UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 1-9965

KEITHLEY INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

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

Address of principal executive offices: 28775 Aurora Road, Solon, Ohio, 44139
Registrant’s telephone number, including area code: (440) 248-0400
Securities registered pursuant to section 12(b) of the Act:

Common Shares, Without Par Value		New York Stock Exchange
(Title of Each Class)		(Name of Each Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

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

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ

The aggregate market value of the Common Shares of the Registrant held by non-affiliates was $85.74 million and the aggregate market value of the Class B Common Shares of the Registrant held by non-affiliates was $0.13 million for a total aggregate market value of all classes of Common Shares held by non-affiliates of $85.87 million at March 31, 2010, the Registrant’s most recently completed second fiscal quarter. While the Class B Common Shares are not listed for public trading on any exchange or market system, shares of that class are convertible into Common Shares at any time on a share-for-share basis. The market values indicated were calculated based upon the last sale price of the Common Shares as reported by the New York Stock Exchange on March 31, 2010, which was $6.60.

As of December 8, 2010 (last practicable date), there were outstanding 13,778,741 Common Shares (net of shares repurchased held in treasury), without par value, and 2,150,502 Class B Common Shares, without par value.

 

 

Keithley Instruments, Inc.
10-K Annual Report

Table of Contents

		PAGE
PART I
Item 1 Business			3
Item 1A Risk Factors			7
Item 1B Unresolved Staff Comments			9
Item 2 Properties			9
Item 3 Legal Proceedings			9
PART II:
Item 5 Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			11
Item 6 Selected Financial Data			13
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 7A Quantitative and Qualitative Disclosures About Market Risk			23
Item 8 Financial Statements and Supplementary Data			24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			53
Item 9A Controls and Procedures			53
Item 9B Other Information			54
PART III:
Item 10 Directors; Executive Officers and Corporate Governance			54
Item 11 Executive Compensation			56
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			79
Item 13 Certain Relationships and Related Transactions, and Director Independence			80
Item 14 Principal Accountant Fees and Services			80
PART IV:
Item 15 Exhibits and Financial Statement Schedules			81
SIGNATURES			85
Exhibit 22.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

Statements and information included in this Annual Report on Form 10-K that are not purely historical are forward-looking statements intended to be covered by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements in this Report on Form 10-K include statements regarding Keithley’s expectations, intentions, beliefs, and strategies regarding the future, including recent trends, cyclicality, growth in the markets into which Keithley sells, conditions of the electronics industry and the economy in general, deployment of our own sales employees throughout the world, expected cost savings from recent cost-cutting actions, investments to develop new products, the potential impact of adopting new accounting pronouncements, our future effective tax rates, liquidity position, ability to generate cash, expected growth, and obligations under our retirement benefit plans.

When used in this report, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “opinions,” “forecasts,” “may,” “could,” “future,” “forward,” “potential,” “probable,” and similar expressions are intended to identify forward-looking statements.

These forward-looking statements involve risks and uncertainties. We may make other forward-looking statements from time to time, including in press releases and public conference calls and webcasts. All forward-looking statements made by Keithley are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements. It is important to note that the forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those included in such forward-looking statements. Some of these risks and uncertainties are discussed below in Item 1A Risk Factors of this Form 10-K.

PART I

ITEM 1 — BUSINESS

General

Keithley Instruments, Inc. was founded in 1946 and organized as an Ohio corporation in 1955. Its principal executive offices are located at 28775 Aurora Road, Solon, Ohio 44139; telephone (440) 248-0400. References herein to the “Company,” “Keithley,” “we” or “our” are to Keithley Instruments, Inc. and its subsidiaries unless the context indicates otherwise.

On December 8, 2010, the Company completed the transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) dated September 29, 2010, among Danaher Corporation (“Danaher”), Aegean Acquisition Corp. and the Company. Pursuant to the Merger Agreement, Aegean Acquisition Corp. was merged into the Company and each outstanding Common Share and Class B Common Share of the Company was converted into the right to receive $21.60 per share in cash.

