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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 June 30, 2004 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
    
    (I.R.S. Employerincorporation or organization)
    
    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. YESx
    
    NOo
 Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YESx
    
    NOo
 As of August 4, 2004 there were outstanding 14,061,007 Common Shares,
without par value and 2,150,502 Class B Common Shares, without par value.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1. Financial StatementsCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosure About Market RiskITEM 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 6. Exhibits and Reports on Form 8-KSIGNATURESEX-31(A) CERTIFICATIONEX-31(B) CERTIFICATIONEX-32(A) CERTIFICATIONEX-32(B) CERTIFICATION    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements. 
 KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
(Unaudited) JUNE 30,
    
    SEPTEMBER 30,2004
    
    2003
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,180
    
    
    $
    8,875
    
    
    $
    15,739Short-term investments
    
    
    29,388
    
    
    
    26,262
    
    
    
    20,070Refundable income taxes
    
    
    278
    
    
    
    550
    
    
    
    519Accounts receivable and other, net
    
    
    19,576
    
    
    
    14,593
    
    
    
    15,607Inventories:Raw materials
    
    
    8,397
    
    
    
    7,335
    
    
    
    7,842Work in process
    
    
    2,099
    
    
    
    2,432
    
    
    
    1,513Finished products
    
    
    2,038
    
    
    
    1,316
    
    
    
    1,859Total inventories
    
    
    12,534
    
    
    
    11,083
    
    
    
    11,214Deferred income taxes
    
    
    6,754
    
    
    
    6,242
    
    
    
    4,023Other current assets
    
    
    3,377
    
    
    
    1,177
    
    
    
    1,088Total current assets
    
    
    88,087
    
    
    
    68,782
    
    
    
    68,260Property, plant and equipment, at cost
    
    
    45,943
    
    
    
    46,331
    
    
    
    45,383Less-Accumulated depreciation
    
    
    32,359
    
    
    
    31,785
    
    
    
    31,082Net property, plant and equipment
    
    
    13,584
    
    
    
    14,546
    
    
    
    14,301Deferred income taxes
    
    
    20,498
    
    
    
    19,902
    
    
    
    20,002Other assets
    
    
    12,503
    
    
    
    11,736
    
    
    
    11,623Total assets
    
    $
    134,672
    
    
    $
    114,966
    
    
    $
    114,186Liabilities and Shareholders EquityCurrent liabilities:Short-term debt
    
    $
    435
    
    
    $
    625
    
    
    $
    409Accounts payable
    
    
    7,330
    
    
    
    6,865
    
    
    
    7,071Accrued payroll and related expenses
    
    
    8,249
    
    
    
    4,299
    
    
    
    4,661Other accrued expenses
    
    
    6,240
    
    
    
    4,347
    
    
    
    4,855Income taxes payable
    
    
    8,683
    
    
    
    4,855
    
    
    
    2,796Total current liabilities
    
    
    30,937
    
    
    
    20,991
    
    
    
    19,792Other long-term liabilities
    
    
    6,818
    
    
    
    7,330
    
    
    
    7,292Deferred income taxes
    
    
    2,290
    
    
    
    548
    
    
    
    2,339Shareholders equity:Paid-in-capital
    
    
    24,527
    
    
    
    26,166
    
    
    
    25,569Retained earnings
    
    
    70,787
    
    
    
    67,041
    
    
    
    65,640Accumulated other comprehensive income (loss)
    
    
    522
    
    
    
    (183
    )
    
    
    98Unamortized portion of restricted stock
    
    
    (44
    )
    
    
    (76
    )
    
    
    (65
    )Common shares held in treasury, at cost
    
    
    (1,165
    )
    
    
    (6,851
    )
    
    
    (6,479
    )Total shareholders equity
    
    
    94,627
    
    
    
    86,097
    
    
    
    84,763Total liabilities and shareholders equity
    
    $
    134,672
    
    
    $
    114,966
    
    
    $
    114,186
 The accompanying notes are an integral part of these financial statements. 1




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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars Except for Per Share Data)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    36,822
    
    
    $
    25,264
    
    
    $
    100,553
    
    
    $
    77,415Cost of goods sold
    
    
    13,929
    
    
    
    11,819
    
    
    
    38,729
    
    
    
    35,300Selling, general and administrative expenses
    
    
    14,169
    
    
    
    12,732
    
    
    
    40,879
    
    
    
    37,558Product development expenses
    
    
    4,065
    
    
    
    3,488
    
    
    
    11,113
    
    
    
    10,080Severance charges
    
    
    
    
    
    
    535
    
    
    
    
    
    
    
    535Operating income (loss)
    
    
    4,659
    
    
    
    (3,310
    )
    
    
    9,832
    
    
    
    (6,058
    )Investment income
    
    
    126
    
    
    
    228
    
    
    
    405
    
    
    
    757Interest income (expense)
    
    
    3
    
    
    
    (85
    )
    
    
    (66
    )
    
    
    (201
    )Income (loss) before income taxes
    
    
    4,788
    
    
    
    (3,167
    )
    
    
    10,171
    
    
    
    (5,502
    )Income tax provision (benefit)
    
    
    1,611
    
    
    
    (1,241
    )
    
    
    3,280
    
    
    
    (2,146
    )Net income (loss)
    
    $
    3,177
    
    
    $
    (1,926
    )
    
    $
    6,891
    
    
    $
    (3,356
    )Basic earnings (loss) per share
    
    $
    0.20
    
    
    $
    (0.12
    )
    
    $
    0.44
    
    
    $
    (0.22
    )Diluted earnings (loss) per share
    
    $
    0.19
    
    
    $
    (0.12
    )
    
    $
    0.42
    
    
    $
    (0.22
    )Cash dividends per Common Share
    
    $
    .0375
    
    
    $
    .0375
    
    
    $
    .1125
    
    
    $
    .1125Cash dividends per Class B
Common Share
    
    $
    .030
    
    
    $
    .030
    
    
    $
    .090
    
    
    $
    .090
 The accompanying notes are an integral part of these financial statements. 2




