##### 



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 (Mark One)
 x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 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
    
    34-0794417(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
 Registrants telephone number, including area code: (440) 248-0400
  YES (Checkmark) NO
  YES (Checkmark) NO




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##### 



PART I. FINANCIAL INFORMATION
 ITEM 1 Financial Statements.
 
 JUNE 30,
    
    
    SEPTEMBER 30,Assets
    
    2005
    
    
    2004
    
    
    2004Current assets:Cash and cash equivalents
    
    $
    13,703
    
    
    $
    16,180
    
    
    $
    16,451Short-term investments
    
    
    40,916
    
    
    
    29,388
    
    
    
    32,112Refundable income taxes
    
    
    59
    
    
    
    278
    
    
    
    181Accounts receivable and other, net
    
    
    17,672
    
    
    
    19,576
    
    
    
    21,435Inventories:Raw materials
    
    
    8,520
    
    
    
    8,397
    
    
    
    9,720Work in process
    
    
    1,289
    
    
    
    2,099
    
    
    
    840Finished products
    
    
    2,691
    
    
    
    2,038
    
    
    
    2,055Total inventories
    
    
    12,500
    
    
    
    12,534
    
    
    
    12,615Deferred income taxes
    
    
    4,942
    
    
    
    6,754
    
    
    
    7,438Other current assets
    
    
    1,824
    
    
    
    3,377
    
    
    
    1,927Total current assets
    
    
    91,616
    
    
    
    88,087
    
    
    
    92,159Property, plant and equipment, at cost
    
    
    48,648
    
    
    
    45,943
    
    
    
    47,271Less-Accumulated depreciation
    
    
    34,749
    
    
    
    32,359
    
    
    
    32,968Net property, plant and equipment
    
    
    13,899
    
    
    
    13,584
    
    
    
    14,303Deferred income taxes
    
    
    17,638
    
    
    
    20,498
    
    
    
    16,456Other assets
    
    
    16,256
    
    
    
    12,503
    
    
    
    13,748Total assets
    
    $
    139,409
    
    
    $
    134,672
    
    
    $
    136,666Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    467
    
    
    $
    435
    
    
    $
    440Accounts payable
    
    
    6,296
    
    
    
    7,330
    
    
    
    7,422Accrued payroll and related expenses
    
    
    6,299
    
    
    
    8,249
    
    
    
    9,897Other accrued expenses
    
    
    4,796
    
    
    
    6,240
    
    
    
    5,047Income taxes payable
    
    
    3,903
    
    
    
    8,683
    
    
    
    4,935Total current liabilities
    
    
    21,761
    
    
    
    30,937
    
    
    
    27,741Long-term deferred compensation
    
    
    2,990
    
    
    
    2,431
    
    
    
    2,605Other long-term liabilities
    
    
    4,911
    
    
    
    4,387
    
    
    
    4,743Deferred income taxes
    
    
    
    
    
    
    2,290
    
    
    
    Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,219,135 at June 30, 2005, 14,053,531 at
June 30, 2004 and 14,067,107 at September 30, 2004
    
    
    178
    
    
    
    176
    
    
    
    176Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 at June 30, 2005, June 30, 2004 and
September 30, 2004
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    29,406
    
    
    
    24,324
    
    
    
    27,449Retained earnings
    
    
    80,757
    
    
    
    70,787
    
    
    
    74,686Accumulated other comprehensive income
    
    
    562
    
    
    
    522
    
    
    
    501Unamortized portion of restricted stock plan
    
    
    (28
    )
    
    
    (44
    )
    
    
    (37
    )Common shares held in treasury, at cost
    
    
    (1,155
    )
    
    
    (1,165
    )
    
    
    (1,225
    )Total shareholders equity
    
    
    109,747
    
    
    
    94,627
    
    
    
    101,577Total liabilities and shareholders equity
    
    $
    139,409
    
    
    $
    134,672
    
    
    $
    136,666
  1




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##### 



For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    33,251
    
    
    $
    36,822
    
    
    $
    106,557
    
    
    $
    100,553Cost of goods sold
    
    
    13,113
    
    
    
    13,929
    
    
    
    41,894
    
    
    
    38,729Selling, general and administrative expenses
    
    
    13,534
    
    
    
    14,169
    
    
    
    41,698
    
    
    
    40,879Product development expenses
    
    
    4,223
    
    
    
    4,065
    
    
    
