##### Table of Contents



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 March 31, 2007
 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



Forward-Looking Statements




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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 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 ITEM 1 Financial Statements.
 
 MARCH 31,
    
    
    SEPTEMBER 30,2007
    
    
    2006
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    18,985
    
    
    $
    9,029
    
    
    $
    10,501Short-term investments
    
    
    33,425
    
    
    
    45,755
    
    
    
    36,203Refundable income taxes
    
    
    314
    
    
    
    122
    
    
    
    583Accounts receivable and other, net
    
    
    17,090
    
    
    
    23,768
    
    
    
    26,836Inventories:Raw materials
    
    
    9,399
    
    
    
    9,111
    
    
    
    9,375Work in process
    
    
    1,479
    
    
    
    2,331
    
    
    
    1,208Finished products
    
    
    4,311
    
    
    
    2,988
    
    
    
    4,064Total inventories
    
    
    15,189
    
    
    
    14,430
    
    
    
    14,647Deferred income taxes
    
    
    3,966
    
    
    
    4,195
    
    
    
    4,206Other current assets
    
    
    2,170
    
    
    
    1,553
    
    
    
    1,664Total current assets
    
    
    91,139
    
    
    
    98,852
    
    
    
    94,640Property, plant and equipment, at cost
    
    
    51,998
    
    
    
    48,812
    
    
    
    49,968Less-Accumulated depreciation
    
    
    37,384
    
    
    
    34,598
    
    
    
    35,543Net property, plant and equipment
    
    
    14,614
    
    
    
    14,214
    
    
    
    14,425Deferred income taxes
    
    
    19,607
    
    
    
    17,158
    
    
    
    17,679Other assets
    
    
    22,449
    
    
    
    15,847
    
    
    
    22,148Total assets
    
    $
    147,809
    
    
    $
    146,071
    
    
    $
    148,892Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    576
    
    
    $
    255
    
    
    $
    872Accounts payable
    
    
    6,950
    
    
    
    8,524
    
    
    
    8,033Accrued payroll and related expenses
    
    
    4,691
    
    
    
    5,406
    
    
    
    6,089Other accrued expenses
    
    
    4,241
    
    
    
    4,144
    
    
    
    4,870Income taxes payable
    
    
    2,526
    
    
    
    2,926
    
    
    
    2,733Total current liabilities
    
    
    18,984
    
    
    
    21,255
    
    
    
    22,597Long-term deferred compensation
    
    
    3,832
    
    
    
    3,380
    
    
    
    3,549Other long-term liabilities
    
    
    6,758
    
    
    
    5,256
    
    
    
    6,243Shareholders equity:Common Shares, stated value $.0125:Authorized - 80,000,000; issued and outstanding -
14,497,031 at March 31, 2007, 14,359,309 at
March 31, 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 March 31, 2007, March 31, 2006 and
September 30, 2006
    
    
    27
    
    
    
    27
    
    
    
    27Capital in excess of stated value
    
    
    35,364
    
    
    
    31,758
    
    
    
    33,703Retained earnings
    
    
    88,212
    
    
    
    85,244
    
    
    
    88,393Accumulated other comprehensive income
    
    
    980
    
    
    
    253
    
    
    
    615Common shares held in treasury, at cost
    
    
    (6,529
    )
    
    
    (1,281
    )
    
    
    (6,415
    )Total shareholders equity
    
    
    118,235
    
    
    
    116,180
    
    
    
    116,503Total liabilities and shareholders equity
    
    $
    147,809
    
    
    $
    146,071
    
    
    $
    148,892
  2




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For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    32,930
    
    
    $
    39,679
    
    
    $
    73,956
    
    
    $
    75,469Cost of goods sold
    
    
    13,290
    
    
    
    15,464
    
    
    
    29,402
    
    
    
    29,051Gross profit
    
    
    19,640
    
    
    
    24,215
    
    
    
    44,554
    
    
    
    46,418Selling, general and administrative expenses
    
    
    16,324
    
    
    
    15,706
    
    
    
    32,967
    
    
    
    30,709Product development expenses
    
    
    6,501
    
    
    
    5,971
    
    
    
    12,247
    
    
    
    10,986Operating (loss) income
    
    
    (3,185
    )
    