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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited) For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    3,177
    
    
    $
    (1,926
    )
    
    $
    6,891
    
    
    $
    (3,356
    )Depreciation
    
    
    978
    
    
    
    784
    
    
    
    3,005
    
    
    
    2,813Other expenses not requiring outlay of cash
    
    
    1
    
    
    
    339
    
    
    
    207
    
    
    
    327Changes in working capital
    
    
    1,739
    
    
    
    (6,717
    )
    
    
    88
    
    
    
    (7,541
    )Other operating activities
    
    
    (1,143
    )
    
    
    (62
    )
    
    
    (301
    )
    
    
    (600
    )Net cash provided by (used in)
operating activities
    
    
    4,752
    
    
    
    (7,582
    )
    
    
    9,890
    
    
    
    (8,357
    )Cash flows from investing activities:Payments for property, plant and equipment
    
    
    (449
    )
    
    
    (989
    )
    
    
    (2,331
    )
    
    
    (3,474
    )Purchase of short-term investments
    
    
    (15,859
    )

    
    
    (60
    )
    
    
    (28,181
    )
    
    
    (6,195
    )Sale of short-term investments
    
    
    11,388
    
    
    
    1,359
    
    
    
    18,742
    
    
    
    7,809Net cash (used in) provided by
investing activities
    
    
    (4,920
    )
    
    
    310
    
    
    
    (11,770
    )
    
    
    (1,860
    )Cash flows from financing activities:Net (decrease) increase in short term debt
    
    
    (152
    )
    
    
    395
    
    
    
    18
    
    
    
    78Cash dividends
    
    
    (589
    )
    
    
    (564
    )
    
    
    (1,743
    )
    
    
    (1,689
    )Purchase of treasury stock
    
    
    
    
    
    
    (419
    )
    
    
    
    
    
    
    (2,774
    )Proceeds from employee stock purchase plans
    
    
    599
    
    
    
    129
    
    
    
    3,791
    
    
    
    1,060Other transactions, net
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    12Net cash (used in) provided by
financing activities
    
    
    (142
    )
    
    
    (447
    )
    
    
    2,066
    
    
    
    (3,313
    )Effect of exchange rate changes on cash
    
    
    (136
    )
    
    
    233
    
    
    
    255
    
    
    
    698(Decrease) increase in cash and cash equivalents
    
    
    (446
    )
    
    
    (7,486
    )
    
    
    441
    
    
    
    (12,832
    )Cash and cash equivalents at beginning of period
    
    
    16,626
    
    
    
    16,361
    
    
    
    15,739
    
    
    
    21,707Cash and cash equivalents at end of period
    
    $
    16,180
    
    
    $
    8,875
    
    
    $
    16,180
    
    
    $
    8,875
 The accompanying notes are an integral part of these financial statements. 3




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except for share data)  A.
    
    Nature of OperationsKeithley Instruments, Inc. provides a greater measure of confidence to
customers around the world by designing solutions for their emerging test
and measurement needs. By building from our strength in electrical
measurement solutions for research, Keithley has become a production test
technology leader through working partnerships with leaders in fields where
the pace of innovation and change is fast, such as global communications,
semiconductors, and components manufacturing. Keithley offers a broad line
of test and measurement products for engineers and scientists throughout the
world in dozens of disciplines. The Company markets highly accurate
instruments and data acquisition products that measure low levels of
voltage, resistance, current, capacitance, and charge, along with complete
system solutions for high volume production and assembly testing. Our
products are manufactured in Ohio and sold throughout the world in over 70
countries. Our principal markets are the United States, Europe and the
Pacific Basin, where we have subsidiaries or sales offices in 15 countries.
References herein to the Company, Keithley, we or our are to
Keithley Instruments, Inc., and its subsidiaries unless the context
indicates otherwise.B.
    
    Summary of Significant Accounting PoliciesBasis of PresentationThe consolidated financial statements at June 30, 2004 and 2003, and for the
three and nine month periods then ended have not been audited by independent
auditors, but in the opinion of the management of Keithley Instruments,
Inc., all adjustments necessary to fairly present the consolidated balance
sheets, consolidated statements of operations and consolidated statements of
cash flows for those periods have been included. All adjustments included
are of a normal recurring nature.The Companys consolidated financial statements for the three and nine month
periods ended June 30, 2004 and 2003 included in this Form 10-Q report have
been prepared in accordance with the accounting policies described in the
Notes to Consolidated Financial Statements for the year ended September 30,
2003, which were included in the Form 10-K filed on December 24, 2003.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and
the notes thereto included in the Form 10-K referred to above.The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the reported
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Examples include the allowance for doubtful
accounts, estimates of contingent liabilities, inventory valuation,
depreciation, amortization and recoverability of long-lived assets, pension
plan assumptions, and the assessment of the valuation of deferred income
taxes and income tax reserves. Actual results could differ from those
estimates.ReclassificationsCertain reclassifications have been made to prior year financial statements
and the notes to conform to the current year presentation.C.
    
    Recent Accounting PronouncementsIn December 2003, the Financial Accounting Standards Board (FASB) issued a
revision to SFAS No. 132 (revision), Employers Disclosures about
Pensions and Other Postretirement Benefits. The revision
requires additional disclosures relating to the description of the types of
plan assets, investment strategy, measurement 4




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date(s), plan obligations,
cash flows, and components of net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans recognized
during interim periods. These disclosure requirements were effective for
our second quarter of fiscal 2004. See Note K.D.
    
