##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 Commission File Number 1-9965
 KEITHLEY INSTRUMENTS, INC.
  Ohio
    
    34-0794417(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 28775 Aurora Road, Solon, Ohio 44139
 Registrants telephone number, including area code: (440) 248-0400
  YES þ NO o
  Large accelerated filer o Accelerated filer þ Non-accelerated filer o
  YES o NO þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2.Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4.Controls and ProceduresPART II. OTHER INFORMATIONITEM 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  Forward-Looking Statements




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1 Financial Statements.
 
 June 30,
    
    
    September 30,Assets
    
    2007
    
    
    2006
    
    
    2006Current assets:Cash and cash equivalents
    
    $
    14,262
    
    
    $
    8,502
    
    
    $
    10,501Short-term investments
    
    
    33,049
    
    
    
    45,068
    
    
    
    36,203Refundable income taxes
    
    
    393
    
    
    
    132
    
    
    
    583Accounts receivable and other, net
    
    
    19,607
    
    
    
    21,828
    
    
    
    26,836Inventories:Raw materials
    
    
    8,539
    
    
    
    10,051
    
    
    
    9,375Work in process
    
    
    1,184
    
    
    
    1,766
    
    
    
    1,208Finished products
    
    
    4,168
    
    
    
    3,676
    
    
    
    4,064Total inventories
    
    
    13,891
    
    
    
    15,493
    
    
    
    14,647Deferred income taxes
    
    
    3,920
    
    
    
    4,199
    
    
    
    4,206Other current assets
    
    
    1,891
    
    
    
    1,781
    
    
    
    1,664Total current assets
    
    
    87,013
    
    
    
    97,003
    
    
    
    94,640Property, plant and equipment, at cost
    
    
    51,328
    
    
    
    50,371
    
    
    
    49,968Less-Accumulated depreciation
    
    
    37,031
    
    
    
    35,558
    
    
    
    35,543Net property, plant and equipment
    
    
    14,297
    
    
    
    14,813
    
    
    
    14,425Deferred income taxes
    
    
    21,378
    
    
    
    16,843
    
    
    
    17,679Other assets
    
    
    24,057
    
    
    
    17,190
    
    
    
    22,148Total assets
    
    $
    146,745
    
    
    $
    145,849
    
    
    $
    148,892Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    21
    
    
    $
    1,004
    
    
    $
    872Accounts payable
    
    
    7,595
    
    
    
    8,219
    
    
    
    8,033Accrued payroll and related expenses
    
    
    4,510
    
    
    
    5,483
    
    
    
    6,089Other accrued expenses
    
    
    3,780
    
    
    
    4,350
    
    
    
    4,870Income taxes payable
    
    
    1,729
    
    
    
    2,171
    
    
    
    2,733Total current liabilities
    
    
    17,635
    
    
    
    21,227
    
    
    
    22,597Long-term deferred compensation
    
    
    3,941
    
    
    
    3,406
    
    
    
    3,549Other long-term liabilities
    
    
    6,884
    
    
    
    5,566
    
    
    
    6,243Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,518,231 at June 30, 2007, 14,380,656 at
June 30, 2006 and 14,410,245 at September 30, 2006
    
    
    181
    
    
    
    179
    
    
    
    180Class B Common Shares, stated value $.0125:Authorized - 9,000,000; issued and outstanding -
2,150,502 at June 30, 2007, June 30, 2006 and
September 30, 2006
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    36,423
    
    
    
    32,592
    
    
    
    33,703Retained earnings
    
    
    87,160
    
    
    
    86,315
    
    
    
    88,393Accumulated other comprehensive income
    
    
    1,073
    
    
    
    581
    
    
    
    615Common shares held in treasury, at cost
    
    
    (6,579
    )
    
    
    (4,044
    )
    
    
    (6,415
    )Total shareholders equity
    
    
    118,285
    
    
    
    115,650
    
    
    
    116,503Total liabilities and shareholders equity
    
    $
    146,745
    
    
    $
    145,849
    
    
    $
    148,892
  2




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For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    33,446
    
    
    $
    38,427
    
    
    $
    107,402
    
    
    $
    113,896Cost of goods sold
    
    
    14,059
    
    
    
    15,000
    
    
    
    43,461
    
    
    
    44,051Gross profit
    
    
    19,387
    
    
    
    23,427
    
    
    
    63,941
    
    
    
    69,845Selling, general and administrative expenses
    
    
    15,288
    
    
    
