##### Table of Contents



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 March 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
    
    34-0794417(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (440) 248-0400 Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES þ   NO o
 Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). YES þ  NO o
 As of May 2, 2005 there were outstanding 14,210,785 Common Shares, without par value and
2,150,502 Class B Common Shares, without par value.




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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 Disclosure About Market RiskITEM 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEXHIBIT INDEXEX-31(A) Certification of Joseph P. KeithleyEX-31(B) Certification of Mark J. PlushEX-32(A) Certification of Joseph P. KeithleyEX-32(B) Certification of Mark J. Plush    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements KEITHLEY INSTRUMENTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
(Unaudited) MARCH 31,
    
    
    SEPTEMBER 30,2005
    
    
    2004
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,093
    
    
    $
    16,626
    
    
    $
    16,451Short-term investments
    
    
    35,802
    
    
    
    24,990
    
    
    
    32,112Refundable income taxes
    
    
    57
    
    
    
    275
    
    
    
    181Accounts receivable and other, net
    
    
    20,482
    
    
    
    16,905
    
    
    
    21,435Inventories:Raw materials
    
    
    9,738
    
    
    
    8,241
    
    
    
    9,720Work in process
    
    
    1,546
    
    
    
    1,624
    
    
    
    840Finished products
    
    
    2,981
    
    
    
    2,342
    
    
    
    2,055Total inventories
    
    
    14,265
    
    
    
    12,207
    
    
    
    12,615Deferred income taxes
    
    
    5,409
    
    
    
    6,734
    
    
    
    7,438Other current assets
    
    
    2,718
    
    
    
    2,886
    
    
    
    1,927Total current assets
    
    
    94,826
    
    
    
    80,623
    
    
    
    92,159Property, plant and equipment, at cost
    
    
    48,237
    
    
    
    45,924
    
    
    
    47,271Less-Accumulated depreciation
    
    
    34,297
    
    
    
    31,788
    
    
    
    32,968Net property, plant and equipment
    
    
    13,940
    
    
    
    14,136
    
    
    
    14,303Deferred income taxes
    
    
    17,316
    
    
    
    20,005
    
    
    
    16,456Other assets
    
    
    14,128
    
    
    
    11,653
    
    
    
    13,748Total assets
    
    $
    140,210
    
    
    $
    126,417
    
    
    $
    136,666Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    226
    
    
    $
    596
    
    
    $
    440Accounts payable
    
    
    7,707
    
    
    
    6,251
    
    
    
    7,422Accrued payroll and related expenses
    
    
    5,996
    
    
    
    6,270
    
    
    
    9,897Other accrued expenses
    
    
    5,595
    
    
    
    5,800
    
    
    
    5,047Income taxes payable
    
    
    3,749
    
    
    
    3,904
    
    
    
    4,935Total current liabilities
    
    
    23,273
    
    
    
    22,821
    
    
    
    27,741Long-term deferred compensation
    
    
    2,916
    
    
    
    2,368
    
    
    
    2,605Other long-term liabilities
    
    
    5,026
    
    
    
    4,488
    
    
    
    4,743Deferred income taxes
    
    
    
    
    
    
    2,358
    
    
    
    Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,210,785 at March 31, 2005, 13,906,012 at
March 31, 2004 and 14,067,107 at September 30, 2004
    
    
    177
    
    
    
    174
    
    
    
    176Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 at March 31, 2005, March 31, 2004 and
September 30, 2004
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    29,634
    
    
    
    26,418
    
    
    
    27,449Retained earnings
    
    
    79,501
    
    
    
    68,199
    
    
    
    74,686Accumulated other comprehensive income
    
    
    796
    
    
    
    751
    
    
    
    501Unamortized portion of restricted stock plan
    
    
    (31
    )
    
    
    (51
    )
    
    
    (37
    )Common shares held in treasury, at cost
    
    
    (1,109
    )
    
    
    (1,136
    )
    
    
    (1,225
    )Total shareholders equity
    
    
    108,995
    
    
    
    94,382
    
    
    
    101,577Total liabilities and shareholders equity
    
    $
    140,210
    
    
    $
    126,417
    
    
    $
    136,666
 The accompanying notes are an integral part of these financial statements. 1




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KEITHLEY INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars Except for Per Share Data)
(Unaudited) For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    37,663
    
    
    $
    33,989
    
    
    $
    73,306
    
    
    $
    63,731Cost of goods sold
    
    
    14,581
    
    
    
    12,657
    
    
    
    28,781
    
    
    
    24,800Selling, general and administrative expenses
    
    
    14,578
    
    
    
    13,900
    
    
    
    28,164
    
    
    
    26,710Product development expenses
    
    
    4,159
    
    
    
    3,703
    
    
    
    8,249
    
    
    
    7,048Operating income
    
    
    4,345
    
    
    
    3,729
    
    
    
    8,112
    
    
    
    5,173Investment income
    
    
    340
    
    
    
    128
    
    
    
    631
    
    
    
    279Interest expense
    
    
    (26
    )
    
    
    (52
    )
    
    
    (39
    )
    
    
    (69
    )Income before income taxes
    
    
    4,659
    
    
    
    3,805
    
    
    
    8,704
    
    
    
    5,383Income tax provision
    
    
    1,444
    
    
    
    1,180
    
    
    
    2,698
    
    
    
    1,669Net income
    
    $
    3,215
    
    
    $
    2,625
    
    
    $
    6,006
    
    
    $
    3,714Basic earnings per share
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.37
    
    
    $
    0.24Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.23Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .075
    
    
    $
    .075Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .060
    
    
    $
    .060
 The accompanying notes are an integral part of these financial statements. 2




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KEITHLEY INSTRUMENTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited) For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    3,215
    
    
    $
    2,625
    
    
    $
    6,006
    
    
    $
    3,714Depreciation
    
    
    948
    
    
    