We design, develop, manufacture, and market complex electronic instruments and systems geared to the specialized needs of engineers at electronics manufacturers and academic institutions for research, product development, high-performance production testing and process monitoring. We currently offer approximately 500 products used to source, measure, connect, control or communicate direct current (DC) and alternating current (AC) signals. Our product offerings include integrated systems solutions, along with instruments and data acquisition modules that can be used as system components or stand-alone solutions. Customers of our products are scientists and engineers in the worldwide electronics industry involved with advanced materials research, semiconductor device development and fabrication, and the production of electronic systems and products.

During the fiscal year ended September 30, 2010, or fiscal 2010, approximately 35 percent of our orders were received from the semiconductor industry; approximately 5 percent came from the wireless communications customer group; approximately 25 percent came from the precision electronics customer group, which includes customers in automotive, computers and peripherals, medical equipment, aerospace and defense, and manufacturers of components; and approximately 25 percent came from research and education customers. The remainder of orders came 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 industry segment.

Business Strategy

We have focused our efforts on identifying test applications within segments of the electronics test and measurement industry that have high rates of technology change, long-term growth in demand, and a meaningful market size, and that leverage our measurement capabilities and/or other test applications. New products are an important factor in our sales growth strategy, and we have generally sought to maintain our investment in product development activity spending levels to expand our product offering and accelerate the introduction of new products. During fiscal 2009, however, the significant decline in our revenues as a result of global economic conditions made it difficult for us to continue product development spending at historical levels. As a result, we selectively reduced these costs, most notably by exiting our S600 parametric test line, reducing worldwide headcounts, eliminating or curtailing various discretionary spending items, and in fiscal 2010, selling our RF product line. Our product development spending is now more focused on expanding and enhancing our core product lines.

We work closely with our customers to build partnerships in order to anticipate their current and future measurement needs. A thorough understanding of their applications coupled with our precision measurement technology enables us to add value to our customers’ processes improving the quality, throughput and yield of their products, as well as to determine which test applications we will choose to serve. We believe our ability to serve our customers has been aided by deploying our own sales and support employees throughout the Americas, Europe and Asia, as opposed to relying on an independent sales force.

We leverage our applications expertise and product platforms to other industries. By concentrating on interrelated industries and product technologies, we are able to gain insight into measurement problems experienced by one set of customers that can be addressed and offered as solutions for others. Our applications knowledge and technology solutions in one area build credibility as we expand to related fields, often using the same measurement platforms that are already proven among a variety of customers.

Product Offerings

We have approximately 500 products used to source, measure, connect, control or communicate direct current and alternating current signals. Product offerings include integrated systems solutions, along with instruments and data acquisition modules that can be used as system components or stand-alone solutions. Prices per product vary. Our semiconductor characterization systems range in price from $25,000 to $200,000. Bench top instruments generally range in price from $1,000 to $25,000 on a stand-alone basis and from $15,000 to $35,000 when used as a system. Switch systems generally range in price from $2,000 to $50,000. PC plug-in boards are used for process control and data collection applications. Selling prices generally range from $200 for a single module to $4,000 for a system. In February 2009, we announced the exit of our S600 series parametric test product line. We continued to accept orders through fiscal 2010 and will provide technical support, calibration, and repair services through 2014 or longer if parts are available. In November 2009, we sold substantially all of our RF product line, which will continue to be supported by Agilent Technologies, Inc. (Agilent).

New Products During Fiscal Year 2010

Our objective is to grow faster than the overall test and measurement industry by pursuing applications that outpace overall demand for test and measurement equipment. New products play a critical role in providing us the opportunity to achieve this higher growth rate. During fiscal 2010, we introduced several new products and enhancements that add complementary capability to our product offering. These products provide our customers with critical tools to serve their production test application and research and development needs.

We introduced the Model 4225-PMU Ultra-Fast I-V instrument module, the latest addition to our growing range of instrumentation options for the Model 4200-SCS Semiconductor Characterization System. It integrates ultra-fast voltage waveform generation and current/voltage measurement capabilities into the Model 4200-SCS’s test environment, and allows semiconductor companies and researchers to gain further insight as they work on new materials, shrinking geometries and new devices. Its measurement capabilities make it well-suited for applications that demand both ultra-fast voltage outputs and synchronized current-voltage measurements. Unlike competitive units that require up to three separate test stands, the Model 4225-PMU is able to deliver this measurement performance within a single instrument platform.

