<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NO. 0-22780
FEI COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0621989
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7451 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124-5830
(Address of principal executive offices) (Zip Code)
(503) 640-7500
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
The number of shares of Common Stock outstanding as of May 5, 2000 was
27,956,384.
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 2, 2000 (unaudited) and
December 31, 1999......................................................................................... 1
Condensed Consolidated Statements of Operations (unaudited) -
Thirteen Weeks Ended April 2, 2000 and April 4, 1999 ..................................................... 2
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) -
Thirteen Weeks Ended April 2, 2000 and April 4, 1999 ..................................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Thirteen Weeks Ended April 2, 2000 and April 4, 1999.......................................................4
Notes to Condensed Consolidated Financial Statements (unaudited)............................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................................ 10
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................................................15
Signatures....................................................................................................16
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEI COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, April 2,
ASSETS 1999 2000
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,124 $ 14,760
Receivables 77,628 80,336
Current account with Philips (Note 6) 95 480
Inventories (Note 4) 59,517 57,934
Deferred income taxes 16,699 14,575
Other 6,796 6,576
--------- ---------
Total current assets 171,859 174,661
EQUIPMENT 28,768 28,377
PURCHASED GOODWILL AND TECHNOLOGY (Note 2) 65,586 64,177
OTHER ASSETS (Note 5) 21,887 23,778
--------- ---------
TOTAL $ 288,100 $ 290,993
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 21,362 $ 17,875
Accrued payroll liabilities (Note 3) 6,795 6,298
Accrued warranty reserves 8,779 9,618
Deferred revenue 20,627 18,319
Income taxes payable 6,105 8,364
Accrued restructuring costs (Note 3) 426 --
Other current liabilities 22,808 20,118
--------- ---------
Total current liabilities 86,902 80,592
BANK LINE OF CREDIT BORROWINGS (Note 7) 1,192 2,257
CREDIT FACILITY WITH PHILIPS (Note 7) 34,820 40,604
DEFERRED INCOME TAXES 10,637 9,500
OTHER LIABILITIES 1,972 2,082
SHAREHOLDERS' EQUITY:
Preferred stock - 500,000 shares authorized; none issued and outstanding -- --
Common stock - 45,000,000 shares authorized; 27,544,280 and
27,952,591 shares issued and outstanding at December 31, 1999
and April 2, 2000 218,406 220,366
Note receivable from shareholder (1,116) (1,116)
Accumulated deficit (56,185) (53,430)
Accumulated other comprehensive loss (8,528) (9,862)
--------- ---------
Total shareholders' equity 152,577 155,958
--------- ---------
TOTAL $ 288,100 $ 290,993
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
April 4, April 2,
1999 2000
<S> <C> <C>
NET SALES $ 45,408 $ 67,153
COST OF SALES 28,083 39,985
------------ ------------
Gross profit 17,325 27,168
------------ ------------
OPERATING EXPENSES:
Research and development 5,239 7,226
Selling, general and administrative 10,645 13,445
Amortization of purchased goodwill and technology 629 1,538
------------ ------------
Total operating expenses 16,513 22,209
------------ ------------
OPERATING INCOME 812 4,959
OTHER INCOME (EXPENSE):
Interest income 81 198
Interest expense (307) (542)
Other 552 132
------------ ------------
Total other income (expense), net 326 (212)
------------ ------------
INCOME BEFORE TAXES 1,138 4,747
INCOME TAX EXPENSE 432 1,992
------------ ------------
NET INCOME $ 706 $ 2,755
============ ============
PER SHARE DATA:
Net income per share-basic $ 0.04 $ 0.10
============ ============
Net income per share-diluted $ 0.04 $ 0.10
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 18,204,755 27,603,094
============ ============
Diluted 19,259,553 28,780,103
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
April 4, April 2,
1999 2000
<S> <C> <C>
NET INCOME $ 706 $ 2,755
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment, zero taxes provided (1,078) (1,334)
------- -------
COMPREHENSIVE INCOME (LOSS) $ (372) $ 1,421
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
April 4, April 2,
1999 2000
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 706 $ 2,755
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation 1,759 2,512
Amortization 898 1,844
Retirement of fixed assets and demonstration systems 43 461
Deferred income taxes 13 987
Decrease (increase) in assets:
Receivables 2,439 (2,708)
Current account with Philips (4,460) (385)
Inventories 320 1,583
Other assets (3,370) (1,916)
Increase (decrease) in liabilities:
Accounts payable 6,068 (3,487)
Accrued payroll liabilities 866 (497)
Accrued warranty reserves 748 839
Deferred revenue 3,492 (2,308)
Accrued restructuring costs 424 (426)
Other liabilities (280) (322)
