FEI hitting its stride with new CEO

A year ago at this time, FEI was bleeding cash. Founded in 1971, the Hillsboro, Ore., company had been making ion and scanning electron beam microscopes for failure analysis, fab production process control and other tasks, but an economic downturn and perhaps overly ambitious management missteps had taken a toll. Worried managers and a supportive board put a two-year restructuring plan in place to solve the problems – selling off operations and eventually accepting the resignation of CEO Vahe Sarkissian, who had been with the company since 1998.

Enter Don Kania, 51, recruited from Veeco Instruments Inc. of Woodbury, N.Y., where Kania had been president and chief operating officer since 1998. He started at FEI in mid-August 2006, just as the company’s turnaround was beginning to accelerate, with two great quarters in a row. Competition in this space is fierce and companies are in a race to introduce new products, Kania told Small Times Contributing Editor Jo McIntyre, but he says FEI is well positioned for good results.

Q: What steps have been taken, both before and after your arrival, to return FEI to profitability?

Before I came, there was a significant restructuring that was complete when I came on board. We closed the Peabody (Mass.) operation and several sites in Europe. That allows you to operate more efficiently. Revenues have increased and orders have gone up. We are shifting to higher margin products and are doing a good job of controlling costs. There’s a big difference between restructuring and growing.

The best way to delineate what’s happened since I showed up is that the mantra now is “profitable growth.”

Q: When do you expect commerce to overtake research as a market for S/TEMs?

Today, they’re not far out of balance. Industrial class customers make up at least half of our customer base, but that includes researchers at industrial companies. In applications, manufacturing is about two-thirds of our business, compared to research which is one-third. And about one-quarter of our business is in service.

Big sales used to be to Intel and Hitachi. The recently announced big sales to universities are a big shift. Five years ago universities were building new spaces for nanotechnology research. The brick and mortar is now in place and that leads them to being ready to fill the building with tools. We’ve done a great job of filling them. They are buying our stuff in bulk.

Q: What do your latest orders from University of Ulster and Technical University of Denmark mean for FEI?

An $11.5 million order for seven different electron microscopes from the Technical University of Denmark was the biggest recent sale, but there was also a big order for University of Ulster’s new Center for Advanced Imaging for three FEI products, the value of which has not been disclosed.

These orders are an extension of existing markets, but in Denmark they are focusing on an area that we think holds great industrial prospects. So, the order is a precursor to new markets.

Q: Which of your competitors are you most concerned with and why?

That varies by the market we’re touching. In the nano-market, Hitachi – they’re big and good… but not quite as good as us. They are a large multi-divisional company. While we have some competing products, we also have products and applications that they do not.

Other Asian competitors are JEOL [acronym for Japanese Electron Optics Laboratory] and Seiko’s SII NanoTechnology. Seiko makes a focused ion beam product and has started a joint product development program with Zeiss.

In Europe, our competitor is Carl Zeiss’ SMT Nanotechnology Division. That’s about a $600 million business, more than half of which is a business that sells lenses and doesn’t compete directly with us. The remainder is smaller – they make a FIB/SEM system.

Applied Materials does have one product that competes with one product of ours – an in-fab defect analyzer. That’s an important product for us, but a very small portion of our sales.

As for the rest, we are concerned about all of our competitors. Most of the things we do are done from the technology and support and applications and product performance point of view. Other companies don’t do all of those as well as we do, though we’re always fearful of the competition.

Q: Talk about European and Asian markets for S/TEMs – which market is growing the most rapidly?

We’ve seen robust growth planet-wide. Our market share is smaller in Asia, so that’s an opportunity we’re going to invest in to grow our business faster than the market.

Q: Gallium, argon, helium are all used as sources for ion beams in scanning electron microscopes. What is their relationship to the future of measurement instruments?

Our current view is that for the present gallium is the workhorse, the established approach. With the other elements, we are developing programs to use different atoms in our sources. There may be advantages to using heavier or lighter atoms for an ion beam. Gallium makes sources very bright, but we might want to use a different ion for other applications.

Q: What is your take on Veeco’s recent announcement of a succession plan relative to your own move to Oregon?

I think Ed Braun is a great leader of the company, but Ed understands that for the company to get to the next level, some new leadership is required to make that happen.

I think the opportunity to come to the West Coast and work for a great company like FEI was the best business decision I ever made in my life. Our history includes living in California for 20 years, when we used to vacation in Oregon. Our long-term plan was to retire in Oregon, so we just moved up the plan a little bit. My daughter is loving it. Of course, getting a horse didn’t hurt!

There are some cultural differences between the East Coast and the West Coast. What I learned through this process of moving from Michigan to New Mexico, then to California and on to New York is…I’m a Westerner.

Q: You just announced FEI is selling Knight Technologies, a company making yield management and failure analysis software for the semiconductor industry, with operations in San Jose, Calif. and India. Is FEI still spinning off companies?

Knight was a small part of our business. Originally, management thought it would be a help [to have another related product for FEI’s big customers], but there are multiple suppliers of their software products, so it did not differentiate us. The sale will result in a net pretax gain of about $2.8 million in the fourth quarter of 2006, so we made a little money on the transaction.

And rather than have this good company erode away within our walls, we decided to divest it. All the employees went with them, including some in India, which the acquirer, Santa Clara, Calif. -based Magma Design Automation, had some interest in.

All other acquisitions have been divested or integrated. Generally, I would say there is nothing on our radar screen that is coming up.

Q: Some analysts say your fingerprints are on the Philips’ sale of its remaining share of FEI stock. Are you pleased with the Dutch company’s move?

Since the 1997 merger with Philips, the company has been reducing their ownership. They are currently a 25 percent owner (about 8 million out of 40 million shares); Philips has moved its business model to being a healthcare and lifestyle company. So they are divesting themselves from all businesses that don’t fit that mold.

It’s a good thing for us for a very important reason. We think that in a quarter or two it will benefit the stock price significantly. What that will do for us now is reduce the concentration of ownership. People view that as a problem, because it reduced the float. People hesitate to take a large position, because a big subsequent trade could affect the stock price. We have no issues with Philips. None of the relationships have changed. I did sit down with their CFO and other executives with the company. They are resolute about their new direction.

Q: Do you care to look into your crystal ball for us?

What I like about the whole thing as I think about FEI going into 2007 – we have new products and tools, strong technology, our restructuring is behind us, the change in executive is behind us, we have improved our focus by selling Knight, and we are growing revenue, income and profitability.

The Kania File

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Don Kania, 51, has been CEO at FEI Company since August 2006. He was president and chief operating officer of Woodbury, N.Y.-based Veeco Instruments Inc., where he had been since 1998. Known for being good with customers, Kania held technical and management positions at Lawrence Livermore National Laboratory in California and Los Alamos National Laboratory in New Mexico.

He holds B.S., M.S. and Ph.D. degrees in physics and engineering from the University of Michigan.


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