Keithley Instruments, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For fiscal year ended, SEPTEMBER 30, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 1-9965
KEITHLEY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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34-0794417 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
Address of principal executive offices: 28775 Aurora Road, Solon, Ohio, 44139
Registrants telephone number, including area code: (440) 248-0400
Securities registered pursuant to section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Shares, Without Par Value
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New York Stock Exchange |
Securities Registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
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 and 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 mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
Exchange Act Rule). Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the Common Shares of the Registrant held by non-affiliates was $224.6
million and the aggregate market value of the Class B Common Shares of the Registrant held by
non-affiliates was $.3 million for a total aggregate market value of all classes of Common Shares
held by non-affiliates of $224.9 million at March 31, 2005, the registrants most recently
completed second fiscal quarter. While the Class B Common Shares are not listed for public trading
on any exchange or market system, shares of that class are convertible into Common Shares at any
time on a share-for-share basis. The market values indicated were calculated based upon the last
sale price of the Common Shares as reported by the New York Stock Exchange on March 31, 2005, which
was $16.13.
As of December 5, 2005 there were outstanding 14,315,164 Common Shares, without par value, and
2,150,502 Class B Common Shares, without par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the registrants Annual Meeting of Shareholders to
be held on February 11, 2006 (the 2006 Annual Meeting) are incorporated by reference in Part III
in this Annual Report on Form 10-K (this Annual Report) and are identified under the appropriate
items in this Annual Report.
Keithley Instruments, Inc.
10-K Annual Report
Table of Contents
-1-
PART I.
ITEM 1 BUSINESS.
General
Keithley Instruments, Inc. was founded in 1946 and organized as an Ohio corporation in 1955.
Its principal executive offices are located at 28775 Aurora Road, Solon, Ohio 44139; telephone
(440) 248-0400. References herein to the Company, Keithley, we or our are to Keithley
Instruments, Inc. and its subsidiaries unless the context indicates otherwise.
Our website is www.keithley.com. We make our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to
the U.S. Securities and Exchange Commission available to the public free of charge through our
website as soon as reasonably practicable after making such filings.
Keithleys 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), radio frequency (RF) or optical signals. Our customers are
engineers, technicians and scientists in manufacturing, product development and research functions.
During fiscal 2005, approximately 30 percent of our orders were received from the semiconductor
industry; approximately 20 percent came from research and education customers; approximately 20
percent came from the wireless communications customer group; and approximately 25 percent came
from the electronic components and subassemblies manufacturers customer group, which includes
customers in automotive, computers and peripherals, medical equipment, aerospace and defense, and
manufacturers of components, including optoelectronic components. The remainder of orders came 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, RF,
optical or physical properties. As such, we consider our business to be in a single industry
segment.
Business Strategy
Our strategy for sales growth is straightforward. We have focused our efforts on identifying
test applications in segments of the electronics industry that have high rates of technology
change, long-term growth in demand, a meaningful market size, and leverage our measurement
capabilities and/or other test applications. New products are an important factor in our sales
growth strategy.
We work closely with our customers to build partnerships in order to anticipate their current
and future measurement needs. A thorough understanding of their applications coupled with our
precision measurement technology enables us to add value to our customers processes improving the
quality, throughput and yield of their products, as well as to determine which test applications we
will choose to serve. In addition to production test customers, we recognize the importance of
traditional research
customers. Whether these customers are performing basic or applied research in a university or
an industrial laboratory, they give us a first-hand look at new industry trends and technologies,
and they permit us to establish long-lasting relationships.
We leverage our applications expertise and product platforms to other industries. Keithley
technology is deployed in hundreds of applications where the most accurate and precise measurements
are required, known as high-reliability measurements, in such fields as high-performance
production test, military/aerospace, medical electronics and automotive electronics. By
concentrating on interrelated industries and product technologies, we are able to gain insight into
measurement problems experienced by one set of customers that can be solved for others. Our
applications knowledge and technology solutions in one area build credibility as we expand to
related fields, often using the same measurement platforms that are proven among a variety of
customers.
Product Offerings
We have approximately 500 products used to source, measure, connect, control or communicate DC, RF
or optical signals. Product offerings include integrated systems solutions and instruments and PC
plug-in boards that can be used as system components or stand-alone solutions. Prices per product
vary. Parametric test systems used by semiconductor wafer manufacturers generally range in price
from $150,000 to $500,000 depending upon the configuration specified by the customer. Our
semiconductor characterization system ranges in price from $30,000 to $75,000 depending upon the
configuration and options. Bench top instruments generally range in price from $1,000 to $10,000 on
a stand-alone basis and from $15,000 to $25,000 when used as a system. Switch systems generally
range in price from $2,000 to $50,000. PC plug-in boards are used for process control and data
collection applications, and in production test for machine builders and system integrators.
Selling prices generally range from $200 to $4,000.
New Products During Fiscal Year 2005
We develop new products for specific industry applications and for general purposes to serve a
larger customer constituency. New products introduced during fiscal 2005 included:
-2-
We introduced several products to serve the needs of our semiconductor customers. Our
Model S510 Reliability Test System is a high channel count, turnkey solution for semiconductor
labs. It is being used for reliability testing and lifetime modeling of the worlds most advanced
semiconductor devices at the smallest device sizes. We added integrated pulse measurement
capabilities to our Model 4200-SCS Semiconductor Characterization System. Pulse measurement
capability is becoming increasingly critical for researchers characterizing leading edge
semiconductors composed of new materials and device structures. We continued to enhance our Model
S680 with our third generation of on-wafer RF measurement capability, which is particularly
important to device manufacturers fabricating 90nm and smaller devices in their 300mm fabs.
Our Series 2600 System SourceMeter® Instrument is a new platform that significantly
lowers the cost of test for a wide range of electronic component producers, including silicon and
compound semiconductor device manufacturers. These products can be used in conjunction with our
switching products for product development and production test applications where testing a large
number of devices with high pin counts and high throughput are critical factors. Each sourcemeter
channel within a 2602 includes a precision power supply, a 5-1/2 digit multimeter, a true current
source, an arbitrary waveform generator, a voltage or current pulse generator with measurement, an
electronic load, and trigger controller functions. The 2600 controls and synchronizes the operation
of multiple SourceMeter channels via the TSP-Link trigger and communication bus.
The Series KUSB-3100 USB-based data acquisition measurement solutions consist of five
different multi-function modules that cover a broad range of applications, including system
automation, in-vehicle automotive testing, life science research, and educational teaching labs.
Units connect to USB ports on a
PC via a standard, low-cost cable, eliminating the need to install a board.
We introduced the Model 7002-HD, a high density two-slot switching mainframe with several
switch cards. The Model 7002-HD, used together with our 2400 series source meter products or 2000
series digital multimeters, provides a cost-effective source-measure solution targeted at both
production and design verification applications.
Geographic Markets and Distribution
During fiscal 2005, all of the Companys products were manufactured in Ohio and were sold in
over 80 countries throughout the world. The Companys principal markets are the United States,
Europe and Asia.
In the United States, our products are sold by our own sales personnel and through direct
marketing and catalog mailings. Outside the United States, we market our products directly in
countries in which we have sales offices and through distributors or manufacturers representatives
in other countries. Keithley has subsidiary sales and service offices located in Great Britain,
Germany, France, the Netherlands, Switzerland, Italy, Japan and Malaysia. We also have sales
offices in Belgium, Finland, Sweden, China, Korea, Taiwan, India and Singapore. Sales in areas
outside the above named locations are made through independent sales representatives and
distributors.
Sources and Availability of Raw Materials
Our products require a wide variety of electronic and mechanical components, most of which are
purchased. We have multiple sources for the vast majority of the components and materials we use;
however, there are some instances where the components are obtained from a sole-source supplier. If
we were unable to purchase components or materials from a sole-source supplier, we could experience
a temporary adverse impact on operations; however, we believe alternative sources could be found
quickly. Although shortages of purchased materials and components have been experienced from time
to time, these items have generally been available as needed.
Patents
Electronic instruments of the nature we design, develop and manufacture generally cannot be
patented in their entirety. Although we hold patents with respect to certain of our products, we do
not believe our business is dependent to any material extent upon any single patent or group of
patents because of the rapid rate of technological change in the industry.
Seasonal Trends and Working Capital Requirements
Our business is not subject to significant seasonal trends. However, many of the industries we
serve, including but not limited to the semiconductor industry, the wireless communications
industry, the optoelectronics industry and other sectors of the global electronics industry, have
historically been cyclical. We do not have any unusual working capital requirements.
Customers
Our customers generally are involved in production test, engineering research and development,
electronic service or repair, and educational and governmental research. During the fiscal year
ended September 30, 2005, no one customer accounted for more than 10% of our sales. We do not
believe that the loss of any one customer would materially affect our sales or net income.
-3-
Backlog
Our backlog of unfilled orders amounted to approximately $18,331,000 as of September 30, 2005 and
approximately $15,973,000 as of September 30, 2004. We expect that substantially all of the
orders included in the 2005 backlog will be delivered during fiscal 2006. A portion of orders
included in backlog may be canceled by the customer prior to shipment. The level of backlog at any
given time will be affected by the timing of the Companys receipt of orders and the speed with
which those orders are filled. Accordingly, the Companys backlog as of September 30, 2005 may not
necessarily represent the actual amount of shipments or sales for any future period.
Competition
The Company competes on the basis of quality, performance, service and price, with quality and
performance frequently being dominant. There are many firms in the world engaged in the manufacture
of electronic measurement instruments, some of which are larger and have greater financial
resources than the Company. In general, we compete with a number of companies in specialized areas
of the test and measurement industry and one large broad line measurement products supplier,
Agilent Technologies, Inc.
Research and Development
Our engineering development activities are directed toward the development of new products
that will complement, replace or add to the products currently included in our product line. We do
not perform basic research, but on an ongoing basis we utilize new component and software
technologies in the development of our products. The highly technical nature of our products and
the rapid rate of technological change in the industry require a large and continuing commitment to
engineering development efforts. Product development expenses were $17,040,000 in 2005, $15,017,000
in 2004 and $13,488,000 in 2003, or approximately 12%, 11% and 13% of net sales, respectively, for
each of the last three fiscal years. The Company expects to increase the level of product
development expenses relative to net sales during fiscal 2006.
Government Regulations
We believe our current operations and uses of property, plant and equipment conform in all
material respects to applicable laws and regulations. Keithley has not experienced, nor do we
anticipate, any material claim or material capital expenditure in connection with environmental
laws and other regulations.
Employees
As of September 30, 2005, the Company employed approximately 651 persons, 183 of whom were located
outside the United States. None of our employees are covered under the terms of a collective
bargaining agreement, and we believe that relations with our employees are good.
Foreign Operations and Export Sales
Information related to foreign and domestic operations and export sales is contained in Note L of
the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.
Keithley has significant revenues from outside the United States which increase the risk to
the Company. These risks include increased exposure to the risk of foreign currency fluctuations
and the potential economic and political impacts from conducting business in foreign countries.
With the exception of changes in the value of foreign currencies, which is not possible to predict,
we believe our foreign subsidiaries and other larger international markets are in countries where
the economic and political climate generally is stable. The Company must also comply with foreign
regulations, which may increase the complexity of conducting its business.
ITEM 2 PROPERTIES.
The Companys principal administrative, marketing, manufacturing and development activities are
conducted at two Company-owned buildings in Solon, Ohio. The two buildings total approximately
200,000 square feet and sit on approximately 33 acres of land. The Company also owns another 50,000
square foot building on 5.5 acres of land adjacent to its executive offices. This facility is
currently being leased to others, but is available for expansion should additional space be
required. The Company also maintains a number of sales and service offices in the United States and
overseas. We believe the facilities owned and leased are well maintained, adequately insured and
suitable for their present and intended uses.
ITEM 3 LEGAL PROCEEDINGS.
We are subject to various litigation matters and claims that occur in the normal course of
business. While the results of such litigation matters and claims cannot be predicted with
certainty, management believes that their final outcome will not have a material adverse impact on
the financial position or results of operations of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year
covered by this report.
-4-
EXECUTIVE OFFICERS OF THE REGISTRANT:
Certain information regarding our executive officers is set forth below:
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Name |
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Position |
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Age |
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Joseph P. Keithley
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Chairman of the Board of Directors, President and Chief Executive Officer
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56 |
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Steven A. Chipchase
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Vice President Operations
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42 |
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Philip R. Etsler
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Vice President Human Resources
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55 |
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Alan S. Gaffney
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Vice President Commercial Marketing and Information Systems
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35 |
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Mark A. Hoersten
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Vice President Business Management
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47 |
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Larry L. Pendergrass
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Vice President New Product Development
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50 |
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John A. Pesec
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Vice President Worldwide Sales and Support
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45 |
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Mark J. Plush
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Vice President and Chief Financial Officer
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56 |
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Linda C. Rae
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Executive Vice President and Chief Operating Officer
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40 |
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Joseph P. Keithley was elected Chairman of the Board of Directors in February 1991. He was elected
Chief Executive Officer in November 1993, and President in May 1994. He has been a Director since
1986, and was elected Vice Chairman of the Board in February 1988. Mr. Keithley joined the Company
in 1976 and held various positions in production, customer service, sales and marketing prior to
being elected Vice President of Marketing in 1986.
Steven A. Chipchase was elected Vice President Operations in December 2005. Mr. Chipchase joined
Keithley in April 2000 as Materials/ Logistics Manager and held various positions in operations,
including Cell Manager from March to July 2003, Acting Director of Operations from July 2003 to
February 2004, and Director of Operations from February 2004 to December 2005.
Philip R. Etsler has been Vice President of Human Resources since February 1990. He joined the
Company in January 1986 as Personnel Director.
Alan S. Gaffney was elected Vice President Commercial Marketing and Information Systems in May
2003. He joined Keithley in July 1999 as Direct Marketing Manager. He became Director of Worldwide
Communications and Marketing Support in May 2000. Prior to joining Keithley, Mr. Gaffney held the
position of Sales and Marketing Manager at Diebold, Inc., a global provider of self-service
transaction solutions, security systems and services to financial institutions, retailers, colleges
and universities, healthcare facilities and utilities.
Mark A. Hoersten was elected Vice President Business Management in May 2003. He joined Keithley in
June 1980 as a Design Engineer and held various positions in product development and marketing
until September 1997 when Mr. Hoersten became the Director of Marketing. He was promoted to
Telecommunications Test Business Manager in July 1999, and General Manager in April 2001.
Larry L. Pendergrass joined Keithley in May 2003 as Vice President, New Product Development.
Prior to joining Keithley, Mr. Pendergrass had over 20 years experience in research and
development, product development, and manufacturing engineering in various roles including Section
Manager, Project Manager and Project Leader with Agilent Technologies and Hewlett-Packard.
John A. Pesec was elected Vice President Worldwide Sales and Support in September 2002. Mr.
Pesec joined Keithley in July 1990 and has held various positions with Keithley since then,
including Director of Pacific Basin Operations from February 1995 to January 1998, Director
Semiconductor Sales from January 1998 to March 1999, Director of Sales from March 1999 to April
2001, and Managing Director Worldwide Sales from April 2001 to September 2002.