-------- --------
Net cash provided by (used in) operating activities 9,666 (1,068)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (1,711) (2,582)
Investment in software development (399) (190)
-------- --------
Net cash used in investing activities (2,110) (2,772)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) bank lines of credit (6,860) 1,065
Proceeds from exercise of stock options and employee stock purchases 452 2,474
Sale of stock to Philips -- 144
Repurchase of Company stock -- (657)
Proceeds from long-term borrowings from Philips 11,526 5,784
-------- --------
Net cash provided by financing activities 5,118 8,810
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,078) (1,334)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,596 3,636
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,198 11,124
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,794 $ 14,760
======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - FEI Company and its wholly-owned subsidiaries (the
"Company") design, manufacture, market and service products based on focused
charged particle beam technology. The Company's products include transmission
electron microscopes ("TEMs"), scanning electron microscopes ("SEMs"), focused
ion-beam systems ("FIBs") and products that incorporate an electron beam and an
ion beam into a single system ("DualBeam Systems"). The Company also sells some
of the components of electron microscopes and FIBs to other manufacturers. The
Company has manufacturing operations in Hillsboro, Oregon; Peabody,
Massachusetts; Eindhoven, The Netherlands; and Brno, Czech Republic. Sales and
service operations are conducted in the United States and 23 other countries,
constituting a majority of the worldwide market for the Company's products. The
Company also sells its products through independent representatives in certain
countries. Prior to December 1999, the Company's products were sold through
distribution agreements with affiliates of Koninklijke Philips Electronics N.V.
("Philips") located in approximately 20 countries. The Company's FIBs and
DualBeam Systems are sold primarily to semiconductor manufacturers and to thin
film head manufacturers in the data storage industry, and are used in the
design, manufacture and testing of integrated circuits and thin film heads. The
Company's SEMs and TEMs are sold to life science and materials science research
institutes, universities and industrial customers, as well as to semiconductor
and thin film head manufacturers.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of FEI Company and all of its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Approximately 50 percent of the Company's outstanding shares of
common stock are owned by Philips resulting from the combination of FEI Company
with Philips Electron Optics Division in 1997 (the "PEO Combination").
The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for fair presentation have been
included.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During 1998, the Financial
Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which has not yet been adopted by the
Company, but, as amended, is required to be adopted on January 1, 2001. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which the Company
is required to adopt in the second quarter of 2000. The Company is in the
process of completing its analysis of the impact on earnings and the financial
position of the Company upon adoption.
EARNINGS PER SHARE - The Company reports basic and diluted net income per share
in accordance with SFAS No. 128, EARNINGS PER SHARE. The difference between
basic and diluted net income per share is a result of the dilutive effect of
options, which are considered potential common shares. The difference between
the number of shares used in the calculation of basic and diluted net income per
share is as follows:
5
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------------
April 4, 1999 April 2, 2000
<S> <C> <C>
Weighted average shares outstanding - basic 18,204,755 27,603,094
Dilutive effect of stock options calculated using the treasury stock
method 1,054,798 1,177,009
----------- -----------
Weighted average shares outstanding - diluted 19,259,553 28,780,103
=========== ===========
</TABLE>
2. MERGERS AND ACQUISITIONS
MICRION CORPORATION - On August 13, 1999, the Company acquired all of the
outstanding common stock of Micrion Corporation ("Micrion"), a Massachusetts
corporation engaged in the design, manufacture, sale and service of focused
charged particle beam systems. The purchase consideration consisted of 5,064,150
newly issued shares of the Company's Common Stock plus $30,385 in cash. The
transaction was accounted for as a purchase, and, accordingly, purchase
accounting was applied to the assets and liabilities of Micrion. The total
purchase price of $69,355 consisted of the fair value of the Company's newly
issued shares of Common Stock, the cash paid to Micrion shareholders, and
transaction costs of $4,286 including investment banking fees and legal fees
associated with required regulatory processes. Micrion's results of operations
are included in the consolidated financial statements for the period subsequent
to August 13, 1999.
