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Cash influx to fuel stock repurchase cleveland-"Bittersweet," says Joseph P. Keithley, president/CEO/chairman of Keithley Instruments, when asked to describe the measurement company's divestiture of its Quantox oxide monitoring product line to KLA-Tencor. A capital-intensive but promising product line that contributed 10 percent to the company's sales, Quantox also threatened the identity and direction of Keithley Instruments. "To take advantage of what Quantox had to offer, we would have to shift our focus a lot farther than I would care to take our company," says Mr. Keithley. "We would have to shift closer to being a metrology company." While Keithley's Quantox line had begun to return a profit in the last two quarters of 1998, the company felt that additional investments in the line as well as the need to shift the company away from electronic measurement instruments closer to metrology, warranted the sale. Fewer Orders Than Expected In 1996, Keithley licensed technology from IBM, which it married to its own instrumentation to form the Quantox line. The capital-intensive effort, while categorized as a success by Mr. Keithley, proved to have less market potential than previously expected. Customers ordered fewer Quantox systems than the company anticipated would be required on the fab line. In order to make Quantox pay off, the company would have been forced to divest the majority of its businesses both to finance the transition and realign the company with complimentary product rollouts. Consequently, Keithley took a step back from the front-end equipment business (where Quantox positioned them) to its core measurement business and a renewed focus on parametric testing for semiconductors. In KLA-Tencor, Keithley found a company that contained all the advantages that Keithley lacked, including a complementary product portfolio to the Quantox line. In addition, KLA-Tencor saw the potential for Quantox to improve its own products in the area of electrical characterization of films and optical measurement capabilities for thin films. "As the semiconductor industry continues to push toward 0.13-micron device technology and beyond, monitoring and controlling gate oxides will become increasingly difficult," said Gary Bultman, VP/GM of KLA- Tencor's Film Measurement division. Keithley expects the sale to result in a one-time gain of 35-40 cents per share. The gain will be recorded in the company's 1Q ending Dec. 31. The cash proceeds from the sale will be used to partially fund a stock repurchase tender offer for up to 2 million of its common shares or approximately 40 percent of common shares outstanding (25 percent of Class B and common shares combined) from existing shareholders. Tender Is The Offer Keithley also disclosed the tender offer last week along with its fourth quarter and fiscal year 1998 results. SEC regulations necessitated the close timing of the divestiture, tender offer and fiscal results. The company will conduct the tender offer through a procedure commonly known as a "Dutch auction," in which shareholders can tender their shares at prices not in excess of $7.00 nor less than $5.75 per share. Following the Dutch auction, the company intends to implement an ongoing open-market stock repurchase program. "We expect that the majority of the stock repurchased through the Dutch auction will be bought with available cash received from our August sale of the Radiation Measurements division and today's announced sale of the Quantox product line," says Mr. Keithley. The repurchase program will give those larger Keithley shareholders who wish to sell their shares the opportunity to sell them back to the company. According to Mr. Keithley, the stock market giveth, and it taketh away. In September 1997, Keithley was trading at 12 on the New York Stock Exchange. Twelve days ago, the stock was trading at 3 3/4. Out Of Favor "Companies making capital equipment have been out of favor with the stock market. Companies that make semiconductor capital equipment have certainly been out of favor. And companies that service companies in (the Asia/Pacific region) have been somewhat out of favor with the stock market," says Mr. Keithley. "Our market valuation did not give us much credit." While other equipment vendors experienced disastrous years, Keithley's fiscal 1998 net sales were $117.8 million, down 4 percent from $123.3 million in fiscal 1997. Fourth-quarter net sales of $27.9 million dropped 20 percent from record sales of $34.9 million recorded in the fourth quarter of 1997. Net income was $2.5 million, or 31 cents per share, compared with $1.2million, or 15 cents per share, a year ago. Net income was aided by a 22-cent per share gain on the sale of Keithley's Radiation Measurements division (RMD), while the company took charges equaling 9 cents per share for personnel and cost reductions. Excluding these items in both years, net income was 18 cents per share compared with 19 cents per share in last year's quarter. For the year, net income was $5 million, or 62 cents per share, compared with $800,000, or 10 cents per share, in 1997. Excluding the gain on the sale of RMD and other personnel cost reductions in both years, net income was 58 cents per share, compared with 16 cents per share last year. |