Mark J. Plush was elected Vice President and Chief Financial Officer in October 1998. Mr. Plush
joined the Company in March 1982 as Controller.
Linda C. Rae was elected Executive Vice President and Chief Operating Officer in December 2005. Ms.
Rae joined Keithley in September 1995 as a Product Marketer and has held various marketing
positions with Keithley since then, including Component Test Business Manager from July 1999 to
June 2000, Business Manager of Optoelectronics from June 2000 to April 2001, General Manager from
April 2001 to May 2003, and Senior Vice President and General Manager from May 2003 to December
2005.
-5-
PART II.
ITEM 5 MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
The Companys Common Shares trade on the New York Stock Exchange under the symbol KEI. The high and
low prices shown below are sales prices of the Companys Common Shares as reported on the NYSE.
There is no established public trading market for the Class B Common Shares; however, they are
readily convertible on a one-for-one basis into Common Shares.
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Cash Dividends |
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Cash Dividends |
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Per Class B |
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Fiscal 2005 |
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High |
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Low |
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Per Common Share |
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Common Share |
First Quarter |
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$ |
19.99 |
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$ |
15.96 |
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$ |
.0375 |
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$ |
.0300 |
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Second Quarter |
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19.70 |
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15.58 |
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.0375 |
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.0300 |
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Third Quarter |
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16.33 |
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12.90 |
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.0375 |
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.0300 |
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Fourth Quarter |
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16.55 |
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13.05 |
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.0375 |
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.0300 |
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Fiscal 2004 |
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First Quarter |
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$ |
19.16 |
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$ |
14.16 |
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$ |
.0375 |
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$ |
.0300 |
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Second Quarter |
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25.73 |
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18.35 |
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.0375 |
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.0300 |
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Third Quarter |
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22.90 |
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19.23 |
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.0375 |
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.0300 |
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Fourth Quarter |
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22.07 |
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15.61 |
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.0375 |
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.0300 |
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The approximate number of shareholders of record of Common Shares and Class B Common Shares,
including those shareholders participating in the Dividend Reinvestment Plan, as of December 5,
2005 was 2,398 and 4, respectively.
Equity Compensation Plan Information as of September 30, 2005
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Number of securities remaining |
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available for future issuance |
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Number of securities to be |
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Weighted-average |
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under equity compensation |
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issued upon exercise of |
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exercise price of |
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plans (excluding securities |
Plan category |
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outstanding options |
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outstanding options |
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reflected in column (a) |
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(a) |
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(b) |
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(c) |
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Equity compensation plans
approved
by security holders |
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3,327,346 |
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$ |
20.04 |
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1,611,193 |
(1) |
Equity compensation plans not
approved by security holders |
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Total |
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3,327,346 |
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$ |
20.04 |
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1,611,193 |
(1) |
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(1) |
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Includes 81,119 shares available for issuance under the 1993 Employee Stock Purchase and
Dividend Reinvestment Plan. |
Purchases of Equity Securities
On December 10, 2003, the Company announced that 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, which represented approximately 13 percent of
the outstanding shares at the time the program was announced, over a three-year period ending
December 31, 2006. 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 replaced the prior repurchase program, which expired
in December 2003 and had substantially the same terms as the 2003 program. There were no shares
repurchased in fiscal 2005 or fiscal 2004. During fiscal 2003, the Company repurchased 243,200
shares at an average price per share of $11.41 under the repurchase program that expired in
December 2003.
-6-
ITEM 6 SELECTED FINANCIAL DATA.
The following table sets forth consolidated selected financial data for the Company. The financial
data should be read in conjunction with the Financial Statements and Notes thereto, included in
Item 8 of this Annual Report, and with Managements Discussion and Analysis of Financial Condition
and Results of Operations, included in Item 7 of this Annual Report.
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For the years ended September 30, |
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(In thousands of dollars except for per share data) |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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Operating Results: |
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Net sales |
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$ |
141,552 |
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140,248 |
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106,718 |
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96,922 |
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149,692 |
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Gross margin percentage |
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60.7 |
% |
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61.1 |
% |
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55.3 |
% |
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56.2 |
% |
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60.1 |
% |
Income (loss) before income taxes |
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$ |
14,087 |
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15,541 |
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(4,361 |
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(5,046 |
) |
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26,199 |
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Net income (loss) |
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$ |
10,128 |
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11,381 |
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(4,192 |
) |
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(3,080 |
) |
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17,392 |
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Basic earnings (loss) per share |
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$ |
0.62 |
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0.71 |
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(0.27 |
) |
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(0.20 |
) |
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1.11 |
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Diluted earnings (loss) per share |
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$ |
0.61 |
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0.69 |
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(0.27 |
) |
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(0.20 |
) |
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1.05 |
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Common Stock Information: |
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|
|
|
|
|
|
|
|
|
|
Cash dividends per Common Share |
|
$ |
0.150 |
|
|
|
0.150 |
|
|
|
0.150 |
|
|
|
0.150 |
|
|
|
0.140 |
|
Cash dividends per Class B Common Share |
|
$ |
0.120 |
|
|
|
0.120 |
|
|
|
0.120 |
|
|
|
0.120 |
|
|
|
0.112 |
|
Weighted average number of shares
outstanding- diluted |
|
|
16,591 |
|
|
|
16,544 |
|
|
|
15,487 |
|
|
|
15,687 |
|
|
|
16,583 |
|
At fiscal year-end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payout ratio |
|
|
24.6 |
% |
|
|
21.7 |
% |
|
|
n/m |
|
|
|
n/m |
|
|
|
13.3 |
% |
Shareholders equity per share |
|
$ |
6.81 |
|
|
|
6.26 |
|
|
|
5.33 |
|
|
|
5.81 |
|
|
|
5.90 |
|
Closing market price |
|
$ |
14.60 |
|
|
|
17.45 |
|
|
|
14.15 |
|
|
|
12.15 |
|
|
|
14.35 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
142,364 |
|
|
|
136,666 |
|
|
|
114,186 |
|
|
|
120,371 |
|
|
|
123,600 |
|
Current ratio |
|
|
4.2 |
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
3.9 |
|
|
|
4.5 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000 |
|
Total debt |
|
|
|
|
|
|
440 |
|
|
|
409 |
|
|
|
539 |
|
|
|
3,000 |
|
Total debt-to-capital |
|
|
|
|
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
3.1 |
% |
Shareholders equity |
|
$ |
111,976 |
|
|
|
101,577 |
|
|
|
84,763 |
|
|
|
92,448 |
|
|
|
93,946 |
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average shareholders equity |
|
|
9.5 |
% |
|
|
12.2 |
% |
|
|
-4.7 |
% |
|
|
-3.3 |
% |
|
|
20.5 |
% |
Return on average total assets |
|
|
7.3 |
% |
|
|
9.1 |
% |
|
|
-3.6 |
% |
|
|
-2.5 |
% |
|
|
14.7 |
% |
Return on net sales |
|
|
7.2 |
% |
|
|
8.1 |
% |
|
|
-3.9 |
% |
|
|
-3.2 |
% |
|
|
11.6 |
% |
Number of employees |
|
|
651 |
|
|
|
632 |
|
|
|
608 |
|
|
|
612 |
|
|
|
640 |
|
Sales per employee |
|
$ |
220.7 |
|
|
|
226.2 |
|
|
|
174.9 |
|
|
|
154.8 |
|
|
|
236.5 |
|
Cash flow: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities |
|
$ |
10,543 |
|
|
|
15,045 |
|
|
|
(6,530 |
) |
|
|
7,815 |
|
|
|
38,273 |
|
Ten-year compound annual growth rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
2.6 |
% |
|
|
4.6 |
% |
|
|
1.6 |
% |
|
|
0.2 |
% |
|
|
4.2 |
% |
Net income |
|
|
7.5 |
% |
|
|
28.8 |
% |
|
|
n/m |
|
|
|
n/m |
|
|
|
15.2 |
% |
|
|
|
n/m These ratios are not meaningful due to the reported net losses in 2003 and 2002. |
-7-
|
|
|
ITEM 7 |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. |
In Thousands of Dollars except for per share information.
Forward-Looking Statements
Certain of the matters and subject areas discussed in this Annual Report on Form 10-K 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 (Enterprise Resource Planning) and CRM (Customer Relationship
Management) system implementations, investments to develop RF products, conditions of the
electronics industry, order cancellations, cost reduction efforts, general economic conditions,
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
Annual Report. These forward-looking statements reflect managements 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), radio frequency (RF) or optical signals. Our customers are engineers, technicians and
scientists in manufacturing, product development and research functions. During fiscal 2005,
approximately 30 percent of our orders were received from the semiconductor industry. Approximately
20 percent came from research and education customers. Approximately 20 percent came from the
wireless communications customer group. Approximately 25 percent came from the electronic
components and subassemblies manufacturers customer group, which includes customers in automotive,
computers and peripherals, medical equipment, aerospace and defense, and manufacturers of
components, including optoelectronic components. The remainder of orders came 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, RF, optical or physical properties.
As such, we consider our business to be in a single 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. During much of fiscal 2003, conditions continued to negatively affect the worldwide
electronics industry. This caused a negative impact to our customers and, therefore, our results.
However, during the fourth quarter of fiscal 2003 we noted an improved environment in the
electronics industry. During fiscal 2004 and 2005, we noted improving conditions in the health of
our customers. However, 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.
During the past several years our focus has been on building long-term relationships and
strong collaborative partnerships with our global customers for serving their measurement needs.
Effective January 1, 2003, we began to sell our products in the United States through a direct
sales force. Prior to January 1, 2003, we sold our products through sales representatives to whom
we paid a commission. The change in our sales channel allowed us to build a sales network of
focused, highly trained sales engineers who specialize in measurement expertise and problem-solving
for customers and enhanced our ability to sell not only in the United States, but to U.S. companies
with foreign manufacturing operations. During the first quarter of fiscal 2003, we incurred
approximately $600 in one-time costs as we paid both commissions to sales representatives and
salaries to our own sales employees. We have continued to build our direct sales force throughout
the world and our ability to serve our customers has been aided immeasurably by deploying our own
employees throughout the Americas, Europe and most recently Asia. We expect that selling through
our own sales force will be favorable to earnings during times of strong sales and unfavorable
during times of depressed sales as a greater portion of our selling costs are now fixed.
Over the past few years we have incurred costs for the preparation and transition to new ERP and
CRM software systems. Implementations that have occurred to date have caused minimal disruptions to
our business, however, we will continue our ERP and CRM transitions in various locations throughout
the world in fiscal 2006 and beyond. The financial impact of the ERP and CRM projects was a charge
to selling, general and administrative expenses of approximately $789 in fiscal 2005, $889 in
fiscal 2004 and $735 in 2003, including depreciation expense of the software and other expenses
that are not capitalizable under the accounting guidance. Included in capital expenditures was
$203, $336 and $1,719 in fiscal 2005, 2004 and 2003, respectively, related to the ERP and CRM
systems.
During the last two years, the Company continued to increase its investment in new product
development, particularly for RF products, including opening a west coast development center in
fiscal 2004. As we move forward into 2006, we will be increasing our investment in product
development activities to expand our measurement capabilities for the semiconductor and wireless
industries. We believe there are many opportunities to create sales growth through serving
customers in these industries, and believe new products will drive our future growth.
-8-
Critical Accounting Policies and Estimates
Management has identified the Companys 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.
Use of estimates:
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 that
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 period. Actual results could differ materially from those
estimates.
Revenue recognition:
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable and collectibility is reasonably assured.
Generally, these criteria are met at the time the product is shipped under FOB shipping terms. Upon
shipment, a provision is made for estimated costs that may be incurred for product warranties and
sales returns. When other significant obligations remain after products are delivered, revenue is
recognized only after such obligations are fulfilled.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined based on a
currently-adjusted standard, which approximates actual cost on a first-in, first-out basis. We
periodically review our recorded inventory and estimate a reserve for obsolete or slow-moving
items. If actual demand and market conditions are less favorable than those projected by
management, additional reserves may be required. If actual market conditions are more favorable
than anticipated, our cost of sales will be lower than expected in that period.
Income taxes:
Keithley is subject to taxation from federal, state and international jurisdictions. The
annual provision for income taxes and the determination of the resulting deferred tax assets and
liabilities involves a significant amount of judgment by management. Judgment also is applied in
determining whether the deferred tax assets will be realized in full or in part. In evaluating our
ability to recover our deferred tax assets, we consider all available positive and negative
evidence including our past operating results, the existence of cumulative losses in the most
recent fiscal years, and our forecast of future taxable income. In determining future taxable
income, we are responsible for assumptions utilized including the amount of federal, state and
international pretax operating income, the reversal of book versus tax differences, and the
implementation of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are consistent with the plans
and estimates we are using to manage the underlying business. A valuation allowance against
deferred tax assets has been established related to foreign tax credits and net operating losses
which may not be realized due to the uncertainty of future profit levels or foreign source income.
We intend to maintain this valuation allowance until sufficient positive evidence exists to support
reversal of the valuation allowance, until such credits are realized or until such credits expire.
Our income tax expense (benefit) recorded in the future will be reduced to the extent of offsetting
decreases in our valuation allowance. The realization of our remaining deferred tax assets is
primarily dependent upon forecasted future taxable income. Any significant reduction in estimated
forecasted future taxable income may require that we record an additional valuation allowance
against our deferred tax assets. An increase in the valuation allowance would result in
additional income tax expense in such period and could have a significant impact on our future
earnings. In addition, the calculation of our tax liabilities involves dealing with uncertainties
in the application of complex tax regulations in various tax jurisdictions. We recognize potential
liabilities for anticipated tax issues based upon our estimate of whether additional taxes will be
due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the
liabilities would result in tax benefits being recognized in the period when we determine the
liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to income tax expense would result.
Pension plan:
Retirement benefit plans are a significant cost of doing business representing obligations
that will be ultimately settled far in the future and therefore are subject to estimation. Pension
accounting is intended to reflect the recognition of future benefit costs over the employees
approximate service period based on the terms of the plans and the investment and funding decisions
made by us. We are required to make assumptions regarding such variables as the expected long-term
rate of return on assets and the discount rate applied to determine service cost and interest cost
to arrive at pension income or expense for the year. As the rate of return on plan assets
assumption is a long-term estimate, it can differ materially from the actual return realized on
plan assets in any given year, especially when markets are highly volatile. We have analyzed the
rates of return on assets used and determined that the rates we use are reasonable based on the
plans historical performance relative to the overall markets in the countries where the plans are
effective, as well as the plans asset mix between equities and fixed income investments. Assumed
discount rates are used in measurements of the projected and accumulated benefit obligations, and
the service and interest cost components of net periodic pension cost.
The discount rate for the United States Plan was determined as of the June 30, 2005
measurement date by constructing a portfolio of bonds with cash flows from coupon payments and
maturities matching the projected benefit payments under the Plan. Bonds considered in constructing
the model portfolio are rated AA- or higher by Standard & Poors. Callable bonds were excluded from
consideration. The longest maturity of any bond included in the data is February 7, 2035. Benefit
payments lying beyond 2035 were discounted back to that year using interest rates based on the
Citigroup Pension Discount Curve as of June 30, 2005. Because the United States Plans cash flows
are larger in future years than they are currently, coupon payments from longer maturity bonds are
in excess of what is needed to meet early period benefit payments. The purchase
-9-
price of the bond portfolio was adjusted by removing the value of the excess bond income,
with such value based on prices of bonds with cash flows matching the excess amounts.
