FEI cuts loss as reorg begins paying off

May 4, 2006 – FEI Co. (Nasdaq: FEIC) turned a corner on Wednesday. The Hillsboro, Ore., maker of tools for nanoscale characterization and research announced it had cut its first quarter loss to $5.2 million, compared with a $30.7 million loss in the fourth quarter of 2005.

While that performance is still a ways off the $3.4 million first quarter profit the company posted a year ago, net sales of $113.8 million were up 12 percent over the first quarter of last year. New orders also remained strong, as the company cited a record backlog.

Analysts responded positively to the news. “We see Q1 as confirmation that the company effectively implemented its operational overhaul during 2005 to raise gross margins and overall profitability,” wrote JoAnne Feeney in a research note this morning. Feeney is an equities analyst with investment bank Punk Ziegel & Co., which makes a market in FEI stock. She reiterated a buy rating on the stock and raised her price target from $26 to $28. The stock closed today at $25.39, up 14.8 percent over yesterday’s close.

Other analysts echoed the sentiment. ThinkEquity Partners analyst Stuart Pulvirent and W.R Hambrecht analyst John Roy also raised their targets on the stock.

It was a shift that was long in coming. Prior to yesterday’s earnings announcement Feeney said the company had taken a “giant step away from the competition” through the introduction of its Titan scanning transmission electron microscope. The device began shipping in August of last year.

She was also unfazed by CEO Vahe Sarkissian’s relatively sudden departure, which was announced April 3. He had been with FEI since 1998 and had led through numerous transformations in technology. “I think Vahe was looking for retirement,” Feeney said.

FEI, which makes focused ion- and electron-beam tools for nanoscale characterization and research, is conducting a search to replace Sarkissian, who is also leaving his position on the company’s board of directors.

“We are doing a search that will include inside and outside candidates, so probably it will take several months,” said Fletcher Chamberlin, director of investor relations for the company. He would not comment on reasons for the change in leadership. He said there has been no change in the company’s strategy of focusing on three major markets: nano research, nanobiology and nanoelectronics.

In early December 2005, FEI closed its Peabody, Mass. site, where nanoelectronics instruments were made, “to focus our nanoelectronics business more tightly,” Chamberlin said.

“We concentrated those product lines back here in Hillsboro. We also had more capacity than needed.” The company will retain its Eindhoven, Netherlands site, according to Chamberlin. “It is a very significant piece of the company. That’s where we have designed and built the Titan scanning transmission electron microscope,” he said.

The Eindhoven site could also be what attracted the attention of Carl Zeiss SMT, a unit of Carl Zeiss AG, which initiated acquisition discussions with FEI several months ago. FEI terminated those discussions in February.

Analyst Feeney doesn’t think a renewed Zeiss acquisition offer is likely now that the leadership has changed hands. “My understanding is that the company as a whole rejected it,” she said.

Raymond Link, who was brought on as chief financial officer in July of last year, was recently named interim CEO while the company’s search for a new chief executive ensues.

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