    Earnings Per Share, Including Pro Forma Effects of Stock-Based
CompensationBoth Common Shares and Class B Common Shares are included in calculating
earnings per share. The weighted average number of shares outstanding used
in the calculation is set forth below: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    3,177
    
    
    $
    (1,926
    )
    
    $
    6,891
    
    
    $
    (3,356
    )Weighted average shares outstanding
    
    
    16,106,374
    
    
    
    15,481,248
    
    
    
    15,840,438
    
    
    
    15,481,568Assumed exercise of stock options
    
    
    560,499
    
    
    
    
    
    
    
    613,322
    
    
    
    Assumed purchase of stock under
stock purchase plan
    
    
    35,871
    
    
    
    
    
    
    
    30,615
    
    
    
    Weighted average shares used for
dilutive earnings per share
    
    
    16,702,744
    
    
    
    15,481,248
    
    
    
    16,484,375
    
    
    
    15,481,568Basic earnings (loss) per share
    
    $
    0.20
    
    
    $
    (0.12
    )
    
    $
    0.44
    
    
    $
    (0.22
    )Diluted earnings (loss) per share
    
    $
    0.19
    
    
    $
    (0.12
    )
    
    $
    0.42
    
    
    $
    (0.22
    )
  Due to the net loss for the three months ended June 30, 2003, 406,703 and
26,103 shares are excluded from the dilutive calculation for the exercise of
stock options and purchase of stock under the stock purchase plan,
respectively. Due to the net loss for the nine months ended June 30, 2003,
396,491 and 15,937 shares are excluded from the dilutive calculation for the
exercise of stock options and purchase of stock under the stock purchase
plan, respectively. The Company has elected to continue to account for stock
issued to employees according to APB Opinion 25, Accounting for Stock
Issued to Employees and its related interpretations. Under APB No. 25, no
compensation expense is recognized in the Companys consolidated financial
statements for employee stock options except in certain cases when stock
options are granted below the market price of the underlying stock on the
date of grant. Alternatively, under the fair value method of accounting
provided for under SFAS No. 123, Accounting for Stock-Based Compensation
and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123, the measurement of
compensation expense is based on the fair value of employee stock options or
purchase rights at the grant or right date and requires the use of option
pricing models to value the options.The pro forma impact to both net income and earnings per share from
calculating stock-related compensation expense consistent with the fair
value alternative of SFAS 123 is indicated below: 5




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For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    3,177
    
    
    $
    (1,926
    )
    
    $
    6,891
    
    
    $
    (3,356
    )Add: Stock-based employee compensation
expense included in reported income/
loss, net of related tax effects
    
    
    14
    
    
    
    7
    
    
    
    47
    
    
    
    20Deduct: Stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of related tax effects
    
    
    (1,256
    )
    
    
    (1,014
    )
    
    
    (3,428
    )
    
    
    (2,790
    )Pro forma net income (loss)
    
    $
    1,935
    
    
    $
    (2,933
    )
    
    $
    3,510
    
    
    $
    (6,126
    )Pro forma basic earnings (loss) per share
    
    $
    0.12
    
    
    $
    (0.19
    )
    
    $
    0.22
    
    
    $
    (0.40
    )Pro forma diluted earnings (loss) per share
    
    $
    0.12
    
    
    $
    (0.19
    )
    
    $
    0.21
    
    
    $
    (0.40
    )
  E.
    
    Repurchase of Common SharesOn December 10, 2003, the Company announced its Board of Directors had
approved an open market stock repurchase program (the 2003 program). Under
the terms of the 2003 program, the Company may purchase up to 2,000,000
Common Shares, or approximately 13 percent of shares outstanding, over a
three-year period. The purpose of the 2003 program is to offset the dilutive
effect of stock option and stock purchase plans. Common Shares held in
treasury may be reissued in settlement of stock purchases under these plans.
The 2003 program replaces the prior program, which expired in December 2003.
The shares purchased in the prior fiscal year, were acquired under the
previous repurchase program, which had substantially the same terms as the
2003 program.The following table summarizes the Companys stock repurchase activity: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Total number of shares purchased
    
    
    
    
    
    
    32,500
    
    
    
    
    
    
    
    243,200Average price paid per share
(including commissions)
    
    
    
    
    
    $
    12.89
    
    
    
    
    
    
    $
    11.41Identity of broker-dealer used
    
    
    N/A
    
    
    Bear Stearns
    
    
    N/A
    
    
    Bear Stearnsto effect the purchases
    
    
    
    
    
    Securities Corp.
    
    
    
    
    
    Securities Corp.Number of shares purchased as part of
publicly announced repurchase programs
    
    
    
    
    
    
    32,500
    
    
    
    
    
    
    
    243,200Maximum number of shares that remain
to be purchased under the program
    
    
    2,000,000
    
    
    
    1,223,800
    (1)
    
    
    2,000,000
    
    
    
    1,223,800
    (1)
  (1)
    
    The shares remaining at June 30, 2003, expired in December 2003.  There were no Common Shares remaining in treasury under the Companys share
repurchase programs at June 30, 2004, as these shares were reissued under
stock option or stock purchase plans.Also, included in the Common shares held in treasury, at cost caption of
the consolidated balance sheets are shares repurchased to settle
non-employee Directors fees deferred pursuant to the Keithley Instruments,
Inc. 6




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1996 Outside Directors Deferred Stock Plan. Shares held in treasury
related to this plan at June 30, 2004 totaled 140,308.F.
    
    Financing ArrangementsOn March 30, 2004, the Company amended its credit agreement to extend the
term to March 31, 2005 from March 30, 2004. The agreement is a $10,000 debt
facility ($435 outstanding at June 30, 2004) that provides
unsecured, multi-currency revolving credit at various interest rates based
on Prime or LIBOR. Under the agreement, the Company is required to comply
with various financial ratios and covenants. The Company is in compliance
with these requirements as of June 30, 2004.G.
    
