##### 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, 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
(State or other jurisdiction of incorporation or organization)
    
    34-0794417
(I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
 Registrants telephone number, including area code: (440) 248-0400
  YES þ NO o
  Large accelerated filero
    
    Accelerated filerþ
    
    Non-accelerated filero
  YES o NO þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEX-31(A) 302 CEO CERTIFICATIONEX-31(B) 302 CFO CERTIFICATIONEX-32(A) 906 CEO CERTIFICATIONEX-32(B) 906 CFO CERTIFICATION    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
  
 MARCH 31,
    
    
    SEPTEMBER 30,2006
    
    
    2005
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    9,029
    
    
    $
    16,093
    
    
    $
    14,397Short-term investments
    
    
    45,755
    
    
    
    35,802
    
    
    
    40,869Refundable income taxes
    
    
    122
    
    
    
    57
    
    
    
    387Accounts receivable and other, net
    
    
    23,768
    
    
    
    20,482
    
    
    
    19,452Inventories:Raw materials
    
    
    9,111
    
    
    
    9,738
    
    
    
    9,191Work in process
    
    
    2,331
    
    
    
    1,546
    
    
    
    847Finished products
    
    
    2,988
    
    
    
    2,981
    
    
    
    3,113Total inventories
    
    
    14,430
    
    
    
    14,265
    
    
    
    13,151Deferred income taxes
    
    
    4,195
    
    
    
    5,409
    
    
    
    4,444Other current assets
    
    
    1,553
    
    
    
    2,718
    
    
    
    1,385Total current assets
    
    
    98,852
    
    
    
    94,826
    
    
    
    94,085Property, plant and equipment, at cost
    
    
    48,812
    
    
    
    48,237
    
    
    
    46,996Less-Accumulated depreciation
    
    
    34,598
    
    
    
    34,297
    
    
    
    33,198Net property, plant and equipment
    
    
    14,214
    
    
    
    13,940
    
    
    
    13,798Deferred income taxes
    
    
    17,158
    
    
    
    17,316
    
    
    
    18,087Other assets
    
    
    15,847
    
    
    
    14,128
    
    
    
    16,394Total assets
    
    $
    146,071
    
    
    $
    140,210
    
    
    $
    142,364Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    255
    
    
    $
    226
    
    
    $
    Accounts payable
    
    
    8,524
    
    
    
    7,707
    
    
    
    7,540Accrued payroll and related expenses
    
    
    5,406
    
    
    
    5,996
    
    
    
    5,618Other accrued expenses
    
    
    4,144
    
    
    
    5,595
    
    
    
    4,649Income taxes payable
    
    
    2,926
    
    
    
    3,749
    
    
    
    4,341Total current liabilities
    
    
    21,255
    
    
    
    23,273
    
    
    
    22,148Long-term deferred compensation
    
    
    3,380
    
    
    
    2,916
    
    
    
    3,100Other long-term liabilities
    
    
    5,256
    
    
    
    5,026
    
    
    
    5,140Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,359,309 at March 31, 2006, 14,210,785 at
March 31, 2005 and 14,300,676 at September 30, 2005
    
    
    179
    
    
    
    177
    
    
    
    179Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 at March 31, 2006, March 31, 2005 and
September 30, 2005
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    31,758
    
    
    
    29,603
    
    
    
    30,155Retained earnings
    
    
    85,244
    
    
    
    79,501
    
    
    
    82,425Accumulated other comprehensive income
    
    
    253
    
    
    
    796
    
    
    
    397Common shares held in treasury, at cost
    
    
    (1,281
    )
    
    
    (1,109
    )
    
    
    (1,207
    )Total shareholders equity
    
    
    116,180
    
    
    
    108,995
    
    
    
    111,976Total liabilities and shareholders equity
    
    $
    146,071
    
    
    $
    140,210
    
    
    $
    142,364
  1




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For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    39,679
    
    
    $
    37,663
    
    
    $
    75,469
    
    
    $
    73,306Cost of goods sold
    
    
    15,464
    
    
    
    14,581
    
    
    
    29,051
    
    
    
    28,781Selling, general and administrative expenses
    
    
    15,706
    
    
    
    14,578
    
    
    
    30,709
    
    
    
    28,164Product development expenses
    
    
    5,971
    
    
    
    4,159
    
    
    
    10,986
    
    
    
    8,249Operating income
    
    
    2,538
    
    
    