    
    2,538
    
    
    
    (660
    )
    
    
    4,723Investment income
    
    
    555
    
    
    
    472
    
    
    
    1,133
    
    
    
    912Interest expense
    
    
    (9
    )
    
    
    (2
    )
    
    
    (27
    )
    
    
    (6
    )(Loss) income before income taxes
    
    
    (2,639
    )
    
    
    3,008
    
    
    
    446
    
    
    
    5,629Income tax (benefit) provision
    
    
    (566
    )
    
    
    910
    
    
    
    (556
    )
    
    
    1,605Net (loss) income
    
    $
    (2,073
    )
    
    $
    2,098
    
    
    $
    1,002
    
    
    $
    4,024Basic (loss) earnings per share
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24Diluted (loss) earnings per share
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .075
    
    
    $
    .075Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .060
    
    
    $
    .060
  3




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For the Six MonthsEnded March 31,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    1,002
    
    
    $
    4,024Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    2,057
    
    
    
    1,856Stock-based compensation
    
    
    1,041
    
    
    
    1,168Other items not effecting outlay of cash
    
    
    370
    
    
    
    273Changes in working capital
    
    
    5,820
    
    
    
    (6,440
    )Other operating activities
    
    
    (1,854
    )
    
    
    1,666Net cash provided by operating activities
    
    
    8,436
    
    
    
    2,547Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (2,270
    )
    
    
    (2,329
    )Purchase of short-term investments
    
    
    (14,496
    )
    
    
    (24,903
    )Sale of short-term investments
    
    
    17,348
    
    
    
    19,959Net cash provided by (used in) investing activities
    
    
    582
    
    
    
    (7,273
    )Cash flows from financing activities:Net (payment) borrowing of short term debt
    
    
    (302
    )
    
    
    255Cash dividends
    
    
    (1,183
    )
    
    
    (1,204
    )Proceeds from stock purchase and option plans
    
    
    296
    
    
    
    230Excess tax benefits from stock-based compensation arrangements
    
    
    270
    
    
    
    70Net cash used in financing activities
    
    
    (919
    )
    
    
    (649
    )Effect of exchange rate changes on cash
    
    
    385
    
    
    
    7Increase (decrease) in cash and cash equivalents
    
    
    8,484
    
    
    
    (5,368
    )Cash and cash equivalents at beginning of period
    
    
    10,501
    
    
    
    14,397Cash and cash equivalents at end of period
    
    $
    18,985
    
    
    $
    9,029
  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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6




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Earnings Per Share
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (2,073
    )
    
    $
    2,098
    
    
    $
    1,002
    
    
    $
    4,024Weighted averages shares outstanding
    
    
    16,202,313
    
    
    
    16,492,492
    
    
    
    16,182,142
    
    
    
    16,476,913Dilutive effect of stock awards
    
    
    
    
    
    
    193,835
    
    
    
    210,922
    
    
    
    199,509Assumed purchase of stock under
stock purchase plan
    
    
    
    
    
    
    1,639
    
    
    
    
    
    
    
    1,727Weighted average shares used for
dilutive earnings per share
    
    
    16,202,313
    
    
    
    16,687,966
    
    
    
    16,393,064
    
    
    
    16,678,149Basic (loss) earnings per share
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24Diluted (loss) earnings per share
    
    $
    (0.13
    )
    
    $
    0.13
    
    
    $
    0.06
    
    
    $
    0.24
  Stock-based Compensation
  Stock option activity
  Second Quarter
    
    First QuarterFiscal 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
   8




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Compensation costs recorded
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of goods sold
    
    $
    39
    
    
    $
    27
    
    
    $
    57
    
    
    $
    55Selling, general and administrative expenses
    
    
    494
    
    
    
    499
    
    
    
    842
    
    
    
    973Product development expenses
    
    
    92
    
    
    
    71
    
    
    
    142
    
    
    
    140Stock-based compensation included in operating
expenses
    
    
    625
    
    
    
    597
    
    
    
    1,041
    
    
    
    1,168Estimated tax impact of stock-based compensation
    
    
    204
    
    
    
    201
    
    
    
    341
    
    
    