    12,472
    
    
    
    11,113Operating income
    
    
    2,381
    
    
    
    4,659
    
    
    
    10,493
    
    
    
    9,832Investment income
    
    
    366
    
    
    
    126
    
    
    
    997
    
    
    
    405Interest (expense) income
    
    
    (15
    )
    
    
    3
    
    
    
    (54
    )
    
    
    (66
    )Income before income taxes
    
    
    2,732
    
    
    
    4,788
    
    
    
    11,436
    
    
    
    10,171Income tax provision
    
    
    878
    
    
    
    1,611
    
    
    
    3,576
    
    
    
    3,280Net income
    
    $
    1,854
    
    
    $
    3,177
    
    
    $
    7,860
    
    
    $
    6,891Basic earnings per share
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.47
    
    
    $
    0.42Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .1125
    
    
    $
    .1125Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .090
    
    
    $
    .090
  2




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##### 



For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    1,854
    
    
    $
    3,177
    
    
    $
    7,860
    
    
    $
    6,891Depreciation
    
    
    932
    
    
    
    978
    
    
    
    2,971
    
    
    
    3,005Other expenses not requiring outlay of cash
    
    
    88
    
    
    
    1
    
    
    
    (53
    )
    
    
    207Changes in working capital
    
    
    4,134
    
    
    
    1,739
    
    
    
    672
    
    
    
    88Other operating activities
    
    
    (2,869
    )
    
    
    (1,143
    )
    
    
    (2,877
    )
    
    
    (301
    )Net cash provided by operating activities
    
    
    4,139
    
    
    
    4,752
    
    
    
    8,573
    
    
    
    9,890Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (1,020
    )
    
    
    (449
    )
    
    
    (2,687
    )
    
    
    (2,331
    )Purchase of short-term investments
    
    
    (12,095
    )
    
    
    (15,859
    )
    
    
    (23,195
    )
    
    
    (28,181
    )Sale of short-term investments
    
    
    7,083
    
    
    
    11,388
    
    
    
    14,244
    
    
    
    18,742Net cash used in investing activities
    
    
    (6,032
    )
    
    
    (4,920
    )
    
    
    (11,638
    )
    
    
    (11,770
    )Cash flows from financing activities:Net increase (decrease) in short term debt
    
    
    263
    
    
    
    (152
    )
    
    
    29
    
    
    
    18Cash dividends
    
    
    (598
    )
    
    
    (589
    )
    
    
    (1,788
    )
    
    
    (1,743
    )Proceeds from employee stock purchase
and option plans
    
    
    89
    
    
    
    599
    
    
    
    1,968
    
    
    
    3,791Net cash (used in) provided by financing activities
    
    
    (246
    )
    
    
    (142
    )
    
    
    209
    
    
    
    2,066Effect of exchange rate changes on cash
    
    
    (251
    )
    
    
    (136
    )
    
    
    108
    
    
    
    255(Decrease) increase in cash and cash equivalents
    
    
    (2,390
    )
    
    
    (446
    )
    
    
    (2,748
    )
    
    
    441Cash and cash equivalents at beginning of period
    
    
    16,093
    
    
    
    16,626
    
    
    
    16,451
    
    
    
    15,739Cash and cash equivalents at end of period
    
    $
    13,703
    
    
    $
    16,180
    
    
    $
    13,703
    
    
    $
    16,180
  3




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##### 



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (In thousands of dollars, except for per share data)
 A.
    