    15,848
    
    
    
    48,255
    
    
    
    46,557Product development expenses
    
    
    7,116
    
    
    
    6,357
    
    
    
    19,363
    
    
    
    17,343Operating (loss) income
    
    
    (3,017
    )
    
    
    1,222
    
    
    
    (3,677
    )
    
    
    5,945Investment income
    
    
    582
    
    
    
    510
    
    
    
    1,715
    
    
    
    1,422Interest expense
    
    
    (11
    )
    
    
    (2
    )
    
    
    (38
    )
    
    
    (8
    )(Loss) income before income taxes
    
    
    (2,446
    )
    
    
    1,730
    
    
    
    (2,000
    )
    
    
    7,359Income tax (benefit) provision
    
    
    (1,987
    )
    
    
    61
    
    
    
    (2,543
    )
    
    
    1,666Net (loss) income
    
    $
    (459
    )
    
    $
    1,669
    
    
    $
    543
    
    
    $
    5,693Basic (loss) earnings per share
    
    $
    (0.03
    )
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.35Diluted (loss) earnings per share
    
    $
    (0.03
    )
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.34Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .1125
    
    
    $
    .1125Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .090
    
    
    $
    .090
  3




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For the Nine MonthsEnded June 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    543
    
    
    $
    5,693Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    3,137
    
    
    
    2,882Stock-based compensation
    
    
    1,689
    
    
    
    1,770Deferred income taxes
    
    
    (3,577
    )
    
    
    1,278Other items not effecting outlay of cash
    
    
    542
    
    
    
    303Changes in working capital
    
    
    3,980
    
    
    
    (6,576
    )Other operating activities
    
    
    (941
    )
    
    
    (218
    )Net cash provided by operating activities
    
    
    5,373
    
    
    
    5,132Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (3,054
    )
    
    
    (3,943
    )Purchase of short-term investments
    
    
    (23,920
    )
    
    
    (32,683
    )Sale of short-term investments
    
    
    27,152
    
    
    
    28,407Net cash generated in (used in) investing activities
    
    
    178
    
    
    
    (8,219
    )Cash flows from financing activities:Net (payments) borrowing under short term debt agreements
    
    
    (857
    )
    
    
    990Cash dividends
    
    
    (1,776
    )
    
    
    (1,803
    )Purchase of treasury shares
    
    
    
    
    
    
    (2,711
    )Proceeds from stock purchase and option plans
    
    
    338
    
    
    
    284Excess tax benefits from stock-based compensation arrangements
    
    
    298
    
    
    
    217Net cash used in financing activities
    
    
    (1,997
    )
    
    
    (3,023
    )Effect of exchange rate changes on cash
    
    
    207
    
    
    
    215Increase (decrease) in cash and cash equivalents
    
    
    3,761
    
    
    
    (5,895
    )Cash and cash equivalents at beginning of period
    
    
    10,501
    
    
    
    14,397Cash and cash equivalents at end of period
    
    $
    14,262
    
    
    $
    8,502
  4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands of dollars, except for per-share data)
 Nature of Operations
  Summary of Significant Accounting Policies
 Basis of Presentation
    Reclassifications
  Recent Accounting Pronouncements
  5




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6




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Earnings Per Share
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (459
    )
    
    $
    1,669
    
    
    $
    543
    
    
    $
    5,693Weighted averages shares outstanding
    
    
    16,252,296
    
    
    
    16,454,185
    
    
    
    16,204,214
    
    
    
    16,464,532Dilutive effect of stock awards
    
    
    
    
    
    
    160,120
    
    
    
    201,099
    
    
    
    181,803Assumed purchase of stock under
stock purchase plan
    
    
    
    
    
    
    1,662
    
    
    
    1,153
    
    
    
    1,859Weighted average shares used for
dilutive earnings per share
    
    
    16,252,296
    
    
    
    16,615,967
    
    
    
    16,406,466
    
    
    
    16,648,194Basic earnings per share
    
    $
    (0.03
    )
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.35Diluted earnings per share
    
    $
    (0.03
    )
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    0.34
  Stock-based Compensation
  Stock option activity
   Nine Months
    
    Nine MonthsFiscal 2007
    
    Fiscal 2006Expected life (years)
    
    
    4.75
    
    
    