    Accounting for Derivatives and Hedging ActivitiesIn accordance with the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (as amended),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 hedged transactions occur. The
Company also has an interest rate swap instrument, which expires September
19, 2005. 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 designated and qualifies as a cash flow hedge are recorded in
other comprehensive income until earnings are affected by the transaction in
the underlying asset. Changes in the fair value of derivatives that are
highly effective and that qualify as foreign currency hedges are recorded in
either current period income or other comprehensive income, depending on
whether the hedge transaction is a fair value hedge or a cash flow hedge. At
June 30, 2004, the forward exchange forward contracts were designated as
foreign currency cash flow hedges. The interest rate swap instrument was
determined to be an ineffective hedge and accordingly, changes in its fair
market value are recorded in the Companys records as income or expense in
the interest income (expense) line item in the consolidated statements of
operations. The Company recorded income (expense) of $74 and ($13) for the
three month periods ended June 30, 2004 and 2003, respectively, and $136 and
$3 for the nine month periods ended June 30, 2004 and 2003, respectively,
for the interest rate swap.The Company documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. The Company also assesses whether
the derivatives that are used in hedging transactions are highly effective
in offsetting changes in cash flows of hedged items. When it is determined
that a derivative is not highly effective as a hedge, the Company
discontinues hedge accounting prospectively. Cash flows resulting from
hedging transactions are classified in the consolidated statements of cash
flows in the same category as the cash flows from the item being hedged. 7




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H.
    
    Comprehensive IncomeComprehensive income for the three and nine month periods ended June 30,
2004 and 2003 is as follows: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    3,177
    
    
    $
    (1,926
    )
    
    $
    6,891
    
    
    $
    (3,356
    )Unrealized gains (losses) on value
of derivative securities
    
    
    7
    
    
    
    (9
    )
    
    
    75
    
    
    
    (97
    )Net unrealized investment
(losses) gains
    
    
    (8
    )
    
    
    (42
    )
    
    
    98
    
    
    
    (201
    )Foreign currency translation
adjustments
    
    
    (228
    )
    
    
    60
    
    
    
    251
    
    
    
    464Comprehensive income
    
    $
    2,948
    
    
    $
    (1,917
    )
    
    $
    7,315
    
    
    $
    (3,190
    )
  I.
    
    Geographic Segment InformationThe Companys business is to develop test and measurement solutions to
verify customers product performance or aid in their product development
process. The Companys customers are engineers, technicians and scientists
in manufacturing, product development and research functions within a range
of industries. Although the Companys products vary in capability,
sophistication, use, size and price, they basically test, measure and
analyze electrical and physical properties. The Companys gross margins,
customers, production processes and distribution methods are similar for all
its products. Accordingly, the company reports a single Test and Measurement
segment. The Companys net sales and long-lived assets 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
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Net sales:United States
    
    $
    12,975
    
    
    $
    8,040
    
    
    $
    32,158
    
    
    $
    24,255Europe
    
    
    12,114
    
    
    
    7,975
    
    
    
    33,496
    
    
    
    25,722Pacific Basin
    
    
    8,421
    
    
    
    6,773
    
    
    
    28,128
    
    
    
    23,161Other
    
    
    3,312
    
    
    
    2,476
    
    
    
    6,771
    
    
    
    4,277$
    36,822
    
    
    $
    25,264
    
    
    $
    100,553
    
    
    $
    77,415
 At June 30,
    
    At September 30,2004
    
    2003
    
    2003Long-lived assets:United States
    
    $
    21,286
    
    
    $
    21,698
    
    
    $
    21,131Germany
    
    
    4,154
    
    
    
    3,851
    
    
    
    4,055Other
    
    
    647
    
    
    
    733
    
    
    
    738$
    26,087
    
    
    $
    26,282
    
    
    $
    25,924
 8




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J.
    
    Guarantors Disclosure RequirementsGuarantee of original leaseThe Company has assigned the lease of its former office space in Reading,
Great Britain to a third party. In the event the third party defaults on the
monthly lease payments, the Company would be responsible for the payments
until the lease expires on July 14, 2009. If the third party were to
default, the maximum amount of future payments (undiscounted) the Company
would be required to make under the guarantee would be approximately $1,055
through July 14, 2009. The Company has not recorded any liability for this
item, as it does not believe that it is probable that the third party will
default on the lease payments.Product WarrantiesGenerally, the Companys products are covered under a one-year warranty;
however, certain products are covered under a two or three-year warranty. It
is the Companys policy to accrue for all product warranties based upon
historical in-warranty repair data. In addition, the Company accrues for
specifically identified product performance issues. The Company also offers
extended warranties for certain of its products for which revenue is
recognized over the life of the contract period. The costs associated with
servicing the extended warranties are expensed as incurred. The revenue, as
well as the costs related to the extended warranties is immaterial for the
three and nine month periods ending June 30, 2004 and 2003.A reconciliation of the estimated changes in the aggregated product warranty
liability for the three and nine month periods ending June 30, 2004 and 2003
is as follows: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Beginning balance
    
    $
    1,636
    
    
    $
    1,378
    
    
    $
    1,498
    
    
    $
    1,415Accruals for warranties issued during the period
    
    
    422
    
    
    
    451
    
    
    
    1,158
    
    
    
    1,171Accruals related to pre-existing warranties
(including changes in estimates and
expiring warranties)
    
    
    (196
    )
    
    
    81
    
    
    
    (334
    )
    
    
    (150
    )Settlements made (in cash or in kind)
during the period
    
    
    (309
    )
    
    
    (437
    )
    
    
    (769
    )
    
    
    (963
    )Balance at June 30
    
    $
    1,553
    
    
    $
    1,473
    
    
    $
    1,553
    
    
    $
    1,473
 9




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K.
    
