Keithley Instruments (KEI) 10-Q 2001 Q1 Quarterly report

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. Financial Statements.
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
PART II. OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
Exhibit 11

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

           (Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2000

OR

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-9965

KEITHLEY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)

Ohio	34-0794417
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

28775 Aurora Road, Solon, Ohio 44139
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (440) 248-0400

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    X     NO       

      As of February 8, 2001 there were outstanding 13,738,359 Common Shares, without par value, and 2,163,532 Class B Common Shares, without par value.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements.

KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
(Unaudited)

				DECEMBER 31,						SEPTEMBER 30,
				2000			1999			2000
Assets
Current assets:
	Cash and cash equivalents			$	30,745		$	13,097		$	21,408
	Accounts receivable and other, net				29,958			17,646			30,621
	Inventories:
		Raw materials			11,294			7,439			11,376
		Work in process			3,886			3,389			5,685
		Finished products			4,409			2,291			3,083
			Total inventories		19,589			13,119			20,144
	Deferred income taxes				14,551			3,025			13,935
	Other current assets				789			786			506
			Total current assets		95,632			47,673			86,614
Property, plant and equipment, at cost					40,563			38,193			39,809
Less-Accumulated depreciation					27,439			25,815			26,590
Net property, plant and equipment					13,124			12,378			13,219
Deferred income taxes					6,026			7,722			5,987
Other assets					7,040			6,809			6,518
Total assets				$	121,822		$	74,582		$	112,338
Liabilities and Shareholders’ Equity
Current liabilities:
	Short-term debt and current installments on long-term debt			$	—		$	515		$	225
	Accounts payable				10,130			8,217			9,321
	Accrued payroll and related expenses				5,649			3,866			9,041
	Other accrued expenses				6,844			5,988			6,152
	Income taxes payable				5,180			3,709			4,096
		Total current liabilities			27,803			22,295			28,835
Long-term debt					3,000			3,000			3,000
Other long-term liabilities					5,417			4,943			4,723
Deferred income taxes					7			8			7
Shareholders’ equity:
	Paid-in-capital				19,732			9,127			17,359
	Earnings reinvested in the business				68,694			45,866			62,211
	Accumulated other comprehensive loss				(572	)		(175	)		(819	)
	Unamortized portion of restricted stock				(185	)		(228	)		(196	)
	Common shares held in treasury, at cost				(2,074	)		(10,254	)		(2,782	)
		Total shareholders’ equity			85,595			44,336			75,773
Total liabilities and shareholders’ equity				$	121,822		$	74,582		$	112,338

      The accompanying notes are an integral part of the financial statements.

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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars Except for Per Share Data)
(Unaudited)

	FOR THE THREE MONTHS
	ENDED DECEMBER 31,
	2000			1999
Net sales	$	44,508		$	29,760
Cost of goods sold		16,534			11,760
Selling, general and administrative expenses		13,434			10,339
Product development expenses		3,883			2,828
Gain on sale of business		—			(477	)
Net financing income		(297	)		(90	)
Income before income taxes		10,954			5,400
Income taxes		4,053			1,890
Net income	$	6,901		$	3,510
Basic earnings per share	$	.44		$	.25
Diluted earnings per share	$	.42		$	.23
Cash dividends per Common Share	$	.0275		$	.0205
Cash dividends per Class B
Common Share	$	.0220		$	.0164

      The accompanying notes are an integral part of the financial statements.

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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)

			FOR THE THREE MONTHS
			ENDED DECEMBER 31,
			2000			1999
Cash flows from operating activities:
	Net income		$	6,901		$	3,510
	Expenses not requiring outlay of cash			953			832
	Gain on sale of business			—			(477	)
	Changes in working capital			1,822			(1,579	)
	Other operating activities			80			180
	Net cash provided by operating activities			9,756			2,466
Cash flows from investing activities:
	Payments for property, plant, and equipment			(778	)		(546	)
	Other investing activities, net			—			37
	Net cash used in investing activities			(778	)		(509	)
Cash flows from financing activities:
	(Decrease) increase in short-term debt			(222	)		515
	Cash dividends			(418	)		(267	)
	Purchase of treasury stock			—			(3,013	)
	Proceeds from employee stock purchase plans			594			683
	Other			110			(81	)
	Net cash provided by (used in) financing activities			64			(2,163	)
Effect of changes in foreign currency exchange rates				295			(123	)
Increase (decrease) in cash and cash equivalents				9,337			(329	)
Cash and cash equivalents at beginning of period				21,408			13,426
Cash and cash equivalents at end of period			$	30,745		$	13,097
Supplemental disclosures of cash flow information       Cash paid during the period for:
		Income taxes	$	1,240		$	730
		Interest		27			7

      Disclosure of accounting policy
      For purposes of this statement, the Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.