Pro forma combined statement of operations data, presented as if the merger had
occurred on January 1, 1999 is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
April 4,
1999*
<S> <C>
Net sales $ 56,275
=========
Net loss $ (15,183)
=========
Pro forma net loss per share $ (0.56)
=========
Pro forma weighted average shares outstanding 27,182
=========
</TABLE>
* Pro forma results for 1999 include the $14,089 charge for
in-process research and development resulting from the Micrion
acquisition.
Concurrent with the merger, Philips purchased from the Company 3,913,299 newly
issued shares of common stock for $31,385 in cash.
PURCHASED GOODWILL AND TECHNOLOGY arising from the Company's merger and
acquisition activity consisted of the following:
<TABLE>
<CAPTION>
December 31, April 2,
1999 2000
<S> <C> <C>
Existing technology from PEO Combination, net of amortization
of $3,893 and $4,237, respectively $ 12,597 $ 12,253
Existing technology from Micrion acquisition, net of amortization
of $543 and $1,066, respectively 15,734 15,211
Goodwill from PEO Combination, net of amortization
of $3,330 and $3,616, respectively 13,822 13,667
Goodwill from Micrion acquisition, net of amortization
of $658 and $1,045, respectively 23,433 23,046
-------- --------
Purchased goodwill and technology, net $ 65,586 $ 64,177
======== ========
</TABLE>
6
<PAGE>
3. RESTRUCTURING AND REORGANIZATION
In the third quarter of 1998 the Company implemented a restructuring and
reorganization plan to consolidate operations, eliminate redundant facilities,
reduce operating expenses, and provide for outsourcing of certain manufacturing
activities. The plan included the elimination of 173 positions worldwide, or
about 16% of the Company's work force as of July 29, 1998. The positions
affected included manufacturing, marketing, administrative, field service and
sales personnel. During the third quarter of 1998, all affected employees were
informed of the planned terminations and the related severance benefits they
would be entitled to receive. Of the 173 positions targeted for elimination, 76
positions were terminated in 1998, 88 positions were terminated in 1999, and 9
positions were terminated in 2000.
The various components of restructuring and reorganization charges were as
follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended April 2, 2000
----------------------------------
Liability Liability
as of Charged as of
December 31, Charged to April 2,
1999 Expense Settled (1) 2000
<S> <C> <C> <C> <C>
Severance, outplacement and related
benefits for terminated employees $ 1,665 $ -- $ (404) $ 1,261
Lease abandonment costs for
vacated facilities 22 -- (22) --
--------- --------- --------- ---------
$ 1,687 $ -- $ (426) $ 1,261
========= ========= ========= =========
</TABLE>
(1) Represents cash payments as well as effects of changes in currency
translation on recorded liabilities.
These amounts are reported in the condensed consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
December 31, April 2,
1999 2000
<S> <C> <C>
Accrued restructuring costs $ 426 $ --
Accrued payroll liabilities 1,261 1,261
------------ ------------
Total $ 1,687 $ 1,261
============ ============
</TABLE>
Although all terminations under the plan have been completed, certain post
termination obligations remain unpaid by the Company as of April 2, 2000, and
these obligations are classified as accrued payroll liabilities.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, April 4,
1999 2000
<S> <C> <C>
Raw materials and assembled parts $ 29,148 $ 26,854
Service inventories, current requirements 6,540 7,507
Work in process 20,896 24,904
Finished goods 17,824 13,114
------------ ------------
74,408 72,379
Reserve for obsolete inventory (14,891) (14,445)
------------ ------------
Total inventories $ 59,517 $ 57,934
============ ============
</TABLE>
7
<PAGE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31, April 4,
1999 2000
<S> <C> <C>
Service inventories, noncurrent, net of obsolescence reserves
of $8,537 and $8,174, respectively $11,716 $13,724
Capitalized software development costs, net of amortization
of $1,938 and $2,145, respectively 4,821 4,596
Patents, net of amortization of $60 and $66, respectively 261 255
Investments in unconsolidated affiliates 3,000 3,000
Deposits and other 2,089 2,203
------- -------
Total other assets $21,887 $23,778
======= =======
</TABLE>
Software development costs capitalized during the thirteen weeks ended April 4,
1999 and April 2, 2000 were $399 and $190, respectively. Amortization of
software development costs was $266 and $303 for the thirteen weeks ended April
4, 1999 and April 2, 2000.
6. CURRENT ACCOUNT WITH PHILIPS
Current account with Philips represents accounts receivable and accounts payable
between the Company and other Philips business units. Most of the current
account transactions relate to deliveries of goods and services.