    1,050
    
    
    
    2,039
    
    
    
    2,027Other expenses not requiring outlay of cash
    
    
    (333
    )
    
    
    27
    
    
    
    (141
    )
    
    
    206Changes in working capital
    
    
    (1,890
    )
    
    
    (994
    )
    
    
    (3,462
    )
    
    
    (1,651
    )Other operating activities
    
    
    (120
    )
    
    
    675
    
    
    
    (8
    )
    
    
    842Net cash provided by operating activities
    
    
    1,820
    
    
    
    3,383
    
    
    
    4,434
    
    
    
    5,138Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (722
    )
    
    
    (1,096
    )
    
    
    (1,667
    )
    
    
    (1,882
    )Purchase of short-term investments
    
    
    (7,054
    )
    
    
    (7,058
    )
    
    
    (11,100
    )
    
    
    (12,322
    )Sale of short-term investments
    
    
    3,602
    
    
    
    3,149
    
    
    
    7,161
    
    
    
    7,354Net cash used in investing activities
    
    
    (4,174
    )
    
    
    (5,005
    )
    
    
    (5,606
    )
    
    
    (6,850
    )Cash flows from financing activities:Net (decrease) increase in short term debt
    
    
    (279
    )
    
    
    47
    
    
    
    (234
    )
    
    
    170Cash dividends
    
    
    (597
    )
    
    
    (586
    )
    
    
    (1,190
    )
    
    
    (1,154
    )Proceeds
from employee stock purchase and option plans
    
    
    1,732
    
    
    
    2,931
    
    
    
    1,879
    
    
    
    3,192Net cash provided by financing activities
    
    
    856
    
    
    
    2,392
    
    
    
    455
    
    
    
    2,208Effect of exchange rate changes on cash
    
    
    (265
    )
    
    
    (12
    )
    
    
    359
    
    
    
    391(Decrease) increase in cash and cash equivalents
    
    
    (1,763
    )
    
    
    758
    
    
    
    (358
    )
    
    
    887Cash and cash equivalents at beginning of period
    
    
    17,856
    
    
    
    15,868
    
    
    
    16,451
    
    
    
    15,739Cash and cash equivalents at end of period
    
    $
    16,093
    
    
    $
    16,626
    
    
    $
    16,093
    
    
    $
    16,626
 The accompanying notes are an integral part of these financial statements. 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. offers a broad line of test and measurement products for engineers
and scientists throughout the world in dozens of disciplines. The Company markets highly
accurate instruments and data acquisition products that measure low levels of voltage,
resistance, current, capacitance, and charge, along with complete system solutions for high
volume production and assembly testing. 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 March 31, 2005 and 2004, and for the three and six
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 six month periods ended March
31, 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 4




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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.  In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB Opinion No. 29. The guidance in Accounting Principles Board (APB) Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged. The
guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS No.
153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the
exchange. Currently the Company does not enter into nonmonetary exchange transactions; however,
the provisions of SFAS No. 153 will be applied prospectively to any of these transactions
entered into beginning in our fourth quarter of fiscal year 2005, if applicable.In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No.
123R). This new pronouncement requires compensation cost relating to share-based payment
transactions to be recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee stock purchase plans. SFAS No.
123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting for share-based
payment transactions with employees. However, SFAS No. 123 permitted entities the option of
continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial
statements disclosed what net income would have been had the fair-value-based method been used.
In April 2005, the effective date to apply the provisions of the pronouncement was postponed for
public entities to fiscal years beginning after June 15, 2005. Accordingly, the Company will be
required to adopt the provisions of SFAS No. 123R in our 2006 fiscal year. Management is
currently evaluating the requirements of SFAS No. 123R, including stock-based compensation
valuation models and transition methods allowed under the pronouncement. The adoption of SFAS
No. 123R is expected to have a significant effect on the consolidated financial statements of
the Company. See Note D for the pro forma impact on net earnings (loss) and earnings (loss) per
share from calculating stock-related compensation costs under the fair value alternative of SFAS
No. 123. However, the calculation of compensation cost for share-based payment transactions
issued after the effective date of SFAS No. 123R may be different from the calculation of
compensation cost under SFAS No. 123, but such differences have not yet been quantified.In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB
107). SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123R
and certain SEC rules and regulations, as well as provides the staffs views regarding the
valuation of share-based payment arrangements for public companies. SAB 107 also notes the
importance for public companies to include disclosures within filings made with the SEC relating
to the accounting for share-based payment transactions, particularly during the transition to
Statement 123R. Most of the provisions of this pronouncement will be effective for the Company
upon adoption of SFAS No. 123R in fiscal 2006. See Note D of the Notes to Condensed Consolidated
Financial Statements for disclosure of the Companys activities relating to the transition to
adoption of SFAS No. 123R.In December 2004, the FASB issued two staff positions (FSP): FSP FAS 109-1, Application of
FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to
U.S.-Based Manufacturers by the American Jobs Creation Act of 2004; and FSP FAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. FSP FAS 109-1 clarifies that the tax deduction for
domestic manufacturers under the American Jobs Creation Act of 2004 (the Act) should be
accounted for as a special deduction in accordance with SFAS No. 109, Accounting for Income
Taxes. FSP FAS 109-1 will begin to impact the Company in our 2006 fiscal year. Management is
currently evaluating the provisions of the pronouncement to identify the impact on the Company.
FSP FAS 109-2 provides enterprises more time (beyond the financial reporting period during which
the Act took effect) to evaluate the Acts impact on the enterprises plan for reinvestment or
repatriation of certain foreign earnings for purposes of applying SFAS No. 109. The Company has
historically repatriated
dividends from our foreign subsidiaries; therefore, this provision of the American Jobs Creation
Act provides no benefit to the Company. As such, FSP FAS 109-2 will not impact our consolidated
financial statements for fiscal 2005. 5