The discount rate used in determining the recorded liability for our U.S. pension plan was
5.50% for 2005, compared to 6.50% for 2004 and 6.25% for 2003. The decrease in the rate was
primarily due to lower interest rates on long-term, highly rated corporate bonds.
Actual rate of return on U.S. plan assets was 7.9% for 2005 compared to an expected rate of
return of 8.25%. A 0.25% increase (decrease) in the expected rate of return would have produced an
$81 decrease (increase) in 2005 expense.
Management will continue to assess the expected long-term rate of return on plan assets and
discount rate assumptions for both the U.S. plan and non-U.S. plan based on relevant market
conditions as prescribed by accounting principles generally accepted in the U.S. and will make
adjustments to the assumptions as appropriate. Pension income or expense is allocated to Cost of
goods sold, Selling, general and administrative expenses, and Product development expenses in the
Consolidated Statements of Operations.
At the end of the 2005 fiscal year, the U.S. pension plans funded status reflected $10,896 of
unrecognized actuarial loss, including $1,135 in experience loss that will not be subject to
recognition in determining 2006 expense. The excluded portion is due to differences between
expected and actual investment returns on the current measurement date and the preceding three
measurement dates. Such losses are made subject to recognition at a rate of 20% per year until
fully included. The remaining loss of $9,761, which is due to changes in data, assumption changes
(including discount rate) and previously recognized asset gains or losses, is subject to
recognition based on the 10% corridor method. Any amount falling outside of the 10% corridor is
divided by the average future working lifetime of active participants to determine the amount
recognized in 2006 expense.
Stock compensation plans:
We have two active stock option plans and an employee stock purchase plan. We have chosen the
disclosure provisions of Statement of Financial Accounting Standards No. 148, Accounting for
Stock-based Compensation Transition and Disclosure an amendment of FASB Statement No. 123
(SFAS 148), and as such, no compensation cost for the stock option and stock purchase plans has
been recognized in the consolidated financial statements, except in certain cases when stock
options were granted below the market price of the underlying stock on the date of grant or
variable accounting is required under applicable accounting guidance. For disclosure purposes, the
valuation of stock issued to employees requires management to determine estimates for the expected
life of the options, the expected risk-free interest rate during the expected life of the option,
the expected volatility of the stock price over the expected life of the option, and the expected
dividend yield. These estimations are significant factors in the valuation model, and actual
results could differ materially from these estimates. We currently use the Black-Scholes model to
value options. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment
(SFAS No. 123R). For further discussion, see the section entitled Recent Accounting
Pronouncements of Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Results of Operations
The following discussion should be read in conjunction with the Financial Statements and
Supplementary Data included in Item 8 of this Annual Report.
Percent of net sales for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of goods sold |
|
|
39.3 |
|
|
|
38.9 |
|
|
|
44.7 |
|
Selling, general and administrative expenses |
|
|
39.7 |
|
|
|
39.6 |
|
|
|
46.6 |
|
Product development expenses |
|
|
12.0 |
|
|
|
10.7 |
|
|
|
12.6 |
|
Severance charges |
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
Operating income (loss) |
|
|
9.0 |
|
|
|
10.8 |
|
|
|
(4.7 |
) |
Investment income |
|
|
1.0 |
|
|
|
0.4 |
|
|
|
0.8 |
|
Interest expense |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
Income (loss) before income taxes |
|
|
10.0 |
|
|
|
11.1 |
|
|
|
(4.1 |
) |
Provision (benefit) for income taxes |
|
|
2.8 |
|
|
|
3.0 |
|
|
|
(0.2 |
) |
|
Net income (loss) |
|
|
7.2 |
|
|
|
8.1 |
|
|
|
(3.9 |
) |
|
Net income for 2005 was $10,128, or $0.61 per diluted share compared to $11,381, or $0.69 per
share for 2004. The net loss was $4,192, or $0.27 per share in 2003 including the establishment of
a tax valuation allowance in the income tax provision of $1,822, or
$0.12 per share, and severance
charges of $845 pretax, or $0.03 per share after taxes.
Net sales were $141,552 in 2005 compared with $140,248 in 2004 and $106,718 in 2003. Net sales
increased one percent in 2005 from 2004. The effect of a four percent weaker U.S. dollar on net
sales was negligible. Net sales increased 31% in 2004 from 2003. Approximately four percentage
points of the 31 percent increase were due to the effect of a weaker U.S. dollar. The downturn in
the electronics industry, which began in 2001, had a negative effect on results into 2003.
Throughout 2004 and 2005, we noted improving conditions in the health of our customers and the
-10-
electronics industry as a whole. Geographically, sales were up 21% in Asia, down nine percent
in Europe and down eight percent in the Americas during 2005. In 2004, sales were up 32% in the
Americas, 39% in Asia, and up 25% in Europe from 2003.
Cost of goods sold as a percentage of net sales was 39.3%, 38.9% and 44.7% in 2005, 2004 and 2003,
respectively. A favorable product mix in 2005 was more than offset by higher sales discounts, which
raises cost of goods sold as a percentage of net sales, and by higher other manufacturing costs due
to our 2005 investment in the manufacturing design engineering organization, as well as higher
manufacturing variances. The improvement in 2004 over 2003 was due to spreading fixed manufacturing
costs over higher sales volume, lower manufacturing costs as a result of the progress we made in
fine-tuning our lean manufacturing process and improved product mix. Foreign exchange hedging had a
minimal effect on cost of goods sold in 2005, 2004 and 2003.
Selling, general and administrative expenses of $56,177 increased one percent in 2005 from
$55,533 in 2004, and increased 12% in 2004 from $49,786 in 2003. Selling, general and
administrative expenses as a percentage of net sales were 39.7%, 39.6% and 46.6%, in 2005, 2004 and
2003, respectively. The increase in 2005 over 2004 was due primarily to higher costs related to
Sarbanes-Oxley compliance, higher salaries and fringe benefits and higher costs outside the U.S.
due to the weaker dollar, offset by lower incentive costs tied to financial performance. The
increase in 2004 over 2003 was due primarily to higher incentive costs due to our strong financial
performance in fiscal 2004. Additionally, the weaker U.S. dollar increased costs in Europe and
Japan.
Product development expenses of $17,040 increased 13% from $15,017 in 2004, and increased 11%
in 2004 from $13,488 in 2003. Product development expenses as a percentage of net sales were 12.0%,
10.7% and 12.6%, in 2005, 2004 and 2003, respectively. The increase in 2005 was due primarily to
higher personnel-related costs, project consultants, and development supplies for our continued
investment in the development of new products, as well as the full-year impact of our west coast RF
development group. The
increase in 2004 from 2003 was due primarily to the investment in our west coast RF
development group and higher incentive costs.
During fiscal 2003, we recorded $845 pretax, or $.03 per share after taxes, for severance charges
relating to a reduction in force of 23 individuals, or less than 5% of the worldwide work force.
The majority of the individuals were in sales or sales support functions. The charge included
salaries and vacation pursuant to each individuals severance agreement, payroll taxes, health
insurance and pension costs. Cash payments of $94, $406 and $579 were made for severance in 2005,
2004 and 2003, respectively. At September 30, 2004, $107 was included in the Accrued payroll and
related expenses caption of the consolidated Balance Sheets related to severance. All remaining
liabilities under these agreements were paid in 2005 (See Note J).
Interest income was $1,383 in 2005, $540 in 2004 and $896 in 2003. Higher interest rates and higher
average cash and short-term investment balances accounted for the increase in 2005 over 2004. Lower
interest rates and lower average cash and short-term investments levels accounted for the decrease
in 2004 from 2003. Interest expense was $64 in 2005, $92 in 2004 and $210 in 2003. The decrease in
2004 from 2003 was due primarily to favorable mark-to-market adjustments on the Companys interest
rate swap agreement.
The tax rate for fiscal 2005 was 28.1%, compared to the prior years rate of 26.8%. The 2005
rate was lower than the statutory rate as a result of extraterritorial income exclusion benefits,
R&D credit utilization and changes in state deferred taxes. The 2004 rate was below the statutory
rate due mainly to the extraterritorial income exclusion benefit and R&D credit utilization. We
recorded a tax benefit for 2003 at a 3.9% effective rate. The benefit was lower than the statutory
tax rate primarily due to the establishment of a valuation allowance for certain tax credits where
we determined it is more likely than not that the deferred tax asset related to those credits would
not be realized (See Note I).
Our financial results are affected by foreign exchange rate fluctuations. Generally, a
weakening U.S. dollar versus foreign currency favorably impacts our foreign currency denominated
sales. A strengthening U.S. dollar has an unfavorable effect. This foreign exchange effect cannot
be precisely isolated since many other factors affect our foreign sales and earnings. These factors
include product offerings and pricing policies of Keithley and our competition, whether competition
is foreign or U.S. based, changes in technology, product and customer mix, and local and worldwide
economic conditions.
We utilize hedging techniques designed to mitigate the short-term effect of exchange rate
fluctuations on operations and balance sheet positions by entering into foreign exchange forward
contracts. We do not speculate in foreign currencies or derivative financial instruments, and
hedging techniques do not increase our exposure to foreign exchange rate fluctuations.
Liquidity and Capital Resources
Net cash provided by operating activities was $10,543 in fiscal 2005. Cash and cash
equivalents decreased $2,054 to $14,397 at September 30, 2005. Short-term investments increased
$8,757 to $40,869 at September 30, 2005. Cash and short term investments were used to purchase
$3,768 of property, plant and equipment, to pay $2,389 in dividends, to contribute $2,500 to the
United States pension plan, and to fund the working capital needs of our business. We had no debt
at September 30, 2005, a decrease of $440 from September 30, 2004.
The Companys credit agreement, which expires March 31, 2008, is a $10,000 debt facility ($0
outstanding at September 30, 2005) that provides unsecured, multi-currency revolving credit at
various interest rates based on Prime or LIBOR. We are required to pay a facility fee of 0.125% on
the total amount of the commitment. Additionally, the Company has a number of other credit
facilities in various currencies and for standby letters of credit aggregating $5,000 ($617
outstanding at September 30, 2005).
At September 30, 2005, we had total unused lines of credit with domestic and foreign banks
aggregating $14,383, of which $10,000 is long-term and $4,383 was a combination of long-term and
short-term
depending upon the nature of the indebtedness. Under certain provisions of the debt
agreements, we are required to comply with various financial ratios and covenants. We were in
compliance with all such debt covenants, as amended, at September 30, 2005 and during each of the
three years then ended.
-11-
Our current stock repurchase program expires on December 31, 2006. Under the current program
we may repurchase up to 2,000,000 Common Shares through December 31, 2006. The current program
replaces a prior program that expired in December 2003.
During 2006, 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.
Capital expenditures in fiscal 2006 are expected to approximate $5,000 to $6,500.
Set forth below is a table of information with respect to the Companys contractual obligations as
of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Payments Due by Period |
|
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
More than 5 years |
Short-Term Debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating Lease Obligations |
|
|
3,827 |
|
|
|
1,584 |
|
|
|
1,397 |
|
|
|
570 |
|
|
|
276 |
|
Payments Under Deferred
Compensation Agreements (a) |
|
|
463 |
|
|
|
98 |
|
|
|
196 |
|
|
|
169 |
|
|
|
|
|
Pension Benefit (b) |
|
|
|
|
|
|
|
|
|
|
(b |
) |
|
|
(b |
) |
|
|
(b |
) |
Total Contractual Obligations |
|
$ |
4,290 |
|
|
$ |
1,682 |
|
|
$ |
1,593 |
|
|
$ |
739 |
|
|
$ |
276 |
|
|
|
|
(a) |
|
Includes amounts due under a deferred compensation agreement with a retired executive. Amounts
exclude additional interest that will be earned from September 30, 2005 through the time of
payment. Other executives and directors are included in this plan; however, as retirement dates are
uncertain, they are excluded from the above table. |
|
(b) |
|
The obligation related to pension benefits is actuarially determined and is reflective of
obligations as of September 30, 2005. The Company made its 2005 pension contribution of $2,500 in
fiscal 2005, and as such does not have a required contribution due in fiscal 2006. We are not able
to reasonably estimate our future required contributions beyond 2006 due to uncertainties regarding
significant assumptions involved in estimating future required contributions to our defined benefit
pension plans; including interest rate levels, the amount and timing of asset returns; what, if
any, changes may occur in legislation; and how contributions in excess of the minimum requirements
could impact the amounts and timing of future contributions. |
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
In 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). The provisions of SFAS No. 151
will apply to inventory costs beginning in fiscal year 2006. The adoption of SFAS No. 151 is not
expected to have a significant effect on the Companys consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB Opinion No. 29. 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. The provisions of SFAS No. 153 were effective for transactions entered
into beginning in our fourth quarter of fiscal year 2005. The effect of adopting SFAS No. 153 was
not material to the consolidated financial statements of the Company.
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 the Companys
current accounting under APB Opinion No. 25, Accounting for Stock Issued to Employees. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, Share-Based
Payment, which expresses the views of the Staff regarding the adoption of SFAS No. 123R. 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, and is being adopted October 1, 2005. The
Company estimates that the expense for fiscal 2006 will range between $2,000 and $2,500 on a pretax
basis. The Companys assessment of the estimated compensation charges is affected by the Companys
stock price as well as assumptions regarding a number of complex and subjective variables and the
related tax impact. Those variables include, but are not limited to, the Companys stock price
volatility and employee stock option exercise behaviors. The Company will recognize the
compensation cost for the stock-based awards issued after September 30, 2005 over the requisite
service period for the entire award. The Company will adopt this Statement using the modified
prospective application method.
-12-
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement changes the
requirements for the accounting for and reporting of a change in accounting principle. This
Statement is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. As such, the pronouncement is effective beginning with the
Companys 2007 fiscal year although early application is allowed.
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 Acts
impact on the enterprises 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 did not impact our consolidated financial statements
for fiscal 2005.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations to clarify the guidance included in FASB Statement No. 143,
Accounting for Asset Retirement Obligations. FIN 47 requires companies to recognize a liability
for the fair value of a legal obligation to perform asset retirement activities that are
conditional on a future event if the amount can be reasonably estimated. If amounts cannot be
reasonably estimated, certain disclosures will be required about the unrecognized 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.
Factors That May Affect Future Results
Statements included in the sections entitled Business, Overview, Recent Accounting
Pronouncements and Liquidity and Capital Resources of Managements Discussion and Analysis of
Financial Condition and Results of Operations, and elsewhere in this report constitute
forward-looking statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements generally include words such as anticipates, expects,
believes, intends, estimates, and similar expressions. Such statements are subject to risks
and uncertainties that could cause actual results to differ materially from those projected
including those discussed below. Except as otherwise required by applicable securities laws, the
Company disclaims any intention or obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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 Companys
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 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.