Current account with Philips consisted of the following:
<TABLE>
<CAPTION>
December 31, April 2,
1999 2000
<S> <C> <C>
Current accounts receivable $ 4,921 $ 3,972
Current accounts payable (4,826) (3,492)
------------ ------------
Total current account with Philips $ 95 $ 480
============ ============
</TABLE>
7. CREDIT FACILITY WITH PHILIPS AND BANK LINE OF CREDIT BORROWINGS
The Company has a credit facility with Philips that provides borrowing capacity
of up to $50,000, with advances bearing interest at various base rates (LIBOR
for U.S. dollar borrowings) plus 0.75%. The weighted average interest rates in
effect at December 31, 1999 and April 2, 2000 were 5.02% and 4.66% respectively.
Advances up to $10,000 may be made on a revolving current account basis, with
additional advances made with maturities of one month, three months, or six
months. The credit facility is unsecured, matures on February 26, 2002 and
requires that the Company meet certain financial covenants. As of April 2, 2000
the Company was in compliance with all of these covenants. Based on management's
intent, the borrowings outstanding under the credit facility are classified as
long-term.
The Company also maintains a $5,000 unsecured and uncommitted bank borrowing
facility in the U.S. and certain limited facilities in selected foreign
countries. At April 2, 2000, the Company had outstanding standby letters of
credit totaling approximately $868 to secure customer advance deposits. These
standby letters of credit reduce the amount available to borrow under the
Company's $5,000 uncommitted facility.
8
<PAGE>
8. SHAREHOLDERS' EQUITY
The Company issued 81,414 and 96,383 shares of common stock to employees under
its Employee Stock Purchase Plan during the thirteen weeks ended April 4, 1999
and April 2, 2000, respectively. 1,892 and 203,459 stock options were exercised
during the thirteen weeks ended April 4, 1999 and April 2, 2000, respectively.
Under the combination agreement between the Company and Philips, the Company
issued 125,969 shares of common stock to Philips during the thirteen weeks ended
April 2, 2000. No such shares were issued during the thirteen weeks ended April
4, 1999. During the thirteen weeks ended April 2, 2000, the Company sold 5,000
shares of common stock to Philips for $144. Also during the thirteen weeks ended
April 2, 2000, the Company purchased 22,500 shares of its own common stock in
the open market for an aggregate purchase price of $657.
9. SEGMENT INFORMATION
The Company operates in three business segments. The Components segment
manufactures and markets electron and ion emitters, focusing columns, and
components thereof. These components are used in the Company's FIB, SEM and TEM
systems, and are also sold to other electron microscope manufacturers. The
Microelectronics segment manufactures, markets and services FIBs and DualBeam
systems. Microelectronics segment products are sold primarily to the
semiconductor and data storage industries. The Electron Optics segment
manufactures, markets and services SEMs and TEMs. Electron Optics products are
sold in the materials and life sciences markets as well as in the semiconductor
and data storage markets. The demand forces for these products differ
significantly among the segments. See Note 1.
The following table summarizes various financial amounts for each of the
Company's business segments:
<TABLE>
<CAPTION>
Corporate
Micro- Electron and
Thirteen Weeks Ended Components electronics Optics Eliminations Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
April 4, 1999:
Product sales to customers $ 2,351 $ 18,806 $ 16,817 $ -- $ 37,974
Service sales to customers -- 1,213 6,221 -- 7,434
Inter-segment sales 873 -- 1,013 (1,886) --
------------ ------------ ------------ ------------ ------------
Total sales 3,224 20,019 24,051 (1,886) 45,408
Operating income (loss) 415 2,189 (182) (1,610) 812
April 2, 2000:
Product sales to customers 4,695 25,951 25,233 -- 55,879
Service sales to customers -- 4,249 7,025 -- 11,274
Inter-segment sales 1,054 -- 1,491 (2,545) --
------------ ------------ ------------ ------------ ------------
Total sales 5,749 30,200 33,749 (2,545) 67,153
Operating income (loss) 2,093 2,562 3,216 (2,912) 4,959
</TABLE>
Inter-segment sales are recorded at cost, with no markup for gross profit within
the selling segment. Shared operating expenses are allocated pro-rata to the
business segments on the basis of product sales to customers.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect on the Company's financial position, results of operations, or liquidity.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the periods
indicated as a percentage of net sales.