    Pension BenefitsThe Company has noncontributory defined benefit pension plans covering all
of its eligible employees in the United States and certain non-U.S.
employees. Pension benefits are based upon the employees length of service
and a percentage of compensation above certain base levels. The Company
also has an unfunded supplemental retirement plan (SERP) for former key
employees, which includes retirement, death and disability benefits. Net
periodic benefit cost for this plan is $2 and $34 for the three month
periods ended June 30, 2004 and 2003, respectively, and $6 and $101 for the
nine month periods ended June 30, 2004 and 2003, respectively, and is
included in the table below. A summary of the components of net periodic
pension cost for the three and nine month periods ending June 30, 2004 and
2003 is shown below: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    355
    
    
    $
    374
    
    
    $
    1,064
    
    
    $
    1,124Interest cost
    
    
    512
    
    
    
    498
    
    
    
    1,539
    
    
    
    1,495Expected return on plan assets
    
    
    (657
    )
    
    
    (625
    )
    
    
    (1,969
    )
    
    
    (1,874
    )Net loss recognition
    
    
    1
    
    
    
    6
    
    
    
    1
    
    
    
    17Prior service cost amortization
    
    
    45
    
    
    
    66
    
    
    
    137
    
    
    
    197Member contributions
    
    
    (4
    )
    
    
    (4
    )
    
    
    (12
    )
    
    
    (11
    )Amortization of net gain
    
    
    (6
    )
    
    
    (6
    )
    
    
    (17
    )
    
    
    (18
    )Net periodic benefit cost
    
    $
    246
    
    
    $
    309
    
    
    $
    743
    
    
    $
    930
  L.
    
    Accrued Severance LiabilityDuring the third and fourth quarters of fiscal 2003, the Company recorded
pretax charges of $535 and $310, respectively, for severance relating to a
reduction in force of approximately 23 individuals, or less than 5 percent
of the worldwide work force. The majority of the individuals were in sales
or sales support functions.A reconciliation of the changes in the aggregated accrued severance
liability for the three and nine month periods ended June 30, 2004 are as
follows: For the Three Months
    
    For the Nine MonthsEnded June 30,
    
    Ended June 30,2004
    
    2004Balance, beginning of period
    
    $
    125
    
    
    $
    503Payments made
    
    
    
    
    
    
    (406
    )Foreign exchange revaluation
    
    
    
    
    
    
    28Balance, end of period
    
    $
    125
    
    
    $
    125
 10




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ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations. Forward-Looking Statements Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical information provided herein are forward-looking
statements. Forward-looking statements generally include words such as
anticipates, expects, believes, intends, estimates, and similar
expressions, and include those statements regarding our expectations,
intentions and beliefs with regard to the future, including our efforts
involving lean manufacturing, ERP and CRM system implementations, investments
to develop RF products, cost reduction efforts, conditions of the electronics
industry, general economic conditions, technology or other trends and known
uncertainties. These forward-looking statements involve certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated in the forward-looking statements as a result of many factors,
including those more fully described under the caption Factors That May Affect
Future Results and elsewhere in this Quarterly Report. These forward-looking
statements reflect managements analysis, judgment, belief or expectation only
as of the date hereof. We assume no obligation to update any forward-looking
statements. Overview Our business is to design, develop, manufacture and market complex electronic
instruments and systems geared to the specialized needs of electronics
manufacturers for high-performance production testing, process monitoring,
product development and research. Our primary products are integrated systems
used to source, measure, connect, control or communicate electrical DC, RF or
optical signals. Our customers are engineers, technicians and scientists in
manufacturing, product development and research functions. During the first
nine months of fiscal 2004, orders from our semiconductor customers comprised
approximately 30 percent of the total, wireless communications orders were
approximately 20 percent, precision electronic components and subassembly
manufacturers orders were approximately 25 percent, research and education made
up about 20 percent, optoelectronics orders were less than 5 percent, with the
remainder coming from customers in a variety of other industries. Although our
products vary in capability, sophistication, use, size and price, they
generally test, measure and analyze electrical, optical or physical properties.
As such, we consider our business to be in a single test and measurement
industry segment. Many of the industries we serve, including but not limited to the semiconductor
industry, the wireless communications industry, the optoelectronics industry,
and precision electronic components and subassemblies manufacturers, have
historically been very cyclical and have experienced periodic downturns. The
downturns have had, and may have in the future, a material adverse impact on
our customers demand for equipment, including test and measurement equipment.
The severity and length of a downturn also may affect overall access to
capital, which could adversely affect the Companys customers. The health of
our customers and worldwide economies continue to improve. However, there can
be no assurance that the underlying end markets we serve will continue to
improve or that the recent increased levels of business activity will continue
as a trend into the future. Effective January 1, 2003, we began to sell certain products in the United
States through our own direct sales force. Prior to January 1, 2003, we sold
through sales representatives to whom we paid a commission. The change in our
sales channel allowed us to build a sales network of focused, highly trained
sales engineers who specialize in measurement expertise and problem-solving for
customers and enhanced our ability to sell not only in the United States, but
to U.S. companies with foreign manufacturing operations. During the first
quarter of fiscal 2003, we incurred approximately $600 in one-time costs as we
paid both commissions to sales representatives and salaries to our own sales
employees. We have previously disclosed that during times of depressed sales,
the financial impact of an all-employee sales force would be negative to the
bottom line, and that during times of increasing sales, the financial impact
should be positive. So, in addition to being a more efficient business model
to grow our sales, we are seeing the financial benefits from leveraging our
selling and support costs. Beginning near the end of fiscal 2002, we began to incur costs in preparation
for the transition to new ERP (Enterprise Resource Planning) and CRM (Customer
Relationship Management) software systems. We went live with ERP in the United
States and Europe in the third quarter of fiscal 2003 and the first quarter of
fiscal 2004, respectively. Additionally, we went live with CRM in the United
States during the first quarter of fiscal 2004. We will continue to roll out
additional ERP and CRM modules and locations throughout 2004. 11