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In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations. FIN 47 clarifies that the term conditional asset retirement
obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about
the timing and (or) method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information exists. FIN 47 also
clarifies when an entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. Currently the Company is not involved in asset retirement
obligations; however, the provisions of FIN 47 will be applied to any of these transactions if
so entered beginning in fiscal 2006. D. Earnings Per Share, Including Pro Forma Effects of Stock-Based Compensation Both Common Shares and Class B Common Shares are included in calculating earnings per share.
The weighted average number of shares outstanding used in the calculation is set forth below: For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    3,215
    
    
    $
    2,625
    
    
    $
    6,006
    
    
    $
    3,714Weighted average shares outstanding
    
    
    16,326,180
    
    
    
    15,861,649
    
    
    
    16,280,507
    
    
    
    15,719,343Assumed exercise of stock options
    
    
    274,238
    
    
    
    711,914
    
    
    
    315,265
    
    
    
    637,573Assumed purchase of stock under
stock purchase plan
    
    
    26,317
    
    
    
    39,043
    
    
    
    31,406
    
    
    
    26,208Weighted average shares used for
dilutive earnings per share
    
    
    16,626,735
    
    
    
    16,612,606
    
    
    
    16,627,178
    
    
    
    16,383,124Basic earnings per share
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.37
    
    
    $
    0.24Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.23
 The Company has elected to continue to account for stock issued to employees according to APB
Opinion 25, Accounting for Stock Issued to Employees and its related interpretations. Under
APB No. 25, no compensation expense is recognized in the Companys consolidated financial
statements for employee stock options except in certain cases when stock options are granted
below the market price of the underlying stock on the date of grant. Alternatively, under the
fair value method of accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123, the measurement of compensation expense is
based on the fair value of employee stock options or purchase rights at the grant or right date
and requires the use of option pricing models to value the options. During the first quarter of fiscal 2005, the Company amended the 1993 Employee Stock Purchase
Plan to change the subscription period from the calendar year to a six month period ending June
30. The change was made to maintain the current benefits of the Plan for all eligible employees
through June 30, 2005 while assessing the future value of the Plan relative to the expense that
would be required to be recorded by SFAS No. 123R for subscription periods beginning after
October 1, 2005. During the second quarter of fiscal 2005, the Companys Board of Directors authorized the
acceleration of the vesting of certain unvested and out-of-the-money stock options outstanding
as of January 31, 2005 under the Companys stock plans that had exercise prices of $17.00 or
higher. As a result of the acceleration, the
Company expects to reduce stock option expense it otherwise would have been required to record
under SFAS No. 123R by approximately $1,200 in fiscal 2006, $1,200 in fiscal 2007 and $900 in
fiscal 2008 on a pre-tax basis. The pro forma impact to both net income and earnings per share from calculating stock-related
compensation expense consistent with the fair value alternative of SFAS 123 is indicated below: 6




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For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    3,215
    
    
    $
    2,625
    
    
    $
    6,006
    
    
    $
    3,714Add: Stock-based employee compensation
expense included in reported income,
net of related tax effects
    
    
    (28
    )
    
    
    28
    
    
    
    (6
    )
    
    
    33Deduct: Stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (3,524
    )
    
    
    (1,118
    )
    
    
    (4,347
    )
    
    
    (2,172
    )Pro forma net (loss) income
    
    $
    (337
    )
    
    $
    1,535
    
    
    $
    1,653
    
    
    $
    1,575Pro forma basic (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.10Pro forma diluted (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    0.10
 E. Repurchase of Common Shares On December 10, 2003, the Company announced its Board of Directors had approved an open market
stock repurchase program (the 2003 program). Under the terms of the 2003 program, the Company
may purchase up to 2,000,000 Common Shares, or approximately 13 percent of shares outstanding at
the time the program was approved, over a three-year period. The purpose of the 2003 program is
to offset the dilutive effect of stock option and stock purchase plans. Common Shares held in
treasury may be reissued in settlement of stock purchases under these plans. The 2003 program
replaces the prior program, which expired in December 2003. The Company made no share
repurchases during the first six months of fiscal 2005 or during
fiscal 2004 and consequently, 2,000,000 shares remain available to be
repurchased. There were no Common Shares remaining in treasury under the Companys share repurchase programs
at March 31, 2005, as these shares were reissued under stock option or stock purchase plans.
There were no shares issued from treasury under these plans during the first six months of
fiscal 2005, while 322,356 shares were issued from treasury during the second quarter of fiscal
2004, and 398,837 shares were issued from treasury during the first six months in fiscal 2004. Also, included in the Common shares held in treasury, at cost caption of the consolidated
balance sheets are shares repurchased to settle non-employee Directors fees deferred pursuant
to the Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. Shares held in
treasury related to this plan at March 31, 2005 totaled 132,008. F. Financing Arrangements On March 30, 2005, the Company amended its credit agreement to extend the term to March 31, 2008
from March 31, 2005. The agreement is a $10,000 debt facility ($226 outstanding at March 31,
2005) that provides unsecured, multi-currency revolving credit at various interest rates based
on Prime or LIBOR and for standby letters of credit ($662 outstanding at March 31, 2005). The
agreement may be extended annually in one-year increments beginning March 31, 2006. The
amendment to the credit agreement dated March 30, 2005 is incorporated by reference as Exhibit
No. 10(n) to this Form 10-Q. Additionally, the Company has a number of
other credit facilities in various currencies aggregating $5,000 ($0 outstanding at March 31,
2005). The principal on these facilities is due monthly with a 30-day rollover provision. The
Company has $14,112 available under the short and long-term lines of credit with domestic and
foreign banks at March 31, 2005. Under certain provisions of the debt agreements, the Company is required to comply with various
financial ratios and covenants. The Company is in compliance with these requirements as of March
31, 2005. 7