    4,345
    
    
    
    4,723
    
    
    
    8,112Investment income
    
    
    472
    
    
    
    340
    
    
    
    912
    
    
    
    631Interest expense
    
    
    (2
    )
    
    
    (26
    )
    
    
    (6
    )
    
    
    (39
    )Income before income taxes
    
    
    3,008
    
    
    
    4,659
    
    
    
    5,629
    
    
    
    8,704Income tax provision
    
    
    910
    
    
    
    1,444
    
    
    
    1,605
    
    
    
    2,698Net income
    
    $
    2,098
    
    
    $
    3,215
    
    
    $
    4,024
    
    
    $
    6,006Basic earnings per share
    
    $
    0.13
    
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.37Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.36Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .075
    
    
    $
    .075Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .060
    
    
    $
    .060
  2




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For the Six MonthsEnded March 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    4,024
    
    
    $
    6,006Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    1,856
    
    
    
    2,039Stock-based compensation
    
    
    1,168
    
    
    
    Other items not effecting outlay of cash
    
    
    273
    
    
    
    (141
    )Changes in working capital
    
    
    (6,440
    )
    
    
    (3,462
    )Other operating activities
    
    
    1,666
    
    
    
    (8
    )Net cash provided by operating activities
    
    
    2,547
    
    
    
    4,434Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (2,329
    )
    
    
    (1,667
    )Purchase of short-term investments
    
    
    (24,903
    )
    
    
    (11,100
    )Sale of short-term investments
    
    
    19,959
    
    
    
    7,161Net cash used in investing activities
    
    
    (7,273
    )
    
    
    (5,606
    )Cash flows from financing activities:Net increase (decrease) in short term debt
    
    
    255
    
    
    
    (234
    )Cash dividends
    
    
    (1,204
    )
    
    
    (1,190
    )Proceeds from stock purchase and option plans
    
    
    230
    
    
    
    1,879Excess tax benefits from stock-based compensation arrangements
    
    
    70
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (649
    )
    
    
    455Effect of exchange rate changes on cash
    
    
    7
    
    
    
    359Decrease in cash and cash equivalents
    
    
    (5,368
    )
    
    
    (358
    )Cash and cash equivalents at beginning of period
    
    
    14,397
    
    
    
    16,451Cash and cash equivalents at end of period
    
    $
    9,029
    
    
    $
    16,093
  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
    Earnings Per Share
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    2,098
    
    
    $
    3,215
    
    
    $
    4,024
    
    
    $
    6,006Weighted averages shares outstanding
    
    
    16,492,492
    
    
    
    16,326,180
    
    
    
    16,476,913
    
    
    
    16,280,507Dilutive effect of stock awards
    
    
    193,835
    
    
    
    274,238
    
    
    
    199,509
    
    
    
    315,265Assumed purchase of stock under
stock purchase plan
    
    
    1,639
    
    
    
    26,317
    
    
    
    1,727
    
    
    
    31,406Weighted average shares used for
dilutive earnings per share
    
    
    16,687,966
    
    
    
    16,626,735
    
    
    
    16,678,149
    
    
    
    16,627,178Basic earnings per share
    
    $
    0.13
    
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.37Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.36
 
 5




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Stock-based Compensation
 Stock options
      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
    
    
    (37,550
    )
    
    
    6.13
    
    
    
    
    
    
    $
    336Options forfeited
    
    
    (75,400
    )
    
    
    38.77Outstanding at March 31, 2006
    
    
    3,380,047
    
    
    $
    19.53
    
    
    6.3 Years
    
    $
    4,325Exercisable at March 31, 2006
    
    
    3,076,109
    
    
    $
    20.03
    
    
    6.1 Years
    
    $
    4,038
 6




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Six Months Ended March 312006
    
    2005Expected life (years)
    
    
    4.5
    
    
    
    2.5Risk-free interest rate
    
    
    4.27
    %
    
    
    3.34
    %Volatility
    
    
    45
    %
    
    
    44
    %Dividend yield
    
    
    1.01
    %
    
    
    0.88
    %
     7




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##### Table of Contents



Employee Stock Purchase Plan
   Pro forma disclosure
   Three Months Ended
    
    
    Six Months EndedMarch 31 2005
    
    
    March 31, 2005Net income
    
    $
    3,215
    
    
    $
    6,006Add: Stock-based employee compensation
expense included in reported income,
net of related tax effects
    
