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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended December 31, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 Commission File Number 1-9965
 KEITHLEY INSTRUMENTS, INC.
  Ohio
    
    34-0794417(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio
(Address of principal executive offices)
    
    44139
(Zip Code)
 Registrants telephone number, including area code: (440) 248-0400
 YES þ NO o
  Large accelerated filer o      Accelerated filer þ Non-accelerated filer o
 YES o NO þ




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Forward-Looking Statements
    
 1




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4. Controls and ProceduresPART II. OTHER INFORMATIONITEM 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1 Financial Statements.
 
 DECEMBER 31,
    
    
    SEPTEMBER 30,2006
    
    
    2005
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    13,564
    
    
    $
    10,243
    
    
    $
    10,501Short-term investments
    
    
    35,764
    
    
    
    43,402
    
    
    
    36,203Refundable income taxes
    
    
    331
    
    
    
    846
    
    
    
    583Accounts receivable and other, net
    
    
    24,216
    
    
    
    18,475
    
    
    
    26,836Inventories:Raw materials
    
    
    9,652
    
    
    
    8,865
    
    
    
    9,375Work in process
    
    
    1,478
    
    
    
    1,391
    
    
    
    1,208Finished products
    
    
    4,181
    
    
    
    3,999
    
    
    
    4,064Total inventories
    
    
    15,311
    
    
    
    14,255
    
    
    
    14,647Deferred income taxes
    
    
    4,124
    
    
    
    4,085
    
    
    
    4,206Prepaid expenses
    
    
    2,449
    
    
    
    2,252
    
    
    
    1,664Total current assets
    
    
    95,759
    
    
    
    93,558
    
    
    
    94,640Property, plant and equipment, at cost
    
    
    51,031
    
    
    
    48,212
    
    
    
    49,968Less-Accumulated depreciation
    
    
    36,535
    
    
    
    34,045
    
    
    
    35,543Property, plant and equipment, net
    
    
    14,496
    
    
    
    14,167
    
    
    
    14,425Deferred income taxes
    
    
    18,054
    
    
    
    17,807
    
    
    
    17,679Other assets
    
    
    22,526
    
    
    
    16,125
    
    
    
    22,148Total assets
    
    $
    150,835
    
    
    $
    141,657
    
    
    $
    148,892Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    609
    
    
    $
    214
    
    
    $
    872Accounts payable
    
    
    8,106
    
    
    
    7,277
    
    
    
    8,033Accrued payroll and related expenses
    
    
    5,140
    
    
    
    4,561
    
    
    
    6,089Other accrued expenses
    
    
    4,609
    
    
    
    4,320
    
    
    
    4,870Income taxes payable
    
    
    2,357
    
    
    
    3,083
    
    
    
    2,733Total current liabilities
    
    
    20,821
    
    
    
    19,455
    
    
    
    22,597Long-term deferred compensation
    
    
    3,850
    
    
    
    3,392
    
    
    
    3,549Other long-term liabilities
    
    
    6,560
    
    
    
    5,066
    
    
    
    6,243Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,410,245 at December 31, 2006, 14,315,164 at
December 31, 2005 and 14,410,245 at September 30, 2006
    
    
    180
    
    
    
    179
    
    
    
    180Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 at December 31, 2006, December 31, 2005 and
September 30, 2006
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    34,097
    
    
    
    30,888
    
    
    
    33,703Retained earnings
    
    
    90,878
    
    
    
    83,750
    
    
    
    88,393Accumulated other comprehensive income
    
    
    837
    
    
    
    168
    
    
    
    615Common shares held in treasury, at cost
    
    
    (6,415
    )
    
    
    (1,268
    )
    
    
    (6,415
    )Total shareholders equity
    
    
    119,604
    
    
    
    113,744
    
    
    
    116,503Total liabilities and shareholders equity
    
    $
    150,835
    
    
    $
    141,657
    
    
    $
    148,892
  2




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For the Three MonthsEnded December 31,2006
    
    
    2005Net sales
    
    $
    41,026
    
    
    $
    35,790Cost of goods sold
    
    
    16,112
    
    
    
    13,587Gross profit
    
    
    24,914
    
    
    
    22,203Selling, general and administrative expenses
    
    
    16,643
    
    
    
    15,003Product development expenses
    
    
    5,746
    
    
    
    5,015Operating income
    
    
    2,525
    
    
    
    2,185Investment income
    
    
    578
    
    
    
    440Interest expense
    
    
    (18
    )
    
    
    (4
    )Income before income taxes
    
    
    3,085
    
    
    
    2,621Income tax provision
    
    
    10
    
    
    
