##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2008
 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 filero
    
    Accelerated filerþ
    
    Non-accelerated filero
    
    Smaller reporting companyo(Do not check if smaller reporting company.)
  YES o NO þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED 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 1. Legal ProceedingsITEM 1A. Risk FactorsITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSIGNATURESEXHIBIT INDEXExhibit 31(a)Exhibit 31(b)Exhibit 32(a)Exhibit 32(b)    Table of Contents  Forward-Looking Statements
      1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 
 ITEM 1 Financial Statements.
  
 
    June 30, 2008
    
    
    September 30, 2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    20,156
    
    
    $
    12,888Short-term investments
    
    
    6,201
    
    
    
    32,340Refundable income taxes
    
    
    132
    
    
    
    136Accounts receivable and other, net
    
    
    23,067
    
    
    
    19,510Inventories:Raw materials
    
    
    12,016
    
    
    
    9,599Work in process
    
    
    1,495
    
    
    
    984Finished products
    
    
    5,112
    
    
    
    4,092Total inventories
    
    
    18,623
    
    
    
    14,675Deferred income taxes
    
    
    3,885
    
    
    
    3,961Prepaid expenses
    
    
    2,112
    
    
    
    2,026Total current assets
    
    
    74,176
    
    
    
    85,536Property, plant and equipment, at cost
    
    
    53,780
    
    
    
    51,955Less-Accumulated depreciation
    
    
    40,332
    
    
    
    38,256Property, plant and equipment, net
    
    
    13,448
    
    
    
    13,699Deferred income taxes
    
    
    24,937
    
    
    
    23,823Intangible assets
    
    
    1,260
    
    
    
    1,400Long-term investments
    
    
    7,673
    
    
    
    1,324Other assets
    
    
    22,327
    
    
    
    20,624Total assets
    
    $
    143,821
    
    
    $
    146,406Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    283
    
    
    $
    799Accounts payable
    
    
    6,803
    
    
    
    8,018Accrued payroll and related expenses
    
    
    5,701
    
    
    
    4,799Other accrued expenses
    
    
    4,985
    
    
    
    4,753Income taxes payable
    
    
    1,371
    
    
    
    3,911Total current liabilities
    
    
    19,143
    
    
    
    22,280Long-term deferred compensation
    
    
    2,940
    
    
    
    3,924Deferred income taxes
    
    
    74
    
    
    
    74Long-term income taxes payable
    
    
    2,595
    
    
    
    Other long-term liabilities
    
    
    7,985
    
    
    
    7,104Shareholders equity:Common Shares, stated value $.0125:Authorized
 80,000,000; issued and outstanding 
14,661,525 at June 30, 2008, and
14,580,978 at September 30, 2007
    
    
    183
    
    
    
    182Class B Common Shares, stated value $.0125:Authorized  9,000,000; issued and outstanding 
2,150,502 at June 30, 2008 and September 30, 2007
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    38,895
    
    
    
    36,436Retained earnings
    
    
    85,960
    
    
    
    85,676Accumulated other comprehensive loss
    
    
    (780
    )
    
    
    (946
    )Common shares held in treasury, at cost
    
    
    (13,201
    )
    
    
    (8,351
    )Total shareholders equity
    
    
    111,084
    
    
    
    113,024Total liabilities and shareholders equity
    
    $
    143,821
    
    
    $
    146,406
   2




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##### Table of Contents



For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    40,955
    
    
    $
    33,446
    
    
    $
    119,331
    
    
    $
    107,402Cost of goods sold
    
    
    17,191
    
    
    
    14,059
    
    
    
    48,588
    
    
    
    43,461Gross profit
    
    
    23,764
    
    
    
    19,387
    
    
    
    70,743
    
    
    
    63,941Selling, general and administrative expenses
    
    
    17,441
    
    
    
    15,288
    
    
    
    49,869
    
    
    
    48,255Product development expenses
    
    
    6,771
    
    
    
    7,116
    
    
    
    19,212
    
    
    
    19,363Operating (loss) income
    
    
    (448
    )
    
    
    (3,017
    )
    
    
    1,662
    
    
    
    (3,677
    )Investment income
    
    
    338
    
    
    
    582
    
    
    
    1,321
    
    
    
    1,715Interest expense
    
    
    (15
    )
    
    
    (11
    )
    
