Equipment maker adjusts to lower demand from semi market

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July 12, 2005 — Providers of nanotechnology processing and metrology equipment are retooling their plans in the face of lower demand from semiconductor companies. Since Friday, two equipment makers have announced they were lowering their revenue forecasts for the second quarter and a new semiconductor industry report confirmed the equipment market will have a percentage decline in double digits this year.

FEI Co. (Nasdaq: FEIC) adjusted its second quarter revenue expectations on Monday to a range of $109 million to $111 million from a previous range of $114 million to $120 million. The Hillsboro, Ore., company, which makes tools for nanoscale characterization, analysis and modification, also announced a reorganization with various cost-saving components. It now expects second quarter earnings to be flat, down from a previously-anticipated 5 cents to 9 cents per share.

On Friday, Nanometrics Inc. (Nasdaq: NANO) said it expects revenues for the quarter to be down as much as 20 percent. It had previously anticipated revenues would be down between 0 percent and 10 percent. Nanometrics is based in Milpitas, Calif., and makes integrated and standalone metrology equipment for the semiconductor industry.

Both companies blamed a slowdown in the semiconductor industry for delaying both new bookings and shipments of previously booked orders. The mid-year edition of the SEMI Capital Equipment Consensus Forecast, released on Monday by trade group SEMI at the annual SEMICON West exposition, confirmed their thinking. It forecasts that the equipment market will decline 12.1 percent to $32.6 billion in 2005.

“We see customers becoming cautious,” said Vahe Sarkissian, FEI’s president and CEO, in a conference call. “We see them deferring their buys to the degree they can.”

The softening of demand comes at a challenging time for FEI, which had planned to do more than break even in the quarter. In order to stay on track, the company announced a reorganization that includes a plant closure, a realignment of its product groups, and a restructuring of various charges designed to lower ongoing costs.

Concurrent with closing the plant, located in Peabody, Mass., FEI management said 30 employees had been terminated in the second quarter to reduce costs.

The product group realignment will be focused on three markets — nanoelectronics, nanoresearch and nanobiology — and is designed, in Sarkissian’s words, to “prioritize investment towards highest value opportunities.”

The financial restructuring includes asset writedowns, restructuring charges and modest gains from the sale of a product line. The company estimates about $15 million of restructuring charges will be incurred over the latter two quarters but that the changes will put the company in line to break even at under $100 million in revenue.

The reaction from analysts was mixed. WR Hambrecht’s John Roy downgraded the stock from a buy to a hold, though he is not setting a price target. ThinkEquity’s Stuart Pulvirent reiterated his accumulate rating, though he lowered his 12- to 18-month price target from $24 to $22. Investors agreed. At 2 p.m. Tuesday, the company’s stock was down $2.05 at $22.25.

The question for investors is whether the revised estimate and other news will be factored into the price by the time second quarter earnings are released on Aug. 3.

If CEO Sarkissian is right, the moves announced this week could position the company for an earnings-positive 2006 as demand stabilizes and growth returns. The SEMI forecast predicts single-digit growth in 2006 and a return to double-digit growth for the equipment market over the following two years to reach $44.3 billion in 2008.


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