    395Stock-based compensation expense, net of tax
    
    $
    421
    
    
    $
    396
    
    
    $
    700
    
    
    $
    773
   Repurchase of Common Shares
    Financing Arrangements
   9




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Accounting for Derivatives and Hedging Activities
 ,
    Comprehensive Income
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (2,073
    )
    
    $
    2,098
    
    
    $
    1,002
    
    
    $
    4,024Unrealized (losses) gains on value of
derivative securities, net of tax
    
    
    (35
    )
    
    
    1
    
    
    
    (86
    )
    
    
    (65
    )Net unrealized investment gains (losses),
net of tax
    
    
    27
    
    
    
    (19
    )
    
    
    48
    
    
    
    (39
    )Foreign currency translation adjustments
    
    
    151
    
    
    
    103
    
    
    
    403
    
    
    
    (40
    )Comprehensive (loss) income
    
    $
    (1,930
    )
    
    $
    2,183
    
    
    $
    1,367
    
    
    $
    3,880
 10




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Geographic Segment Information
  For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales:United States
    
    $
    7,637
    
    
    $
    11,038
    
    
    $
    17,318
    
    
    $
    21,906Other Americas
    
    
    1,003
    
    
    
    1,530
    
    
    
    2,546
    
    
    
    2,586Germany
    
    
    3,593
    
    
    
    4,683
    
    
    
    10,009
    
    
    
    8,820Other Europe
    
    
    6,651
    
    
    
    8,568
    
    
    
    14,836
    
    
    
    15,789Japan
    
    
    5,514
    
    
    
    4,554
    
    
    
    10,028
    
    
    
    8,890Other Asia
    
    
    8,532
    
    
    
    9,306
    
    
    
    19,219
    
    
    
    17,478$
    32,930
    
    
    $
    39,679
    
    
    $
    73,956
    
    
    $
    75,469
  At March 31,
    
    
    At September 30,2007
    
    
    2006
    
    
    2006Long-lived assets:United States
    
    $
    30,092
    
    
    $
    24,447
    
    
    $
    30,246Germany
    
    
    5,722
    
    
    
    4,697
    
    
    
    5,406Other
    
    
    1,249
    
    
    
    917
    
    
    
    921$
    37,063
    
    
    $
    30,061
    
    
    $
    36,573
 Guarantors Disclosure Requirements
 Guarantee of original lease
  Product Warranties
  11




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For the Three Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    1,009
    
    
    $
    963
    
    
    $
    992
    
    
    $
    1,084Accruals for warranties issued during the period
    
    
    241
    
    
    
    402
    
    
    
    630
    
    
    
    658Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (29
    )
    
    
    (104
    )
    
    
    (32
    )
    
    
    (155
    )Settlements made (in cash or in kind)
during the period
    
    
    (352
    )
    
    
    (351
    )
    
    
    (721
    )
    
    
    (677
    )Balance at March 31
    
    $
    869
    
    
    $
    910
    
    
    $
    869
    
    
    $
    910
 Pension Benefits
  United States Plan
    
    
    Non U.S. PlanFor the Three Months
    
    
    For the Three MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Service costs-benefits earned during the period
    
    $
    355
    
    
    $
    411
    
    
    $
    59
    
    
    $
    52Interest cost on projected benefit obligation
    
    
    551
    
    
    
    500
    
    
    
    81
    
    
    
    67Expected return on plan assets
    
    
    (783
    )
    
    
    (722
    )
    
    
    (16
    )
    
    
    (20
    )Net loss recognition
    
    
    17
    
    
    
    109
    
    
    
    
    
    
    
    Amortization of transition asset
    
    
    
    
    
    
    (2
    )
    
    
    7
    
    
    
    6Amortization of prior service cost
    
    
    45
    
    
    
    44
    
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    185
    
    
    $
    340
    
    
    $
    132
    
    
    $
    106
 United States Plan
    
    
    Non U.S. PlanFor the Six Months
    
    
    For the Six MonthsEnded March 31,
    
    
    Ended March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Service costs-benefits earned during the period
    
    $
    710
    
    
    $
    821
    
    
    $
    118
    
    
    $
    104Interest cost on projected benefit obligation
    
    
    1,102
    
    
    
    1,000
    
    
    
    162
    
    
    
    133Expected return on plan assets
    
    
    (1,565
    )
    
    
    (1,445
    )
    