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------
April 4, April 2,
1999 2000
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 61.8 59.5
------------ ------------
Gross profit 38.2 40.5
Research and development costs 11.5 10.8
Selling, general and administrative costs 23.4 20.0
Amortization of intangibles 1.4 2.3
------------ ------------
Operating income 1.8 7.4
Other income (expense), net 0.7 (0.3)
------------ ------------
Income before taxes 2.5 7.1
Tax expense 1.0 3.0
------------ ------------
Net income 1.6% 4.1%
------------ ------------
</TABLE>
NET SALES. Net sales for the thirteen weeks ended April 2, 2000 increased $21.7
million (48%) compared to the corresponding period in 1999. The acquisition of
Micrion, completed in August 1999, contributed $8.1 million to net sales for the
thirteen weeks ended April 2, 2000.
Microelectronics segment product sales increased $7.1 million (38%) in the first
quarter of 2000 compared to the first quarter of 1999. Of this increase, $5.8
million was attributable to Micrion. Microelectronics segment service sales
increased $3.0 million (250%) in the first quarter of 2000 compared to the first
quarter of 1999, with Micrion contributing $2.3 million of the increase.
Industry conditions in both the semiconductor and data storage industries were
generally stronger in the first quarter of 2000 than in the first quarter of
1999. In addition, the development of new applications for the Microelectronics
segment products contributed to increased demand.
Electron Optics segment product sales increased $8.4 million (50%) in the first
quarter of 2000 compared to the first quarter of 1999. Electron Optics segment
service sales increased $0.8 million (13%) in the first quarter of 2000 compared
to the first quarter of 1999. The Company began shipping a new series of TEM
products in 1999 and strong demand for these products contributed to the sales
increase in 2000. Sales of the Company's SEM products decreased 8% from 1999 to
2000, primarily due to increased competition. Growth in Electron Optics segment
service revenues was primarily due to the acquisition of additional sales and
service businesses from Philips in late 1999, which contributed $0.8 million of
additional 2000 service revenue.
Product sales in the Components segment increased $2.3 million (100%) in the
first quarter of 2000 compared to the first quarter of 1999. The demand for
Components segment products was weak in the first quarter of 1999, due to
customers' utilization of on-hand inventories. Demand for the Company's
components segment products increased sharply beginning in late 1999.
10
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------
April 4, April 2,
Sales by Geographic Region as a Percent of Total Revenues: 1999 2000
<S> <C> <C>
North America 48% 47%
Europe 31 32
Asia Pacific 17 18
Rest of World 4 3
----------- ----------
100% 100%
----------- ----------
</TABLE>
Sales increased in the first quarter of 2000 compared to the first quarter of
1999 in each of the three major geographic regions in which the Company sells;
North America, Europe and Asia Pacific. In North America, sales increased by
$9.9 million (46%) from 1999 to 2000 due to increased demand in the
semiconductor industry and other markets in that region. Sales increased in the
North America region across all of the Company's business segments. In Europe,
sales increased by $7.8 million (56%) from 1999 to 2000 due to increased demand
in the semiconductor industry, strong demand for the Company's new TEM products,
and increased service revenues from the acquisition of additional sales and
service businesses from Philips in late 1999. Sales increased in the Europe
region across all of the Company's business segments. In the Asia Pacific
region, sales increased by $4.3 million (54%) from 1999 to 2000 primarily due to
increased demand in the data storage industry in that region. Sales increased in
the Asia Pacific region in the Components and Microelectronics segments, and
decreased slightly in the Electron Optics segment.
In addition to the U.S. Dollar, the Company conducts significant business in
Euros, British Pounds, and Japanese Yen. In general, the U.S. Dollar was
stronger in relation to the Euro (and the underlying European currencies) and
British Pound and weaker in relation to the Japanese Yen in the first quarter of
2000 compared with the first quarter of 1999. Accordingly, the translation of
sales denominated in European currencies resulted in lower reported sales in
U.S. Dollars in the first quarter of 2000 as compared with the first quarter of
1999. The translation of sales denominated in Japanese Yen resulted in higher
reported sales in U.S. Dollars in the first quarter of 2000 as compared with the
first quarter of 1999.
GROSS PROFIT. Gross profit as a percentage of sales ("gross margin") was 40.5%
for the first quarter of 2000 compared with 38.2% for the first quarter of 1999.
