##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 Commission File Number 1-9965
 KEITHLEY INSTRUMENTS, INC.
  Ohio
    
    34-0794417(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
 Registrants telephone number, including area code: (440) 248-0400
  YES þ NO o
  Large accelerated filer o Accelerated filer þ Non-accelerated filer o
  YES o NO þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements.KEITHLEY INSTRUMENTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars) (Unaudited)KEITHLEY INSTRUMENTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands of Dollars Except for Per Share Data) (Unaudited)KEITHLEY INSTRUMENTS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTSITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.ITEM 4. Controls and Procedures.PART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds.Item 6. Exhibits.SIGNATURESEX-31.AEX-31.BEX-32.AEX-32.B    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1 Financial Statements.
 
 
 June 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,502
    
    
    $
    13,703
    
    
    $
    14,397Short-term investments
    
    
    45,068
    
    
    
    40,916
    
    
    
    40,869Refundable income taxes
    
    
    132
    
    
    
    59
    
    
    
    387Accounts receivable and other, net
    
    
    21,828
    
    
    
    17,672
    
    
    
    19,452Inventories:Raw materials
    
    
    10,051
    
    
    
    8,520
    
    
    
    9,191Work in process
    
    
    1,766
    
    
    
    1,289
    
    
    
    847Finished products
    
    
    3,676
    
    
    
    2,691
    
    
    
    3,113Total inventories
    
    
    15,493
    
    
    
    12,500
    
    
    
    13,151Deferred income taxes
    
    
    4,199
    
    
    
    4,942
    
    
    
    4,444Other current assets
    
    
    1,781
    
    
    
    1,824
    
    
    
    1,385Total current assets
    
    
    97,003
    
    
    
    91,616
    
    
    
    94,085Property, plant and equipment, at cost
    
    
    50,371
    
    
    
    48,648
    
    
    
    46,996Less-Accumulated depreciation
    
    
    35,558
    
    
    
    34,749
    
    
    
    33,198Net property, plant and equipment
    
    
    14,813
    
    
    
    13,899
    
    
    
    13,798Deferred income taxes
    
    
    16,843
    
    
    
    17,638
    
    
    
    18,087Other assets
    
    
    17,190
    
    
    
    16,256
    
    
    
    16,394Total assets
    
    $
    145,849
    
    
    $
    139,409
    
    
    $
    142,364Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    1,004
    
    
    $
    467
    
    
    $
    Accounts payable
    
    
    8,219
    
    
    
    6,296
    
    
    
    7,540Accrued payroll and related expenses
    
    
    5,483
    
    
    
    6,299
    
    
    
    5,618Other accrued expenses
    
    
    4,350
    
    
    
    4,796
    
    
    
    4,649Income taxes payable
    
    
    2,171
    
    
    
    3,903
    
    
    
    4,341Total current liabilities
    
    
    21,227
    
    
    
    21,761
    
    
    
    22,148Long-term deferred compensation
    
    
    3,406
    
    
    
    2,990
    
    
    
    3,100Other long-term liabilities
    
    
    5,566
    
    
    
    4,911
    
    
    
    5,140Shareholders equity:Common Shares, stated value $.0125:Authorized
 80,000,000; issued and outstanding 
14,380,656 at June 30, 2006, 14,219,135 at
June 30, 2005 and 14,300,676 at September 30, 2005
    
    
    179
    
    
    
    178
    
    
    
    179Class B Common Shares, stated value $.0125:Authorized
 9,000,000; issued and outstanding 
2,150,502 at June 30, 2006, June 30, 2005 and
September 30, 2005
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    32,592
    
    
    
    29,378
    
    
    
    30,155Retained earnings
    
    
    86,315
    
    
    
    80,757
    
    
    
    82,425Accumulated other comprehensive income
    
    
    581
    
    
    
    562
    
    
    
    397Common shares held in treasury, at cost
    
    
    (4,044
    )
    
    
    (1,155
    )
    
    
    (1,207
    )Total shareholders equity
    
    
    115,650
    
    
    
    109,747
    
    
    
    111,976Total liabilities and shareholders equity
    
    $
    145,849
    
    
    $
    139,409
    
    
    $
    142,364
  1




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For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    38,427
    
    
    $
    33,251
    
    
    $
    113,896
    
    
    $
    106,557Cost of goods sold
    
    
    15,000
    
    
    
    13,113
    
    
    
    44,051
    
    
    
    41,894Selling, general and administrative expenses
    
    
    15,848
    
    
    
    13,534
    
    
    
    46,557
    
    
    
    41,698Product development expenses
    
    
    6,357
    
    
    
    4,223
    
    
    