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Over the last two years, we have made major changes to the way we purchase
materials and manufacture our products as we have adopted lean manufacturing
principles. During the initial start-up phase, our overall manufacturing costs
increased. During the fourth quarter of fiscal 2003, we began our next phase of
the lean implementation, which involves fine-tuning our processes and improving
our execution. We have seen significant improvements in our lean manufacturing
processes. Customer lead times are shorter resulting in improved on-time
customer delivery, which reduced backlog slightly. Additionally, we have
continued to lower our cost to manufacture, which contributed to the gross
profit margin improvement during the three and nine month periods ending June
30, 2004. Critical Accounting Policies and Estimates Management has identified the Companys critical accounting policies. These
policies have the potential to have a more significant impact on our financial
statements, either because of the significance of the financial statement item
to which they relate, or because they require judgment and estimation due to
the uncertainty involved in measuring, at a specific point in time, events
which will be settled in the future. Our critical accounting policies and estimates are described in Managements
Discussion and Analysis included in the 2003 annual report on Form 10-K filed
on December 24, 2003, and include use of estimates, revenue recognition,
inventories, income taxes, pension plan, and stock compensation plans. In
addition, foreign currency translation was added to our critical accounting
policies and estimates in the first quarter of fiscal 2004 Form 10-Q filed on
February 17, 2004. Foreign currency translation Our revenues, costs and expenses, and assets and liabilities are exposed to
changes in foreign currency exchange rates as a result of our global
operations. For those subsidiaries that operate in a local currency functional
environment, all assets and liabilities are translated into U.S. dollars using
current exchange rates, and revenues and expenses are translated using weighted
average exchange rates in effect during the period. Resulting translation
adjustments are reported as a separate component of accumulated comprehensive
income (loss) in shareholders equity. For those entities that operate in a
U.S. dollar functional currency environment, foreign currency assets and
liabilities are remeasured into U.S. dollars at current exchange rates. Gains
or losses from foreign currency remeasurement are generally immaterial and are
included in the Selling, general and administrative expenses caption of the
consolidated statements of operations. Results of Operations Third Quarter Fiscal 2004 Compared with Third Quarter Fiscal 2003 Net sales of $36,822 for the third quarter of fiscal 2004 increased 46 percent
from sales of $25,264 in the prior years third quarter. Approximately three
percentage points of the increase was due to the weaker U.S. dollar with the
remaining increase due to higher volume. Sales were higher in all major
geographies with U.S. sales up 61 percent, Europe up 52 percent and the Pacific
Basin region up 24 percent from the prior years quarter. Sequentially, sales
increased eight percent from the second quarter of fiscal 2004. Orders of $35,977 for the third quarter of fiscal 2004 increased 20 percent
from last years orders of $30,075. Geographically, orders were up five percent
in the United States, up 17 percent in the Pacific Basin, and up 49 percent in
Europe. Compared to the prior years third quarter, orders from semiconductor
customers were essentially flat, orders from wireless customers increased
approximately 120 percent and orders from precision electronic components and
subassembly manufacturers were up about 15 percent. The majority of the
increase in our wireless business came from one large customer as they retooled
existing lines to support production of their new, multi-feature handsets.
Research and education customer orders decreased approximately 12 percent.
Order backlog decreased $258 during the quarter to $15,412 at June 30, 2004.
The Company does not track net sales in the same manner as it tracks orders by
major customer group. However, sales trends generally correlate to Company
order trends although they may vary between quarters depending upon the orders
which remain in backlog. Cost of goods sold as a percentage of net sales decreased to 37.8 percent from
46.8 percent in the prior years third quarter, a 9.0 percentage point
improvement.The improvement was due to spreading fixed manufacturing costs
over 12




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higher sales volume, as well as lower manufacturing costs as a result of the
progress we made in fine-tuning our lean manufacturing process. Nearly all
products the Company sells are manufactured in the United States; therefore,
cost of goods sold expressed in dollars is generally not affected by changes in
foreign currencies. However, as a percentage of net sales, it is affected as
net sales dollars are affected by currency exchange rate changes. As such,
gross margins benefited due to the weaker dollar in the third quarter of fiscal
2004 versus the prior years quarter. The effect of foreign exchange hedging on
cost of goods sold was immaterial in both periods. Selling, general and administrative expenses of $14,169 increased $1,437, or
11.3 percent, from last years third quarter, although such expenses decreased
as a percentage of net sales to 38.5 percent from 50.4 percent last year. The
increase in costs was primarily due to higher incentive and internal commission
costs that are tied to financial performance and higher costs outside the
United States due to the weaker dollar partially offset by lower consulting
costs and foreign exchange expense. Product development expenses for the quarter were $4,065, or 11.0 percent of
net sales, up $577, or 16.5 percent, from last years $3,488, or 13.8 percent
of sales.We have increased our product development budget and resources for RF
products beginning in the first quarter of fiscal 2004. This expansion will
allow us to accelerate our RF product development plans over time.
Additionally, product development expenses increased due to higher incentive
costs that are tied to financial performance. All product development
activities are done in the United States, therefore, changes in foreign
exchange rates have no impact on these expenses. The Company reported operating income for the third quarter of fiscal 2004 of
$4,659 versus a loss from operations of $3,310 for the prior years quarter.
Higher sales and better gross margins, partially offset by higher operating
costs, accounted for the increase. Investment income was $126 for the quarter compared to $228 in last years
third quarter. Lower interest rates accounted for the decrease. The Company recorded interest income for the quarter of $3 compared to interest
expense of $85 in the prior year. The increase is due primarily to a favorable
interest rate swap fair market value adjustment recorded in the third quarter
of fiscal 2004 compared to an unfavorable adjustment in the prior years third
quarter. See Note G. The Company recorded income taxes at a 33.6 percent rate for the quarter. The
rate increased from the preceding quarter primarily due to the establishment of
a valuation allowance for foreign tax credits generated that may not be
utilized. Last years third quarter tax benefit was recorded at a 39.2 percent
rate. The Company reported net income of $3,177, or $0.19 per diluted share, compared
to a net loss of $1,926, or $0.12 per diluted share, in last years third
quarter. The increase from the prior year was largely due to higher sales and
improved gross margins, offset somewhat by higher operating expenses described
above. Nine Months Ended June 30, 2004 Compared with Nine Months Ended June 30, 2003 Net income for the first nine months of fiscal 2004 was $6,891, or $0.42 per
diluted share, compared to a net loss of $3,356, or $0.22 per diluted share,
last year. Net sales of $100,553 increased 30 percent from $77,415 reported for the nine
month period last year. Approximately five percentage points of the increase
were due to the effect of a weaker U.S. dollar with the remaining increase due
to higher volume. Sales were up in all major geographies with the United States
up 33 percent, Europe up 30 percent, and the Pacific Basin region up 21
percent. Orders of $98,026 for the nine months ending June 30, 2004, increased 26
percent from $77,716 last year. Geographically, orders increased 15 percent in
the United States, increased 38 percent in Europe and increased 21 percent in
the Pacific Basin. See the Overview section of Managements Discussion and
Analysis of Financial Condition and Results of Operations for a breakout of the
first nine months of fiscal 2004 orders by major industry group. 13