We introduced the Model 3732 Quad 4x28 Ultra-High Density Reed Relay Matrix Card, which was designed for automated switch measure applications that require multiple instrument connections as well as high crosspoint density and high speed. The Company’s Series 3700 System Switch/Multimeter and Plug-in Card Family offers users the accuracy and flexibility of instrument-grade switching integrated with low-noise, high performance multimeter instruments.

The Company released its ACS Basic Edition Version 1.2 Semiconductor Parametric Test Software for semiconductor test and measurement applications. This software upgrade adds new levels of usability, convenience and productivity in the characterization of component and discrete semiconductor devices.

The Company also introduced the six-slot Model 707B and single-slot Model 708B switch matrix mainframes, which are optimized for both research and development and production semiconductor test applications. Both of these new mainframes incorporate the Company’s virtual backplane technology implemented with our Test Script Processor architecture which provides substantial throughput advantages over competitive models. These switch mainframes are also key components of the S530 parametric test system.

Geographic Markets and Distribution

During fiscal 2010, the majority of our products were manufactured in Ohio and were sold in over 80 countries throughout the world. Our principal markets are Asia, Europe and the United States.

In the United States, our products are sold by our own sales personnel and through direct marketing and catalog mailings. Outside the United States, we market our products directly in countries in which we have sales offices and through distributors or manufacturers’ representatives in other countries. We have subsidiary sales and service offices located in Great Britain, Germany, France, the Netherlands, Italy, Japan, Malaysia and China. We also have sales offices in Belgium, Korea, Taiwan, India and Singapore.

Sources and Availability of Raw Materials

Our products require a wide variety of electronic and mechanical components, most of which are purchased. We have multiple sources for the vast majority of the components and materials we use; however, there are some instances in which the components are obtained from a sole-source supplier. If we were unable to purchase components or materials from a sole-source supplier, we could experience a temporary adverse impact on operations; however, we believe alternative sources could be found. Although shortages of purchased materials and components have been experienced from time to time, these items have generally been available as needed.

Patents

Electronic instruments of the nature we design, develop and manufacture generally cannot be patented in their entirety. Although we hold patents with respect to certain of our products, we do not believe our business is dependent to any material extent upon any single patent or group of patents because of the rapid rate of technological change in the industry.

Seasonal Trends and Working Capital Requirements

Our business is not subject to significant seasonal trends. However, many of the industries we serve, including the semiconductor industry, the wireless communications industry and other sectors of the global electronics industry, historically have been cyclical. We generally maintain adequate working capital to support our business and do not have any unusual working capital requirements.

Customers

Our customers generally are involved in production test, engineering research and development, electronic service or repair, and educational and governmental research. During fiscal year 2010, no one customer accounted for more than 10 percent of our sales. We do not believe that the loss of any one customer would materially affect our sales or net income.

Backlog

Our backlog of unfilled orders amounted to approximately $18.0 million as of September 30, 2010, and approximately $12.2 million as of September 30, 2009. We expect that substantially all of the orders included in the 2010 backlog will be delivered during fiscal 2011. A portion of orders included in backlog may be canceled by the customer prior to shipment. The level of backlog at any given time will be affected by the timing of our receipt of orders, the speed with which those orders are filled and our customers’ requested delivery schedules. Accordingly, our backlog as of September 30, 2010, may not necessarily represent the actual amount of shipments or sales for any future period.

Competition

The Company competes on the basis of quality, performance, service, product availability, and price, with quality and performance frequently being the most important. There are many firms in the world engaged in the manufacture of electronic measurement instruments, some of which are larger and have greater financial resources than the Company. In general, the Company competes with a number of companies in specialized areas of the test and measurement industry and one large broad line measurement products supplier, Agilent Technologies, Inc.

Research and Development

Our engineering development activities are directed toward the development of new products that will complement, replace or add to the products currently included in our product line. We do not perform basic research, but on an ongoing basis we utilize new component and software technologies in the development of our products. The highly technical nature of our products and the rapid rate of technological change in the industry require a large and continuing commitment to engineering development efforts. Product development expenses were $12.1 million in 2010, $18.0 million in 2009 and $25.5 million in 2008, or approximately 10%, 18% and 17% of net sales, respectively, for each of the last three fiscal years.