    
    (53
    )
    
    
    (38
    )Impairment of long-term investments
    
    
    
    
    
    
    
    
    
    
    (670
    )
    
    
    (Loss) income before income taxes
    
    
    (125
    )
    
    
    (2,446
    )
    
    
    2,260
    
    
    
    (2,000
    )Income tax (benefit) provision
    
    
    (86
    )
    
    
    (1,987
    )
    
    
    225
    
    
    
    (2,543
    )Net (loss) income
    
    $
    (39
    )
    
    $
    (459
    )
    
    $
    2,035
    
    
    $
    543Basic (loss) earnings per share
    
    $
    (0.00
    )
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Diluted (loss) earnings per share
    
    $
    (0.00
    )
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Cash 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 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    2,035
    
    
    $
    543Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    3,007
    
    
    
    3,137Stock-based compensation
    
    
    2,075
    
    
    
    1,689Deferred income taxes
    
    
    (1,926
    )
    
    
    (3,577
    )Other items not effecting outlay of cash
    
    
    866
    
    
    
    542Changes in working capital
    
    
    (7,391
    )
    
    
    3,980Other operating activities
    
    
    (808
    )
    
    
    (941
    )Net cash (used in) provided by operating activities
    
    
    (2,142
    )
    
    
    5,373Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (2,768
    )
    
    
    (3,054
    )Purchase of short-term investments
    
    
    (13,225
    )
    
    
    (23,920
    )Sale of short-term investments
    
    
    31,586
    
    
    
    27,152Net cash provided by investing activities
    
    
    15,593
    
    
    
    178Cash flows from financing activities:Net payments under short term debt agreements
    
    
    (606
    )
    
    
    (857
    )Cash dividends
    
    
    (1,734
    )
    
    
    (1,776
    )Purchase of treasury shares
    
    
    (4,700
    )
    
    
    Proceeds from stock purchase and option plans
    
    
    153
    
    
    
    338Excess tax benefits from stock-based compensation arrangements
    
    
    81
    
    
    
    298Net cash used in financing activities
    
    
    (6,806
    )
    
    
    (1,997
    )Effect of exchange rate changes on cash
    
    
    623
    
    
    
    207Increase in cash and cash equivalents
    
    
    7,268
    
    
    
    3,761Cash and cash equivalents at beginning of period
    
    
    12,888
    
    
    
    10,501Cash and cash equivalents at end of period
    
    $
    20,156
    
    
    $
    14,262
   4




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




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Earnings Per Share
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (39
    )
    
    $
    (459
    )
    
    $
    2,035
    
    
    $
    543Weighted averages shares outstanding
    
    
    15,772,488
    
    
    
    16,252,296
    
    
    
    15,899,263
    
    
    
    16,204,214Dilutive effect of stock awards
    
    
    
    
    
    
    
    
    
    
    206,252
    
    
    
    201,099Assumed purchase of stock under
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    760
    
    
    
    1,153Weighted average shares used for
dilutive earnings 
per share
    
    
    15,772,488
    
    
    
    16,252,296
    
    
    
    16,106,275
    
    
    
    16,406,466Basic (loss) earnings per share
    
    $
    (0.00
    )
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03Diluted (loss) earnings per share
    
    $
    (0.00
    )
    
    $
    (0.03
    )
    
    $
    0.13
    
    
    $
    0.03
   6




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Stock-based Compensation
  Compensation costs recorded
 For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of goods sold
    
    $
    56
    
    
    $
    45
    
    
    $
    161
    
    
    $
    102Selling, general and administrative expenses
    
    
    554
    
    
    
    504
    
    
    
    1,610
    
    
    
    1,346Product development expenses
    
    
    105
    
    
    
    99
    
    
    
    304
    
    
    
    241Stock-based compensation included in operating expenses
    
    
    715
    
    
    
    648
    
    
    
    2,075
    
    
    
    1,689Estimated tax impact of stock-based compensation
    
    
    232
    
    
    
    213
    
    
    
    673
    
    
    
    554Stock-based compensation expense, net of tax
    
    $
    483
    
    
    $
    435
    
    
    $
    1,402
    
    
    $
    1,135
   Stock option activity
   Nine Months
    
    
    Nine MonthsFiscal 2008
    
    
    Fiscal 2007Expected life (years)
    
    
    4.75
    
    
    