    695Net income
    
    $
    3,075
    
    
    $
    1,926Basic earnings per share
    
    $
    0.19
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.12Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375Cash dividends per Class B
Common Share
    
    $
    .0300
    
    
    $
    .0300
  3




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For the Three MonthsEnded December 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,075
    
    
    $
    1,926Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,014
    
    
    
    892Non-cash stock compensation
    
    
    416
    
    
    
    571Other non-cash items
    
    
    220
    
    
    
    89Changes in working capital
    
    
    (105
    )
    
    
    (4,023
    )Other operating activities
    
    
    (353
    )
    
    
    614Net cash provided by operating activities
    
    
    4,267
    
    
    
    69Cash flows from investing activities:Capital expenditures
    
    
    (1,075
    )
    
    
    (1,282
    )Purchase of investments and other
    
    
    (4,501
    )
    
    
    (12,015
    )Proceeds from maturities and sales of investments
    
    
    4,973
    
    
    
    9,452Net cash used in investing activities
    
    
    (603
    )
    
    
    (3,845
    )Cash flows from financing activities:Net (payment) borrowing of short-term debt
    
    
    (262
    )
    
    
    214Proceeds from employee stock purchase and option plans
    
    
    
    
    
    
    71Cash dividends
    
    
    (590
    )
    
    
    (601
    )Other
    
    
    4
    
    
    
    10Net cash used in financing activities
    
    
    (848
    )
    
    
    (306
    )Effect of exchange rate changes on cash
    
    
    247
    
    
    
    (72
    )Increase (decrease) in cash and cash equivalents
    
    
    3,063
    
    
    
    (4,154
    )Cash and cash equivalents at beginning of period
    
    
    10,501
    
    
    
    14,397Cash and cash equivalents at end of period
    
    $
    13,564
    
    
    $
    10,243
  4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (In thousands of dollars, except for share data)
 Nature of Operations
  Summary of Significant Accounting Policies
 Basis of Presentation
    Recent Accounting Pronouncements
  5




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Earnings Per Share
  For the Three MonthsEnded December 31,2006
    
    
    2005Net income
    
    $
    3,075
    
    
    $
    1,926Weighted averages shares outstanding
    
    
    16,155,247
    
    
    
    16,458,522Dilutive effect of stock awards
    
    
    188,989
    
    
    
    177,943Assumed purchase of stock under
stock purchase plan
    
    
    303
    
    
    
    6,251Weighted average shares used for
dilutive earnings per share
    
    
    16,344,539
    
    
    
    16,642,716Basic earnings per share
    
    $
    0.19
    
    
    $
    0.12Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.12
 Stock-based Compensation
  Stock option activity
   Expected life (years)
    
    
    4.5Risk-free interest rate
    
    
    4.27
    %Volatility
    
    
    45
    %Dividend yield
    
    
    1.01
    %
 Performance award units
  7




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Restricted award units
  Directors equity plans
   Compensation costs recorded
  2006
    
    
    2005Cost of goods sold
    
    $
    18
    
    
    $
    28Selling, general and administrative expenses
    
    
    348
    
    
    
    474Product development expenses
    
    
    50
    
    
    
    69Stock-based compensation included in operating expenses
    
    
    416
    
    
    
    571Estimated tax impact of stock-based compensation
    
    
    137
    
    
    
    194Stock-based compensation expense, net of tax
    
    $
    279
    
    
    $
    377
   Repurchase of Common Shares
    8




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Financing Arrangements
   Accounting for Derivatives and Hedging Activities
 ,
    9




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Comprehensive Income
  2006
    
    
    2005Net income
    
    $
    3,075
    
    
    $
    1,926Unrealized losses on value of derivative securities
    
    
    (51
    )
    
    
    (66
    )Net unrealized investment gains (losses)
    
    
    21
    
    
    
    (20
    )Foreign currency translation adjustments
    
    
    252
    
    
    
    (143
    )Comprehensive income
    
    $
    3,297
    
    
    $
    1,697
 Geographic Segment Information
  For the Three MonthsEnded December,2006
    
    
    2005Net sales:United States
    
    $
    9,681
    
    
    $
    10,867Other Americas
    
    
    1,543
    
    
    
    1,057Germany
    
    
    6,416
    
    
    
    4,137Other Europe
    
    
    8,185
    
    
    
    7,221Japan
    
    
    4,514
    
    
    
    4,335Other Asia
    
    
    10,687
    
    
    
    8,173$
    41,026
    
    
    $
    35,790
  At December 31,
    
    
    At September 30,2006
    
    
    2005
    
    
    2006Long-lived assets:United States
    
    $
    30,386
    
    
    $
    24,698
    
    
    $
    30,246Germany
    
    
    5,592
    
    
    