Government Regulations

We believe our current operations and uses of property, plant and equipment conform in all material respects to applicable laws and regulations. Keithley has not experienced, nor do we anticipate, any material claim or material capital expenditure in connection with environmental laws and other regulations.

Employees

As of September 30, 2010, the Company employed approximately 490 persons, 161 of whom were located outside the United States. None of our employees are covered under the terms of a collective bargaining agreement, and we believe that relations with our employees are good.

Foreign Operations and Export Sales

Information related to foreign and domestic operations and export sales is contained in Note P of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

During fiscal 2010, non-U.S. sales accounted for more than 70 percent of our revenue. There are several risks attendant to such foreign operations. These risks include increased exposure to the risk of foreign currency fluctuations and the potential economic and political impacts from conducting business in foreign countries. With the exception of changes in the value of foreign currencies, which are not possible to predict, we believe our foreign subsidiaries and other larger international markets are in countries where the economic and political climates generally are stable. The Company also must comply with foreign regulations, which may increase the complexity of conducting its business.

Executive Officers of the Registrant

Certain information regarding our executive officers is set forth below:

Name		Position		Age
Joseph P. Keithley		Chairman of the Board of Directors, President and Chief Executive Officer			61
Daniel Faia		Vice President Sales and Support			43
Mark A. Hoersten		Vice President Marketing			52
Larry L. Pendergrass		Vice President New Product Development			55
Mark J. Plush		Senior Vice President and Chief Financial Officer			61
Linda C. Rae		Executive Vice President and Chief Operating Officer			45

Joseph P. Keithley was elected Chairman of the Board of Directors in February 1991. He was elected Chief Executive Officer in November 1993, and President in May 1994. He has been a Director since 1986, and was elected Vice Chairman of the Board in February 1988. Mr. Keithley joined the Company in 1976 and held various positions in production, customer service, sales and marketing prior to being elected Vice President of Marketing in 1986. From 1986 until his election to Chief Executive Officer in 1993, Mr. Keithley held various management positions within the Company. He is Chairman of the Board of Nordson Corporation, a worldwide producer of precision dispensing equipment and manufacturer of equipment used in the testing and inspection of electronic components as well as technology-based systems for curing and surface treatment processes, and a director of Brush Engineered Materials, Inc., which is an integrated producer of high performance specialty engineered materials used in a variety of electrical, electronic, thermal and structural applications.

			Daniel Faia joined the Company in February 2009 as Vice President Sales and Support. Prior to joining Keithley, Mr. Faia served as Vice President/Worldwide Sales and Marketing at Eagle Test Systems with responsibility for managing global sales, applications and customer service efforts. Prior to joining Eagle Test, Mr. Faia was employed by Teradyne, Inc. in various sales and product marketing positions from March 1997 to April 2004.
			Mark A. Hoersten was elected Vice President Business Management in May 2003, and in September 2008 his role was expanded to Vice President of Marketing. He joined the Company in June 1980 as a Design Engineer and held various positions in product development and marketing before becoming Vice President, including Director of Marketing, Telecommunications Test Business Manager, and General Manager.
			Larry L. Pendergrass joined the Company in May 2003 as Vice President New Product Development. Prior to joining Keithley, Mr. Pendergrass had over 20 years experience in research and development, product development, and manufacturing engineering in various roles including Section Manager, Project Manager and Project Leader with Agilent Technologies and Hewlett-Packard.
			Mark J. Plush was elected Vice President and Chief Financial Officer in October 1998 and was named Senior Vice President in February 2010. Mr. Plush joined the Company in March 1982 as Controller and has been an officer of the Company since 1989.
			Linda C. Rae was elected Executive Vice President and Chief Operating Officer in December 2005. Ms. Rae joined the Company in September 1995 as a Product Marketer and has held various marketing positions with the Company since then, including Component Test Business Manager from July 1999 to June 2000, Business Manager of Optoelectronics from June 2000 to April 2001, General Manager from April 2001 to May 2003, and Senior Vice President and General Manager from May 2003 to December 2005.

Available Information

Our website address is http://www.keithley.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) available to the public free of charge through our website as soon as reasonably practicable after making such filings. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

ITEM 1A — RISK FACTORS

Cyclicality of the electronics industry and timing of the current economic downturn and large orders

Many of the industries we serve, including but not limited to the semiconductor, wireless communications, and precision electronic industries, 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. These conditions could impact our ability to effectively manage inventory levels, create unabsorbed costs due to lower net sales and ultimately result in write downs of assets, which would adversely affect our profitability.