The 2000 gross margin was negatively impacted by $0.3 million of non-cash
inventory step-up adjustments related to purchase accounting for the Micrion
acquisition. Without these purchase accounting effects, the gross margin would
have been 40.9% in the first quarter of 2000. The improvement in gross margin
was primarily due to changes in product mix. Gross margins on product sales
increased in the Microelectronics and Components segments and decreased in the
Electron Optics segment from 1999 to 2000. The Company's service activities also
experienced strong improvement in gross margins due to economies of scale gained
by further integration of the Company's global service resources.
RESEARCH AND DEVELOPMENT COSTS. Research and development ("R&D") costs for the
thirteen weeks ended April 2, 2000 increased $2.0 million (38%) compared to the
same period in 1999. As a percentage of sales, research and development costs
were 10.8% and 11.5% for the thirteen weeks ended April 2, 2000 and April 4,
1999, respectively. Micrion accounted for $1.8 million of additional R&D
expenses in 2000. R&D expense is reported net of subsidies and capitalized
software development costs. These off-sets to R&D expense in the first quarter
or 2000 increased by $0.5 million compared to the first quarter of 1999.
Excluding the effects of these increased off-sets and the effect of the Micrion
acquisition, 2000 R&D expense increased $0.7 million (13%) from the first
quarter of 1999 to the first quarter of 2000. The Company is continuing to
invest in the development of its next generation platform technology, as well as
product upgrades, new software systems, and new products to broaden the product
line offerings of our business segments. The Company expects to increase its
research and development expenditures in 2000 compared to the expenditure levels
of 1999.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and administrative
("SG&A") costs for the thirteen weeks ended April 2, 2000 increased $2.8 million
(26%) compared to the same period in 1999. As a percentage of sales, selling,
general and administrative costs were 20.0% in the first quarter of 2000
compared with 23.4% in the first quarter
11
<PAGE>
of 1999. The increase in SG&A costs in 2000 was primarily attributable to the
acquisition of Micrion and the additional sales and service businesses from
Philips in 1999. For the first quarter of 2000, Micrion added $1.6 million of
additional expense and the additional sales and service businesses added another
$0.9 million of expense. Excluding the effect of these acquisitions, SG&A
expense increased 3% in the first quarter of 2000 compared to the first quarter
of 1999.
AMORTIZATION OF PURCHASED GOODWILL AND TECHNOLOGY. Amortization of purchased
goodwill and technology increased by $0.9 million (145%) in the first quarter of
2000 compared with the first quarter of 1999 as a result of the Micrion
acquisition.
OTHER INCOME (EXPENSE). Interest income represents interest earned on the
short-term temporary investment of excess cash. The increase in interest income
in 2000 compared to 1999 is primarily the result of increased principal
invested. Interest expense increased in the first quarter of 2000 compared with
the first quarter of 1999 reflecting higher levels of borrowing. Other income
decreased in the first quarter of 2000 compared with the first quarter of 1999
due to lower levels of currency transaction gains.
INCOME TAX EXPENSE. The effective income tax rate on income before taxes was 42%
for the thirteen weeks ended April 2, 2000 and 38% for the thirteen weeks ended
April 4, 1999. The Company's effective tax rate is negatively impacted by the
amortization of certain intangible assets not deductible for income tax
purposes. The effective tax rate also differs from the U.S. federal statutory
rate due to state and foreign taxes and the favorable tax effect of the
Company's use of a foreign sales corporation ("FSC") for exports from the U.S.,
among other factors. The World Trade Organization ("WTO") has ruled that U.S.
FSC's violate the WTO's global trading rules. The U.S. government is currently
considering its response to the WTO and the tax benefit afforded the Company
from utilization of its FSC may change in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were negative $1.1 million in the first
quarter of 2000 compared to positive $9.7 million in the first quarter of 1999.
Higher net income and depreciation and amortization expense were more than
off-set by increases in receivables and decreases in accounts payable and
deferred revenue in the first quarter of 2000. Capital expenditures, including
capitalized software development costs, increased from $2.1 million in the first
quarter of 1999 to $2.8 million in the first quarter of 2000. Financing
activities provided $8.8 million in cash in the first quarter of 2000,
consisting of net borrowings of $6.8 million under credit facilities and $2.6
million provided from the sale of common stock reduced by $0.7 million used to
repurchase common stock for use in certain employee benefit plans. In the first
quarter of 1999, financing activities provided $5.1 million in cash, consisting
of $4.7 million in net borrowings under credit facilities and $0.5 million from
the sale of common stock. The Company's cash and cash equivalents increased by
$3.6 million in the quarter to $14.8 million as of April 2, 2000.
