor requalification cost as we look into 2010 and the savings that we can ultimately get and the balance that we get from currency, it's a very compelling argument to move forward with a faster pace on this.

Bill Dezellem - Tieton Capital Management

So, essentially due to the currency movements, it gives you more incentive to do what you had been doing and therefore more incentive to accelerate?

Don Kania

Yes, this is Don. I think maybe even a more fundamental way to look at it is, if you look at the position of the United States with its large deficits and no doubt motivation to keep interest rates low, the currency environment probably doesn't look so great over the next few years for the US, so clearly we see that. We are taking that into account. So, I think the way to answer your question is that, yes, we are looking at accelerating the transition to a more balance company with respect to currency.

Operator

Thank you. Our next question is a follow-up from Matt Petkun with DA Davidson & Company.

Matt Petkun - DA Davidson & Company

NIH if and when you get orders there would you characterize that as life sciences or industry institute?

Don Kania

Predominantly it would be a life sciences.

Operator

Our next question is a follow-up from JoAnne Feeney with FTN Equity Capital Markets.

JoAnne Feeney - FTN Equity Capital

Just, Ray, on the restructuring, so if you are speeding things up a bit, how should we think about the restructuring charges next year, because you had originally talked about those sort of falling off to zero over the next few quarters, I thought?

Ray Link

That's a great question JoAnne, and literally we are in the process of trying to put all that together, so I hate to give by quarter what it will be, but certainly, we will have cost clearly at least for the first two quarters and then we'll have to see how much that can get done whether there's some lingering cost as we go into the second half.

JoAnne Feeney - FTN Equity Capital

On inventories, with the new arrangements whereby you have outsourced a lot of the assembly, does that imply that as the company grows your holding of inventory will not have to grow as quickly, because you'll be able to keep much of this off your books?

Ray Link

What we've done so far is we've in-sourced, so to speak, the manufacturing activities in our factory here in Hillsboro and that is a relatively small percent of our total output, and we did have a slight benefit from some inventory rolling off our books, rolling to their books and basically comes on to our books for a relatively short cycle. The way we are looking at things with all of our other suppliers, that won't really change that, whether or not we do more outsourcing, it is still up in the air at this point in time. So I wouldn't be looking near-term for any big change in inventory as a result of our manufacturing model.

JoAnne Feeney - FTN Equity Capital

Then if I could, Don, circle back to the issue of orders for this quarter.

Don Kania

That's not an issue. We'll get some orders this quarter.

JoAnne Feeney - FTN Equity Capital

So in comparison to prior quarters where you've given this guidance, open ended upside guidance, how do you feel about the sort of the level of uncertainty around that order guidance this time around? Is it more or less uncertain? And where is the greatest uncertainty? Is it in R&I , because you've talked about life sciences coming back. You talked about electronics going up. It sounds like it's research that's more uncertain one.

Don Kania

I think the better way to think about the way we are guiding is with the floor and up is, as I commented earlier, we are taking a stand that we are viewing the usual Q4 end of year monies as just very uncertain in this environment. So we've taken a conservative view on that piece. Predominantly those orders fall into the R&I camp when we look back on history. So that's probably the number one.

Number two is just a question of some of the timing on the stimulus goes around that. Given NIH, we'll no doubt be pushed into early next year, that's if life sciences come next year and it's really a question about what upside we see on funding that flow out of the areas that go into R&I as well. So I think, I want to be clear the uncertainty is to the upside not to the downside on these activities and we've taken a conservative view.

Operator

(Operator Instructions) Our next question comes from the line of Peter Wright with GC Research.

Peter Wright- GC Research

Your research and industrial was strong from a revenue standpoint in the current quarter. Did I catch it right that you don't believe there's really any stimulus impact yet in your revenue numbers, that is just better than seasonal number and if you could help us understand what contributed to that in the quarter?

Ray Link

That's correct, Peter. There really is no meaningful stimulus revenue in the R&I numbers for the quarter.

Peter Wright- GC Research

What is contributing the stronger research and industrial? Is that the industrial side picking up in this third quarter?

Don Kania

I think if you look back the last few quarters, I think the strength out of Asia is a good piece of puzzle in the first half of orders and some of that is starting to flow into revenue and some of that will have a tail into Q4. So I think global demand for research products is the underlying theme. They are tagged directly to stimulus. So we are very particular. We talk about stimulus. We are talking about things that we tag them directly to flows of funds that have been identified by government as stimulus related activity. So we have a robust demand environment in research and industry around the globe.

Operator

(Operator Instructions). I show no further questions in queue. I'd like to turn the call back over to management. for closing remarks

Don Kania

We would like to thank everybody for dialing into the call. We appreciate your interest and we will all get back together another quarter. Thank you very, very much.

Operator

Thank you. Ladies and gentlemen, this concludes the FEI's third quarter earnings conference call. If you would like to listen to a replay of today's call please dial 303-590-3030 or 1-800-406-7325 and enter the access code 4175238. Those numbers again are 303-590-3030 or 1-800-406-7325 and access code is 4175238. ACT would like to thank you for your participation and you may now disconnect.