If we fail to appropriately manage our cost structure to reallocate resources to areas that will
provide the best long-term benefits to our customers and shareholders, our reporting results will
be adversely affected. For instance, we may not be able to reduce our manufacturing costs, while
increasing our product development investments for RF technologies, and we may experience
unfavorable shifts in product mix or reductions in demand for a product that limits our ability to
spread manufacturing costs over higher sales volume.
Our business relies on the development of new high technology products and services, including
RF products, 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 our expectations will
eventually result in products that achieve market acceptance. We incur significant expenses
developing new products 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 17 countries including the United
States, and non-U.S. sales accounted for approximately two-thirds of our revenue during 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.
-13-
We implemented a 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 fine-tune 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 2006 could change from what is currently anticipated due to changes in tax laws
of various countries, changes in our overall tax planning strategy, or countries where earnings or
losses are incurred. At September 30, 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 fiscal 2005, we have continued our implementation of ERP and CRM
systems. Our results could be adversely affected if we are unable to further implement systems
without significant interruptions in accounting systems, order entry, billing, manufacturing and
other customer support functions.
We have continued to build our direct sales force throughout the world with our own employees
rather than through sales representatives. This action increased our fixed costs, and our results
could be adversely affected during times of depressed sales.
Other risk factors include, but are not limited to, changes in our customer and product mix
affecting 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 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 nor 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 and corporate notes and bonds. An increase in interest rates would decrease
the value of certain of these investments. However, in managements opinion, a 10 percent increase
in interest rates would not have a material impact on our results of operations, financial position
or cash flows.
The Company also had an interest rate swap instrument originally entered into to mitigate the risk
of interest rate changes related to long-term debt. The agreement effectively fixed the interest
rate on a notional $3,000 of variable 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 were recorded in the Companys records as income or expense. The instrument
expired September 19, 2005.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Keithley Instruments, Inc.
We have completed an integrated audit of Keithley Instruments, Inc.s 2005 consolidated financial
statements and of its internal control over financial reporting as of September 30, 2005 and audits
of its 2004 and 2003 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated Financial Statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders equity and cash flows present fairly, in all material
respects, the financial position of Keithley Instruments, Inc. and its subsidiaries at September
30, 2005 and 2004, and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2005, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
-14-
Internal Control Over Financial Reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of September 30, 2005 based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2005, based on criteria established in
Internal Control Integrated Framework issued by the COSO. The Companys management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
December 13, 2005
Consolidated Statements of Operations
For the years ended September 30, 2005, 2004 and 2003 (In Thousands of Dollars Except for Per-Share
Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Net sales |
|
$ |
141,552 |
|
|
$ |
140,248 |
|
|
$ |
106,718 |
|
Cost of goods sold |
|
|
55,567 |
|
|
|
54,605 |
|
|
|
47,646 |
|
Selling, general and administrative
expenses |
|
|
56,177 |
|
|
|
55,533 |
|
|
|
49,786 |
|
Product development expenses |
|
|
17,040 |
|
|
|
15,017 |
|
|
|
13,488 |
|
Severance charges |
|
|
|
|
|
|
|
|
|
|
845 |
|
|
Operating income (loss) |
|
|
12,768 |
|
|
|
15,093 |
|
|
|
(5,047 |
) |
Investment income |
|
|
1,383 |
|
|
|
540 |
|
|
|
896 |
|
Interest expense |
|
|
(64 |
) |
|
|
(92 |
) |
|
|
(210 |
) |
|
Income (loss) before income taxes |
|
|
14,087 |
|
|
|
15,541 |
|
|
|
(4,361 |
) |
Provision (benefit) for income taxes |
|
|
3,959 |
|
|
|
4,160 |
|
|
|
(169 |
) |
|
Net income (loss) |
|
$ |
10,128 |
|
|
$ |
11,381 |
|
|
$ |
(4,192 |
) |
|
Basic earnings (loss) per share |
|
$ |
0.62 |
|
|
$ |
0.71 |
|
|
$ |
(0.27 |
) |
|
Diluted earnings (loss)per share |
|
$ |
0.61 |
|
|
$ |
0.69 |
|
|
$ |
(0.27 |
) |
|
The accompanying notes are an integral part of the financial statements.
-15-
Consolidated Balance Sheets
As of September 30, 2005 and 2004 (In Thousands of Dollars Except for Per-Share Data)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,397 |
|
|
$ |
16,451 |
|
Short-term investments |
|
|
40,869 |
|
|
|
32,112 |
|
Refundable income taxes |
|
|
387 |
|
|
|
181 |
|
Accounts receivable and other, net of allowance
for doubtful accounts of
$451 and $454 as of September 30,2005 and 2004,
respectively |
|
|
19,452 |
|
|
|
21,435 |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
|
9,191 |
|
|
|
9,720 |
|
Work in process |
|
|
847 |
|
|
|
840 |
|
Finished products |
|
|
3,113 |
|
|
|
2,055 |
|
|
Total inventories |
|
|
13,151 |
|
|
|
12,615 |
|
|
Deferred income taxes |
|
|
4,444 |
|
|
|
7,438 |
|
Prepaid expenses |
|
|
1,385 |
|
|
|
1,927 |
|
|
Total current assets |
|
|
94,085 |
|
|
|
92,159 |
|
|
Property, plant and equipment, at cost: |
|
|
|
|
|
|
|
|
Land |
|
|
1,325 |
|
|
|
1,325 |
|
Buildings and leasehold improvements |
|
|
16,638 |
|
|
|
16,315 |
|
Manufacturing, laboratory and office equipment |
|
|
29,033 |
|
|
|
29,631 |
|
|
|
|
|
46,996 |
|
|
|
47,271 |
|
Less-Accumulated depreciation and amortization |
|
|
33,198 |
|
|
|
32,968 |
|
|
Total property, plant and equipment, net |
|
|
13,798 |
|
|
|
14,303 |
|
|
Deferred income taxes |
|
|
18,087 |
|
|
|
16,456 |
|
Other assets |
|
|
16,394 |
|
|
|
13,748 |
|
|
Total assets |
|
$ |
142,364 |
|
|
$ |
136,666 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt |
|
$ |
|
|
|
$ |
440 |
|
Accounts payable |
|
|
7,540 |
|
|
|
7,422 |
|
Accrued payroll and related expenses |
|
|
5,618 |
|
|
|
9,897 |
|
Other accrued expenses |
|
|
4,649 |
|
|
|
5,047 |
|
Income taxes payable |
|
|
4,341 |
|
|
|
4,935 |
|
|
Total current liabilities |
|
|
22,148 |
|
|
|
27,741 |
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred compensation |
|
|
3,100 |
|
|
|
2,605 |
|
Other long-term liabilities |
|
|
5,140 |
|
|
|
4,743 |
|
Commitments and contingencies (See Note K) |
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Common Shares, stated value $.0125: |
|
|
|
|
|
|
|
|
Authorized 80,000,000; issued and outstanding 14,300,676 and 14,067,107 in 2005 and 2004 |
|
|
179 |
|
|
|
176 |
|
Class B Common Shares, stated value $.0125: |
|
|
|
|
|
|
|
|
Authorized - 9,000,000; issued and outstanding
2,150,502 in 2005 and 2004 |
|
|
27 |
|
|
|
27 |
|
Capital in excess of stated value |
|
|
30,180 |
|
|
|
27,449 |
|
Retained earnings |
|
|
82,425 |
|
|
|
74,686 |
|
Accumulated other comprehensive income |
|
|
397 |
|
|
|
501 |
|
Unamortized portion of restricted stock plan |
|
|
(25 |
) |
|
|
(37 |
) |
Common Shares held in treasury, at cost |
|
|
(1,207 |
) |
|
|
(1,225 |
) |
|
Total shareholders equity |
|
|
111,976 |
|
|
|
101,577 |
|
|
Total liabilities and shareholders equity |
|
$ |
142,364 |
|
|
$ |
136,666 |
|
|
The accompanying notes are an integral part of the financial statements.
-16-
Consolidated Statements of Shareholders Equity
For the years ended September 30, 2005, 2004 and 2003 (In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
other |
|
Unamortized |
|
Common |
|
|
|
|
|
|
|
|
Class B |
|
in excess |
|
|
|
|
|
comprehen- |
|
portion of |
|
Shares |
|
Total |
|
|
Common |
|
Common |
|
of stated |
|
Retained |
|
sive income |
|
restricted |
|
held in |
|
shareholders |
|
|
Shares |
|
Shares |
|
value |
|
earnings |
|
(loss) |
|
stock plan |
|
treasury |
|
equity |
|
Balance September 30, 2002 |
|
$ |
172 |
|
$ |
27 |
|
$ |
26,567 |
|
|
$ |
72,087 |
|
|
$ |
(349 |
) |
|
$ |
(108 |
) |
|
$ |
(5,948 |
) |
|
$ |
92,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on derivative
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,745 |
) |
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares ($.15 pershare) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,997 |
) |
Class B Common Shares ($.12 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
Shares issued under stock plans, net of taxes |
|
|
|
|
|
|
|
|
|
|
(1,342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,388 |
|
|
|
1,046 |
|
Repurchase of Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,774 |
) |
|
|
(2,774 |
) |
Common Shares acquired for
settlement of deferred Directors fees |
|
|
|
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
Common Shares reissued in settlement
of Directors fees |
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
43 |
|
|
Balance September 30, 2003 |
|
|
172 |
|
|
|
27 |
|
|
|
25,370 |
|
|
|
65,640 |
|
|
|
98 |
|
|
|
(65 |
) |
|
|
(6,479 |
) |
|
|
84,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivative securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,784 |
|
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares ($.15 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,077 |
) |
Class B Common Shares ($.12 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
Shares issued under stockplans, net of taxes |
|
|
4 |
|
|
|
|
|
|
|
1,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,404 |
|
|
|
7,337 |
|
Common Shares acquired for
settlement of deferred Directors fees |
|
|
|
|
|
|
|
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(156 |
) |
|
|
|
|
Common Shares reissued in settlement
of Directors fees |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
Balance September 30, 2004 |
|
|
176 |
|
|
|
27 |
|
|
|
27,449 |
|
|
|
74,686 |
|
|
|
501 |
|
|
|
(37 |
) |
|
|
(1,225 |
) |
|
|
101,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on derivative securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,024 |
|
Cash dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares ($.15 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,131 |
) |
Class B Common Shares ($.12 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
Shares issued under stock plans, net of taxes |
|
|
3 |
|
|
|
|
|
|
|
2,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,752 |
|
Common Shares acquired for
settlement of deferred Directors fees |
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172 |
) |
|
|
|
|
Common Shares reissued in settlement
of Directors fees |
|
|
|
|
|
|
|
|
|
|
(190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 |
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
Balance September 30, 2005 |
|
$ |
179 |
|
|
$ |
27 |
|
|
$ |
30,180 |
|
|
$ |
82,425 |
|
|
$ |
397 |
|
|
$ |
(25 |
) |
|
$ |
(1,207 |
) |
|
$ |
111,976 |
|
|
The accompanying notes are an integral part of the financial statements.
-17-
Consolidated Statements of Cash Flows
For the years ended September 30, 2005, 2004 and 2003 (In Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,128 |
|
|
$ |
11,381 |
|
|
$ |
(4,192 |
) |
Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
4,081 |
|
|
|
4,010 |
|
|
|
3,595 |
|
Deferred income taxes |
|
|
(2,079 |
) |
|
|
(187 |
) |
|
|
(1,266 |
) |
Deferred compensation |
|
|
(30 |
) |
|
|
146 |
|
|
|
150 |
|
Change in current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Refundable income taxes |
|
|
(203 |
) |
|
|
361 |
|
|
|
497 |
|
Accounts receivable and other |
|
|
2,181 |
|
|
|
(5,530 |
) |
|
|
(792 |
) |
Inventories |
|
|
(554 |
) |
|
|
(1,358 |
) |
|
|
(930 |
) |
Prepaid expenses |
|
|
117 |
|
|
|
(1,353 |
) |
|
|
91 |
|
Other current liabilities |
|
|
(5,128 |
) |
|
|
7,925 |
|
|
|
(4,039 |
) |
Tax benefit of employee stock purchase and option
plans |
|
|
3,313 |
|
|
|
798 |
|
|
|
279 |
|
Other operating activities |
|
|
(1,283 |
) |
|
|
(1,148 |
) |
|
|
77 |
|
|
Net cash provided by (used in) operating activities |
|
|
10,543 |
|
|
|
15,045 |
|
|
|
(6,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(3,768 |
) |
|
|
(4,072 |
) |
|
|
(4,039 |
) |
Purchase of investments |
|
|
(38,194 |
) |
|
|
(33,179 |
) |
|
|
(6,248 |
) |
Proceeds from maturities and sales of investments |
|
|
29,176 |
|
|
|
21,037 |
|
|
|
13,949 |
|
|
Net cash (used in) provided by investing activities |
|
|
(12,786 |
) |
|
|
(16,214 |
) |
|
|
3,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayment) borrowing of short-term debt |
|
|
(439 |
) |
|
|
25 |
|
|
|
(139 |
) |
Proceeds from employee stock purchase and option plans |
|
|
2,921 |
|
|
|
3,898 |
|
|
|
1,195 |
|
Repurchase of Common Shares |
|
|
|
|
|
|
|
|
|
|
(2,774 |
) |
Cash dividends |
|
|
(2,389 |
) |
|
|
(2,335 |
) |
|
|
(2,255 |
) |
|
Net cash provided by (used in) financing activities |
|
|
93 |
|
|
|
1,588 |
|
|
|
(3,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign currency exchange
rates on cash and cash equivalents |
|
|
96 |
|
|
|
293 |
|
|
|
873 |
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(2,054 |
) |
|
|
712 |
|
|
|
(5,968 |
) |
Cash and cash equivalents at beginning of period |
|
|
16,451 |
|
|
|
15,739 |
|
|
|
21,707 |
|
|
Cash and cash equivalents at end of period |
|
$ |
14,397 |
|
|
$ |
16,451 |
|
|
$ |
15,739 |
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,774 |
|
|
$ |
486 |
|
|
$ |
1,991 |
|
Interest |
|
|
182 |
|
|
|
227 |
|
|
|
193 |
|
|
The accompanying notes are an integral part of the financial statements.
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars Except for Per-Share Data)
Note A Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Keithley Instruments, Inc. and its
subsidiaries. Intercompany transactions have
been eliminated.
Nature of operations
Keithleys business is to design, develop, manufacture and market complex electronic instruments
and systems to serve 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), radio frequency (RF)
or optical signals. Although our products vary in capability, sophistication, use, size and price,
they generally test, measure and analyze electrical,
RF, optical or physical properties. As such, we consider our business to be in a single industry
segment.
Revenue recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or
determinable and collectibility is reasonably assured. Generally, these criteria are met at the
time the product is shipped under FOB shipping
terms. Upon shipment, a provision is made for estimated costs that may be incurred for product
warranties and sales returns. When other
significant obligations remain after products are delivered, revenue is recognized only after such
obligations are fulfilled.
