##### 



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, 2005
 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
(State or other jurisdiction of incorporation or organization)
    
    34-0794417
(I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
 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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PART I. FINANCIAL INFORMATION
 ITEM 1 Financial Statements.
 
 DECEMBER 31,
    
    
    SEPTEMBER 30,2005
    
    
    2004
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,243
    
    
    $
    17,856
    
    
    $
    14,397Short-term investments
    
    
    43,402
    
    
    
    32,531
    
    
    
    40,869Refundable income taxes
    
    
    846
    
    
    
    56
    
    
    
    387Accounts receivable and other, net
    
    
    18,475
    
    
    
    18,299
    
    
    
    19,452Inventories:Raw materials
    
    
    8,865
    
    
    
    9,004
    
    
    
    9,191Work in process
    
    
    1,391
    
    
    
    1,243
    
    
    
    847Finished products
    
    
    3,999
    
    
    
    2,394
    
    
    
    3,113Total inventories
    
    
    14,255
    
    
    
    12,641
    
    
    
    13,151Deferred income taxes
    
    
    4,085
    
    
    
    6,648
    
    
    
    4,444Other current assets
    
    
    2,252
    
    
    
    2,251
    
    
    
    1,385Total current assets
    
    
    93,558
    
    
    
    90,282
    
    
    
    94,085Property, plant and equipment, at cost
    
    
    48,212
    
    
    
    48,430
    
    
    
    46,996Less-Accumulated depreciation
    
    
    34,045
    
    
    
    34,208
    
    
    
    33,198Net property, plant and equipment
    
    
    14,167
    
    
    
    14,222
    
    
    
    13,798Deferred income taxes
    
    
    17,807
    
    
    
    16,826
    
    
    
    18,087Other assets
    
    
    16,125
    
    
    
    14,635
    
    
    
    16,394Total assets
    
    $
    141,657
    
    
    $
    135,965
    
    
    $
    142,364Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    214
    
    
    $
    512
    
    
    $
    Accounts payable
    
    
    7,277
    
    
    
    5,975
    
    
    
    7,540Accrued payroll and related expenses
    
    
    4,561
    
    
    
    6,734
    
    
    
    5,618Other accrued expenses
    
    
    4,320
    
    
    
    5,468
    
    
    
    4,649Income taxes payable
    
    
    3,083
    
    
    
    3,981
    
    
    
    4,341Total current liabilities
    
    
    19,455
    
    
    
    22,670
    
    
    
    22,148Long-term deferred compensation
    
    
    3,392
    
    
    
    3,211
    
    
    
    3,100Other long-term liabilities
    
    
    5,066
    
    
    
    5,290
    
    
    
    5,140Shareholders equity:Common Shares, stated value $.0125:Authorized
 80,000,000; issued and outstanding 
14,315,164 at December 31, 2005, 14,092,907 at
December 31, 2004 and 14,300,676 at September 30, 2005
    
    
    179
    
    
    
    176
    
    
    
    179Class B Common Shares, stated value $.0125:Authorized
 9,000,000; issued and outstanding 
2,150,502 at December 31, 2005, December 31, 2004 and
September 30, 2005
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    30,888
    
    
    
    27,876
    
    
    
    30,155Retained earnings
    
    
    83,750
    
    
    
    76,884
    
    
    
    82,425Accumulated other comprehensive income
    
    
    168
    
    
    
    1,089
    
    
    
    397Common shares held in treasury, at cost
    
    
    (1,268
    )
    
    
    (1,258
    )
    
    
    (1,207
    )Total shareholders equity
    
    
    113,744
    
    
    
    104,794
    
    
    
    111,976Total liabilities and shareholders equity
    
    $
    141,657
    
    
    $
    135,965
    
    
    $
    142,364
  1




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For the Three MonthsEnded December 31,2005
    
    
    2004Net sales
    
    $
    35,790
    
    
    $
    35,643Cost of goods sold
    
    
    13,587
    
    
    
    14,200Selling, general and administrative expenses
    
    
    15,003
    
    
    
    13,586Product development expenses
    
    
    5,015
    
    
    
    4,090Operating income
    
    
    2,185
    
    
    
    3,767Investment income
    
    
    440
    
    
    
    291Interest expense
    
    
    (4
    )
    
    
    (13
    )Income before income taxes
    
    
    2,621
    
    
    
    4,045Income tax provision
    
    
    695
    
    
    
    1,254Net income
    
    $
    1,926
    
    
    $
    2,791Basic earnings per share
    
    $
    0.12
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.12
    
    
    $
    0.17Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375Cash dividends per Class B
Common Share
    