    
    (32
    )
    
    
    (39
    )Net loss recognition
    
    
    33
    
    
    
    219
    
    
    
    1
    
    
    
    Amortization of transition asset
    
    
    
    
    
    
    (5
    )
    
    
    12
    
    
    
    11Amortization of prior service cost
    
    
    89
    
    
    
    89
    
    
    
    2
    
    
    
    2Net periodic benefit cost
    
    $
    369
    
    
    $
    679
    
    
    $
    263
    
    
    $
    211
  
 12




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




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Critical Accounting Policies and Estimates
  Stock compensation plans:
  Results of Operations
 Second Quarter Fiscal 2007 Compared with Second Quarter Fiscal 2006
   14




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.
     Six Months Ended March 31, 2007 Compared with Six Months Ended March 31, 2006
    15




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16




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Financial Condition, Liquidity and Capital Resources
 Working Capital
  March 31
    
    
    September 30Current assets:Cash and cash equivalents
    
    $
    18,985
    
    
    $
    10,501Short-term investments
    
    
    33,425
    
    
    
    36,203Refundable income taxes
    
    
    314
    
    
    
    583Accounts receivable and other, net
    
    
    17,090
    
    
    
    26,836Total inventories
    
    
    15,189
    
    
    
    14,647Deferred income taxes
    
    
    3,966
    
    
    
    4,206Prepaid expenses
    
    
    2,170
    
    
    
    1,664Total current assets
    
    
    91,139
    
    
    
    94,640Current liabilities:Short-term debt
    
    
    576
    
    
    
    872Accounts payable
    
    
    6,950
    
    
    
    8,033Accrued payroll and related expenses
    
    
    4,691
    
    
    
    6,089Other accrued expenses
    
    
    4,241
    
    
    
    4,870Income taxes payable
    
    
    2,526
    
    
    
    2,733Total current liabilities
    
    
    18,984
    
    
    
    22,597Working capital
    
    $
    72,155
    
    
    $
    72,043
  Sources and Uses of Cash
  For the Six MonthsEnded March 31,2007
    
    2006Cash provided by (used in):Operating activities
    
    $
    8,436
    
    
    $
    2,547Investing activities
    
    
    582
    
    
    
    (7,273
    )Financing activities
    
    
    (919
    )
    
    
    (649
    )
 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.
    19




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ITEM 4 Controls and Procedures.
   
 PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors.
  Cyclicality of the electronics industry and timing of large orders
  Rapid technology changes
  Competitive factors
  20




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Dependence on key suppliers
  International operations, political and economic conditions
  Changes in manufacturing processes
  Tax planning strategies
  Information technology management systems
  Fixed cost of sales force
  Planned cost savings initiatives
  21




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Non-cash compensation expense
  Historical stock option grant practices
     Other risk factors
  22




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Unregistered Sales of Equity Securities and Use of Proceeds
  
 Submission of Matters to a Vote of Security Holders
  PROPOSAL
    
    FOR
    
    
    WITHHELD(a) Election of Directors:Joseph P. Keithley
    
    
    33,159,884
    
    
    
    780,155*Brian R. Bachman
    
    
    7,380,420
    
    
    
    5,074,599James T. Bartlett
    
    
    32,638,202
    
    
    
    1,301,837James B. Griswold
    
    
    33,167,792
    
    
    
    772,247Leon J. Hendrix, Jr.
    
    
    28,398,196
    
    
    
    5,541,843*Brian J. Jackman
    
    
    6,979,746
    
    
    
    5,475,273*Dr. N. Mohan Reddy
    
    
    11,159,370
    
    
    
    1,295,649Thomas A. Saponas
    
    
    29,408,695
    
    
    
    4,531,344Barbara V. Scherer
    
    
    28,889,694
    
    
    
    5,050,345R. Elton White
    
    
    28,260,883
    
    
    
    5,679,156
 
 *
    
    Elected by holders of Common Shares only.No other matters were brought before shareholders for a vote at the meeting. 
 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.
  23




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##### Table of Contents



KEITHLEY INSTRUMENTS, INC.(Registrant)Date: May 10, 2007
    
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer(Principal Executive Officer)Date: May 10, 2007
    
    /s/ Mark J. PlushMark J. PlushVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 24