Foreign currency translation
Our revenues, costs and expenses, and assets and liabilities are exposed to changes in foreign
currency exchange rates as a result of our global
operations. For those subsidiaries that operate in a local functional currency environment, all
assets and liabilities are translated into U.S. dollars
using current exchange rates, and revenues and expenses are translated using weighted average
exchange rates in effect during the period.
Resulting translation adjustments are reported as a separate component of accumulated comprehensive
income in shareholders equity. For those
entities that operate in a U.S. dollar functional currency environment, foreign currency assets and
liabilities are remeasured into U.S. dollars at
current exchange rates. Gains or losses from foreign currency remeasurement are generally
immaterial and are included in the Selling, general
and administrative expenses caption of the consolidated statements of operations.
Advertising
Advertising production and placement costs are expensed when incurred. Advertising expenses were
$7,358, $7,223 and $7,000 in 2005, 2004
and 2003, respectively.
Product development expenses
Expenditures for product development are charged to expense as incurred. These expenses include the
cost of computer software, an integral part
of certain products. The Companys policy is to expense all software development costs because of
the short time frame between technological
feasibility and commercialization. In addition, based upon the rapid change in technology, the
amortization periods for any capitalized costs
would be relatively short. However, the Company continually reviews the materiality and financial
statement classification of computer software expenditures in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of three months or less when
purchased to be cash equivalents. Cash flows
resulting from hedging transactions are classified in the same category as the cash flows from the
item being hedged.
Accounts receivable and allowance for doubtful accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is our best estimate
of the amount of probable credit losses in our existing accounts receivable. We determine the
allowance based on historical write-off experience
by industry and regional economic data. We review our allowance for doubtful accounts monthly and
all account balances are reviewed for
collectibility. Account balances are charged off against the allowance when we feel it is probable
the receivable will not be recovered. We do not
have any off-balance sheet credit exposure related to our customers. The changes in the allowance
for doubtful accounts for fiscal years ending
September 30, 2005, 2004 and 2003 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Balance at beginning of year |
|
$ |
454 |
|
|
$ |
458 |
|
|
$ |
412 |
|
Additions |
|
|
4 |
|
|
|
24 |
|
|
|
73 |
|
Write-offs, net of recoveries |
|
|
(3 |
) |
|
|
(35 |
) |
|
|
(42 |
) |
Foreign exchange revaluation |
|
|
(4 |
) |
|
|
7 |
|
|
|
15 |
|
|
Balance at end of year |
|
$ |
451 |
|
|
$ |
454 |
|
|
$ |
458 |
|
|
Inventories
Inventories are stated at the lower of cost or market. Cost is determined based on a
currently-adjusted standard, which approximates actual cost
on a first-in, first-out basis. The Company provides inventory allowances based on excess and
obsolete inventories determined primarily by future
demand forecasts. The allowance is measured as the difference between the cost of the inventory and
market based upon assumptions about
-19-
future demand and charged to the provision for inventory, which is a component of cost of
sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is
established, and subsequent changes in facts and circumstances do not result in the restoration or
increase in that newly established cost basis.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is provided over periods
approximating the estimated useful lives of the assets. Substantially all manufacturing, laboratory
and office equipment is depreciated by the double declining balance method over periods of 3 to 10
years. Buildings are depreciated by the straight-line method over periods of 23 to 45 years.
Leasehold improvements are amortized over the shorter of the asset lives or the terms of the
leases. Depreciation expense was $4,081, $4,010 and $3,595 in fiscal 2005, 2004 and 2003,
respectively.
Capitalized software
Certain internal and external costs incurred to acquire or create internal use software are
capitalized in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Capitalized software is included in
property, plant and equipment and is depreciated over 3 to 5 years after it is placed in service.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment when events or circumstances indicate costs may
not be recoverable. Impairment exists when the carrying value of the assets is greater than the
pretax undiscounted future cash flows expected to be provided by the asset. If impairment exists,
the asset is written down to its fair value. Fair value is determined through quoted market values
or through the calculation of the pretax present value of future cash flows expected to be provided
by the asset.
Capital stock
The Company has two classes of stock. Each Class B Common Share has ten times the voting power of a
Common Share, but the Class B Common Shares are entitled to cash dividends of no more than 80% of
the cash dividends on the Common Shares. Holders of Common Shares, voting as a class, elect
one-fourth of the Companys Board of Directors and participate with holders of Class B Common
Shares in electing the balance of the Directors and in voting on all other corporate matters
requiring shareholder approval. Additional Class B Common Shares may be issued only to holders of
such shares for stock dividends or stock splits. These shares are convertible at any time to Common
Shares on a one-for-one basis.
Included in the Common Shares held in treasury, at cost caption of the Consolidated Balance
Sheets at September 30, 2005 and 2004, were shares repurchased to settle non-employee Directors
fees deferred pursuant to the Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock
Plan. There were no shares remaining in treasury acquired under the Companys share repurchase
program at September 30, 2005 and 2004, as these shares were reissued under stock option or stock
purchase plans. The number of shares held in treasury acquired under the Keithley Instruments, Inc.
1996 Outside Directors Deferred Stock Plan at September 30, 2005 and 2004 was 137,418 and 143,991,
respectively. (See Note C).
Accumulated other comprehensive income
The components of accumulated other comprehensive income at September 30, 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Translation adjustment |
|
$ |
521 |
|
|
$ |
519 |
|
Minimum pension liability adjustment |
|
|
(36 |
) |
|
|
(18 |
) |
Net unrealized gain (loss) on derivative securities |
|
|
55 |
|
|
|
(20 |
) |
Net unrealized investment (loss) gain |
|
|
(143 |
) |
|
|
20 |
|
|
Accumulated other comprehensive income |
|
$ |
397 |
|
|
$ |
501 |
|
|
Income taxes
Deferred tax assets and liabilities are recognized under the liability method based upon the
difference between the amounts reported for financial reporting and tax purposes. These deferred
taxes are measured by applying current enacted tax rates. Valuation allowances are established when
necessary to reflect the estimated amount of deferred tax assets that may not be realized based
upon the Companys analysis of estimated future taxable income and establishment of tax strategies.
Future taxable income, the results of tax strategies and changes in tax laws could impact these
estimates. We have provided for estimated United States and foreign withholding taxes, less
available tax credits, for the undistributed earnings of the non-United States subsidiaries as of
September 30, 2005, 2004 and 2003.
Use of estimates
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,
pension plan assumptions, and the assessment of the valuation of deferred income taxes and income
tax reserves. Actual results could differ from those estimates.
-20-
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income (loss) in thousands |
|
$ |
10,128 |
|
|
$ |
11,381 |
|
|
$ |
(4,192 |
) |
Weighted average shares outstanding |
|
|
16,337,903 |
|
|
|
15,926,839 |
|
|
|
15,487,435 |
|
Assumed exercise of stock options,
weighted average of incremental
shares |
|
|
251,408 |
|
|
|
583,989 |
|
|
|
|
|
Assumed purchase of stock under
stock purchase plan, weighted
average |
|
|
1,983 |
|
|
|
33,161 |
|
|
|
|
|
|
Diluted
shares adjusted weighted
average shares and assumed
conversions |
|
|
16,591,294 |
|
|
|
16,543,989 |
|
|
|
15,487,435 |
|
Basic earnings (loss) per share |
|
$ |
0.62 |
|
|
$ |
0.71 |
|
|
$ |
(0.27 |
) |
Diluted earnings (loss) per share |
|
$ |
0.61 |
|
|
$ |
0.69 |
|
|
$ |
(0.27 |
) |
|
Due to the net loss in fiscal 2003, 459,674 shares are excluded from the dilutive calculation for
the exercise of stock options and purchase of stock under the stock purchase plan.
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 Companys 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 or variable accounting is required under
applicable accounting guidance. 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.
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. SFAS No. 123R replaces SFAS No. 123, and
supersedes APB Opinion No. 25. The Company will be required to adopt the provisions of SFAS No.
123R on October 1, 2005. See Recent Accounting Pronouncements for a more in-depth discussion of
SFAS No. 123R.
During the second and third quarters of fiscal 2005, the Companys Board of Directors and
Executive Committee of the Board of Directors authorized the acceleration of the vesting of certain
unvested and out-of-the-money stock options. These options, outstanding as of January 31, 2005
and August 9, 2005 had exercise prices of $17.00 or higher and $16.00 or higher, respectively. As a
result of the acceleration, the Company reduced stock option expense it otherwise would have been
required to record under SFAS No. 123R by approximately $2,200 in fiscal 2006, $2,000 in fiscal
2007 and $900 in fiscal 2008 on a pre-tax basis.
During the fiscal year, the 1993 Employee Stock Purchase Plan was amended to require at least one
subscription period each and every 12 months during the term of the plan. However, the Board of
Directors or the Chief Financial Officer, as its delegatee, may establish multiple subscription
periods with variable durations. Accordingly, the subscription period starting January 1, 2005
ended on June 30, 2005.
In December 2005, the Board of Directors adopted the 2005 Employee Stock Purchase and Dividend
Reinvestment Plan, which requires shareholder approval at the Annual Meeting of Shareholders to be
held on February 11, 2006. The plan subscription period that began on July 1, 2005 is subject to
shareholder approval. The Plan contains provisions which include eliminating the look-back feature
and increasing the purchase price to 95 percent of the market price at the end of the subscription
period. These provisions, if approved by the shareholders, would eliminate the measurement of
compensation expense required by SFAS No. 123 or SFAS No. 123R. See Notes to Consolidated Financial
Statements Note H for further detail regarding stock plans.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income (loss) |
|
$ |
10,128 |
|
|
$ |
11,381 |
|
|
$ |
(4,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Stock-based employee compensation (income) expense
included in reported income/loss, net of related tax effects |
|
|
(5 |
) |
|
|
45 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Stock-based employee compensation expense
determined under fair value based methods for all awards, net of related tax effects |
|
|
(6,168 |
) |
|
|
(4,452 |
) |
|
|
(4,029 |
) |
|
Pro forma net income (loss) |
|
$ |
3,955 |
|
|
$ |
6,974 |
|
|
$ |
(8,192 |
) |
|
Pro forma earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
0.44 |
|
|
$ |
(0.53 |
) |
Diluted |
|
$ |
0.24 |
|
|
$ |
0.42 |
|
|
$ |
(0.53 |
) |
-21-
Derivatives and Hedging Activities
In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (as amended), all of the Companys 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 Companys 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 had an interest rate swap instrument that expired
September 19, 2005. The estimated fair value of the swap instrument was determined through quotes
from the related financial institutions. See Note F.
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, 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 September 30, 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 were recorded in the Companys records as income or expense in the interest expense line item
in the consolidated statements of operations. The Company recorded income of $120, $163 and $63 in
2005, 2004 and 2003, respectively, for the interest rate swap fair market value.
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.
Reclassifications
Certain reclassifications have been made to prior year financial statements and the notes to
conform to the current year presentation.
Recent accounting pronouncements
In 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). The provisions of SFAS
No. 151 will apply to inventory costs beginning in fiscal year 2006. The adoption of SFAS No. 151
is not expected to have a significant effect on the consolidated financial statements of the
Company.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment
of APB Opinion No. 29. 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. The provisions of SFAS No. 153 were effective for transactions entered
into beginning in our fourth quarter of fiscal year 2005. The effect of adopting SFAS No. 153 was
not material to the consolidated financial statements of the Company.
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 the Companys
current accounting under APB Opinion No. 25, Accounting for Stock Issued to Employees. In March
2005, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107, Share-Based Payment, which expresses the views of the
Staff regarding the adoption of SFAS No. 123R. 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, and is being adopted October 1, 2005. The Company estimates that the expense for
fiscal 2006 will range between $2,000 and $2,500 on a pretax basis. The Companys assessment of the
estimated compensation charges is affected by the Companys stock price as well as assumptions
regarding a number of complex and subjective variables and the related tax impact. Those variables
include, but are not limited to, the Companys stock price volatility and employee stock option
exercise behaviors. The Company will recognize the compensation cost for the stock-based awards
issued after September 30, 2005 over the requisite service period for the entire award. The Company
will adopt this Statement using the modified prospective application method.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement changes the
requirements for the accounting for and reporting of a change in accounting principle. This
Statement is effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. As such, the pronouncement is effective beginning with the
Companys 2007 fiscal year although early application is allowed.
-22-
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 Acts
impact on the enterprises 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 did not impact our consolidated financial statements
for fiscal 2005.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations to clarify the guidance included in FASB Statement No. 143,
Accounting for Asset Retirement Obligations. FIN 47 requires companies to recognize a liability
for the fair value of a legal obligation to perform asset retirement activities that are
conditional on a future event if the amount can be reasonably estimated. If amounts cannot be
reasonably estimated, certain disclosures will be required about the unrecognized 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.
Note B
Guarantors 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 $769 through July 14, 2009. The Company has not recorded
any liability for this item, as it is does not believe that it is probable that the third party
will default on the lease payments.
Product warranties:
Generally, the Companys products are covered under a one-year warranty; however, certain products
are covered under a three-year warranty. It is the Companys 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 fiscal years 2005 and 2004.
A reconciliation of the estimated changes in the aggregated product warranty liability for fiscal
year 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Beginning balance |
|
$ |
1,459 |
|
|
$ |
1,498 |
|
Accruals for warranties issued during the period |
|
|
1,823 |
|
|
|
1,568 |
|
Accruals related to pre-existing warranties
(including changes in estimates and expiring warranties) |
|
|
(425 |
) |
|
|
(504 |
) |
Settlements made (in cash or in kind) during the period |
|
|
(1,773 |
) |
|
|
(1,103 |
) |
|
Ending balance |
|
$ |
1,084 |
|
|
$ |
1,459 |
|
|
Note C
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, which represented approximately 13 percent of shares
outstanding at the time the program was approved, over a three-year period ending December 31,
2006. 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 and
had substantially the same terms as the 2003 program.
There were no Common Share repurchases under the Companys share repurchase programs during
fiscal year 2005 or 2004. There were no Common Shares remaining in treasury at September 30, 2005
or 2004 pursuant to these programs. There were no shares issued from treasury during fiscal 2005.
During fiscal 2004, 398,837 shares were issued from treasury under stock option or stock purchase
plans.
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
pursuant to this plan totaled 137,418 and 143,991 at September 30, 2005 and 2004, respectively.
-23-
Note D
Short-term Investments
The Company classifies its short-term investments as available-for-sale, which requires they be
recorded at fair market value with the resulting gains and losses included in Accumulated other
comprehensive income on the Companys Consolidated Balance Sheets. There were no sales of
marketable securities in fiscal year 2005. Gross realized losses of $129 and gross realized gains
of $56 were recognized on sales of marketable securities in fiscal year 2004 and 2003,
respectively, using the specific identification method.