      The accompanying notes are an integral part of the financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except for share data)

A.	Management Representation
	The consolidated financial statements at December 31, 2000 and 1999, and for the three month periods then ended have not been examined by independent accountants, but in the opinion of the management of Keithley Instruments, Inc., all adjustments necessary to a fair statement of the consolidated balance sheet, consolidated statement of income and consolidated statement of cash flows for those periods have been included. All adjustments included are of a normal recurring nature.
B.	Earnings per share denominator
	The weighted average number of shares and share equivalents used in determining basic earnings per share and diluted earnings per share was 15,574,631 and 16,570,709 for the quarter ended December 31, 2000, respectively, and 14,188,578 and 15,291,458 for the quarter ended December 31, 1999, respectively. Both Common Shares and Class B Common Shares are included in calculating the weighted average number of shares outstanding.
C.	Sale of assets
	During the first quarter of fiscal 2000, the company recorded an additional adjustment to the gain on previously disposed businesses of $477 pretax, or $0.02 per share after taxes. At the time of the sales of the businesses, the company established liabilities for certain items that were to be settled at future dates. The additional adjustment represents the settlement of certain of these issues.
D.	Stock repurchase programs
	On December 11, 2000, the company announced its Board of Directors had approved an open market stock repurchase program to replace the existing program, which expired in December 2000. Under the new program, the company may purchase up to 2,000,000 Common Shares, or approximately 13 percent of shares outstanding, over a three-year period. The purpose of the repurchase 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 company did not purchase shares during the first quarter of fiscal 2001. During the first quarter of fiscal 2000, the company bought back 304,800 Common Shares at an average cost of $9.89 per share including commissions. At December 31, 2000, 255,850 Common Shares purchased under the company’s share repurchase programs remained in treasury at an average cost of $5.36 per share including commissions. 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. The total number of shares held in treasury at December 31, 2000 was 373,467.

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E	Accounting for Derivatives and Hedging Activities
	The company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) on October 1, 2000. The transition amount recorded upon adoption of SFAS 133 was not material to the consolidated financial results or financial position of the company.
	In accordance with the provisions of SFAS 133, all of the company’s derivative instruments are recognized on the balance sheet at their fair value. To hedge sales, the company currently utilizes foreign exchange forward contracts or option contracts to sell foreign currencies to fix the exchange rates related to near-term sales and effectively fix the company’s margins. Underlying hedged transactions are recorded at hedged rates, therefore realized and unrealized gains and losses are recorded when the operating revenues and expenses are recorded. The company also currently utilizes an interest rate swap instrument to mitigate the risk of interest rate changes. The estimated fair value of the swap instrument is determined through quotes from the related financial institutions.
	On the date the derivative contract is entered into, the company designates its derivative as either a hedge of the fair value of a recognized asset or liability (“fair value” hedge), as a hedge of the variability of cash flows to be received (“cash flow” hedge), or as a foreign-currency cash flow hedge (“foreign currency” hedge). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective and that is designed 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 December 31, 2000, all the company’s derivative instruments were designed as cash flow hedges.
	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.

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F

Comprehensive Income

On October 1, 1998, the company adopted Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”), which establishes rules for reporting comprehensive income and its components. The adoption of SFAS 130 did not impact the company’s net income or total shareholders’ equity. Comprehensive income for the three months ended December 31, 2000 and 1999 is as follows:

	December 31,
	2000			1999
Net income	$	6,901		$	3,510
Unrealized losses on value of derivative securities		(212	)		—
Foreign currency translation adjustments		459			(288	)
Comprehensive income	$	7,148		$	3,222

G

Segment and Geographic Information

The company’s business is to develop measurement-based solutions to verify customers’ product performance. All the company’s products are computer based (multi-point) systems operating under software control. The company’s customers are engineers, technicians and scientists in manufacturing, product development and research functions within a range of industries. The company’s advanced hardware and software is used for process monitoring, production test and basic research. Although the company’s products vary in capability, sophistication, use, size and price, they basically test, measure and analyze electrical and physical properties. As such, the company’s management determined 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.