    
    (28
    )
    
    
    (6
    )Deduct: Stock-based employee compensation
expense determined under fair value based
methods for all awards, net of related tax
effects
    
    
    (3,524
    )
    
    
    (4,347
    )Pro form net (loss) income
    
    $
    (337
    )
    
    $
    1,653Pro form basic (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.10Pro forma diluted (loss) earnings per share
    
    $
    (0.02
    )
    
    $
    0.10
 8




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##### Table of Contents



Repurchase of Common Shares
    Financing Arrangements
   Accounting for Derivatives and Hedging Activities
 ,
  9




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Comprehensive Income
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    2,098
    
    
    $
    3,215
    
    
    $
    4,024
    
    
    $
    6,006Unrealized gains (losses) on value of
derivative securities, net of tax
    
    
    1
    
    
    
    97
    
    
    
    (65
    )
    
    
    53Net unrealized investment losses,
net of tax
    
    
    (19
    )
    
    
    (117
    )
    
    
    (39
    )
    
    
    (162
    )Foreign currency translation adjustments
    
    
    103
    
    
    
    (273
    )
    
    
    (40
    )
    
    
    404Comprehensive income
    
    $
    2,183
    
    
    $
    2,922
    
    
    $
    3,880
    
    
    $
    6,301
 Geographic Segment Information
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:Americas
    
    $
    12,568
    
    
    $
    10,009
    
    
    $
    24,492
    
    
    $
    21,768Europe
    
    
    13,251
    
    
    
    10,340
    
    
    
    24,609
    
    
    
    21,753Asia
    
    
    13,860
    
    
    
    17,314
    
    
    
    26,368
    
    
    
    29,785$
    39,679
    
    
    $
    37,663
    
    
    $
    75,469
    
    
    $
    73,306
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At March 31,
    
    
    At September30,2006
    
    
    2005
    
    
    2005Long-lived assets:Americas
    
    $
    24,447
    
    
    $
    22,286
    
    
    $
    24,408Germany
    
    
    4,697
    
    
    
    4,743
    
    
    
    4,720Other
    
    
    917
    
    
    
    1,039
    
    
    
    1,064$
    30,061
    
    
    $
    28,068
    
    
    $
    30,192
 Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
   For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    963
    
    
    $
    1,418
    
    
    $
    1,084
    
    
    $
    1,459Accruals for warranties issued during the period
    
    
    402
    
    
    
    439
    
    
    
    658
    
    
    
    1,025Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (104
    )
    
    
    (72
    )
    
    
    (155
    )
    
    
    (274
    )Settlements made (in cash or in kind)
during the period
    
    
    (351
    )
    
    
    (453
    )
    
    
    (677
    )
    
    
    (878
    )Balance at March 31
    
    $
    910
    
    
    $
    1,332
    
    
    $
    910
    
    
    $
    1,332
 11




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Pension Benefits
  United States Plan
    
    
    Non U.S. PlanFor the Three Months
    
    
    For the Three MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service costs-benefits earned during the period
    
    $
    411
    
    
    $
    318
    
    
    $
    52
    
    
    $
    41Interest cost on projected benefit obligation
    
    
    500
    
    
    
    465
    
    
    
    67
    
    
    
    78Expected return on plan assets
    
    
    (722
    )
    
    
    (670
    )
    
    
    (20
    )
    
    
    (21
    )Net loss recognition
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    (2
    )
    
    
    (11
    )
    
    
    6
    
    
    
    6Amortization of prior service cost
    
    
    44
    
    
    
    45
    
    
    
    1
    
    
    
    2Net periodic benefit cost
    
    $
    340
    
    
    $
    147
    
    
    $
    106
    
    
    $
    106
 United States Plan
    
    
    Non U.S. PlanFor the Six Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service costs-benefits earned during the period
    
    $
    821
    
    
    $
    637
    
    
    $
    104
    
    
    $
    93Interest cost on projected benefit obligation
    
    
    1,000
    
    
    
    930
    
    
    
    133
    
    
    
    144Expected return on plan assets
    
    
    (1,445
    )
    
    
    (1,340
    )
    
    
    (39
    )
    
    
    (40
    )Net loss recognition
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    (5
    )
    
    
    (22
    )
    
    
    11
    
    
    
    11Amortization of prior service cost
    
    
    89
    
    
    
    89
    
    
    