    4.5Risk-free interest rate
    
    
    4.79
    %
    
    
    4.27
    %Volatility
    
    
    42
    %
    
    
    45
    %Dividend yield
    
    
    1.07
    %
    
    
    1.01
    %
 7




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Performance award units
  Restricted award units
  Directors equity plans
   Compensation costs recorded
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of goods sold
    
    $
    45
    
    
    $
    29
    
    
    $
    102
    
    
    $
    84Selling, general and administrative expenses
    
    
    504
    
    
    
    503
    
    
    
    1,346
    
    
    
    1,476Product development expenses
    
    
    99
    
    
    
    71
    
    
    
    241
    
    
    
    211Stock-based compensation included in operating expenses
    
    
    648
    
    
    
    603
    
    
    
    1,689
    
    
    
    1,771Estimated tax impact of stock-based compensation
    
    
    213
    
    
    
    205
    
    
    
    554
    
    
    
    600Stock-based compensation expense, net of tax
    
    $
    435
    
    
    $
    398
    
    
    $
    1,135
    
    
    $
    1,171
 8




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Repurchase of Common Shares
    Three and Nine Months EndedJune 30, 2006Total number of shares purchased
    
    
    215,000Average price paid per share
(including commissions)
    
    $
    12.61Identity of broker-dealer used to effect
the purchases
    
    National Financial Securities LLCNumber of shares purchased as part of a
publicly announced repurchase program
    
    
    215,000Maximum number of shares that remain
to be purchased under the program
    
    
    1,785,000
  Financing Arrangements
   9




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Accounting for Derivatives and Hedging Activities
 ,
    Comprehensive Income
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (459
    )
    
    $
    1,669
    
    
    $
    543
    
    
    $
    5,693Unrealized gains (losses) on value of
derivative securities, net of tax
    
    
    61
    
    
    
    36
    
    
    
    (25
    )
    
    
    (29
    )Net unrealized investment gains (losses),
net of tax
    
    
    3
    
    
    
    (13
    )
    
    
    51
    
    
    
    (52
    )Foreign currency translation adjustments
    
    
    29
    
    
    
    305
    
    
    
    432
    
    
    
    265Comprehensive (loss) income
    
    $
    (366
    )
    
    $
    1,997
    
    
    $
    1,001
    
    
    $
    5,877
 10




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Geographic Segment Information
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales:United States
    
    $
    9,654
    
    
    $
    11,663
    
    
    $
    26,972
    
    
    $
    33,569Other Americas
    
    
    888
    
    
    
    1,442
    
    
    
    3,434
    
    
    
    4,028Germany
    
    
    3,715
    
    
    
    5,826
    
    
    
    13,724
    
    
    
    14,646Other Europe
    
    
    7,172
    
    
    
    7,600
    
    
    
    22,008
    
    
    
    23,389Japan
    
    
    3,207
    
    
    
    3,341
    
    
    
    13,236
    
    
    
    12,230Other Asia
    
    
    8,810
    
    
    
    8,555
    
    
    
    28,028
    
    
    
    26,034$
    33,446
    
    
    $
    38,427
    
    
    $
    107,402
    
    
    $
    113,896
  At June 30,
    
    
    At September 30,2007
    
    
    2006
    
    
    2006Long-lived assets:Americas
    
    $
    31,341
    
    
    $
    26,015
    
    
    $
    30,246Germany
    
    
    5,828
    
    
    
    5,063
    
    
    
    5,406Other
    
    
    1,185
    
    
    
    925
    
    
    
    921$
    38,354
    
    
    $
    32,003
    
    
    $
    36,573
 Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
   11




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For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    992
    
    
    $
    910
    
    
    $
    869
    
    
    $
    1,084Accruals for warranties issued during the period
    
    
    875
    
    
    
    411
    
    
    
    245
    
    
    
    1,069Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (105
    )
    
    
    (19
    )
    
    
    (73
    )
    
    
    (174
    )Settlements made (in cash or in kind)
during the period
    
    
    (1,051
    )
    
    
    (312
    )
    
    
    (330
    )
    
    
    (989
    )Ending balance
    
    $
    711
    
    
    $
    990
    
    
    $
    711
    
    
    $
    990
 Pension Benefits
  United States Plan
    
    
    Non U.S. PlanFor the Three Months
    
    
    For the Three MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service costs-benefits earned during the period
    
    $
    355
    
    
    $
    409
    
    
    $
    61
    
    
    $
    55Interest cost on projected benefit obligation
    
    
    550
    
    
    
    500
    
    
    