Short-term investments at September 30, 2005 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted cost |
|
|
Unrealized gains |
|
|
Unrealized losses |
|
|
Market value |
|
|
Money market funds |
|
$ |
2,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,000 |
|
U.S. government and
agency securities |
|
|
25,537 |
|
|
|
3 |
|
|
|
(221 |
) |
|
|
25,319 |
|
Corporate notes and
bonds |
|
|
13,550 |
|
|
|
|
|
|
|
|
|
|
|
13,550 |
|
|
Total short-term
investments |
|
$ |
41,087 |
|
|
$ |
3 |
|
|
$ |
(221 |
) |
|
$ |
40,869 |
|
|
Short-term investments at September 30, 2004 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted cost |
|
|
Unrealized gains |
|
|
Unrealized losses |
|
|
Market value |
|
|
Money market funds |
|
$ |
2,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,500 |
|
U.S. government and agency securities |
|
|
11,030 |
|
|
|
4 |
|
|
|
(8 |
) |
|
|
11,026 |
|
Corporate notes and bonds |
|
|
18,551 |
|
|
|
35 |
|
|
|
|
|
|
|
18,586 |
|
|
Total short-term investments |
|
$ |
32,081 |
|
|
$ |
39 |
|
|
$ |
(8 |
) |
|
$ |
32,112 |
|
|
At September 30, 2005 and 2004, the securities, notes and bonds have maturity dates as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Less than 1 year |
|
$ |
24,512 |
|
|
$ |
21,086 |
|
1 to 5 years |
|
|
16,357 |
|
|
|
11,026 |
|
|
Total short-term investments |
|
$ |
40,869 |
|
|
$ |
32,112 |
|
|
The Company reviews investments in debt and equity securities for other-than-temporary impairment
whenever the fair value of an investment is less than amortized cost and evidence indicates that an
investments carrying value is not recoverable within a reasonable period of time. In the
evaluation of whether an impairment is other-than-temporary, the Company considers its ability and
intent to hold the investment until the market price recovers, the reasons for the impairment,
compliance with the Companys investment policy, the severity and duration of the impairment and
expected future performance. Based on this evaluation, no impairment was considered to be
other-than-temporary. The $221 and $8 of unrealized losses for U.S. government and agency
securities at September 30, 2005 and 2004 relate to investments with a fair market value of
approximately $23,419 and $3,992, respectively.
Note E 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 ($0 and $440 outstanding at
September 30, 2005 and 2004, respectively) that provides unsecured, multi-currency revolving credit
at various interest rates based on Prime or LIBOR. The three-month LIBOR interest rate was 4.1% and
2.0% at September 30, 2005 and 2004, respectively. The Company is required to pay a facility fee of
0.125% on the total amount of the commitment. The agreement may be extended annually in one-year
increments beginning March 31, 2006. Additionally, the Company has a number of other credit
facilities in various currencies and for standby letters of credit aggregating $5,000 ($617 and
$646 outstanding at September 30, 2005 and 2004, respectively). At September 30, 2005, the Company
had total unused lines of credit with domestic and foreign banks aggregating $14,383, of which
$10,000 was long-term and $4,383 was a combination of long-term and short-term depending upon the
nature of the indebtedness.
Under certain provisions of the debt agreements, the Company is required to comply with various
financial ratios and covenants. The Company was in compliance with all such debt covenants, as
amended, during each of the three years ended and at September 30, 2005.
The Company had an interest rate swap agreement with a commercial bank to effectively fix its
interest rate on $3,000 of variable rate debt. The agreement effectively fixed the interest rate on
a notional $3,000 of variable LIBOR rate debt at 6.4%. The agreement expired September 19, 2005.
Note F Foreign Currency
The functional currency for the Companys foreign subsidiaries is the applicable local currency.
Income
and expenses are translated into U.S. dollars at average exchange rates for the period. Assets and
liabilities are translated at the rates in effect at the end of the period. Translation gains and
losses are recognized in the accumulated other comprehensive income component of shareholders
equity.
Certain transactions of the Company and its foreign subsidiaries are denominated in currencies
other than the functional currency. The Consolidated Statements of Operations include gains from
such foreign exchange transactions of $12, $132 and $113 for 2005, 2004 and 2003, respectively.
-24-
At September 30, 2005, the Company had obligations under foreign exchange forward contracts to sell
1,950,000 Euros, 270,000 British pounds and 225,000,000 Yen at various dates through December 2005.
In accordance with the provisions of SFAS 133 (as amended), the foreign exchange forward contracts
are recorded on the Companys Consolidated Balance Sheets. At September 30, 2005 and 2004, the fair
market value of the contracts represented an asset (liability) to the Company of $99 and ($28),
respectively.
Note G Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan covering all of its eligible
employees in the United States and a contributory defined plan covering certain non-U.S. employees.
Pension benefits are based upon the employees length of service and a percentage of compensation.
A summary of the components of net periodic pension cost based on a measurement date of June 30 for
the U.S. plan and the non-U.S. plan is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Plan |
|
|
Non-U.S. Plan |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Service cost-benefits earned during the year |
|
$ |
1,274 |
|
|
$ |
1,242 |
|
|
$ |
181 |
|
|
$ |
176 |
|
Interest cost on projected benefit obligation |
|
|
1,859 |
|
|
|
1,760 |
|
|
|
281 |
|
|
|
285 |
|
Expected return on plan assets |
|
|
(2,685 |
) |
|
|
(2,557 |
) |
|
|
(77 |
) |
|
|
(68 |
) |
Amortization of transition asset |
|
|
(43 |
) |
|
|
(43 |
) |
|
|
22 |
|
|
|
21 |
|
Amortization of prior service cost |
|
|
178 |
|
|
|
178 |
|
|
|
5 |
|
|
|
5 |
|
|
Net periodic pension cost |
|
$ |
583 |
|
|
$ |
580 |
|
|
$ |
412 |
|
|
$ |
419 |
|
|
The following table sets forth the funded status of the Companys plans at September 30, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Plan |
|
|
Non-U.S. Plan* |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Change in projected benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
29,063 |
|
|
$ |
28,626 |
|
|
$ |
5,311 |
|
|
$ |
4,624 |
|
Service cost |
|
|
1,274 |
|
|
|
1,242 |
|
|
|
181 |
|
|
|
176 |
|
Interest cost |
|
|
1,859 |
|
|
|
1,760 |
|
|
|
281 |
|
|
|
285 |
|
Actuarial (gain) loss |
|
|
5,859 |
|
|
|
(1,504 |
) |
|
|
999 |
|
|
|
50 |
|
Benefits paid |
|
|
(1,115 |
) |
|
|
(1,061 |
) |
|
|
(144 |
) |
|
|
(138 |
) |
Foreign currency exchange rate changes |
|
|
|
|
|
|
|
|
|
|
(249 |
) |
|
|
314 |
|
|
Benefit obligation at year end |
|
$ |
36,940 |
|
|
$ |
29,063 |
|
|
$ |
6,379 |
|
|
$ |
5,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
29,662 |
|
|
$ |
25,753 |
|
|
$ |
1,061 |
|
|
$ |
930 |
|
Actual return on pension assets |
|
|
2,362 |
|
|
|
3,970 |
|
|
|
28 |
|
|
|
38 |
|
Employer contributions |
|
|
3,500 |
|
|
|
1,000 |
|
|
|
62 |
|
|
|
51 |
|
Benefits paid |
|
|
(1,115 |
) |
|
|
(1,061 |
) |
|
|
(21 |
) |
|
|
(20 |
) |
Foreign currency exchange rate changes |
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
62 |
|
|
Fair value of plan assets at end of year |
|
|
34,409 |
|
|
|
29,662 |
|
|
|
1,092 |
|
|
|
1,061 |
|
|
Funded
status over (under) funded |
|
|
(2,531 |
) |
|
|
599 |
|
|
|
(5,287 |
) |
|
|
(4,250 |
) |
Unrecognized actuarial (gain) loss |
|
|
10,896 |
|
|
|
4,715 |
|
|
|
611 |
|
|
|
(393 |
) |
Contributions after measurement date |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
|
870 |
|
|
|
1,048 |
|
|
|
32 |
|
|
|
38 |
|
Unrecognized initial net (asset) obligation |
|
|
(10 |
) |
|
|
(54 |
) |
|
|
60 |
|
|
|
84 |
|
|
Prepaid pension assets (pension liability) recognized |
|
$ |
9,225 |
|
|
$ |
7,308 |
|
|
$ |
(4,584 |
) |
|
$ |
(4,521 |
) |
|
Amounts recognized in the Consolidated Balance Sheets at September 30, 2005 and 2004, consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Plan |
|
|
Non-U.S. Plan* |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
Other assets (long-term) |
|
$ |
9,225 |
|
|
$ |
7,308 |
|
|
$ |
|
|
|
$ |
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
(4,584 |
) |
|
|
(4,521 |
) |
|
Prepaid pension assets (pension liability) recognized |
|
$ |
9,225 |
|
|
$ |
7,308 |
|
|
$ |
(4,584 |
) |
|
$ |
(4,521 |
) |
|
|
|
|
* |
|
The Company has purchased indirect insurance of $4,425 which is expected to be available to the
Company as non-U.S. pension liabilities of $4,584 mature. The caption, Other assets, on the
Companys Consolidated Balance Sheets includes $4,425 and $4,279 at September 30, 2005 and 2004,
respectively, for this asset. In accordance with SFAS No. 87, Employers Accounting for Pensions,
this Company asset is not included in the non-U.S. plan assets. |
-25-
The accumulated benefit obligation for all defined benefit plans was $38,545 and $30,922 at
September 30, 2005 and 2004, respectively.
At September 30, 2005 and 2004, the Companys accumulated benefit obligation exceeded the fair
value of plan assets for the non-U.S. plan. The projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for the non-U.S. Plan at September 30, 2005 were $6,379,
$5,681, and $1,092, respectively. The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the non-U.S. Plan at September 30, 2004 were $5,311, $4,779, and
$1,061, respectively.
As of the measurement date, the plan assets allocations for the United States plan by asset
category was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
2005 |
|
|
|
2004 |
|
|
Equity securities |
|
|
61 |
% |
|
|
64 |
% |
Debt securities |
|
|
12 |
|
|
|
15 |
|
Market neutral hedge fund |
|
|
18 |
|
|
|
15 |
|
Cash equivalent (money market fund) |
|
|
7 |
|
|
|
3 |
|
Real estate |
|
|
2 |
|
|
|
|
|
All other |
|
|
|
|
|
|
3 |
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
The United States Plan investment strategy is to emphasize total return, which is defined as
the aggregate
return from capital appreciation, dividends, and interest income. In determining the asset
classes in which the Plan will invest, as well as the target weightings to each asset class, the
Company gives consideration to several factors. These include historical risk and return statistics
for each asset class and the statistical relationships between the asset classes. The Company also
has recognized certain aspects specific to the Plan including the current funding status, the
average age of employee participants, and the ability of the Company to make future contributions
to the Plan.
Non-U.S. plan assets represent employee and Company contributions and are invested in an insurance
company in a direct insurance contract payable to the individual participants. The insurance
company directs the investments for this contract.
The significant actuarial assumptions used to determine benefit obligations at September 30, 2005
and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
2004 |
|
|
United States Pension Plan: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.5 |
% |
|
|
6.5 |
% |
Rate of increase in compensation levels |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
Non-U.S. Pension Plan: |
|
|
|
|
|
|
|
|
Discount rate |
|
|
4.25 |
% |
|
|
5.25 |
% |
Rate of increase in compensation levels |
|
|
3.0 |
% |
|
|
3.0 |
% |
The significant actuarial assumptions used to determine net pension expense for fiscal years 2005,
2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
United States Pension Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.5 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
Expected long-term rate of return on plan assets |
|
|
8.25 |
% |
|
|
8.25 |
% |
|
|
8.25 |
% |
Rate of increase in compensation levels |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Pension Plan: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.25 |
% |
|
|
6.0 |
% |
|
|
6.0 |
% |
Expected long-term rate of return on plan assets |
|
|
7.0 |
% |
|
|
7.0 |
% |
|
|
7.0 |
% |
Rate of increase in compensation levels |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
In determining its expected long-term rate-of-return-on-asset assumption for the fiscal year ending
September 30, 2005, the Company considered historical experience, its asset allocation, expected
future long-term rates of return for each major asset class, an assumed long-term inflation rate,
and an asset performance simulator.
-26-
Expected future benefit payments for both the United States and the non-U.S. plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
United States Plan |
|
|
Non-U.S. Plan |
|
|
2006 |
|
$ |
1,077 |
|
|
$ |
144 |
|
2007 |
|
$ |
1,127 |
|
|
$ |
168 |
|
2008 |
|
$ |
1,184 |
|
|
$ |
197 |
|
2009 |
|
$ |
1,241 |
|
|
$ |
230 |
|
2010 |
|
$ |
1,293 |
|
|
$ |
244 |
|
2011 2015 |
|
$ |
8,866 |
|
|
$ |
1,538 |
|
The Company expects to contribute approximately $2,000 to $3,000 to its pension plans in fiscal
year 2006.
In addition to the defined benefit pension plan, the Company also maintains a retirement plan
for all of its
eligible employees in the United States under Section 401(k) of the Internal Revenue Code. It
has been the Companys practice to match a minimum of 25 percent of the first six percent of a
participants contribution, and may match up to 50 percent of the first six percent of a
participants contribution depending upon the Companys financial performance, as part of its
profit sharing program. Expense for the 401(k) plan amounted to $900, $831 and $388 in 2005, 2004
and 2003, respectively. In addition to the extra 25 percent match in the 401(k) plan, the Company
may contribute additional profit sharing to all eligible worldwide employees. U.S. employee
participants, at their discretion, may opt for a cash payout or may defer the bonus into the 401(k)
plan. Non-U.S. employees receive a cash payout. Expense related to the additional profit sharing
program amounted to $0, $248 and $0 in 2005, 2004 and 2003, respectively.
The Company also has an unfunded supplemental executive retirement plan (SERP) for former key
employees which includes retirement, death and disability benefits. Expense (income) recognized for
these benefits was $9, $9, and ($194) for 2005, 2004 and 2003, respectively. Liabilities of $8 and
$0 were accrued in the Accrued payroll and related expenses caption on the Companys Consolidated
Balance Sheets, and $152 and $126 were accrued in the Other long-term liabilities caption to meet
all SERP obligations at September 30, 2005 and 2004, respectively. The income in 2003 represents
the reversal of a liability for a former participant.
Note H Stock Plans
Stock Option Plans
On February 16, 2002, the Companys shareholders approved the Keithley Instruments, Inc. 2002
Stock Incentive Plan. Under the terms of this plan, 3,000,000 Common Shares were reserved for the
granting of options to directors, officers and other key employees. This plan will expire on
February 16, 2012. Under the 1992 Stock Incentive Plan, 5,400,000 of the Companys Common Shares
were reserved for the granting of options to officers and other key employees. After February 8,
2002, no new grants could be issued from this plan. All options outstanding at the time of
termination of either plan shall continue in full force and effect in accordance with their terms.
The Compensation and Human Resources Committee of the Board of Directors administers the plans.
Incentive stock options granted under the plans cannot be granted with an exercise price less than
the fair market price at the date of the grant with an exercise period not to exceed ten years.
Such grants generally become exercisable over a four year period. The option price under
nonqualified stock options is determined by the Committee on the date the option is granted. Both
plans also provide for restricted stock awards and stock appreciation rights.