    2
    
    
    
    3Net periodic benefit cost
    
    $
    679
    
    
    $
    294
    
    
    $
    211
    
    
    $
    211
  
 ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 Forward-Looking Statements
  12




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Overview
     Critical Accounting Policies and Estimates
  13




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Stock compensation plans
   Results of Operations
 Second Quarter Fiscal 2006 Compared with Second Quarter Fiscal 2005
    14




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.
     Six Months Ended March 31, 2006 Compared with Six Months Ended March 31, 2005
     15




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  March 31, 2006
    
    
    Sept. 30, 2005Current assets:Cash and cash equivalents
    
    $
    9,029
    
    
    $
    14,397Short-term investments
    
    
    45,755
    
    
    
    40,869Refundable income taxes
    
    
    122
    
    
    
    387Accounts receivable and other, net
    
    
    23,768
    
    
    
    19,452Total inventories
    
    
    14,430
    
    
    
    13,151Deferred income taxes
    
    
    4,195
    
    
    
    4,444Other current assets
    
    
    1,553
    
    
    
    1,385Total current assets
    
    
    98,852
    
    
    
    94,085Current liabilities:Short-term debt
    
    
    255
    
    
    
    0Accounts payable
    
    
    8,524
    
    
    
    7,540Accrued payroll and related expenses
    
    
    5,406
    
    
    
    5,618Other accrued expenses
    
    
    4,144
    
    
    
    4,649Income taxes payable
    
    
    2,926
    
    
    
    4,341Total current liabilities
    
    
    21,255
    
    
    
    22,148Working capital
    
    $
    77,597
    
    
    $
    71,937
 16




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Sources and Uses of Cash
  Six Months Ended March 312006
    
    2005Cash provided by (used in):Operating activities
    
    $
    2,547
    
    
    $
    4,434Investing activities
    
    
    (7,273
    )
    
    
    (5,606
    )Financing activities
    
    
    (649
    )
    
    
    455
 Operating activities
 Investing activities
 Financing activities
  17




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Outlook
   Recent Accounting Pronouncements
    18




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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
  19




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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.
   20




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ITEM 4 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 Unregistered Sales of Equity Securities and Use of Proceeds
  21




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Submission of Matters to a Vote of Security Holders
  PROPOSAL
    
    FOR
    
    AGAINST
    
    ABSTAIN(a)
    A proposal fix the number of Directors
of the Company at ten
    
    
    33,228,688
    
    
    
    76,679
    
    
    
    16,837
 PROPOSAL
    
    FOR
    
    WITHHELD(b)
    Election of Directors:Joseph P. Keithley
    
    
    32,757,585
    
    
    
    564,619*Brian R. Bachman
    
    
    11,512,999
    
    
    
    324,185James T. Bartlett
    
    
    32,718,695
    
    
    
    603,509James B. Griswold
    
    
    32,429,900
    
    
    
    892,304Leon J. Hendrix, Jr.
    
    
    32,758,017
    
    
    
    564,187*Brian J. Jackman
    
    
    11,514,743
    
    
    
    322,441*Dr. N. Mohan Reddy
    
    
    11,237,503
    
    
    
    599,681Thomas A. Saponas
    
    
    32,995,240
    
    
    
    326,964Barbara V. Scherer
    
    
    32,716,273
    
    
    
    605,931R. Elton White
    
    
    32,553,946
    
    
    
    768,258
 
 *
    
    Elected by holders of Common Shares only. PROPOSAL
    
    FOR
    
    AGAINST
    
    ABSTAIN(c)
    A proposal to approve the Keithley Instruments,
Inc. 2005 Employee Stock 
          Purchase and Dividend Reinvestment Plan
    
    
    28,898,269
    
    
    
    378,700
    
    
    
    21,564
  
 Exhibits
 Exhibits
 ExhibitNumber
    
    Exhibit10(s)
    
    Keithley Instruments, Inc. 2005 Employee Stock Purchase and Dividend Reinvestment
Plan. (Reference is made to Appendix B of the Companys Definitive Proxy Statement
dated December 29, 2005 (File No. 1-9965), which 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. 22




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##### Table of Contents



KEITHLEY INSTRUMENTS, INC.
          (Registrant)Date: May 10, 2006
    
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer(Principal Executive Officer)Date: May 10, 2006
    
    /s/ Mark J. PlushMark J. PlushVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 23