    17,343
    
    
    
    12,472Operating income
    
    
    1,222
    
    
    
    2,381
    
    
    
    5,945
    
    
    
    10,493Investment income
    
    
    510
    
    
    
    366
    
    
    
    1,422
    
    
    
    997Interest expense
    
    
    (2
    )
    
    
    (15
    )
    
    
    (8
    )
    
    
    (54
    )Income before income taxes
    
    
    1,730
    
    
    
    2,732
    
    
    
    7,359
    
    
    
    11,436Income tax provision
    
    
    61
    
    
    
    878
    
    
    
    1,666
    
    
    
    3,576Net income
    
    $
    1,669
    
    
    $
    1,854
    
    
    $
    5,693
    
    
    $
    7,860Basic earnings per share
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.35
    
    
    $
    0.48Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.34
    
    
    $
    0.47Cash 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 Nine MonthsEnded June 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    5,693
    
    
    $
    7,860Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    2,882
    
    
    
    2,971Stock-based compensation
    
    
    1,770
    
    
    
    Other items not effecting outlay of cash
    
    
    303
    
    
    
    (53
    )Changes in working capital
    
    
    (6,576
    )
    
    
    672Other operating activities
    
    
    1,060
    
    
    
    (2,877
    )Net cash provided by operating activities
    
    
    5,132
    
    
    
    8,573Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (3,943
    )
    
    
    (2,687
    )Purchase of short-term investments
    
    
    (32,683
    )
    
    
    (23,195
    )Sale of short-term investments
    
    
    28,407
    
    
    
    14,244Net cash used in investing activities
    
    
    (8,219
    )
    
    
    (11,638
    )Cash flows from financing activities:Net borrowing under short term debt agreements
    
    
    990
    
    
    
    29Cash dividends
    
    
    (1,803
    )
    
    
    (1,788
    )Purchase of treasury shares
    
    
    (2,711
    )
    
    
    Proceeds from stock purchase and option plans
    
    
    284
    
    
    
    1,968Excess tax benefits from stock-based compensation arrangements
    
    
    205
    
    
    
    Other financing activities
    
    
    12
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (3,023
    )
    
    
    209Effect of exchange rate changes on cash
    
    
    215
    
    
    
    108Decrease in cash and cash equivalents
    
    
    (5,895
    )
    
    
    (2,748
    )Cash and cash equivalents at beginning of period
    
    
    14,397
    
    
    
    16,451Cash and cash equivalents at end of period
    
    $
    8,502
    
    
    $
    13,703
  3




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands of dollars, except for per-share data)
 Nature of Operations
  Summary of Significant Accounting Policies
 Basis of Presentation
    Reclassifications
  4




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Recent Accounting Pronouncements
   . .
    5




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Earnings Per Share
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,669
    
    
    $
    1,854
    
    
    $
    5,693
    
    
    $
    7,860Weighted averages shares outstanding
    
    
    16,454,185
    
    
    
    16,364,662
    
    
    
    16,464,532
    
    
    
    16,306,091Dilutive effect of stock awards
    
    
    160,120
    
    
    
    204,101
    
    
    
    181,803
    
    
    
    270,331Assumed purchase of stock under
stock purchase plan
    
    
    1,662
    
    
    
    8,227
    
    
    
    1,859
    
    
    
    11,459Weighted average shares used for
dilutive earnings per share
    
    
    16,615,967
    
    
    
    16,576,990
    
    
    
    16,648,194
    
    
    
    16,587,881Basic earnings per share
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.35
    
    
    $
    0.48Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.34
    
    
    $
    0.47
 Stock-based Compensation
 Stock options
    6




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Weighted
    
    AggregateWeighted
    
    Average
    
    IntrinsicAverage
    
    Remaining
    
    ValueNumber
    
    Exercise
    
    Contractual
    
    (Inof Shares
    
    Price
    
    Life
    
    Thousands)Outstanding at September 30, 2005
    
    
    3,327,346
    
    
    $
    20.03Options granted at fair market value
    
    
    165,651
    
    
    
    15.05Options exercised
    
    
    (50,446
    )
    
    
    5.62
    
    
    
    
    
    
    $
    479Options forfeited
    
    
    (75,900
    )
    
    
    38.82Outstanding at June 30, 2006
    
    
    3,366,651
    
    
    $
    19.58
    
    
    6.1 Years
    
    $
    2,400Exercisable at June 30, 2006
    
    
    3,067,713
    
    
    $
    20.08
    
    
    5.9 Years
    
    $
    2,397
  Nine Months Ended June 302006
    
    2005Risk-free interest rate
    
    
    4.27
    %
    
    
    3.38
    %Dividend yield
    
    
    1.01
    %
    
    
    0.88
    %Expected life (years)
    