    Nature of OperationsKeithley Instruments, Incs business is to design, develop, manufacture and market complex
electronic instruments and systems geared to the specialized needs of electronics manufacturers
for high-performance testing, process monitoring, product development and research. Our primary
products are integrated systems used to source, measure, connect, control or communicate
electrical direct current (DC), radio frequency (RF) or optical signals. Our customers are
engineers, technicians and scientists in manufacturing, product development and research
functions. Our products are manufactured in Ohio and sold throughout the world in over 70
countries. Our principal markets are the Americas, Europe and Asia, where we have subsidiaries
or sales offices in 15 countries. References herein to the Company, Keithley, we or our
are to Keithley Instruments, Inc., and its subsidiaries unless the context indicates otherwise.B.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe consolidated financial statements at June 30, 2005 and 2004, and for the three and nine
month periods then ended have not been audited by an independent registered public accounting
firm, but in the opinion of our management, all adjustments necessary to fairly present the
consolidated balance sheets, consolidated statements of operations and consolidated statements
of cash flows for those periods have been included. All adjustments included are of a normal
recurring nature.The Companys consolidated financial statements for the three and nine month periods ended June
30, 2005 and 2004 included in this Form 10-Q report have been prepared in accordance with the
accounting policies described in the Notes to Consolidated Financial Statements for the year
ended September 30, 2004, which were included in the Form 10-K filed on December 13, 2004.
Certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and the notes thereto
included in the Form 10-K referred to above.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the reported financial statements
and the reported amounts of revenues and expenses during the reporting periods. Examples include
the allowance for doubtful accounts, estimates of contingent liabilities, inventory valuation,
depreciation, amortization and recoverability of long-lived assets, pension plan assumptions,
and the assessment of the valuation of deferred income taxes and income tax reserves. Actual
results could differ from those estimates.ReclassificationsCertain reclassifications have been made to prior year financial statements and the notes to
conform to the current year presentation.C.
    
    Recent Accounting PronouncementsIn November 2004, the Financial Accounting Standards Board, (FASB), issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of
ARB 43, Chapter 4, previously stated that . . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as
to require treatment as current period charges. . . . SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the criterion of so
abnormal. In addition, SFAS No. 151 requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. The
provisions of SFAS No. 151 will apply to inventory costs beginning in fiscal year 2006. The
adoption of SFAS No. 151 is not expected to have a significant effect on the consolidated
financial statements of the Company.
 4




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##### 



,
   5




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##### 



D.
    
    Earnings Per Share, Including Pro Forma Effects of Stock-Based Compensation
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    1,854
    
    
    $
    3,177
    
    
    $
    7,860
    
    
    $
    6,891Weighted average shares outstanding
    
    
    16,364,662
    
    
    
    16,106,374
    
    
    
    16,306,091
    
    
    
    15,840,438Assumed exercise of stock options
    
    
    204,101
    
    
    
    560,499
    
    
    
    270,331
    
    
    
    613,322Assumed purchase of stock under
stock purchase plan
    
    
    8,227
    
    
    
    35,871
    
    
    
    11,459
    
    
    
    30,615Weighted average shares used for
dilutive earnings per share
    
    
    16,576,990
    
    
    
    16,702,744
    
    
    
    16,587,881
    
    
    
    16,484,375Basic earnings per share
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.48
    
    
    $
    0.44Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.47
    
    
    $
    0.42
    6




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##### 



For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    1,854
    
    
    $
    3,177
    
    
    $
    7,860
    
    
    $
    6,891Add: Stock-based employee compensation
expense included in reported income,
net of related tax effects
    
    
    (1
    )
    
    
    14
    
    
    
    (7
    )
    
    
    47Deduct: Stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (551
    )
    
    
    (1,256
    )
    
    
    (4,898
    )
    
    
    (3,428
    )Pro forma net income
    
    $
    1,302
    
    
    $
    1,935
    
    
    $
    2,955
    
    
    $
    3,510Pro forma basic earnings per share
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.22Pro forma diluted earnings per share
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.18
    
    
    $
    0.21
 E.
    
    Repurchase of Common Shares
    F.
    
    Financing Arrangements
  7




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##### 



G.
    
    Accounting for Derivatives and Hedging Activities
 ,
    8




---



##### 



H.
    
    Comprehensive Income
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    1,854
    
    
    $
    3,177
    
    
    $
    7,860
    
    
    $
    6,891Unrealized gains on value
of derivative securities, net of tax
    
    
    34
    
    
    
    7
    
    
    
    87
    
    
    
    75Net unrealized investment
gains (losses), net of tax
    
    
    68
    
    
    
    (8
    )
    
    
    (94
    )
    
    
    98Foreign currency translation
adjustments
    
    
    (336
    )
    
    
    (228
    )
    
    
    68
    
    
    
    251Comprehensive income
    
    $
    1,620
    
    
    $
    2,948
    
    
    $
    7,921
    
    
    $
    7,315
 I.
    