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Cost of goods sold as a percentage of net sales decreased to 38.5 percent from
45.6 percent for the nine month period last year. The improvement was due to
lower manufacturing costs as a result of the progress made in fine-tuning our
lean manufacturing process as well as spreading fixed manufacturing costs over
higher sales volume.Nearly all products the Company sells are manufactured in
the United States; therefore, cost of goods sold expressed in dollars is
generally not affected by changes in foreign currencies. However, as a
percentage of net sales, it is affected as net sales dollars are affected by
currency exchange rate changes. As such, gross margins benefited due to the
weaker dollar in the first nine months of fiscal 2004 versus the prior year.
The effect of foreign exchange hedging on cost of goods sold was immaterial in
both periods. Selling, general and administrative expenses of $40,879 increased nine percent
from $37,558 in the same period last year, but decreased as a percentage of net
sales to 40.7 from 48.5. The increase in dollars was primarily due to higher
incentive and internal commission costs that are tied to financial performance
and higher costs outside the United States due to the weaker dollar offset by
lower commissions paid to outside third parties primarily as a result of our
movement to a direct sales force in the U.S and lower consulting costs. Product development expenses for the first nine months of fiscal 2004 of
$11,113, or 11.0 percent of sales, were up $1,033, or 10 percent, from $10,080,
or 13.0 percent of net sales, last year. Much of the change was due to the
increase in the development of RF products. Additionally, product development
expenses increased due to higher incentive costs that are tied to financial
performance. Investment income during the first nine months of fiscal 2004 was $405 versus
$757 in the prior year. Lower average cash and short-term investment balances
and lower interest rates accounted for the decrease. The Company recorded interest expense of $66 in the first nine months of fiscal
2004 compared to $201 in the prior year. The decrease is due primarily to
favorable adjustments recorded for the fair market value of the interest rate
swap in the first nine months of fiscal 2004. See Note G. The Company recorded a tax provision for the first nine months of fiscal 2004
at a 32.3 percent rate. Last years effective tax benefit was recorded at a
39.0 percent rate. The rate is lower than the statutory rate in fiscal 2004 due
mainly to the extraterritorial income exclusion benefit and a favorable
provision return adjustment for fiscal 2003 partially offset by a valuation
allowance established for certain foreign tax credits. Financial Condition, Liquidity and Capital Resources Cash and cash equivalents and short-term investments totaled $45,568 at June
30, 2004, an increase of $3,952 during the quarter and $9,759 from September
30, 2003. We consider our short-term investments to be available for working
capital needs as the investments consist of highly liquid corporate bonds and
notes, mutual funds, and U.S. government and agency securities. Short-term debt
was $435 at June 30, 2004, a decrease of $161 during the quarter and an
increase of $26 from September 30, 2003. We have no long-term debt. Net cash
provided by operating activities was $4,752 during the third quarter and $9,890
for the nine months ended June 30, 2004. We also received $599 through our
employee stock option and purchase plans in the third quarter and $3,791 during
the nine months ended June 30, 2004. Cash was used for capital expenditures of
$449 and $2,331 and to pay dividends to our shareholders of $589 and $1,743 for
the three and nine month periods, respectively, ending June 30, 2004. During
the first quarter of fiscal 2004, our Board of Directors authorized an open
market stock repurchase program to replace the program which expired in
December 2003. See Note D. We did not repurchase any of our stock during the
first nine months of fiscal 2004. We expect to finance capital spending, working capital requirements and the
stock repurchase program with cash and short-term investments on hand and cash
provided by operations. At June 30, 2004, we had available unused lines of
credit with domestic and foreign banks aggregating $14,565, all of which was
short-term. Our credit agreement was amended during the second quarter to
extend the terms of the agreement to March 31, 2005. See Note F. Outlook We are feeling positive about the health of the electronics industry and
believe our customers have good growth potential. We continue to believe that
our ability to achieve a higher level of orders in the future will be driven by
our customers spending patterns as they invest in new capacity or upgrade
their lines for their new product 14




