FEIC Analysis 8/29/05

FEIC Analysis 8/29/05


The FEIC 5.5% converts due 8/15/08. trade at 100.375. The main risk for this position is FEIC’s credit risk. I reviewed the company’s business and financials and have concluded that the credit is solid.

Positives for the credit are

1) the company has $276M in cash and $220M in debt.

2) FEIC is expected to generate $30M FCF in 2H05 and about $80M in 2006

3) The company is looking to buyback the expensive 5.5% convert in the near future.

4) The company has a new product cycle and its major end market (semi) is in the beginning stages of an upturn.


FEIC has $276M in cash, $150M in 0% converts with a 6/15/08 put and $70M in 5.5% converts due 8/15/08. Both convert issues are subordinated. The company is expected to generate $30M in 2H05 and about $80M in 2006. The company has already bought back $105M of the 5.5% issue and plans to buyback the remainder at some point in the near future. The company is rated B+ by S&P.

  Baa Ba B Caa  


Spread over treasuries 119 220 328 827  
EBIT/Interest Coverage 3.7x 2.1x 0.8x 0.1x


EBITDA Interest Coverage 5.8x 3.4x 1.8x 1.3x


Debt/EBITDA 2.3 3.4 4.9 6.3


Debt/Capital 48.2 62.6 74.8 87.7


The main risks for the credit are 1) The company makes an acquisition. 2) New products fail 3) Semi cycle is short-lived.

FEIC is unlikely to make an acquisition. The company brought in a new management team over the last year and they like the company’s existing portfolio and plan to focus on the current new product launch and improving gross margins. The company’s main new product is the Titan electron microscope which is the best in the market and already has several pre-launch orders. There is risk that the semi cycle could turn down unexpectedly but FEIC should still benefit from the technology investments that come during downturns. FEIC is expected to be FCF positive during the next downturn, which will likely be in 2007.

Business Segments

FEIC sells high resolution imaging tools including electron microscopes and focused ion beams. These products are sold into three key markets: Semiconductor 47% of sales, Industry and Institute 46%, and Data Storage 7%. FEIC is in beginning stages of a new product cycle with their TITAN transmission electron microscope, which is expected to sell 20 units in 2006 at an ASP of $4M. Early buyers include a Mexican Oil company for their material science unit and Samsung for their 65nm line.

Industry & Institute

Customers include universities, public and privately sponsored institutes, and commercial research laboratories. These research & development customers tend to have less cyclical buying patterns than those in manufacturing. This division is expected to grow sales consistently at 15% annually for the next few years. 


FEIC sells electron and ion beam products to semiconductor manufacturers for defect analysis found between layers. These products will become more important as line widths for transistors shrink from 130 nm to 90nm and 65nm because the percentage of defects found within the layers compared to the surface rises. Sales to semiconductor manufacturers are very cyclical and are typically leveraged to the semi R&D cycle, which tends to lag the capacity cycle by 1 or 2 quarters. The current semi cycle will begin an upturn in 3Q with +5% q/q growth and should get stronger over the next few quarters. Competitors include AMAT, JEOL andHitachi.

Data Storage

FEIC sells electron systems and wafer analysis tools to the data storage industry to increase yields. Customers include Seagate, Western Digital, IBM andHitachi. Sales in this division are extremely lump from quarter to quarter.


  • A new product cycle, which includes the Titan transmission electron microscope and expected upgrades of market-expanding, low cost, dual-beam microscopes.
  • Favorable technology trends internal to the semiconductor (rising sub-surface defect rate) and data storage market (transition to perpendicular recording) each requires a greater volume of high-resolution imaging capacity.
  • Product application in materials and life science will evolve from single-tool research settings into high-tool count production environments.


  • FEIC is subject to the lumpy buying patterns of data storage customers and the classical cyclical demand of semiconductors. However, the semi-cycle is in the beginning stages of an upturn.


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