    Geographic Segment Information
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales:Americas
    
    $
    9,306
    
    
    $
    13,589
    
    
    $
    31,074
    
    
    $
    33,910Europe
    
    
    12,433
    
    
    
    12,187
    
    
    
    34,186
    
    
    
    33,822Asia
    
    
    11,512
    
    
    
    11,046
    
    
    
    41,297
    
    
    
    32,821$
    33,251
    
    
    $
    36,822
    
    
    $
    106,557
    
    
    $
    100,553
 At June 30,
    
    
    At September 30,2005
    
    
    2004
    
    
    2004Long-lived assets:Americas
    
    $
    24,658
    
    
    $
    21,286
    
    
    $
    22,750Germany
    
    
    4,489
    
    
    
    4,154
    
    
    
    4,545Other
    
    
    1,008
    
    
    
    647
    
    
    
    756$
    30,155
    
    
    $
    26,087
    
    
    $
    28,051
 9




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##### 



J.
    
    Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
   For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Beginning balance
    
    $
    1,332
    
    
    $
    1,636
    
    
    $
    1,459
    
    
    $
    1,498Accruals for warranties issued during the period
    
    
    390
    
    
    
    422
    
    
    
    1,415
    
    
    
    1,158Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (39
    )
    
    
    (196
    )
    
    
    (313
    )
    
    
    (334
    )Settlements made (in cash or in kind)
during the period
    
    
    (468
    )
    
    
    (309
    )
    
    
    (1,346
    )
    
    
    (769
    )Balance at June 30
    
    $
    1,215
    
    
    $
    1,553
    
    
    $
    1,215
    
    
    $
    1,553
 K.
    
    Pension Benefits
  10




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##### 



For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost-benefits earned during the period
    
    $
    363
    
    
    $
    355
    
    
    $
    1,093
    
    
    $
    1,064Interest cost on projected benefit obligation
    
    
    536
    
    
    
    512
    
    
    
    1,614
    
    
    
    1,539Expected return on plan assets
    
    
    (693
    )
    
    
    (657
    )
    
    
    (2,073
    )
    
    
    (1,969
    )Net loss recognition
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Amortization of transition asset
    
    
    (6
    )
    
    
    (6
    )
    
    
    (16
    )
    
    
    (17
    )Amortization of prior service cost
    
    
    46
    
    
    
    45
    
    
    
    138
    
    
    
    137Net periodic benefit cost
    
    $
    247
    
    
    $
    250
    
    
    $
    757
    
    
    $
    755
  L.
    
    Accrued Severance Liability
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance, beginning of period
    
    $
    
    
    
    $
    125
    
    
    $
    107
    
    
    $
    503Payments made
    
    
    
    
    
    
    
    
    
    
    (94
    )
    
    
    (406
    )Adjustments and write-offs
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    Foreign exchange revaluation
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    28Balance, end of period
    
    $
    
    
    
    $
    125
    
    
    $
    
    
    
    $
    125
 ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
  Overview
  11




---



##### 



Critical Accounting Policies and Estimates
   Results of Operations
 Third Quarter Fiscal 2005 Compared with Third Quarter Fiscal 2004
    12




---



##### 



Nine Months Ended June 30, 2005 Compared with Nine Months Ended June 30, 2004
       13




---



##### 



Financial Condition, Liquidity and Capital Resources
   Outlook
   Factors That May Affect Future Results
  14




---



##### 



ITEM 3 Quantitative and Qualitative Disclosure About Market Risk.
   15




---



##### 



ITEM 4 Controls and Procedures.
   16




---



##### 



PART II. OTHER INFORMATION
 Unregistered Sales of Equity Securities and Use of Proceeds
  Exhibits
 Exhibits
 ExhibitNumber
    
    Exhibit10(1)
    
    Form of Indemnification Agreement entered into by the Company and Brian J. Jackman,
as a member of the Companys Board of Directors on May 5, 2005. (Reference is made
to Exhibit 10.1 of the Companys Current Report on
Form 8-K dated May 4, 2005 (File
No. 001-09965), which Exhibit is incorporated herein by reference.)31(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.
  17




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KEITHLEY INSTRUMENTS, INC.
(Registrant)Date: August 9, 2005
    /s/  Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer
(Principal Executive Officer)Date: August 9, 2005
    /s/  Mark J. PlushMark J. PlushVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 18




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EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit10(1)
    
    Form of Indemnification Agreement entered into by the Company and Brian J. Jackman,
as a member of the Companys Board of Directors on May 5, 2005. (Reference is made
to Exhibit 10.1 of the Companys Current Report on
Form 8-K dated May 4, 2005 (File
No. 001-09965), which Exhibit is incorporated herein by reference.)31(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.
  19