    4.75Risk-free interest rate
    
    
    3.84
    %
    
    
    4.79
    %Volatility
    
    
    38
    %
    
    
    42
    %Dividend yield
    
    
    1.64
    %
    
    
    1.07
    %
  7




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Performance award units
  Restricted award units
  Directors equity plans
   Repurchase of Common Shares
    8




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Financing Arrangements
   Accounting for Derivatives and Hedging Activities
 ,
     9




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Comprehensive Income
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (39
    )
    
    $
    (459
    )
    
    $
    2,035
    
    
    $
    543Unrealized gains (losses) on value of
derivative securities, net of tax
    
    
    114
    
    
    
    61
    
    
    
    48
    
    
    
    (25
    )Net unrealized investment (losses) gains,
net of tax
    
    
    (4
    )
    
    
    3
    
    
    
    (488
    )
    
    
    51Foreign currency translation adjustments
    
    
    (30
    )
    
    
    29
    
    
    
    606
    
    
    
    432Comprehensive income (loss)
    
    $
    41
    
    
    $
    (366
    )
    
    $
    2,201
    
    
    $
    1,001
 Geographic Segment Information
  For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales:United States
    
    $
    10,141
    
    
    $
    9,654
    
    
    $
    27,542
    
    
    $
    26,972Other Americas
    
    
    1,051
    
    
    
    888
    
    
    
    2,311
    
    
    
    3,434Germany
    
    
    4,911
    
    
    
    3,715
    
    
    
    16,825
    
    
    
    13,724Other Europe
    
    
    8,869
    
    
    
    7,172
    
    
    
    24,512
    
    
    
    22,008Japan
    
    
    3,239
    
    
    
    3,207
    
    
    
    13,015
    
    
    
    13,236China
    
    
    6,776
    
    
    
    4,607
    
    
    
    15,826
    
    
    
    12,634Other Asia
    
    
    5,968
    
    
    
    4,203
    
    
    
    19,300
    
    
    
    15,394$
    40,955
    
    
    $
    33,446
    
    
    $
    119,331
    
    
    $
    107,402
 At June 30,
    
    
    At September 30,2008
    
    
    2007Long-lived assets:United States
    
    $
    36,545
    
    
    $
    29,557Germany
    
    
    7,154
    
    
    
    6,369Other
    
    
    1,009
    
    
    
    1,121$
    44,708
    
    
    $
    37,047
 Guarantors Disclosure Requirements
 Guarantee of original lease
   10




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Product Warranties
   For the Three Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    784
    
    
    $
    869
    
    
    $
    722
    
    
    $
    992Accruals for warranties issued during the period
    
    
    411
    
    
    
    245
    
    
    
    1,085
    
    
    
    875Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (27
    )
    
    
    (73
    )
    
    
    (123
    )
    
    
    (105
    )Settlements made (in cash or in kind)
during the period
    
    
    (372
    )
    
    
    (330
    )
    
    
    (888
    )
    
    
    (1,051
    )Ending balance
    
    $
    796
    
    
    $
    711
    
    
    
    796
    
    
    $
    711
 Pension Benefits
  United States Plan
    
    
    German PlanFor the Three Months
    
    
    For the Three MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service costs-benefits earned during the period
    
    $
    419
    
    
    $
    355
    
    
    $
    61
    
    
    $
    61Interest cost on projected benefit obligation
    
    
    589
    
    
    
    550
    
    
    
    108
    
    
    
    84Expected return on plan assets
    
    
    (884
    )
    
    
    (782
    )
    
    
    (20
    )
    
    
    (16
    )Net loss recognition
    
    
    20
    
    
    
    16
    
    
    
    
    
    
    
    1Amortization of transition asset
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    5Amortization of prior service cost
    
    
    45
    
    
    
    45
    
    
    
    1
    
    
    
    2Net periodic benefit cost
    
    $
    189
    
    
    $
    184
    
    
    $
    156
    
    
    $
    137
  11




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United States Plan
    
    
    German PlanFor the Nine Months
    
    
    For the Nine MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Service costs-benefits earned during the period
    
    $
    1,257
    
    
    $
    1,065
    
    
    $
    174
    
    
    $
    179Interest cost on projected benefit obligation
    
    
    1,767
    
    
    
    1,652
    
    
    
    313
    
    
    
    246Expected return on plan assets
    
    
    (2,650
    )
    