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G. Accounting for Derivatives and Hedging Activities In accordance with the provisions of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (as amended),all of the
Companys derivative instruments are recognized on the balance sheet at their fair value. To
hedge sales, the Company currently utilizes foreign exchange forward contracts or option
contracts to sell foreign currencies to fix the exchange rates related to near-term sales and
effectively fix the Companys margins. Underlying hedged transactions are recorded at hedged
rates, therefore realized and unrealized gains and losses are recorded when the hedged
transactions occur. The Company also has an interest rate swap instrument, which expires
September 19, 2005. The estimated fair value of the swap instrument is determined through quotes
from the related financial institutions. On the date the derivative contract is entered into, the Company designates its derivative as
either a hedge of the fair value of a recognized asset or liability (fair value hedge), as a
hedge of the variability of cash flows to be received (cash flow hedge), or as a
foreign-currency cash flow hedge (foreign currency hedge). Changes in the fair value of a
derivative that is highly effective as, and that is designated and qualifies as, a fair value
hedge, along with the gain or loss on the hedged asset or liability that is attributable to the
hedged risk are recorded in current period earnings. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a cash flow hedge are recorded
in other comprehensive income until earnings are affected by the transaction in the underlying
asset. Changes in the fair value of derivatives that are highly effective and that qualify as
foreign currency hedges are recorded in either current period income or other comprehensive
income, depending on whether the hedge transaction is a fair value hedge or a cash flow hedge.
At March 31, 2005, the foreign exchange forward contracts were designated as foreign currency
cash flow hedges. The interest rate swap instrument was determined to be an ineffective hedge
and accordingly, changes in its fair market value are recorded in the Companys records as
income or expense in the interest expense line item in the consolidated statements of
operations. The Company recorded income of $32 and $17 for the three month periods ended March
31, 2005 and 2004, respectively, and $72 and $62 for the six month periods ended March 31, 2005
and 2004, respectively, for the interest rate swap. At March 31, 2005, the Company had obligations under foreign exchange forward contracts to sell
2,200,000 Euros, 300,000 British pounds and 235,000,000 Yen at various dates through June 2005.
In accordance with the provisions of SFAS 133, the derivative instruments are recorded on the
Companys Consolidated Balance Sheets. At March 31, 2005, the fair market value of the foreign
exchange forward contracts and interest rate swap represented assets (liabilities) to the
Company of $97 and ($48), respectively. At March 31, 2004, the fair market value of the foreign
exchange forward contracts and interest rate swap represented liabilities to the Company of $61
and $221, respectively. The Company documents all relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various hedge transactions. The
Company also assesses whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge, the Company discontinues hedge accounting
prospectively. Cash flows resulting from hedging transactions are classified in the consolidated
statements of cash flows in the same category as the cash flows from the item being hedged. 8




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H. Comprehensive Income Comprehensive income for the three and six month periods ended March 31, 2005 and 2004 is as
follows: For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    3,215
    
    
    $
    2,625
    
    
    $
    6,006
    
    
    $
    3,714Unrealized gains on value
of derivative securities, net of tax
    
    
    97
    
    
    
    103
    
    
    
    53
    
    
    
    68Net unrealized investment
(losses) gains, net of tax
    
    
    (117
    )
    
    
    (8
    )
    
    
    (162
    )
    
    
    106Foreign currency translation
adjustments
    
    
    (273
    )
    
    
    87
    
    
    
    404
    
    
    
    479Comprehensive income
    
    $
    2,922
    
    
    $
    2,807
    
    
    $
    6,301
    
    
    $
    4,367
 I. Geographic Segment Information The Companys business is to develop test and measurement solutions to verify customers product
performance or aid in their product development process. The Companys customers are engineers,
technicians and scientists in manufacturing, product development and research functions within a
range of industries. Although the Companys products vary in capability, sophistication, use,
size and price, they basically test, measure and analyze electrical and physical properties. The
Companys gross margins, customers, production processes and distribution methods are similar
for all its products. Accordingly, the Company reports a single Test and Measurement segment.
The Companys net sales and long-lived assets by geographic area are presented below. The basis
for attributing revenues from external customers to a geographic area is the location of the
customer. For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales:Americas
    
    $
    10,009
    
    
    $
    11,511
    
    
    $
    21,768
    
    
    $
    20,321Europe
    
    
    10,340
    
    
    
    10,621
    
    
    
    21,753
    
    
    
    21,635Asia
    
    
    17,314
    
    
    
    11,857
    
    
    
    29,785
    
    
    
    21,775$
    37,663
    
    
    $
    33,989
    
    
    $
    73,306
    
    
    $
    63,731
 At March 31,
    
    
    At September 30,2005
    
    
    2004
    
    
    2004Long-lived assets:Americas
    
    $
    22,286
    
    
    $
    20,856
    
    
    $
    22,750Germany
    
    
    4,743
    
    
    
    4,215
    
    
    
    4,545Other
    
    
    1,039
    
    
    
    718
    
    
    
    756$
    28,068
    
    
    $
    25,789
    
    
    $
    28,051
 9




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J. Guarantors Disclosure Requirements Guarantee of original lease The Company has assigned the lease of its former office space in Reading, Great Britain to a
third party. In the event the third party defaults on the monthly lease payments, the Company
would be responsible for the payments until the lease expires on July 14, 2009. If the third
party were to default, the maximum amount of future payments (undiscounted) the Company would be
required to make under the guarantee would be approximately $933 through July 14, 2009. The
Company has not recorded any liability for this item, as it does not believe that it is probable
that the third party will default on the lease payments. Product Warranties Generally, the Companys products are covered under a one-year warranty; however, certain
products are covered under a two or three-year warranty. It is the Companys policy to accrue
for all product warranties based upon historical in-warranty repair data. In addition, the
Company accrues for specifically identified product performance issues. The Company also offers
extended warranties for certain of its products for which revenue is recognized over the life of
the contract period. The costs associated with servicing the extended warranties are expensed as
incurred. The revenue, as well as the costs related to the extended warranties is immaterial
for the three month periods ending March 31, 2005 and 2004. A reconciliation of the estimated changes in the aggregated product warranty liability for the
three and six month periods ending March 31, 2005 and 2004 is as follows: For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Beginning balance
    