Management assesses liquidity needs by evaluating cash balances on hand,
available borrowings under its credit lines, working capital trends, and
expected cash flows from operating activities compared to its investment needs.
The Company has invested both through research expenditures and through business
combinations to expand its position in the Microelectronics business segment.
During 2000 the Microelectronics segment increased its operating income to $2.7
million from $1.1 million in 1999. Management believes that this segment will
continue to increase in sales and operating profits and provide sufficient cash
flows to warrant continued investment.
The Company conducts sales and service activities on a worldwide basis and
transacts business in numerous foreign currencies whose value in relation to the
U.S. dollar fluctuates daily. Its principal raw materials, labor, and other
manufacturing costs are primarily denominated in U.S. dollars, Dutch guilders,
and Euros. The Company attempts to mitigate its currency translation and
transaction exposures by using forward exchange contracts and by borrowing in
multiple currencies. It also negotiates the selling currency with its customers.
The conversion to the Euro in many European countries has afforded an
opportunity to reduce the number of cross currency transactions.
The Company entered into a $50 million unsecured revolving credit agreement on
February 25, 1999 with Philips, its majority shareholder. The agreement matures
on February 26, 2002. It provides the Company with increased borrowing
12
<PAGE>
capacity, replacing the $25 million facility which was previously in place. The
funds may be drawn either in the U.S. or offshore in a choice of three
currencies. Under terms of the agreement, the Company must comply with customary
banking terms and conditions including financial covenants which require
specific minimum equity levels and minimum cash flow to interest expense ratios.
As of April 2, 2000, the Company was in compliance with the covenants in the
agreement. Interest on the outstanding balance is based on an applicable LIBOR
rate for one, three, or six months, at the Company's option, plus 0.75%. As of
April 2, 2000, borrowings under the credit facility were $40.6 million,
providing unused credit capacity of $9.4 million. The Company also maintains a
$5 million uncommitted line of credit with a U.S. Bank, which is utilized to
support standby letters of credit, as well as certain limited credit facilities
in foreign countries.
The Company issues shares under its Employee Stock Purchase Plan which enables
employees to purchase Company shares at a 15% discount to market price at fixed
points in time. The Company also grants options to purchase Company shares to
many of its employees and directors as part of incentive and other compensation
programs. During the thirteen weeks ended April 2, 2000, 299,842 shares were
issued under these programs as compared to 83,306 shares issued in the same
period of 1999. During the first quarter of 2000, the Company sold 5,000 shares
of common stock to Philips for $0.1 million. The Company also purchased 22,500
shares of common stock in the open market for $0.7 million during the thirteen
weeks ended April 2, 2000.
During 1999 the Company made several business investments in addition to ongoing
investments in equipment and product development. The largest of these
investments was the August 1999 purchase of Micrion. Purchase consideration for
this transaction, including transaction costs, consisted of cash and Company
shares totaling $69.4 million. In September 1999, the Company invested $3.0
million to acquire a 9.5% interest in a company, which is introducing an atomic
force microscopy tool for the semiconductor industry. In conjunction with the
investment, the Company entered into a distribution agreement through which it
will market, sell, and service the equipment. The Company also obtained a
warrant to purchase additional equity at a predetermined price and may make an
additional investment in the future. During the fourth quarter of 1999, the
Company acquired sales and service businesses from Philips in a number of
smaller market areas. Purchase consideration included a preliminary cash payment
of $3.3 million, which is subject to adjustment upon final settlement. The
Company expects to continue to utilize acquisition and investment opportunities
to augment its growth and market position.
The Company also made capital expenditures for acquisition of equipment of $2.6
million in 2000, 51% higher than the $1.7 million invested in 1999. These
expenditures are primarily for application laboratory and demonstration systems,
which exhibit the capabilities of the Company's equipment to its customers and
potential customers. Capital expenditures in 2000 are expected to increase to
the $12 million to $16 million range for this type of equipment as well as
equipment used for research and development. The Company also invests in
internally developed software which controls its equipment and provides
information from the equipment for use by customers. In 2000, capitalized
amounts for internally developed software decreased to $0.2 million from the
1999 investment of $0.4 million. These expenditures are expected to continue to
increase as the Company introduces new products and adds new applications to its
existing products.