	For the Three Months Ended
	December 31,
	2000		1999
Net sales:
United States	$	21,025	$	17,022
Europe		12,184		8,545
Pacific Basin		8,097		3,541
Other		3,202		652
	$	44,508	$	29,760

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	At December 31,
	2000		1999
Long-lived assets:
United States	$	17,108	$	16,011
Germany		2,751		2,835
Other		305		341
	$	20,164	$	19,187

H

Accounting for Derivatives and Hedging Activities

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). SAB 101 provides guidance for public companies on the recognition, presentation and disclosure of revenue in their financial statements. It requires that an entity recognize revenue at the time a product has been accepted by a customer, as defined by certain criteria. SAB 101 is effective no later than the company’s fourth quarter of fiscal year 2001, and would have to be adopted retroactively to the beginning of the fiscal year. The company does not believe SAB 101 will have a material impact on its consolidated results or financial position.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations — In Thousands of Dollars Except for Per Share Data

First Quarter Fiscal 2001 Compared with First Quarter Fiscal 2000

Net income for the first quarter of fiscal 2001 was $6,901, or $0.42 per share, a 115 percent increase from $3,207 or $0.21 per share, before a $0.02 per share adjustment to gains on previously disposed businesses. Net income as reported for the first quarter of fiscal 2000 was $3,510, or $0.23 per share. (See Note C.)

Net sales of $44,508 increased 50 percent from $29,760 in the prior year’s first quarter, and were a record high for the sixth consecutive quarter. A stronger U.S. dollar versus foreign currencies had a negative effect on sales growth by 4 percentage points. Sales increased in all major geographic regions. Orders for the first quarter of $49,782 increased 32 percent from the prior year’s orders of $37,735, and were a new record high for the sixth consecutive quarter. Orders for the company’s products serving the optoelectronics industry were at record levels and grew over 200 percent from the prior year’s first quarter. Orders from semiconductor customers were the second highest in the company’s history and increased approximately 25 percent from the prior year’s quarter. Orders from telecommunications customers remained strong with growth of approximately 60 percent. Orders increased from the prior year in all major geographic regions, with the Pacific Basin region particularly strong, up 92 percent. Sequentially, orders increased 6 percent from the record fourth quarter fiscal 2000. Order backlog increased to a record $35,298 at December 31, 2000.

Cost of goods sold as a percentage of net sales decreased to 37.2 percent from 39.5 percent in the prior year’s first quarter. Improved manufacturing efficiencies as a result of higher sales, favorable product and geography mix and price increases more than offset the unfavorable impact of a stronger U.S. dollar. The effect of foreign exchange hedging on cost of goods sold was immaterial in both periods.

Selling, general and administrative expenses decreased to 30.2 percent of net sales compared to 34.8 percent in last year’s quarter, a 4.6 percentage point improvement. However, selling, general and administrative expense dollars increased $3,095, or 30 percent, from the prior year’s quarter. The increase in dollars is due to higher commissions and incentives related to increased sales and earnings, and higher personnel costs due to increased headcount.

Product development expenses for the quarter were $3,883, or 8.7 percent of sales, up 37 percent from $2,828, or 9.5 percent of net sales, last year. The company has hired approximately 27 employees in the product development area since last year’s first quarter to take advantage of the opportunities management sees in the optoelectronics and telecommunications industries.

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Overall, the company has added approximately 115 employees, a 21 percent increase, from December 31, 1999 to December 31, 2000. Significant investments have been made in the Pacific Basin by adding people in China and Taiwan and by opening a direct sales office in Korea. Of the 115 additions, approximately two-thirds of the new hires are in marketing, sales, application support and product development areas.

On November 9, 1998, the company sold certain assets used in the operation of its Quantox product line to KLA-Tencor Corporation. During the first quarter of fiscal 2000, an additional pretax gain of $477, or $0.02 per share after taxes, was recorded for the sale. At the time of the sale of this business, the company established liabilities for certain items that were to be settled at future dates. The additional adjustment recorded in the first quarter of fiscal 2000 represents the settlement of certain of these issues. (See Note C.)

The company generated net financing income during the quarter of $297 versus $90 in the prior year. Higher levels of cash and cash equivalents, combined with better rates on income earned on cash and cash equivalents accounted for the improvement.

The effective tax rate for the quarter was 37.0 percent versus 35.0 percent last year. The increase in the rate is due to higher profits, as well as increased state and local taxes resulting from higher U.S. earnings.

Liquidity and Capital Resources

During the first quarter, net cash provided by operations was $9,756. The company purchased $778 of capital equipment during the quarter and paid $418 in dividends. Total cash and cash equivalents increased $9,337 during the quarter to $30,745 at December 31, 2000. Total debt of $3,000 at December 31, 2000, decreased $225 during the quarter, and the total debt-to-capital ratio was 3.4 percent at December 31, 2000.

The company expects to finance debt service, capital spending, and working capital requirements through cash on hand and cash provided by operations. At December 31, 2000, the company had available unused lines of credit with domestic and foreign banks aggregating $26,963 of which $4,963 were short-term and $22,000 were long-term.

Outlook

The following statements regarding the results for fiscal year 2001 are based on current expectations:

• Quarter to quarter results will always be order dependent, but the company’s record backlog along with current business activities lead management to believe that sales and pretax earnings for the second quarter will exceed those of the first quarter.