    $
    1,418
    
    
    $
    1,548
    
    
    $
    1,459
    
    
    $
    1,498Accruals for warranties issued during the period
    
    
    439
    
    
    
    389
    
    
    
    1,025
    
    
    
    736Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (72
    )
    
    
    (42
    )
    
    
    (274
    )
    
    
    (138
    )Settlements made (in cash or in kind)
during the period
    
    
    (453
    )
    
    
    (259
    )
    
    
    (878
    )
    
    
    (460
    )Balance at March 31
    
    $
    1,332
    
    
    $
    1,636
    
    
    $
    1,332
    
    
    $
    1,636
 K. Pension Benefits The Company has noncontributory defined benefit pension plans covering all of its eligible
employees in the United States and certain non-U.S. employees. Pension benefits are based upon
the employees length of service and a percentage of compensation above certain base levels.
The Company also has an unfunded supplemental retirement plan (SERP) for former key employees,
which includes retirement, death and disability benefits. Net periodic benefit cost for this
plan is $2 for the three month periods ended March 31, 2005 and 2004 and $4 for the six month
periods ended March 31, 2005 and 2004, and is included in the table below. A summary of the
components of net periodic pension cost for the three and six month periods ending March 31,
2005 and 2004 are shown below: 10




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For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost-benefits earned during the period
    
    $
    365
    
    
    $
    356
    
    
    $
    730
    
    
    $
    709Interest cost on projected benefit obligation
    
    
    540
    
    
    
    515
    
    
    
    1,078
    
    
    
    1,027Expected return on plan assets
    
    
    (690
    )
    
    
    (657
    )
    
    
    (1,380
    )
    
    
    (1,312
    )Amortization of transition asset
    
    
    (5
    )
    
    
    (5
    )
    
    
    (10
    )
    
    
    (11
    )Amortization of prior service cost
    
    
    46
    
    
    
    46
    
    
    
    92
    
    
    
    92Net periodic benefit cost
    
    $
    256
    
    
    $
    255
    
    
    $
    510
    
    
    $
    505
 L. Accrued Severance Liability During the last half of fiscal 2003, the Company recorded pretax charges of $845 for severance
relating to a reduction in force. The remaining liabilities under these severance agreements
were paid in the first quarter of fiscal 2005. A reconciliation of the changes in the aggregated
accrued severance liability for the three month and six month periods ended March 31, 2005 and
2004 is as follows: For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Balance, beginning of period
    
    $
    
    
    
    $
    454
    
    
    $
    107
    
    
    $
    503Payments made
    
    
    
    
    
    
    (326
    )
    
    
    (94
    )
    
    
    (406
    )Adjustments and write-offs
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    Foreign exchange revaluation
    
    
    
    
    
    
    (3
    )
    
    
    8
    
    
    
    28Balance, end of period
    
    $
    
    
    
    $
    125
    
    
    $
    
    
    
    $
    125
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations. Forward-Looking Statements Certain of the matters and subject areas discussed in this Quarterly Report on Form 10-Q contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical information provided herein are
forward-looking statements. Forward-looking statements generally include words such as
anticipates, expects, believes, intends, estimates, and similar expressions, and include
those statements regarding our expectations, intentions and beliefs with regard to the future,
including our efforts involving ERP and CRM system implementations, investments to develop RF
products, conditions of the electronics industry, technology or other trends and known
uncertainties. These forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the forward-looking statements
as a result of many factors, including those more fully described under the caption Factors That
May Affect Future Results and elsewhere in this Quarterly Report. These forward-looking statements
reflect managements analysis, judgment, belief or expectation only as of the date hereof. We
assume no obligation to update any forward-looking statements. Overview Our business is to design, develop, manufacture and market complex electronic instruments and
systems geared to the specialized needs of electronics manufacturers for high-performance
production 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), alternating current (AC), radio frequency (RF) or optical signals. Our customers are
engineers, technicians and scientists in manufacturing, product development and research functions.
During the first six months of fiscal 2005, orders from our semiconductor customers comprised 11