    4,617
    
    
    
    5,406Other
    
    
    1,044
    
    
    
    977
    
    
    
    921$
    37,022
    
    
    $
    30,292
    
    
    $
    36,573
 Guarantors Disclosure Requirements
 Guarantee of original lease
  10




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Product Warranties
   2006
    
    
    2005Balance, beginning of period
    
    $
    992
    
    
    $
    1,084Accruals for warranties issued during the period
    
    
    389
    
    
    
    256Accruals related to pre-existing warranties (including
changes in estimates and expiring warranties)
    
    
    (3
    )
    
    
    (51
    )Settlements made (in cash or kind) during the period
    
    
    (369
    )
    
    
    (326
    )Balance, end of period
    
    $
    1,009
    
    
    $
    963
 Pension Benefits
  United States Plan
    
    
    Non U.S. PlanFor the Three Months
    
    
    For the Three MonthsEnded December 31,
    
    
    Ended December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service costs-benefits earned during the period
    
    $
    355
    
    
    $
    410
    
    
    $
    59
    
    
    $
    52Interest cost on projected benefit obligation
    
    
    551
    
    
    
    500
    
    
    
    81
    
    
    
    66Expected return on plan assets
    
    
    (782
    )
    
    
    (723
    )
    
    
    (16
    )
    
    
    (19
    )Net loss recognition
    
    
    16
    
    
    
    110
    
    
    
    1
    
    
    
    Amortization of transition asset
    
    
    
    
    
    
    (3
    )
    
    
    5
    
    
    
    5Amortization of prior service cost
    
    
    44
    
    
    
    45
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    184
    
    
    $
    339
    
    
    $
    131
    
    
    $
    105
  Income Taxes
  11




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ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Business Overview
      12




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Critical Accounting Policies and Estimates
  Results of Operations
 First Quarter Fiscal 2007 Compared with First Quarter Fiscal 2006
   .
  .
  13




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  December 31
    
    
    September 30Current assets:Cash and cash equivalents
    
    $
    13,564
    
    
    $
    10,501Short-term investments
    
    
    35,764
    
    
    
    36,203Refundable income taxes
    
    
    331
    
    
    
    583Accounts receivable and other, net
    
    
    24,216
    
    
    
    26,836Total inventories
    
    
    15,311
    
    
    
    14,647Deferred income taxes
    
    
    4,124
    
    
    
    4,206Prepaid expenses
    
    
    2,449
    
    
    
    1,664Total current assets
    
    
    95,759
    
    
    
    94,640Current liabilities:Short-term debt
    
    
    609
    
    
    
    872Accounts payable
    
    
    8,106
    
    
    
    8,033Accrued payroll and related expenses
    
    
    5,140
    
    
    
    6,089Other accrued expenses
    
    
    4,609
    
    
    
    4,870Income taxes payable
    
    
    2,357
    
    
    
    2,733Total current liabilities
    
    
    20,821
    
    
    
    22,597Working capital
    
    $
    74,938
    
    
    $
    72,043
  14




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Sources and Uses of Cash
  For the Three MonthsEnded December 31,2006
    
    2005Cash provided by (used in):Operating activities
    
    $
    4,267
    
    
    $
    69Investing activities
    
    
    (603
    )
    
    
    (3,845
    )Financing activities
    
    
    (848
    )
    
    
    (306
    )
 Operating activities
 Investing activities
 Financing activities
  Outlook
   15




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Recent Accounting Pronouncements
       16




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ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.
    
 ITEM 4 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors.
  Cyclicality of the electronics industry and timing of large orders
  17




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Rapid technology changes
  Competitive factors
  Dependence on key suppliers
  International operations, political and economic conditions
  Changes in manufacturing processes
  Tax planning strategies
  Information technology management systems
  18




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Fixed cost of sales force
  Non-cash compensation expense
  Historical stock option grant practices
     Other risk factors
  19




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Unregistered Sales of Equity Securities and Use of Proceeds
  
 Exhibits
 (a)
    
    Exhibits. The following exhibits are filed herewith:
 ExhibitNumber
    
    Exhibit31(a)
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a).31(b)
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a).32(a)+
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section
1350.32(b)+
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
 +
    
    The certifications furnished pursuant to this item will not be deemed filed for
purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the
liability of that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference. 20




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KEITHLEY INSTRUMENTS, INC.(Registrant)Date: February 9, 2007
    
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer(Principal Executive Officer)Date: February 9, 2007
    
    /s/ Mark J. PlushMark J. PlushVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 21