    
    4.5
    
    
    
    2.5Volatility
    
    
    45
    %
    
    
    44
    %
  7




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Employee Stock Purchase Plan
   8




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##### Table of Contents



Pro forma disclosure
   Three Months Ended
    
    
    Nine Months EndedJune 30, 2005
    
    
    June 30, 2005Net income
    
    $
    1,854
    
    
    $
    7,860Add: Stock-based employee compensation
expense included in reported income,
net of related tax effects
    
    
    (1
    )
    
    
    (7
    )Deduct: Stock-based employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects
    
    
    (551
    )
    
    
    (4,898
    )Pro forma net income
    
    $
    1,302
    
    
    $
    2,955Pro forma basic earnings per share
    
    $
    0.08
    
    
    $
    0.18Pro forma diluted earnings per share
    
    $
    0.08
    
    
    $
    0.18
 Repurchase of Common Shares
  9




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Three and Nine Months EndedJune 30, 2006Total number of shares purchased
    
    
    215,000Average price paid per share
(including commissions)
    
    $
    12.61Identity of broker-dealer used to effect
the purchases
    
    National Financial Securities LLCNumber of shares purchased as part of a
publicly announced repurchase program
    
    
    215,000Maximum number of shares that remain
to be purchased under the program
    
    
    1,785,000
   Financing Arrangements
   Accounting for Derivatives and Hedging Activities
 ,
 10




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Comprehensive Income
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    1,669
    
    
    $
    1,854
    
    
    $
    5,693
    
    
    $
    7,860Unrealized gains (losses) on value of
derivative securities, net of tax
    
    
    36
    
    
    
    34
    
    
    
    (29
    )
    
    
    87Net unrealized investment gains (losses),
net of tax
    
    
    (13
    )
    
    
    68
    
    
    
    (52
    )
    
    
    (94
    )Foreign currency translation adjustments
    
    
    305
    
    
    
    (336
    )
    
    
    265
    
    
    
    68Comprehensive income
    
    $
    1,997
    
    
    $
    1,620
    
    
    $
    5,877
    
    
    $
    7,921
 11




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Geographic Segment Information
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:United States
    
    $
    11,663
    
    
    $
    8,413
    
    
    $
    33,569
    
    
    $
    28,950Other Americas
    
    
    1,442
    
    
    
    893
    
    
    
    4,028
    
    
    
    2,124Germany
    
    
    5,826
    
    
    
    5,731
    
    
    
    14,646
    
    
    
    12,619Other Europe
    
    
    7,600
    
    
    
    6,702
    
    
    
    23,389
    
    
    
    21,567Japan
    
    
    3,341
    
    
    
    3,190
    
    
    
    12,230
    
    
    
    13,167Other Asia
    
    
    8,555
    
    
    
    8,322
    
    
    
    26,034
    
    
    
    28,130$
    38,427
    
    
    $
    33,251
    
    
    $
    113,896
    
    
    $
    106,557
  At June 30,
    
    
    At September 30,2006
    
    
    2005
    
    
    2005Long-lived assets:Americas
    
    $
    26,015
    
    
    $
    24,658
    
    
    $
    24,408Germany
    
    
    5,063
    
    
    
    4,489
    
    
    
    4,720Other
    
    
    925
    
    
    
    1,008
    
    
    
    1,064$
    32,003
    
    
    $
    30,155
    
    
    $
    30,192
 Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
  12




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For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    910
    
    
    $
    1,332
    
    
    $
    1,084
    
    
    $
    1,459Accruals for warranties issued during the period
    
    
    411
    
    
    
    390
    
    
    
    1,069
    
    
    
    1,415Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (19
    )
    
    
    (39
    )
    
    
    (174
    )
    
    
    (313
    )Settlements made (in cash or in kind)
during the period
    
    
    (312
    )
    
    
    (468
    )
    
    
    (989
    )
    
    
    (1,346
    )Ending balance
    
    $
    990
    
    
    $
    1,215
    
    
    $
    990
    
    
    $
    1,215
 Pension Benefits
  United States Plan
    
    
    Non U.S. PlanFor the Three Months
    
    
    For the Three MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Service costs-benefits earned during the period
    
    $
    409
    
    
    $
    319
    
    
    $
    55
    
    
    $
    44Interest cost on projected benefit obligation
    
    
    500
    
    
    
    464
    
    
    
    70
    
    
    
    70Expected return on plan assets
    
    
    (723
    )
    
    
    (674
    )
    
    
    (20
    )
    
    
    (19
    )Net loss recognition
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    (2
    )
    
    
    (11
    )
    