    84
    
    
    
    70Expected return on plan assets
    
    
    (782
    )
    
    
    (723
    )
    
    
    (16
    )
    
    
    (20
    )Net loss recognition
    
    
    16
    
    
    
    110
    
    
    
    1
    
    
    
    Amortization of transition asset
    
    
    
    
    
    
    (2
    )
    
    
    5
    
    
    
    5Amortization of prior service cost
    
    
    45
    
    
    
    45
    
    
    
    2
    
    
    
    2Net periodic benefit cost
    
    $
    184
    
    
    $
    339
    
    
    $
    137
    
    
    $
    112
 United States Plan
    
    
    Non U.S. PlanFor the Nine Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Service costs-benefits earned during the period
    
    $
    1,065
    
    
    $
    1,230
    
    
    $
    179
    
    
    $
    159Interest cost on projected benefit obligation
    
    
    1,652
    
    
    
    1,500
    
    
    
    246
    
    
    
    203Expected return on plan assets
    
    
    (2,347
    )
    
    
    (2,168
    )
    
    
    (48
    )
    
    
    (59
    )Net loss recognition
    
    
    49
    
    
    
    329
    
    
    
    2
    
    
    
    Amortization of transition asset
    
    
    
    
    
    
    (7
    )
    
    
    17
    
    
    
    16Amortization of prior service cost
    
    
    134
    
    
    
    134
    
    
    
    4
    
    
    
    4Net periodic benefit cost
    
    $
    553
    
    
    $
    1,018
    
    
    $
    400
    
    
    $
    323
   12




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Income Taxes
     13




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ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Business Overview
     Critical Accounting Policies and Estimates
  14




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Stock compensation plans:
  Results of Operations
 Third Quarter Fiscal 2007 Compared with Third Quarter Fiscal 2006
     .
 15




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Nine Months Ended June 30, 2007 Compared with Nine Months Ended June 30, 2006
        16




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  June 30
    
    
    September 30Current assets:Cash and cash equivalents
    
    $
    14,262
    
    
    $
    10,501Short-term investments
    
    
    33,049
    
    
    
    36,203Refundable income taxes
    
    
    393
    
    
    
    583Accounts receivable and other, net
    
    
    19,607
    
    
    
    26,836Total inventories
    
    
    13,891
    
    
    
    14,647Deferred income taxes
    
    
    3,913
    
    
    
    4,206Prepaid expenses
    
    
    1,898
    
    
    
    1,664Total current assets
    
    
    87,013
    
    
    
    94,640Current liabilities:Short-term debt
    
    
    21
    
    
    
    872Accounts payable
    
    
    7,595
    
    
    
    8,033Accrued payroll and related expenses
    
    
    4,510
    
    
    
    6,089Other accrued expenses
    
    
    3,780
    
    
    
    4,870Income taxes payable
    
    
    1,729
    
    
    
    2,733Total current liabilities
    
    
    17,635
    
    
    
    22,597Working capital
    
    $
    69,378
    
    
    $
    72,043
  17




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Sources and Uses of Cash
  Nine Months Ended June 302007
    
    2006Cash provided by (used in):Operating activities
    
    $
    5,373
    
    
    $
    5,132Investing activities
    
    
    178
    
    
    
    (8,219
    )Financing activities
    
    
    (1,997
    )
    
    
    (3,023
    )
 Operating activities
   Investing activities
 Financing activities
  Outlook
   18




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Recent Accounting Pronouncements
      19




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ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.
    
 ITEM 4 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors.
  Cyclicality of the electronics industry and timing of large orders
  20




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Rapid technology changes
  Competitive factors
  Dependence on key suppliers
  International operations, political and economic conditions
  Changes in manufacturing processes
  Tax planning strategies
  21




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Information technology management systems
  Fixed cost of sales force
  Planned cost savings initiatives
  Non-cash compensation expense
  Historical stock option grant practices
     22




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Other risk factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Exhibits
 Exhibits
 ExhibitNumber
    
    Exhibit31(a)
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a).31(b)
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a).32(a)+
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section
1350.32(b)+
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 
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##### Table of Contents



KEITHLEY INSTRUMENTS, INC.
(Registrant)Date:  August 9, 2007
    /s/  Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer

          (Principal Executive Officer)Date: August 9, 2007
    /s/  Mark J. PlushMark J. PlushVice President and Chief Financial Officer

          (Principal Financial and Accounting Officer) 24