    $
    .03
    
    
    $
    .03
  2




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For the Three MonthsEnded December 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    1,926
    
    
    $
    2,791Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    892
    
    
    
    1,091Non-cash stock compensation
    
    
    571
    
    
    
    Other non-cash items
    
    
    89
    
    
    
    192Changes in working capital
    
    
    (4,023
    )
    
    
    (1,572
    )Other operating activities
    
    
    614
    
    
    
    112Net cash provided by
operating activities
    
    
    69
    
    
    
    2,614Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (1,282
    )
    
    
    (945
    )Purchase of short-term investments
    
    
    (12,015
    )
    
    
    (4,046
    )Sale of short-term investments
    
    
    9,452
    
    
    
    3,559Net cash used in investing activities
    
    
    (3,845
    )
    
    
    (1,432
    )Cash flows from financing activities:Net increase in short term debt
    
    
    214
    
    
    
    45Cash dividends
    
    
    (601
    )
    
    
    (593
    )Proceeds from the sale of Common Shares
    
    
    71
    
    
    
    146Other
    
    
    10
    
    
    
    1Net cash used in financing activities
    
    
    (306
    )
    
    
    (401
    )Effect of exchange rate changes on cash
    
    
    (72
    )
    
    
    624(Decrease) increase in cash and cash equivalents
    
    
    (4,154
    )
    
    
    1,405Cash and cash equivalents at beginning of period
    
    
    14,397
    
    
    
    16,451Cash and cash equivalents at end of period
    
    $
    10,243
    
    
    $
    17,856
  3




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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
    Reclassifications
  Recent Accounting Pronouncements
  4




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\

Earnings Per Share
  For the Three MonthsEnded December 31,2005
    
    
    2004Net income
    
    $
    1,926
    
    
    $
    2,791Weighted average shares outstanding
    
    
    16,458,522
    
    
    
    16,225,559Dilutive effect of stock-based awards
    
    
    177,943
    
    
    
    352,529Assumed purchase of stock under
stock purchase plan
    
    
    6,251
    
    
    
    15,102Weighted average shares used for
dilutive earnings per share
    
    
    16,642,716
    
    
    
    16,593,190Basic earnings per share
    
    $
    0.12
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.12
    
    
    $
    0.17
 Stock-based Compensation
 Stock options
  5




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Weighted
    
    AggregateWeighted
    
    Average
    
    IntrinsicAverage
    
    Remaining
    
    ValueNumber
    
    Exercise
    
    Contractual
    
    (Inof Shares
    
    Price
    
    Life
    
    Thousands)Outstanding
at September 30, 2005
    
    
    3,327,346
    
    
    $
    20.03Options granted at
fair market value
    
    
    165,651
    
    
    
    15.05Options exercised
    
    
    (7,000
    )
    
    
    10.20
    
    
    
    
    
    
    $
    39Options forfeited
    
    
    (18,850
    )
    
    
    20.72Outstanding at
December 31, 2005
    
    
    3,467,147
    
    
    $
    19.81
    
    
    6.5 Years
    
    $
    3,33531, 2005
    
    
    3,162,209
    
    
    $
    20.33
    
    
    6.3 Years
    
    $
    3,285
  6




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Three Months Ended December 312005
    
    2004Expected life (years)
    
    
    4.5
    
    
    
    5.0Risk-free interest rate
    
    
    4.27
    %
    
    
    3.62
    %Volatility
    
    
    45
    %
    
    
    50
    %Dividend yield
    
    
    1.01
    %
    
    
    0.75
    %
       7




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For the ThreeMonths EndedDec. 31, 2004Net income
    
    $
    2,791Add: Stock-based employee compensation
expense included in reported income,
net of related tax effects
    
    
    22Deduct: Stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (823
    )Pro forma net income
    
    $
    1,990Pro forma basic earnings per share
    
    $
    0.12Pro forma diluted earnings per share
    
    $
    0.12
 Employee Stock Purchase Plan
   Repurchase of Common Shares
   8




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Financing Arrangements
   Accounting for Derivatives and Hedging Activities
 ,
    9




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Comprehensive Income
  For the Three MonthsEnded December 31,2005
    
    
    2004Net income
    
    $
    1,926
    
    
    $
    2,791Unrealized losses on value
of derivative securities
    
    
    (66
    )
    
    
    (44
    )Net unrealized investment
losses
    
    
    (20
    )
    
    
    (45
    )Foreign currency translation
adjustments
    
    
    (143
    )
    