    
    5
    
    
    
    6Amortization of prior service cost
    
    
    45
    
    
    
    45
    
    
    
    2
    
    
    
    1Net periodic benefit cost
    
    $
    339
    
    
    $
    143
    
    
    $
    112
    
    
    $
    102
 United States Plan
    
    
    Non U.S. PlanFor the Nine Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Service costs-benefits earned during the period
    
    $
    1,230
    
    
    $
    956
    
    
    $
    159
    
    
    $
    137Interest cost on projected benefit obligation
    
    
    1,500
    
    
    
    1,394
    
    
    
    203
    
    
    
    214Expected return on plan assets
    
    
    (2,168
    )
    
    
    (2,014
    )
    
    
    (59
    )
    
    
    (59
    )Net loss recognition
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    (7
    )
    
    
    (33
    )
    
    
    16
    
    
    
    17Amortization of prior service cost
    
    
    134
    
    
    
    134
    
    
    
    4
    
    
    
    4Net periodic benefit cost
    
    $
    1,018
    
    
    $
    437
    
    
    $
    323
    
    
    $
    313
  13




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Income Taxes
   
 ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 Forward-Looking Statements
  Overview
   14




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Critical Accounting Policies and Estimates
  Stock compensation plans
  15




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Results of Operations
 Third Quarter Fiscal 2006 Compared with Third Quarter Fiscal 2005
     .
    16




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Nine Months Ended June 30, 2006 Compared with Nine Months Ended June 30, 2005
         17




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  June 30, 2006
    
    
    Sept. 30, 2005Current assets:Cash and cash equivalents
    
    $
    8,502
    
    
    $
    14,397Short-term investments
    
    
    45,068
    
    
    
    40,869Refundable income taxes
    
    
    132
    
    
    
    387Accounts receivable and other, net
    
    
    21,828
    
    
    
    19,452Total inventories
    
    
    15,493
    
    
    
    13,151Deferred income taxes
    
    
    4,199
    
    
    
    4,444Other current assets
    
    
    1,781
    
    
    
    1,385Total current assets
    
    
    97,003
    
    
    
    94,085Current liabilities:Short-term debt
    
    
    1,004
    
    
    
    0Accounts payable
    
    
    8,219
    
    
    
    7,540Accrued payroll and related expenses
    
    
    5,483
    
    
    
    5,618Other accrued expenses
    
    
    4,350
    
    
    
    4,649Income taxes payable
    
    
    2,171
    
    
    
    4,341Total current liabilities
    
    
    21,227
    
    
    
    22,148Working capital
    
    $
    75,776
    
    
    $
    71,937
  Sources and Uses of Cash
  Nine Months Ended June 302006
    
    2005Cash provided by (used in):Operating activities
    
    $
    5,132
    
    
    $
    8,573Investing activities
    
    
    (8,219
    )
    
    
    (11,638
    )Financing activities
    
    
    (3,023
    )
    
    
    209
 18




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Operating activities
 Investing activities
 Financing activities
  Outlook
   Recent Accounting Pronouncements
  19




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. .
     20




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Factors That May Affect Future Results
 Cyclicality of the electronics industry and timing of large orders
  Rapid technology changes
  Competitive factors
  Dependence on key suppliers
  International operations, political and economic conditions
  21




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Changes in manufacturing processes
  Tax planning strategies
  Information technology management systems
  Fixed cost of sales force
  Other risk factors
  
 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.
  22




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ITEM 4 Controls and Procedures.
   23




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PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    Maximum number ofshares purchased as
    
    shares that may yetpart of publicly
    
    be purchased underTotal number of
    
    Average price paid
    
    announced plans or
    
    the plans orPeriod
    
    shares purchased
    
    per share
    
    programs
    
    programsMay 23 to 31, 2006
    
    
    60,000
    
    
    $
    13.21
    
    
    
    60,000
    
    
    
    1,940,000June 1 to 30, 2006
    
    
    155,000
    
    
    $
    12.37
    
    
    
    155,000
    
    
    
    1,785,000Total
    
    
    215,000
    
    
    $
    12.61
    
    
    
    215,000
    
    
    
    1,785,000
 
 Exhibits
 Exhibits
 ExhibitNumber
    
    Exhibit31(a)
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a).31(b)
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a).32(a)+
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section
1350.32(b)+
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
 +
    
    The certifications furnished pursuant to this item will not be deemed filed for
purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the
liability of that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference. 24




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KEITHLEY INSTRUMENTS, INC.
(Registrant)Date: August 9, 2006
    /s/  Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer
(Principal Executive Officer) Date:  August 9, 2006
    /s/  Mark J. PlushMark J. PlushVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 25