The Company believes that its cash and cash equivalents, cash flows from
operating activities and existing credit facilities are adequate to meet the
Company's cash requirements over the next 12 to 18 months.
BOOKINGS AND BACKLOG
The Company's backlog consists of purchase orders it has received for products
and services it expects to ship and deliver within the next 12 months, although
there is no assurance that the Company will be able to do so. At April 2, 2000
the Company's product backlog was $104 million and its field service backlog was
$15 million for a total backlog of $119 million. For the first quarter of 2000,
the Company's consolidated book-to-bill ratio for both products and service was
1.2 to 1. A substantial portion of the Company's backlog relates to orders for
products with a relatively high average selling price. As a result, the timing
of the receipt of orders or the shipment of products could have a significant
impact on the Company's backlog at any date. For this and other reasons, the
amount of backlog at any date is not necessarily indicative of revenue in future
periods.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. The statements in this report
concerning increased investment in plant and equipment and software development,
the portions of the Company's sales consisting of international sales and
expected capital requirements constitute forward-looking statements that are
subject to risks and uncertainties. Factors that could materially decrease the
Company's investment in plant and equipment and software development include,
but are not limited to, downturns in the IC manufacturing market, lower than
expected customer orders and changes in product sales mix. Factors that could
materially reduce the portion of the Company's sales consisting of international
sales include, but are not limited to, competitive factors, including increased
international competition, new product offerings by competitors and price
pressures, fluctuations in interest and exchange rates (including changes in
relevant foreign currency exchange rates between time of sale and time of
payment), changes in trade policies, tariff regulations and business conditions
and growth in the electronics industry and general economies, both domestic and
foreign. Factors that could materially increase the Company's capital
requirements include, but are not limited to, receipt of a significant portion
of customer orders and product shipments near the end of a quarter and the other
factors listed above.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 21, 1997 (the "Combination Closing"), the Company combined with the
electron optics business of Philips Electronics N.V. pursuant to a Combination
Agreement dated November 15, 1996 between the Company and Philips Business
Electronics International B.V., a Netherlands corporation ("PBE"). The
Combination Agreement provides in relevant part that at the time of issuance by
the Company of any shares of Common Stock upon the exercise of a stock option
that was outstanding on the date of the Combination Closing, the Company is
required to issue to PBE a number of additional shares of Common Stock equal to
122.22% of the shares issued on exercise of the option. During the thirteen
weeks ended April 2, 2000 the Company issued 125,969 shares of its Common Stock
to PBE pursuant to this provision of the Combination Agreement. The shares
issued were not registered under the Securities Act of 1933 (the "Securities
Act"), and the issuance was made in reliance on Section 4(2) of the Securities
Act as a transaction not involving a public offering. The consideration received
by the Company for the shares issued, together with the shares issued to PBE at
the Combination Closing, was the outstanding shares of Philips Electron Optics
International B.V. and Philips Electron Optics, Inc.
During the thirteen weeks ended April 2, 2000 the Company also sold 5,000 shares
of its Common Stock to Philips for an aggregate purchase price of $144,000. The
shares issued were not registered under the Securities Act, and the sale was
made in reliance on Section 4(2) of the Securities Act as a transaction not
involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FEI COMPANY
Dated: May 15, 2000 /s/ Vahe A. Sarkissian
---------------------------------------------
Vahe A. Sarkissian
President and
Chief Executive Officer
/s/ William P. Mooney
---------------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Mark V. Allred
---------------------------------------------
Mark V. Allred
Corporate Controller
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUUMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-02-2000
<CASH> 14,760
<SECURITIES> 0
<RECEIVABLES> 83,173
<ALLOWANCES> (2,837)
<INVENTORY> 57,934
<CURRENT-ASSETS> 174,661
<PP&E> 51,107
<DEPRECIATION> (22,730)
<TOTAL-ASSETS> 290,993
<CURRENT-LIABILITIES> 80,592
<BONDS> 0
0
0
<COMMON> 220,366
<OTHER-SE> (64,408)
<TOTAL-LIABILITY-AND-EQUITY> 290,993
<SALES> 67,153
<TOTAL-REVENUES> 67,153
<CGS> 39,985
<TOTAL-COSTS> 62,194
<OTHER-EXPENSES> (330)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 542
<INCOME-PRETAX> 4,747
<INCOME-TAX> 1,992
<INCOME-CONTINUING> 2,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,755
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