During the second and third quarters of fiscal 2005, the Companys Board of Directors and
Executive Committee of the Board of Directors authorized the acceleration of the vesting of certain
unvested and out-of-the-money stock options. These options, outstanding as of January 31, 2005
and August 9, 2005 had exercise prices of $17.00 or higher and $16.00 or higher, respectively. 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 $2,200 in fiscal 2006, $2,000 in
fiscal 2007 and $900 in fiscal 2008 on a pre-tax basis.
The 1997 Directors Stock Option Plan provides for the issuance of 850,000 of the Companys
Common Shares to non-employee Directors. Under the terms of the plan, each non-employee Director is
automatically granted an option to purchase 10,000 Common Shares at the close of each annual
shareholders meeting. On December 8, 2005, the Companys Board of Directors terminated the 1997
Directors Stock Option Plan. On February 15, 1997, the Companys Board of Directors terminated the
1992 Directors Stock Option Plan. Prior to its termination, this plan provided for the issuance of
120,000 of the Companys Common Shares to non-employee Directors, with each non-employee Director
automatically granted an option to purchase 1,200 Common Shares at the close of each annual
shareholders meeting. All options outstanding at the time of termination of the plans shall
continue in full force and effect in accordance with their terms. The option price for grants under
both plans is the fair market value of a Common Share on the date of grant as defined by the plans.
The options under both plans are exercisable six months and one day after the date of grant and
will expire after ten years.
-27-
The activity under all option plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
Number |
|
|
Average |
|
|
|
of Shares |
|
|
Exercise Price |
|
|
of Shares |
|
|
Exercise Price |
|
|
September 30, 2002 |
|
|
2,936,189 |
|
|
$ |
17.70 |
|
|
|
1,327,715 |
|
|
$ |
15.39 |
|
Options
granted at fair market value |
|
|
694,550 |
|
|
|
15.35 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(99,400 |
) |
|
|
3.74 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(131,000 |
) |
|
|
22.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2003 |
|
|
3,400,339 |
|
|
|
17.44 |
|
|
|
1,831,702 |
|
|
|
17.22 |
|
Options
granted at fair market value |
|
|
661,600 |
|
|
|
19.15 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(569,969 |
) |
|
|
4.32 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(87,124 |
) |
|
|
20.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004 |
|
|
3,404,846 |
|
|
|
19.88 |
|
|
|
1,830,472 |
|
|
|
22.54 |
|
Options
granted at fair market value |
|
|
94,250 |
|
|
|
16.33 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(67,050 |
) |
|
|
7.24 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(104,700 |
) |
|
|
19.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 |
|
|
3,327,346 |
|
|
$ |
20.03 |
|
|
|
3,186,059 |
|
|
$ |
20.32 |
|
|
The
options outstanding at September 30, 2005 have been segregated into ranges for additional
disclosure as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Remaining |
|
Weighted |
|
|
|
Number |
|
|
Weighted |
|
Range of |
|
of Shares |
|
|
Contractual |
|
Average |
|
|
|
of Shares |
|
|
Average |
|
Exercise Prices |
|
Outstanding |
|
|
Life (years) |
|
Exercise Price |
|
|
|
Exercisable |
|
|
Exercise Price |
|
|
|
|
|
$2.53 - $5.72 |
|
|
314,446 |
|
|
2.94 |
|
$ |
4.23 |
|
|
|
|
314,446 |
|
|
$ |
4.23 |
|
$10.70 - $14.95 |
|
|
606,350 |
|
|
6.91 |
|
$ |
13.51 |
|
|
|
|
465,063 |
|
|
$ |
13.47 |
|
$15.38 - $17.00 |
|
|
639,750 |
|
|
8.00 |
|
$ |
16.19 |
|
|
|
|
639,750 |
|
|
$ |
16.19 |
|
$17.08 - $23.13 |
|
|
1,234,050 |
|
|
7.28 |
|
$ |
18.86 |
|
|
|
|
1,234,050 |
|
|
$ |
18.86 |
|
$32.28 - $36.85 |
|
|
72,000 |
|
|
5.36 |
|
$ |
36.72 |
|
|
|
|
72,000 |
|
|
$ |
36.72 |
|
$45.13 |
|
|
456,000 |
|
|
4.84 |
|
$ |
45.13 |
|
|
|
|
456,000 |
|
|
$ |
45.13 |
|
$48.44 -$66.75 |
|
|
4,750 |
|
|
4.99 |
|
$ |
61.95 |
|
|
|
|
4,750 |
|
|
$ |
61.95 |
|
|
|
|
|
|
|
|
3,327,346 |
|
|
6.56 |
|
$ |
20.03 |
|
|
|
|
3,186,059 |
|
|
$ |
20.32 |
|
|
|
|
|
-28-
1993 Employee Stock Purchase Plan
On February 5, 1994, the Companys shareholders approved the 1993 Employee Stock Purchase and
Dividend Reinvestment Plan. The plan offers eligible employees the opportunity to acquire the
Companys Common Shares at a discount and without transaction costs. Eligible employees can only
participate in the plan on a year-to-year basis, must enroll prior to the commencement of each plan
year, and in the case of U.S. employees, must authorize monthly payroll deductions. Non-U.S.
employees submit their contribution at the end of the plan year. The purchase price of the Common
Shares is 85 percent of the lower of the market price at the beginning or ending of the calendar
plan year. A mid-year enrollment option is also available for new employees. The purchase price for
the mid-year enrollees is 85 percent of the lower or the market price at the beginning of the
mid-year period or ending of the calendar plan year. A total of 1,500,000 Common Shares were
reserved for purchase under the plan, of which 81,119 remained available at September 30, 2005.
Total shares may be increased with shareholder approval or the plan may be terminated when the
shares are fully subscribed. No compensation expense is recorded in connection with
the plan. During the fiscal year, the plan was amended to require at least one subscription period
each and every 12 months during the term of the plan, however, the Board of Directors or the Chief
Financial Officer, as its delegatee, may establish multiple subscription periods with variable
durations. Accordingly, the subscription period starting January 1, 2005 ended on June 30, 2005. In
July 2005, January 2005 and January 2004, 65,266, 101,253 and 135,412 shares were purchased by
employees under this plan at a price of $13.10, $15.61 and $10.63 per share, respectively.
The plan subscription period that began on July 1, 2005 contains provisions that require
shareholder approval at the Annual Meeting on February 11, 2006. These provisions include
eliminating the lookback feature and increasing the purchase price to 95 percent of the market
price at the end of the subscription priod. These provisions, if approved by the shareholders,
would eliminate the measurement of compensation expense required by SFAS No. 123 or SFAS No. 123R.
As such, the current subscription period is excluded from the Pro Forma Disclosures below.
Pro Forma Disclosure
See Note A for the pro forma effects had the Company adopted the fair value criteria provided in
SFAS No. 123.
The pro forma weighted average fair value of options granted under stock option plans in 2005,
2004 and 2003 was $4.60, $8.10 and $6.51, respectively. The fair value of options at the date of
grant was estimated using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
Expected life (years) |
|
|
2.5 |
|
|
|
4.5 |
|
|
|
4.2 |
|
Risk-free interest rate |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
2.5 |
% |
Volatility |
|
|
44 |
% |
|
|
51 |
% |
|
|
54 |
% |
Dividend yield |
|
|
1.0 |
% |
|
|
1.0 |
% |
|
|
1.0 |
% |
The pro forma weighted average fair value of purchase rights granted under the 1993 Employee Stock
Purchase Plan in 2005, 2004 and 2003 was $5.45, $5.14 and $5.24, respectively. The fair value of
employees purchase rights was estimated using the Black-Scholes model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
2004 |
|
|
|
2003 |
|
|
Expected life (years) |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Risk-free interest rate |
|
|
1.7 |
% |
|
|
1.1 |
% |
|
|
1.5 |
% |
Volatility |
|
|
41 |
% |
|
|
50 |
% |
|
|
55 |
% |
Dividend yield |
|
|
1.0 |
% |
|
|
1.0 |
% |
|
|
1.0 |
% |
Subsequent Changes to Stock-based Compensation
Beginning in fiscal 2006, the Compensation and Human Resources Committee of the Board of Directors
recommended, and the Board of Directors approved certain changes in relation to stock-based
compensation. On October 3, 2005, Non-qualified Stock Options (NSOs) and Performance Award Units
were issued to officers, and Performance Award Units or Restricted Award Units were issued to other
key employees. NSOs generally vest in four years and expire in ten years from the date of grant
and have an option price equal to the market price at the time of grant. The performance award
agreements provide for the award of performance units with each unit representing the right to
receive one share of the Companys common shares to be issued after the applicable award period.
The award vests over a 3-year performance period, based on revenue growth relative to the Companys
peers and return on assets or return on invested capital. The final amount of units earned pursuant
to an award may range from a maximum of twice the initial award, as specified in the agreement, to
a minimum of no units depending upon the level of attainment of a minimum performance. The
restricted unit award agreements provide for the award of restricted units with each unit
representing one share of the Companys common shares. The awards will vest on the fourth
anniversary of the award date, subject to certain conditions specified in the agreement.
The annual non-employee Director stock option grant issued pursuant to the 1997 Directors Stock
Option
Plan, which was terminated on December 8, 2005, was replaced with an annual Common Share grant
equal to $58,000. The Common Shares will be issued on a quarterly basis.
-29-
Note I Income Taxes
For financial reporting purposes, income (loss) before income taxes includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
United States |
|
$ |
12,269 |
|
|
$ |
8,974 |
|
|
$ |
(6,711 |
) |
Non-U.S. |
|
|
1,818 |
|
|
|
6,567 |
|
|
|
2,350 |
|
|
|
|
$ |
14,087 |
|
|
$ |
15,541 |
|
|
$ |
(4,361 |
) |
|
The
provision (benefit) for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
4,032 |
|
|
$ |
1,620 |
|
|
$ |
255 |
|
Non-U.S. |
|
|
1,705 |
|
|
|
2,681 |
|
|
|
922 |
|
State and local |
|
|
301 |
|
|
|
46 |
|
|
|
(80 |
) |
|
Total current |
|
|
6,038 |
|
|
|
4,347 |
|
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,530 |
) |
|
|
(50 |
) |
|
|
(873 |
) |
Non-U.S. |
|
|
(549 |
) |
|
|
(137 |
) |
|
|
(393 |
) |
|
Total deferred |
|
|
(2,079 |
) |
|
|
(187 |
) |
|
|
(1,266 |
) |
|
Total provision (benefit) |
|
$ |
3,959 |
|
|
$ |
4,160 |
|
|
$ |
(169 |
) |
|
Differences
between the statutory United States federal income tax and the
effective income tax rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Federal income tax at statutory rate |
|
$ |
4,790 |
|
|
$ |
5,284 |
|
|
$ |
(1,552 |
) |
State and local income taxes |
|
|
(9 |
) |
|
|
(103 |
) |
|
|
292 |
|
Tax on non-U.S. income |
|
|
(216 |
) |
|
|
(284 |
) |
|
|
215 |
|
Foreign tax
credit carry forwards |
|
|
(323 |
) |
|
|
(98 |
) |
|
|
151 |
|
Valuation allowance |
|
|
234 |
|
|
|
105 |
|
|
|
1,291 |
|
Other tax
credit carry forwards |
|
|
(674 |
) |
|
|
(281 |
) |
|
|
(495 |
) |
Adjustment for prior years taxes |
|
|
|
|
|
|
(552 |
) |
|
|
|
|
Other |
|
|
157 |
|
|
|
89 |
|
|
|
(71 |
) |
|
Effective
provision (benefit) for income taxes |
|
$ |
3,959 |
|
|
$ |
4,160 |
|
|
$ |
(169 |
) |
|
-30-
Significant components of the Companys deferred tax assets and liabilities as of September 30,
2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Nonqualified stock options |
|
$ |
222 |
|
|
$ |
3,183 |
|
Capitalized research and development |
|
|
12,478 |
|
|
|
9,347 |
|
Inventory |
|
|
1,758 |
|
|
|
1,837 |
|
Deferred compensation |
|
|
1,394 |
|
|
|
2,239 |
|
Tax credit carryforward |
|
|
7,799 |
|
|
|
8,071 |
|
Depreciation |
|
|
1,025 |
|
|
|
1,044 |
|
Warranty |
|
|
339 |
|
|
|
487 |
|
Medical |
|
|
131 |
|
|
|
157 |
|
Intangibles |
|
|
88 |
|
|
|
105 |
|
State and local taxes |
|
|
1,104 |
|
|
|
1,355 |
|
Foreign net operating losses |
|
|
328 |
|
|
|
417 |
|
Other |
|
|
2,374 |
|
|
|
1,301 |
|
|
Total deferred tax assets |
|
|
29,040 |
|
|
|
29,543 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Pension contribution |
|
|
3,229 |
|
|
|
2,558 |
|
Other |
|
|
463 |
|
|
|
464 |
|
|
Total deferred tax liabilities |
|
|
3,692 |
|
|
|
3,022 |
|
|
Valuation allowance |
|
|
(2,817 |
) |
|
|
(2,627 |
) |
|
Net deferred tax assets |
|
$ |
22,531 |
|
|
$ |
23,894 |
|
|
The net change in the net deferred tax assets as of September 30, 2005 compared to September
30, 2004 is primarily the result of capitalization of research and development costs, exercise of
nonqualified stock options and payment of prior years bonuses.
The valuation allowance relates to provisions for foreign tax credits and net operating losses
which may not be realized due to the uncertainty of future profit levels or foreign source income.
The changes in the valuation allowance for deferred tax assets for fiscal years ending September
30, 2005, 2004 and 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Balance at beginning of year |
|
$ |
2,627 |
|
|
$ |
2,332 |
|
|
$ |
532 |
|
Charged to costs and expenses |
|
|
190 |
|
|
|
105 |
|
|
|
1,822 |
|
Charged to other accounts |
|
|
|
|
|
|
190 |
(a) |
|
|
510 |
(b) |
Deductions |
|
|
|
|
|
|
|
|
|
|
(532 |
)(c) |
|
|
Balance at end of year |
|
$ |
2,817 |
|
|
$ |
2,627 |
|
|
$ |
2,332 |
|
|
|
|
|
|
(a) |
|
The valuation allowance relates to provision for foreign tax credits and certain foreign
net operating losses, which may not be realized due to the uncertainty of future profitability
levels. Approximately $190 of the valuation allowance recorded in fiscal 2004 was recorded as a
reduction of shareholders equity as foreign tax credits generated in the current year could not be
utilized due to the benefit of nonqualified stock options. |
|
(b) |
|
The valuation allowance relates to provision for foreign tax credits, R&D credits, and certain
foreign net operating losses, which may not be realized due to the uncertainty of future
profitability levels. Approximately $510 of the valuation allowance recorded in fiscal 2003 was
recorded as a reduction of shareholders equity as foreign tax credits generated in that year could
not be utilized due to the benefit of nonqualified stock options. |
|
(c) |
|
The valuation allowance for Japanese taxes was no longer required as Japanese operations became
profitable and utilized net operating loss carryforwards. |
At September 30, 2005, the Company had tax credit carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Expiration Commences |
|
Alternative minimum tax credit |
|
$ |
2,188 |
|
|
indefinite |
Foreign tax credit |
|
|
2,405 |
|
|
2012-2015 |
R&D credit |
|
|
3,206 |
|
|
2010-2020 |
Foreign NOLs |
|
|
328 |
|
|
indefinite |
|
|
|
$ |
8,127 |
|
|
|
|
-31-
The Company recorded credits of $352, $3,721 and $312 to additional paid-in-capital during the
years ended September 30, 2005, 2004 and 2003, respectively, in connection with the tax benefit
related to deductions for stock-based compensation programs.