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approximately 35 percent of the total, wireless communications orders were approximately 20
percent, precision electronic components and subassembly manufacturers orders were approximately 20
percent, research and education made up about 20 percent, optoelectronics orders were less than 5
percent, with the remainder coming from customers in a variety of other industries. Although our
products vary in capability, sophistication, use, size and price, they generally test, measure and
analyze electrical or physical properties. As such, we consider our business to be in a single test
and measurement industry segment. Many of the industries we serve, including but not limited to the semiconductor industry, the
wireless communications industry, the optoelectronics industry, and precision electronic components
and subassemblies manufacturers, have historically been very cyclical and have experienced periodic
downturns. The downturns have had, and may have in the future, a material adverse impact on our
customers demand for equipment, including test and measurement equipment. The severity and length
of a downturn also may affect overall access to capital, which could adversely affect the Companys
customers. In addition, the factors leading to and the severity and length of a downturn are
difficult to predict and there can be no assurance that we will appropriately anticipate changes in
the underlying end markets we serve or that any recent increased levels of business activity will
continue as a trend into the future. In addition, our orders are cancelable by customers, and
consequently, orders outstanding at the end of a reporting period may not result in realized sales
in the future. Beginning near the end of fiscal 2002, we began to incur costs in preparation for the transition to
new ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) software systems.
We went live with ERP in the United States and Europe in the third quarter of fiscal 2003 and the
first quarter of fiscal 2004, respectively. Additionally, we went live with CRM in the United
States during the first quarter of fiscal 2004. We are continuing to roll out additional ERP and
CRM modules and locations throughout 2005. Critical Accounting Policies and Estimates Management has identified the Companys critical accounting policies. These policies have the
potential to have a more significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because they require judgment
and estimation due to the uncertainty involved in measuring, at a specific point in time, events
which will be settled in the future. Our critical accounting policies and estimates are described in Managements Discussion and
Analysis included in the 2004 annual report on Form 10-K filed on December 13, 2004, and relate to
our use of estimates, revenue recognition, inventories, income, income taxes, pension plan and
stock compensation plans, among other matters. Results of Operations Second Quarter Fiscal 2005 Compared with Second Quarter Fiscal 2004 Net sales of $37,663 for the second quarter of fiscal 2005 increased 11 percent from sales of
$33,989 in the prior years second quarter. Approximately one percentage point of the increase was
due to the weaker U.S. dollar with the remaining increase due to higher volume. Sales were higher
in Asia by approximately 46 percent while declining in the Americas by approximately 13 percent and
in Europe by approximately three percent from the prior years quarter. Sequentially, sales
increased six percent from the first quarter of fiscal 2005. Orders of $35,729 for the second quarter of fiscal 2005 increased 15 percent from last years
orders of $31,130. Geographically, orders were up 59 percent in Asia, up 23 percent in Europe, and
down 29 percent in the Americas. Compared to the prior years second quarter, orders from
semiconductor customers were essentially flat, orders from wireless customers increased
approximately 145 percent, orders from precision electronic components and subassembly
manufacturers were down approximately 15 percent, research and education customer orders increased
approximately 20 percent, and optoelectronics customer orders were down approximately 35 percent.
Order backlog decreased $1,646 during the quarter to $14,276 at March 31, 2005. The Company does
not track net sales in the same manner as it tracks orders by major customer group. However, sales
trends generally correlate to Company order trends although they may vary between quarters
depending upon the orders which remain in backlog. Cost of goods sold as a percentage of net sales increased to 38.7 percent from 37.2 percent in the
prior years second quarter, a 1.5 percentage point increase. The increase was due primarily to
product and customer mix. Nearly all products the Company sells are manufactured in the United
States; therefore, cost of goods sold expressed in dollars is generally not affected by changes in
foreign currencies. However, as a percentage of net sales, it is affected as net 12




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sales dollars
fluctuate due to currency exchange rates changes. The effect of foreign exchange hedging on cost of
goods sold was immaterial in both periods. Selling, general and administrative expenses of $14,578 increased $678, or five percent, from last
years second quarter, although such expenses decreased as a percentage of net sales to 38.7
percent from 40.9 percent last year. The increase in costs was primarily due to higher marketing expenses including new product
introductions as well as higher costs related to Sarbanes-Oxley compliance, offset by lower
incentive costs that are tied to financial performance. Product development expenses for the quarter were $4,159, or 11.1 percent of net sales, up $456, or
12 percent, from last years $3,703, or 10.9 percent of sales. The increase is primarily a result
of our increased investment for the development of RF products. The Company reported operating income for the second quarter of fiscal 2005 of $4,345 versus $3,729
for the prior years quarter. Higher sales, partially offset by higher operating costs, accounted
for the increase. Investment income was $340 for the quarter compared to $128 in last years second quarter. Higher
average cash and short-term investment balances, as well as higher interest rates accounted for the
increase. The Company recorded interest expense for the quarter of $26 compared to $52 in the prior
year. The Company recorded income taxes at a 31.0 percent rate for the second quarter of both fiscal 2005
and 2004. The rate in 2005 was lower than the statutory rate due to extraterritorial income
exclusion benefits and research and development credits partially offset by a valuation allowance
established for certain foreign tax credits. The rate in 2004 was lower than the statutory rate due
to extraterritorial income exclusion benefits and an estimated return provision adjustment. The Company reported net income of $3,215, or $0.19 per diluted share, compared to $2,625, or $0.16
per diluted share, in last years second quarter. The increase from the prior year was largely due
to higher sales offset somewhat by higher operating expenses described above. Six Months Ended March 31, 2005 Compared with Six Months Ended March 31, 2004 Net sales of $73,306 for the six months ended March 31, 2005 increased 15 percent from $63,731
reported for the six month period last year. Approximately two percentage points of the increase
were due to the effect of a weaker U.S. dollar with the remaining increase due to higher volume.
Sales were up in all major geographies with the Americas up seven percent, Europe up one percent,
and Asia up 37 percent. Orders of $70,672 for the six months ended March 31, 2005, increased 14 percent from $62,049 last
year. Geographically, orders increased 41 percent in Asia and five percent in Europe and decreased
four percent in the Americas. See the Overview section of Managements Discussion and Analysis of
Financial Condition and Results of Operations for a breakout of the first six months of fiscal 2005
orders by major industry group. Cost of goods sold as a percentage of net sales increased to 39.3 percent from 38.9 percent for the
six month period last year. The increase was due primarily to product and customer mix. Nearly all
products the Company sells are manufactured in the United States; therefore, cost of goods sold
expressed in dollars is generally not affected by changes in foreign currencies. However, as a
percentage of net sales, it is affected as net sales dollars are affected by currency exchange rate
changes. The effect of foreign exchange hedging on cost of goods sold was immaterial in both
periods. Selling, general and administrative expenses of $28,164 increased five percent from $26,710 in the
same period last year, but decreased as a percentage of net sales to 38.4 percent from 41.9
percent. The increase in dollars was primarily due to higher marketing expenses tied to programs to
support new products, higher compensation costs in sales and support and higher costs related to
Sarbanes-Oxley compliance. Product development expenses for the first six months of fiscal 2005 of $8,249, or 11.2 percent of
sales, were up $1,201, or 17 percent, from $7,048, or 11.1 percent of net sales, for the same
period last year. Much of the change was due to the increased investment for the development of RF
products. Investment income during the first six months of fiscal 2005 was $631 versus $279 for the same
period in the prior year. Higher average cash and short-term investment balances and higher
interest rates accounted for the increase. 13