    
    677Comprehensive income
    
    $
    1,697
    
    
    $
    3,379
 Geographic Segment Information
  For the Three MonthsEnded December 31,2005
    
    
    2004Net sales:Americas
    
    $
    11,924
    
    
    $
    11,759Europe
    
    
    11,358
    
    
    
    11,413Asia
    
    
    12,508
    
    
    
    12,471$
    35,790
    
    
    $
    35,643
  10




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At December 31,
    
    At September 30,2005
    
    2004
    
    2005Long-lived assets:United States
    
    $
    24,698
    
    
    $
    22,703
    
    
    $
    24,408Germany
    
    
    4,617
    
    
    
    4,993
    
    
    
    4,720Other
    
    
    977
    
    
    
    1,161
    
    
    
    1,064$
    30,292
    
    
    $
    28,857
    
    
    $
    30,192
 Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
   For the Three MonthsEnded December 31,2005
    
    
    2004Balance, beginning of period
    
    $
    1,084
    
    
    $
    1,459Accruals for warranties issued during the period
    
    
    256
    
    
    
    586Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (51
    )
    
    
    (202
    )Settlements made (in cash or in kind)
during the period
    
    
    (326
    )
    
    
    (425
    )Balance, end of period
    
    $
    963
    
    
    $
    1,418
 Pension Benefits
  11




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United States Plan
    
    
    Non-U.S. PlanThree Months
    
    
    Three MonthsEnded December 31,
    
    
    Ended December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost-benefits earned during the period
    
    $
    410
    
    
    $
    319
    
    
    $
    52
    
    
    $
    46Interest cost on projected benefit obligation
    
    
    500
    
    
    
    465
    
    
    
    66
    
    
    
    72Expected return on plan assets
    
    
    (723
    )
    
    
    (670
    )
    
    
    (19
    )
    
    
    (20
    )Net loss recognition
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    (3
    )
    
    
    (11
    )
    
    
    1
    
    
    
    6Amortization of prior service cost
    
    
    45
    
    
    
    44
    
    
    
    5
    
    
    
    1Net periodic pension cost
    
    $
    339
    
    
    $
    147
    
    
    $
    105
    
    
    $
    105




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


Forward-Looking Statements




Overview




12




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Critical Accounting Policies and Estimates
  Stock compensation plans:
   13




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Results of Operations
 First Quarter Fiscal 2006 Compared with First Quarter Fiscal 2005
   .
  .
     14




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Financial Condition, Liquidity and Capital Resources


Working Capital




Dec. 31, 2005
    
    
    Sept. 30, 2005Current assets:Cash and cash equivalents
    
    $
    10,243
    
    
    $
    14,397Short-term investments
    
    
    43,402
    
    
    
    40,869Refundable income taxes
    
    
    846
    
    
    
    387Accounts receivable and other, net
    
    
    18,475
    
    
    
    19,452Total inventories
    
    
    14,255
    
    
    
    13,151Deferred income taxes
    
    
    4,085
    
    
    
    4,444Other current assets
    
    
    2,252
    
    
    
    1,385Total current assets
    
    
    93,558
    
    
    
    94,085Current liabilities:Short-term debt
    
    
    214
    
    
    
    0Accounts payable
    
    
    7,277
    
    
    
    7,540Accrued payroll and related expenses
    
    
    4,561
    
    
    
    5,618Other accrued expenses
    
    
    4,320
    
    
    
    4,649Income taxes payable
    
    
    3,083
    
    
    
    4,341Total current liabilities
    
    
    19,455
    
    
    
    22,148Working capital
    
    $
    74,103
    
    
    $
    71,937




Sources and Uses of Cash




For the Three MonthsEnded December 31,2005
    
    
    2004Cash provided by (used in):Operating activities
    
    
    $
    69
    
    
    $
    2,614Investing activities
    
    
    
    (3,845
    )
    
    
    (1,432
    )Financing activities
    
    
    
    (306
    )
    
    
    (401
    )


Operating activities 15




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Investing activities


Financing
activities




Outlook






Recent Accounting Pronouncements


16




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Factors That May Affect Future Results
       17




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ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.
    ITEM 4 Controls and Procedures.
  18




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PART II. OTHER INFORMATION
 Unregistered Sales of Equity Securities and Use of Proceeds
  Exhibits
 Exhibits
 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. 19




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KEITHLEY INSTRUMENTS, INC.
(Registrant)Date:  February 9, 2006
    /s/  Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer
(Principal Executive Officer)Date:  February 9, 2006
    /s/  Mark J. PlushMark J. PlushVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 20