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offerings, as well as our ability to gain market share. We continue to increase
our investment in new product development, particularly for RF measurements for
wireless communications and semiconductor manufacturers as we believe these
areas are key in allowing us to meet our growth objectives. Based upon current expectations, the company is estimating sales for the fourth
quarter of fiscal 2004, which will end September 30, 2004, to range between
$36,000 and $38,000. Pretax earnings are expected to be between 10 percent and
the lower teens as a percentage of sales. Factors That May Affect Future Results Many of the industries we serve, including but not limited to the semiconductor
industry, the wireless communications industry, the optoelectronics industry,
and precision electronic components and subassemblies manufacturers, have
historically been very cyclical and have experienced periodic downturns. The
downturns have had, and may have in the future, a material adverse impact on
our customers demand for equipment, including test and measurement equipment.
The severity and length of a downturn also may affect overall access to
capital, which could adversely affect the Companys customers. The health of
our customers and worldwide economies continue to improve. However, there can
be no assurance that the underlying end markets we serve will continue to
improve or that the recent increased levels of business activity will continue
as a trend into the future. In addition, our orders are cancelable by
customers, and consequently, orders outstanding at the end of a reporting
period may not result in realized sales in the future. We are managing our cost structure to reallocate resources to areas that we
feel will provide the best long-term benefits to our customers and
shareholders. For instance, we are working to reduce our manufacturing costs,
while increasing our product development investments for RF technologies. If we
fail to cut costs in some areas as we increase them in others, our operating
results will be adversely affected. Our business relies on the development of new high technology products and
services to provide solutions to our customers complex measurement needs. This
requires anticipation of customers changing needs and emerging technology
trends. We must make long-term investments and commit significant resources
before knowing whether our expectations will eventually result in products that
achieve market acceptance. We incur significant expenses developing new
products that may or may not result in significant sources of revenue and
earnings in the future. In many cases our products compete directly with those offered by other
manufacturers. If any of our competitors were to develop products or services
that are more cost-effective or technically superior, demand for our product
offerings could slow. Our products contain large quantities of electronic components and
subassemblies that in some cases are supplied through sole or limited source
third-party suppliers. Although we do 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, our inventory is subject to risks of changes in market demand for
particular products. The resulting excess and/or obsolete inventory could have
an adverse impact on our results of operations. We currently have subsidiaries or sales offices located in 15 countries
including the United States, and non-U.S. sales accounted for approximately
two-thirds of our revenue during the first nine months of fiscal 2004. Our
future results could be adversely affected by several factors, including
changes in foreign currency exchange rates, political unrest, wars and acts of
terrorism, changes in other economic or political conditions, trade protection
measures, import or export licensing requirements, unexpected changes in
regulatory requirements, natural disasters, and the potential for a
reoccurrence of the SARS virus. We have been implementing a lean manufacturing initiative in our manufacturing
facilities, which are located in Solon, Ohio. We incurred start-up costs during
fiscal 2002 and fiscal 2003, which adversely affected gross margins. We are
currently fine-tuning our lean manufacturing processes and improving execution.
The gross margin improvements in the first nine months of fiscal 2004 represent
the benefits from our lean manufacturing initiative, however, future benefits
could be adversely affected if we are unable to continue to effectively
fine-tune our lean manufacturing initiative. 15




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We pay taxes in several jurisdictions throughout the world. We utilize
available tax credits and other tax planning strategies in an effort to
minimize our overall tax liability. Our estimated tax rate for fiscal 2004
could change from what is currently anticipated due to changes in tax laws of
various countries, changes in our overall tax planning strategy, or countries
where earnings or losses are incurred. At June 30, 2004, we had a valuation
allowance against certain deferred tax assets, and had not established
valuation allowances against other deferred tax assets based on tax strategies
planned to mitigate the risk of impairment to these assets. Accordingly, if
facts or financial results were to change thereby impacting the likelihood of
realizing the deferred tax assets, our tax rate and therefore our earnings
could be affected. Throughout fiscal 2004, we will continue our implementation of ERP and CRM
systems. Our results could be adversely affected if we are unable to implement
the systems without significant interruptions in accounting systems, order
entry, billing, manufacturing and other customer support functions. Other risk factors include but are not limited to changes in our customer and
product mix, which affects our gross margins, credit risk of customers,
potential litigation, claims, regulatory and administrative proceedings arising
in the normal course of business, as well as terrorist activities and armed
conflicts. 
 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk. The Company is exposed to a variety of risks, including foreign currency
fluctuations, interest rate fluctuations and changes in the market value of its
short-term investments. In the normal course of business, we employ
established policies and procedures to manage our exposure to fluctuations in
foreign currency values and interest rates. The Company is exposed to foreign currency exchange rate risk primarily through
transactions denominated in foreign currencies. We currently utilize foreign
exchange forward contracts or option contracts to sell foreign currencies to
fix the exchange rates related to near-term sales and effectively fix our
margins. Generally, these contracts have maturities of three months or less.
Our policy is to only enter into derivative transactions when we have an
identifiable exposure to risk, thus not creating additional foreign currency
exchange rate risk. In our opinion, a 10 percent adverse change in foreign
currency exchange rates would not have a material effect on these instruments
and therefore our results of operations, financial position or cash flows. The Company also has an interest rate swap instrument originally entered into
to mitigate the risk of interest rate changes related to long-term debt. The
agreement effectively fixes the interest rate on a notional $3,000 of variable
rate debt; however, the interest rate swap instrument was determined to be an
ineffective hedge and accordingly, changes in the fair market value of the
interest rate swap are recorded in the Companys records as income or expense.
The instrument expires September 19, 2005. In managements opinion, a 10
percent adverse change in interest rates would not have a material effect on
this instrument and therefore on our results of operations, financial position
or cash flows. The Company maintains a short-term investment portfolio consisting of United
States government backed notes and bonds, corporate notes and bonds, and mutual
funds consisting primarily of government notes and bonds. An increase in
interest rates would decrease the value of certain of these investments.
However, a 10 percent increase in interest rates would not have a material
impact on our results of operations, financial position or cash flows. 
 ITEM 4. Controls and Procedures. The Company carried out an evaluation, under the supervision and with
participation of the Companys management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures as of the end of
the period covered by this report pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the periodic SEC filings for
the Company. There was no change in the internal control over financial reporting that
occurred during the third quarter of fiscal 2004 that has materially affected
or is reasonably likely to materially affect the Companys internal controls
over financial reporting. 16




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PART II. OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. On December 10, 2003, the Company announced its Board of Directors had
approved an open market stock repurchase program (the 2003 program). Under
the terms of the 2003 program, the Company may purchase up to 2,000,000 Common
Shares, or approximately 13 percent of shares outstanding, over a three-year
period. The Company made no share repurchases during the third quarter of
fiscal 2004. See Note E. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits. The following exhibits are filed herewith: 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.  (b)
    
    Reports on Form 8-K. On April 28, 2004, the Company
furnished a Current Report on Form 8-K reporting the results of
operations for its second fiscal quarter ended March 31, 2004, under
Item 12 - Results of Operations and Financial Condition. 17




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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: August 9, 2004
    
    /s/ Joseph P. KeithleyJoseph P. KeithleyChairman, President and Chief Executive Officer(Principal Executive Officer)Date: August 9, 2004
    
    /s/ Mark J. PlushMark J. PlushVice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 18