    
    (2,347
    )
    
    
    (58
    )
    
    
    (48
    )Net loss recognition
    
    
    62
    
    
    
    49
    
    
    
    
    
    
    
    2Amortization of transition asset
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    17Amortization of prior service cost
    
    
    134
    
    
    
    134
    
    
    
    4
    
    
    
    4Net periodic benefit cost
    
    $
    570
    
    
    $
    553
    
    
    $
    450
    
    
    $
    400
  Investments
    Income Taxes
   12




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ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations.
  Business Overview
   13




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##### Table of Contents



Critical Accounting Policies and Estimates
  Results of Operations
 Third Quarter Fiscal Year 2008 Compared with Third Quarter Fiscal Year 2007
      14




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Nine Months Ended June 30, 2008 Compared with Nine Months Ended June 30, 2007
       15




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16




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  June 30
    
    
    September 30Current assets:Cash and cash equivalents
    
    $
    20,156
    
    
    $
    12,888Short-term investments
    
    
    6,201
    
    
    
    32,340Refundable income taxes
    
    
    132
    
    
    
    136Accounts receivable and other, net
    
    
    23,067
    
    
    
    19,510Total inventories
    
    
    18,623
    
    
    
    14,675Deferred income taxes
    
    
    3,885
    
    
    
    3,961Prepaid expenses
    
    
    2,112
    
    
    
    2,026Total current assets
    
    
    74,176
    
    
    
    85,536Current liabilities:Short-term debt
    
    
    283
    
    
    
    799Accounts payable
    
    
    6,803
    
    
    
    8,018Accrued payroll and related expenses
    
    
    5,701
    
    
    
    4,799Other accrued expenses
    
    
    4,985
    
    
    
    4,753Income taxes payable
    
    
    1,371
    
    
    
    3,911Total current liabilities
    
    
    19,143
    
    
    
    22,280Working capital
    
    $
    55,033
    
    
    $
    63,256
  Sources and Uses of Cash
  For the Nine MonthsEnded June 30,2008
    
    
    2007Cash provided by (used in):Operating activities
    
    $
    (2,142
    )
    
    $
    5,373Investing activities
    
    
    15,593
    
    
    
    178Financing activities
    
    
    (6,806
    )
    
    
    (1,997
    )
 Operating activities
  17




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Investing activities
 Financing activities
  Outlook
  Recent Accounting Pronouncements
     18




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ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.
    
 
 ITEM 4 Controls and Procedures.
    19




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PART II. OTHER INFORMATION
 
 
 ITEM 1. Legal Proceedings.
     
 
 ITEM 1A. Risk Factors.
  Uncertain Financial Markets
  20




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##### Table of Contents



ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total number of
    
    
    Maximum numbershares purchased as
    
    
    of shares that maypart of publicly
    
    
    yet be purchasedTotal number of
    
    
    Average price paid
    
    
    announced plans or
    
    
    under the plans orPeriod
    
    shares purchased
    
    
    per share (1)
    
    
    programs
    
    
    programsApril 1  30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,414,600May 1  31, 2008
    
    
    11,850
    
    
    $
    9.97
    
    
    
    11,850
    
    
    
    1,402,750June 1  30, 2008
    
    
    36,050
    
    
    $
    10.14
    
    
    
    36,050
    
    
    
    1,366,700Total
    
    
    47,900
    
    
    $
    10.10
    
    
    
    47,900
    
    
    
    1,366,700
 (1)
    
    Price includes commissions.  
 
 Exhibits
 Exhibits
 ExhibitNumber
    
    Exhibit31
    (a)
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(a)-15d-14(a).31
    (b)
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(a)-15d-14(a).32
    (a)+
    
    Certification of Joseph P. Keithley pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.32
    (b)+
    
    Certification of Mark J. Plush pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350.
 +
    
    The certifications furnished pursuant to this item will not be deemed filed for
purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the
liability of that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference.  21




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##### Table of Contents



KEITHLEY INSTRUMENTS, INC.
(Registrant)Date:  August 11, 2008
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer
(Principal Executive Officer)Date:  August 11, 2008
    /s/ Mark J. PlushMark J. PlushVice President and Chief Financial Officer
(Principal Financial and Accounting Officer)  22




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##### Table of Contents



ExhibitIndex
    
    Description31
    (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.
  23