• The company is estimating sales growth for fiscal 2001 in excess of 25 percent over fiscal year 2000 sales of $150,561 based on continued growth in its optoelectronics, semiconductor and telecommunications businesses.

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• Gross margins as a percentage of net sales for fiscal 2001 are expected to range between 60 and 62 percent depending on foreign currency fluctuations, as well as product and geographic mix.

• Selling, general and administrative expenses as a percentage of net sales are expected to range between 29 and 32 percent for fiscal 2001, depending on the rate of sales growth.

• Product development costs are expected to range between 8 and 9 percent of net sales.

• The tax rate for fiscal 2001 is expected to range between 36.5 and 37.5 percent.

As of the date of this filing, the company has begun to see some softening in order rates, particularly in its semiconductor business. Based on the current U.S. economy, some of its customers are becoming more cautious with their capital expansion plans. However, management is encouraged by potential orders in the pipeline, and by new product introductions planned over the next several quarters, and continues to see very good opportunities especially for its optoelectronics business.

Factors That May Affect Future Results

Statements included in the Liquidity and Capital Resources section and the Outlook Section of Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Some of the factors that may affect future results are discussed below.

Although the company operates in a single industry segment, certain of its products and product lines are targeted for specific industries including the semiconductor, telecommunications, optoelectronics, and other electronic industries. These industries, particularly the semiconductor industry, can be cyclical in nature. Growth in demand for semiconductors, new technology and pricing drive the demand for new semiconductor capital equipment. Historically, sales and order levels for this business have been volatile which can affect revenue and earnings for the company.

The company’s business relies on the development of new high technology products and services to provide solutions to customer’s complex measurement needs. This requires anticipation of customers’ changing needs and emerging technology trends. The company must make long-term investments and commit significant resources before knowing whether its expectations will eventually result in products that achieve market acceptance. The company incurs significant expenses developing new products that may or may not result in significant sources of revenue and earnings in the future.

In many cases the company’s products compete directly with those offered by other manufacturers. If any of the company’s competitors were to develop products or services that are more cost-effective or technically superior, demand for the company’s product offerings could slow.

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The company’s success depends to a significant degree upon the continued service of its key executive, sales, development, marketing and operational personnel. The company also believes its future success will depend upon its ability to attract and retain additional highly skilled personnel in these areas. The competition for qualified personnel in the technology area is intense. Although management believes the company offers competitive salaries and benefits, there can be no assurance that it will be successful in retaining its existing key personnel or attracting and retaining additional key resources. Failure to attract and retain personnel could have a material adverse effect on the company’s results of operations.

The company’s products contain large volumes of electronic components and subassemblies that in some cases are supplied through sole or limited source third-party suppliers. Although the company does not anticipate any problems procuring supplies in the near-term, there can never be any assurance that parts and supplies will be available in a timely manner and at reasonable prices. Additionally, the company’s inventory is subject to risk due to changes in market demand for particular products. The resulting excess and/or obsolete inventory could have an adverse impact on the company’s results of operations.

The company’s cost structure is comprised of costs that are directly related to the level of sales, as well as costs that are fixed and do not fluctuate based on sales levels. The company’s quality of earnings depends on its ability to control those costs that are fixed or semi-variable.

The company currently has eleven subsidiaries or sales offices located outside the United States, and non-U.S. sales accounted for approximately 53 percent of the company’s revenue during the first quarter of fiscal 2001. The company’s future results could be adversely affected by several factors, including changes in foreign currency exchange rates, changes in a country’s or region’s political or economic conditions, trade protection measures, import or export licensing requirements, unexpected changes in regulatory requirements and natural disasters.

The company pays taxes in several jurisdictions throughout the world. The company utilizes available tax credits and other tax planning strategies in an effort to minimize the company’s overall tax liability. The company’s actual tax rate for fiscal 2001 could change from what is currently anticipated due to changes in various country’s tax laws or changes in the company’s overall tax planning strategy.

The company has modified its systems to accommodate the Euro. The cost of these modifications was immaterial to the company’s results of operations. Although difficult to predict, any competitive implications and any impact on existing financial instruments are expected to be immaterial to the company’s results of operations, financial condition or cash flows of future periods.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits. The following exhibits are filed herewith:

Exhibit
Number	Exhibit
11	Statement Re Computation of Per Share Earnings
(b)	Reports on Form 8-K. No reports on Form 8-K were filed during the quarterly period ended December 31, 2000.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KEITHLEY INSTRUMENTS, INC. (Registrant)
Date: February 13, 2001	/s/ Joseph P. Keithley
	Joseph P. Keithley Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: February 13, 2001	/s/ Mark J. Plush
	Mark J. Plush Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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