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The Company recorded interest expense of $39 in the
first six months of fiscal 2005 compared to $69 for the same period in the prior year. The Company recorded a tax provision at a 31.0 percent rate for both the first half of fiscal 2005
and fiscal 2004. The rate is lower than the statutory rate in fiscal 2005 due mainly to
extraterritorial income exclusion benefits and research and development credits partially offset by
a valuation allowance established for certain foreign tax credits. The rate in fiscal 2004 was
lower than the statutory rate due to extraterritorial income exclusion benefits and an estimated
return provision adjustment. Net income for the first six months of fiscal 2005 was $6,006, or $0.36 per diluted share, compared
to $3,714, or $0.23 per diluted share, for the same period last year. Financial Condition, Liquidity and Capital Resources Cash and cash equivalents and short-term investments totaled $51,895 at March 31, 2005, an increase
of $1,508 during the quarter and $10,279 from March 31, 2004. We consider our short-term
investments to be available for working capital needs, as the investments consist of highly liquid
corporate bonds and notes, mutual funds, and U.S. government and agency securities. Short-term debt
was $226 at March 31, 2005, a decrease of $286 during the quarter and a decrease of $370 from March
31, 2004. We have no long-term debt. Net cash provided by operating activities was $1,820 during
the second quarter of fiscal 2005 and $4,434 during the first six months of fiscal 2005. We also
received $1,732 through our employee stock option and purchase plans in the second quarter and
$1,879 during the six months ended March 31, 2005. Cash was used for capital expenditures of $722
and $1,667 and to pay dividends to our shareholders of $597 and $1,190 for the three and six month
periods, respectively, ending March 31, 2005. During the first quarter of fiscal 2004, our Board of
Directors authorized an open market stock repurchase program to replace the program which expired
in December 2003. See Notes to Condensed Consolidated Financial Statements Note E. We did not
repurchase any of our stock during the first six months of fiscal 2005. We expect to finance capital spending, working capital requirements and the stock repurchase
program with cash and short-term investments on hand and cash provided by operations. At March 31,
2005, we had available unused short and long-term lines of credit with domestic and foreign banks
aggregating $14,112. Our credit agreement was amended during the second quarter of fiscal 2005 to
extend the terms of the agreement to March 31, 2008. See Notes to Condensed Consolidated Financial
Statements Note F. Outlook We continue to believe that our ability to achieve a higher level of orders in the future will be
driven by our customers spending patterns as they invest in new capacity or upgrade their lines
for their new product offerings, as well as our ability to gain market share. The Company is estimating sales for the third quarter of fiscal 2005, which will end June 30, 2005,
to range between $33,000 and $37,000 based upon current order projections. Pretax earnings are
expected to be between the low single digits and 10 percent as a percentage of net sales. Factors That May Affect Future Results Many of the industries we serve, including but not limited to the semiconductor industry, the
wireless communications industry, the optoelectronics industry, and precision electronic components
and subassemblies manufacturers, have historically been very cyclical and have experienced periodic
downturns. The downturns have had, and may have in the future, a material adverse impact on our
customers demand for equipment, including test and measurement equipment. The severity and length
of a downturn also may affect overall access to capital, which could adversely affect the Companys
customers. In addition, the factors leading to and the severity and length of a downturn are
difficult to predict and there can be no assurance that we will appropriately anticipate changes in
the underlying end markets we serve. In addition, there can be no assurance that any recent
increased levels of business activity will continue as a trend into the future or that any expected
business activity will materialize. In addition, our orders are cancelable by customers, and
consequently, orders outstanding at the end of a reporting period may not result in realized sales
in the future. Our business relies on the development of new high technology products and services to provide
solutions to our customers complex measurement needs. This requires anticipation of customers
changing needs and emerging technology trends. We must make long-term investments and commit
significant resources before knowing whether 14