Note J
Severance Charges
During fiscal 2003, the Company recorded $845 pretax, or $.03 per share after taxes, for severance
charges relating to a reduction in force of 23 individuals, or less than 5 percent of the worldwide
work force. The majority of the individuals were in sales or sales support functions.
At September 30, 2004, $107 of accrued severance was included in the Accrued payroll and
related expenses caption of the consolidated Balance Sheets. The remaining liabilities under these
severance agreements were paid during fiscal 2005.
A reconciliation of the changes in the aggregated accrued severance liability for fiscal years 2005
and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
Beginning balance |
|
$ |
107 |
|
|
$ |
503 |
|
Expense recognized and adjustments |
|
|
(21 |
) |
|
|
(21 |
) |
Payments made |
|
|
(94 |
) |
|
|
(406 |
) |
Foreign exchange revaluation |
|
|
8 |
|
|
|
31 |
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
107 |
|
|
|
Note K
Commitments and Contingencies
The Company leases certain office and manufacturing facilities and office equipment under operating
leases. Rent expense under operating leases (net of sublease income of $184 in 2005, $160 in 2004
and $144 in 2003) was $2,289, $2,117 and $1,895 for 2005, 2004 and 2003, respectively. Future
minimum lease payments under operating leases are:
|
|
|
|
|
2006 |
|
$ |
1,584 |
|
2007 |
|
|
860 |
|
2008 |
|
|
537 |
|
2009 |
|
|
366 |
|
2010 |
|
|
204 |
|
After 2010 |
|
|
276 |
|
|
|
Total minimum operating lease payments |
|
$ |
3,827 |
|
|
|
In the normal course of business, the Company is subject to various legal claims, actions,
complaints and other matters. While the results of such matters cannot be predicted with certainty,
management believes that the final outcome of pending matters known to management will not have a
material adverse impact on the financial position or results of operations of the Company.
Note L
Segment and Geographic Information
The Companys business is to develop test and measurement-based solutions to verify customers
product performance or aid in their product development process. The Companys customers are
engineers, technicians and scientists in manufacturing, product development and research functions
within a range of industries. Although the Companys products vary in capability, sophistication,
use, size and price, they basically test, measure and analyze electrical and physical properties,
and in some cases RF or light. As such, the Companys management has determined that the Company
operates in a single industry segment. The operations by geographic area are presented below. The
basis for attributing revenues from external customers to a geographic area is the location of the
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
43,237 |
|
|
$ |
46,998 |
|
|
$ |
35,605 |
|
Europe |
|
|
43,544 |
|
|
|
48,065 |
|
|
|
38,594 |
|
Asia |
|
|
54,771 |
|
|
|
45,185 |
|
|
|
32,519 |
|
|
|
|
|
$ |
141,552 |
|
|
$ |
140,248 |
|
|
$ |
106,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
24,408 |
|
|
$ |
22,750 |
|
|
$ |
21,131 |
|
Germany |
|
|
4,720 |
|
|
|
4,545 |
|
|
|
4,055 |
|
Other |
|
|
1,064 |
|
|
|
756 |
|
|
|
738 |
|
|
|
|
|
$ |
30,192 |
|
|
$ |
28,051 |
|
|
$ |
25,924 |
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|
|
-32-
Unaudited Quarterly Results of Operations
Following are the Companys unaudited quarterly results of operations for fiscal 2005 and 2004.
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First |
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Second |
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Third |
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Fourth |
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Fiscal 2005 |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales |
|
$ |
35,643 |
|
|
$ |
37,663 |
|
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$ |
33,251 |
|
|
$ |
34,995 |
|
Gross profit |
|
|
21,443 |
|
|
|
23,082 |
|
|
|
20,138 |
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|
|
21,322 |
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Income before income taxes |
|
|
4,045 |
|
|
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4,659 |
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|
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2,732 |
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|
|
2,651 |
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Net income |
|
|
2,791 |
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|
|
3,215 |
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|
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1,854 |
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|
|
2,268 |
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Diluted earnings per share |
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.17 |
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|
|
.19 |
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|
|
.11 |
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|
|
.14 |
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Fiscal 2004 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales |
|
$ |
29,742 |
|
|
$ |
33,989 |
|
|
$ |
36,822 |
|
|
$ |
39,695 |
|
Gross profit |
|
|
17,599 |
|
|
|
21,332 |
|
|
|
22,893 |
|
|
|
23,819 |
|
Income before income taxes |
|
|
1,578 |
|
|
|
3,805 |
|
|
|
4,788 |
|
|
|
5,370 |
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Net income |
|
|
1,089 |
|
|
|
2,625 |
|
|
|
3,177 |
|
|
|
4,490 |
|
Diluted earnings per share |
|
|
.07 |
|
|
|
.16 |
|
|
|
.19 |
|
|
|
.27 |
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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company has evaluated, under the supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, the design and operation of the Companys
disclosure controls and procedures as of September 30, 2005 pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities Exchange Commissions rules and forms, and that information was
accumulated and communicated to the Companys management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based upon the evaluation, management has concluded that our internal control
over financial reporting was effective as of September 30, 2005.
Our assessment of the effectiveness of our internal control over financial reporting as of
September 30, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report dated December 13, 2005 included under Item 8.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the Companys most
recent quarer that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Chief Executive and Chief Financial Officer Certifications
The certifications of our Chief Executive Officer and Chief Financial Officer required under
Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31(a) and 31(b) to this report.
Additionally, in March 2005, our Chief Executive Officer filed with the New York Stock Exchange
(NYSE) the annual certification required to be furnished to the NYSE pursuant to Section 303A.12
of the NYSE Listed Company Manual. The certification confirmed that our Chief Executive Officer was
not aware of any violation by the Company of the NYSEs corporate governance listing standards.
ITEM
9B OTHER INFORMATION
None.
-33-
PART III.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Companys directors, its audit committee, code of ethics, and compliance
with Section 16(a) of the Exchange Act will be included in the Companys Proxy Statement for the
Annual Meeting of Shareholders to be held February 11, 2006, to be filed with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934 and is
incorporated herein by reference.
The information required with respect to the executive officers of the Company is included
under the caption Executive Officers of the Registrant in Item 1 of Part I of this Annual Report
and incorporated herein by reference.
ITEM 11 EXECUTIVE COMPENSATION.
See the caption Executive Compensation and Related Information in the Companys Proxy Statement
to be used in conjunction with the February 11, 2006 Annual Meeting of Shareholders and to be filed
with the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange
Act of 1934, which section is incorporated herein by this reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the caption Principal Shareholders in the Companys Proxy Statement to be used in conjunction
with the February 11, 2006 Annual Meeting of Shareholders and to be filed with the Securities and
Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934, which section
is incorporated herein by this reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
James B. Griswold, a Director and nominee for Director, is a partner in the law firm of Baker
& Hostetler LLP. Baker & Hostetler LLP served as general legal counsel to the Company during the
fiscal year ended September 30, 2005, and is expected to render services in such capacity to the
Company in the future.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.
See the caption Principal Accountant Fees and Services in the Companys Proxy Statement to be
used in conjunction with the February 11, 2006 Annual Meeting of Shareholders and to be filed with
the Securities and Exchange Commission pursuant to Section 14(a) of the Securities Exchange Act of
1934, which section is incorporated herein by this reference.
PART IV.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) Financial Statements
Our Consolidated Financial Statements and Notes thereto are included in Item 8 of this Annual
Report.
(a)(2) Financial Statement Schedules
Schedules are omitted because they are not required or not applicable, or because the information
is furnished elsewhere in the consolidated financial statements or the notes thereto.
-34-
(a)(3) Index to Exhibits
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Exhibit |
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Number |
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Description |
3(a)
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Code of Regulations, as amended on February 9, 1985. (Reference is made to Exhibit 3(a) of the Companys
Annual Report on Form 10-K
for the year ended September 30, 2002 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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3(b)
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Amended Articles of Incorporation, as amended on February 17, 2001. (Reference is made to Exhibit 3(c) of the
Companys Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2001 (File No. 1-9965), which Exhibit is
incorporated herein by reference.) |
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4(a)
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Specimen Share Certificate for the Common Shares, without par value. (Reference is made to Exhibit 4(a) of
the Companys Annual
Report on Form 10-K for the year ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated
herein by reference.) |
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10(a)*
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Keithley Instruments, Inc. Supplemental Deferral Plan as amended. (Reference is made to Exhibit 10(b) of the
Companys Annual Report
on Form 10-K for the year ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by
reference.) |
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10(b)*
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Employment Agreement with Mark J. Plush dated April 7, 1994. (Reference is made to Exhibit 10(k) of the
Companys Annual Report on
Form 10-K for the year ended September 30, 1998 (File No. 1-9965), which Exhibit is incorporated herein by
reference.) |
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10(d)*
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Supplemental Executive Retirement Plan. (Reference is made to Exhibit 10(e) of the Companys Annual Report on
Form 10-K for the year
ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(e)*
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1992 Stock Incentive Plan, as amended. (Reference is made to Exhibit 10(f) of the Companys Annual Report on
Form 10-K for the year
ended September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(f)*
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1992 Directors Stock Option Plan. (Reference is made to Exhibit 10(g) of the Companys Annual Report on Form
10-K for the year ended
September 30, 1999 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(g)
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Credit Agreement dated as of March 30, 2001 by and among Keithley Instruments, Inc. and Subsidiary Borrowers
and the Lenders and
Bank One, NA, as agent. (Reference is made to Exhibit 10(l) of the Companys Quarterly Report on form 10-Q
for the quarter ended
March 31, 2001 (File No. 1-9965) which Exhibit is incorporated herein by reference.) |
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10(h)*
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|
1996 Outside Directors Deferred Stock Plan. (Reference is made to Exhibit 10(x) of the Companys Quarterly
Report on Form 10-Q for
the fiscal quarter ended March 31, 1996 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(i)*
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|
1997 Directors Stock Option Plan, adopted in February 1997. (Reference is made to Exhibit 10(z) of the
Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 1997 (File No. 1-9965), which Exhibit is incorporated
herein by reference.) |
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10(j)
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First Amendment to Credit Agreement, dated August 1, 2002. (Reference is made to Exhibit 10(j) of the
Companys Quarterly Report on
Form 10-Q for the quarter year ended June 30, 2002 (File No. 1-9965), which Exhibit is incorporated herein by
reference.) |
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10(k)*
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|
Keithley Instruments, Inc. 2002 Stock Incentive Plan (Reference is made to Exhibit 4(b) of the Companys
Registration Statement under
The Securities Act of 1933 dated May 13, 2002 on Form S-8 (File No. 333-88088), which Exhibit is incorporated
herein by reference.) |
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10(l)
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Second Amendment to Credit Agreement, dated March 28, 2003. (Reference is made to Exhibit 10(l) of the
Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003 (File No. 1-9965), which Exhibit is incorporated herein by
reference.) |
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10(m)
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Third Amendment to Credit Agreement, dated March 30, 2004. (Reference is made to Exhibit 10(m) of the
Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004 (File No. 1-9965), which Exhibit is incorporated herein by
reference.) |
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10(n)
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|
Fourth Amendment to Credit Agreement, dated March 30, 2005. (Reference is made to Exhibit 10(n) of the
Companys Current Report
on Form 8-K dated March 30, 2005 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(o)*
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|
Form of Indemnification Agreement entered into by the Company and each of Brian R. Bachman, James T.
Bartlett, James B. Griswold,
Leon J. Hendrix, Jr., William Hudson, Joseph P. Keithley, Dr. N. Mohan Reddy, Barbara Scherer and R. Elton
White, as members of the
Companys Board of Directors On December 2, 2004. (Reference is made to Exhibit 10.1 of the Companys Current
Report on Form 8-K
dated December 2, 2004 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(p)*
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|
Form of Indemnification Agreement entered into by the Company and each of Philip R. Etsler, Mark J. Plush and
Linda C. Rae, as executive
officers of the Company, on December 2, 2004. (Reference is made to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated
December 2, 2004 (File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(q)*
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|
Form of Indemnification Agreement entered into by the Company and Brian J. Jackman, as a member of the
Companys Board of
Directors On May 5, 2005. (Reference is made to Exhibit 10.1 of the Companys Current Report on Form 8-K
dated December 2, 2004
(File No. 1-9965), which Exhibit is incorporated herein by reference.) |
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10(r)*
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|
Keithley Instruments, Inc. 2002 Stock Incentive Plan (as amended September 8, 2005) |
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14
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|
Code of Ethics. |
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21
|
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Subsidiaries of the Company. |
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23
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|
Consent of PricewaterhouseCoopers LLP. |
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31(a)
|
|
Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a). |
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31(b)
|
|
Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a). |
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32(a)+
|
|
Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. |
|
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32(b)+
|
|
Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350. |
|
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* |
|
Management contract or compensatory plan or arrangement. |
|
+ |
|
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. |
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
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By:
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/s/ Joseph P. Keithley |
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Joseph P. Keithley, (Chairman, President and Chief Executive Officer) |
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Date:
|
|
December 8, 2005 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities on the date
indicated..
|
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Signature |
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Title |
|
Date |
/s/Joseph P. Keithley
|
|
Chairman of the Board of Directors, President and
|
|
12/8/05 |
|
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|
|
Joseph P. Keithley
|
|
Chief Executive Officer (Principal Executive Officer) |
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|
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/s/ Mark J. Plush
|
|
Vice President and Chief Financial Officer
|
|
12/8/05 |
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|
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|
|
Mark J. Plush
|
|
(Principal Financial and Accounting Officer) |
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|
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/s/ Brian R. Bachman
|
|
Director
|
|
12/8/05 |
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|
|
Brian R. Bachman |
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/s/ James T. Bartlett
|
|
Director
|
|
12/8/05 |
|
|
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|
|
James T. Bartlett |
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|
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/s/ James B. Griswold
|
|
Director
|
|
12/8/05 |
|
|
|
|
|
James B. Griswold |
|
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|
|
/s/ Leon J. Hendrix, Jr.
|
|
Director
|
|
12/8/05 |
|
|
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|
|
Leon J. Hendrix, Jr. |
|
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|
/s/ Brian J. Jackman
|
|
Director
|
|
12/8/05 |
|
|
|
|
|
Brian J. Jackman |
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|
|
/s/ N. Mohan Reddy
|
|
Director
|
|
12/8/05 |
|
|
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|
|
N. Mohan Reddy |
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|
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/s/ Barbara V. Scherer
|
|
Director
|
|
12/8/05 |
|
|
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|
|
Barbara
V. Scherer |
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/s/ R. Elton White
|
|
Director
|
|
12/8/05 |
|
|
|
|
|
R. Elton White |
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|
|
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-36-