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our expectations will eventually result in products that achieve market acceptance. We
incur significant expenses developing new products, including RF, that may or may not result in
significant sources of revenue and earnings in the future. If these expenses do not result in
future earnings, our operating results will be adversely affected. In many cases our products compete directly with those offered by other manufacturers. If any of
our competitors were to develop products or services that are more cost-effective or technically
superior, demand for our product offerings could slow. Our products contain large quantities of electronic components and subassemblies that in some cases
are supplied through sole or limited source third-party suppliers. As a result, there can be no
assurance that parts and supplies will be available in a timely manner and at reasonable prices.
Additionally, our inventory is subject to risks of changes in market demand for particular
products. Our inability to obtain critical parts and supplies or any resulting excess and/or
obsolete inventory could have an adverse impact on our results of operations. We currently have subsidiaries or sales offices located in 15 countries including the United
States, and non-U.S. sales accounted for more than two-thirds of our revenue during the first six
months of fiscal 2005. Our future results could be adversely affected by several factors relating
to our international sales operations, including changes in foreign currency exchange rates,
political unrest, wars and acts of terrorism, changes in other economic or political conditions,
trade protection measures, import or export licensing requirements, unexpected changes in
regulatory requirements and natural disasters. Any of these factors could have a negative impact
on our revenue and operating results. We have experienced a benefit in our gross margin since the start of our lean manufacturing
initiative in our manufacturing facilities, which are located in Solon, Ohio. We may not experience
future benefits if we are unable to continue to effectively manage this initiative, and we could
incur additional costs in the future, having a negative impact on gross margin, if new initiatives
are needed to further improve manufacturing and execution efficiencies. We pay taxes in several jurisdictions throughout the world. We utilize available tax credits and
other tax planning strategies in an effort to minimize our overall tax liability. Our estimated tax
rate for fiscal 2005 could change from what is currently anticipated due to changes in tax laws of
various countries, changes in our overall tax planning strategy, changes in anticipated levels of
pretax earnings or changes in the countries where earnings or losses are incurred. At March 31,
2005, we had a valuation allowance against certain deferred tax assets and had not established
valuation allowances against other deferred tax assets based on tax strategies planned to mitigate
the risk of impairment to these assets. Accordingly, if facts or financial results were to change
thereby impacting the likelihood of realizing the deferred tax assets, our tax rate and therefore
our earnings could be adversely affected. Throughout fiscal 2004 and into fiscal 2005, we have continued our implementation of ERP and CRM
systems. Our results could be adversely affected if we are unable to implement the systems without
significant interruptions in accounting systems, order entry, billing, manufacturing and other
customer support functions. Other risk factors include but are not limited to changes in our customer and product mix, which
affects our gross margins, credit risk of customers, potential litigation, claims, regulatory and
administrative proceedings arising in the normal course of business, as well as terrorist
activities and armed conflicts. 
 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk. The Company is exposed to a variety of risks, including foreign currency fluctuations, interest
rate fluctuations and changes in the market value of its short-term investments. In the normal
course of business, we employ established policies and procedures to manage our exposure to
fluctuations in foreign currency values and interest rates. The Company is exposed to foreign currency exchange rate risk primarily through transactions
denominated in foreign currencies. We currently utilize foreign exchange forward contracts or
option contracts to sell foreign currencies to fix the exchange rates related to near-term sales
and effectively fix our margins. Generally, these contracts have maturities of three months or
less. Our policy is to only enter into derivative transactions when we have an identifiable
exposure to risk, thus not creating additional foreign currency exchange rate risk. In our
opinion, a 10 percent adverse change in foreign currency exchange rates would not have a material
effect on these instruments and therefore our results of operations, financial position or cash
flows. The Company also has an interest rate swap instrument originally entered into to mitigate the risk
of interest rate changes related to long-term debt. The agreement effectively fixes the interest
rate on a notional $3,000 of variable 15




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rate debt; however, the interest rate swap instrument was
determined to be an ineffective hedge and accordingly, changes in the fair market value of the
interest rate swap are recorded in the Companys records as income or expense. The instrument
expires September 19, 2005. In managements opinion, a 10 percent adverse change in interest rates
would not have a material effect on this instrument and therefore on our results of operations,
financial position or cash flows. The Company maintains a short-term investment portfolio consisting of United States government
backed notes and bonds, corporate notes and bonds, and mutual funds consisting primarily of
government notes and bonds. An increase in interest rates would decrease the value of certain of
these investments. However, in managements opinion, a 10 percent increase in interest rates would
not have a material impact on our results of operations, financial position or cash flows. 
 ITEM 4. Controls and Procedures. The Company carried out an evaluation, under the supervision and with participation of the
Companys management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure controls and procedures are effective in
timely alerting them to material information required to be included in the periodic SEC filings
for the Company. There was no change in the internal control over financial reporting that occurred during the
second quarter of fiscal 2005 that has materially affected or is reasonably likely to materially
affect the Companys internal control over financial reporting. 16




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PART II. OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On December 10, 2003, the Company announced its Board of Directors had approved an open market
stock repurchase program (the 2003 program). Under the terms of the 2003 program, the Company may
purchase up to 2,000,000 Common Shares, or approximately 13 percent of shares outstanding at the
time the program was approved, over a three-year period. The Company made no share repurchases
during the first six months of fiscal 2005 or 2004. See Note E to Condensed Consolidated Financial
Statements. 
 Item 4. Submission of Matters to a Vote of Security Holders. On
February 12, 2005, the registrant conducted its Annual Meeting
of Shareholders. The following
matters were brought before the shareholders for vote at this meeting: PROPOSAL
    
    FOR
    
    
    WITHHELD(a) Election of Directors:Joseph P. Keithley
    
    
    33,564,672
    
    
    
    194,230Brian R. Bachman
    
    
    33,258,607
    
    
    
    500,295James B. Griswold
    
    
    33,525,393
    
    
    
    233,509Dr. N. Mohan Reddy
    
    
    33,258,197
    
    
    
    500,704Barbara V. Scherer
    
    
    33,218,808
    
    
    
    540,094R. Elton White
    
    
    32,888,253
    
    
    
    870,649*James T. Bartlett
    
    
    12,038,992
    
    
    
    232,890*Leon J. Hendrix, Jr.
    
    
    11,651,215
    
    
    
    620,667
   *Elected by holders of Common Shares only. 
 Item 6. Exhibits. (a) Exhibits. The following exhibits are filed herewith: ExhibitNumber
    
    Exhibit10(n)
    
    Fourth Amendment to Credit Agreement, dated March 30, 2005. (Reference is made to
Exhibit 10(n) of the Companys Current Report on Form 8-K dated April 5, 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.
   +
    
    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. 17




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. KEITHLEY INSTRUMENTS, INC.(Registrant)Date: May 10, 2005
    
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer(Principal Executive Officer)Date: May 10, 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(n)
    
    Fourth Amendment to Credit Agreement, dated March 30, 2005. (Reference is made to
Exhibit 10(n) of the Companys Current Report on Form 8-K dated April 5, 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.
   +
    
    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