The factors leading to and the severity and length of a downturn are difficult to predict and there can be no assurance that we will appropriately anticipate changes in the underlying end markets we serve or that any increased levels of business activity will continue as a trend into the future. 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. Orders from our top 25 customers during the quarter can generally vary between 20-35 percent of our total quarterly orders. This can cause our financial results to fluctuate from quarter to quarter.

Rapid technology changes

Our business strategy includes significant investment in and expenditures for product development. We sell our products in several industries that are characterized by rapid and significant technological changes, frequent new product introductions and enhancements and evolving industry standards. Without the timely introduction of new products, our products will likely become technologically obsolete over time. Our new products may not gain market acceptance and may not result in significant sources of revenue and earnings in the future. In addition, revenues from our current products may not be sufficient to support development expenses for new generations of our current products or expansions of our product line. If we are unable to make new product development investments or such investments do not result in future earnings, our operating results could be adversely affected.

Competitive factors

The Company competes on the basis of quality, performance, service, product availability, and price, with quality and performance frequently being the most important. There are many firms in the world engaged in the manufacture of electronic measurement instruments, some of which are larger and have greater financial resources than we do and/or have established significant reputations within the test and measurement industry and with the customer base we serve. If any of our competitors were to develop products or services that were more cost-effective or technically superior to ours, or if we were unable to differentiate our product offerings from those of our competitors, demand for our products could slow. Additionally, aggressive competition could cause downward pricing pressure, which would reduce our gross margins or cause us to lose market share.

Dependence on key personnel

Our future success depends partly on the continued service of research, engineering, sales, marketing, manufacturing, executive and administrative personnel. Competition for employees with the skills we require is strong in any technology industry. We believe our pay levels remain competitive; however, there can be no assurance that we will be able to retain one or more key or other personnel. Additionally, there is competition for personnel having certain highly technical specialties. The loss of one or more key or other employees, a decrease in our ability to attract additional qualified employees, or a delay in hiring key personnel could each have a material adverse effect on our business.

Dependence on key suppliers

Our products contain large quantities of electronic components and subassemblies that in some cases are supplied through sole or limited source third-party suppliers. The current economic climate has increased the possibility that these suppliers could become insolvent or otherwise go out of business. Additionally, vendors can obsolete part(s) unexpectedly. As a result, there can be no 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. Our inability to obtain critical parts and supplies or any resulting excess and/or obsolete inventory could have an adverse impact on our results of operations.

International operations, political and economic conditions

We currently have subsidiaries or sales offices located in 14 countries outside the United States, and international sales accounted for more than 70 percent of our revenue during fiscal 2010. Our international sales and operations are subject to significant risks and difficulties, including fluctuating foreign currency exchange rates, trade protection measures, domestic and foreign import or export licensing requirements, unexpected changes in legal and regulatory requirements, compliance with customs regulations, the credit risk, financial condition of, and relationships with local customers and distributors, and cultural differences in the conduct of business. Any of these factors could have a negative impact on our revenue and operating results.

Effective tax rates

We are subject to taxation and pay taxes in numerous countries and other jurisdictions throughout the world. Our future effective tax rate may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of profitability from country to country, changes in valuation allowances against our deferred tax assets, changes in accounting for income taxes and recently enacted and future changes in tax laws in jurisdictions in which we operate. Any of these factors could cause us to experience an effective tax rate significantly different than our current expectations, which could have an adverse effect on our future results of operations.

Changes in manufacturing processes and capacity

We have implemented a lean manufacturing environment in our sole manufacturing facility located in Solon, Ohio. Because we cannot immediately adapt our production capacities to rapidly changing market conditions, when demand does not meet our expectations, our manufacturing capacity will likely exceed our production requirements. Excess manufacturing capacity will result in unabsorbed or underabsorbed fixed costs which would adversely affect our results of operations.

Information technology management systems

Our IT systems are critical to our normal business operations, and we rely on them to provide adequate, accurate and timely information for our order entry, billing, manufacturing and other customer support functions. Any failure in those systems could adversely affect our operating results. We have outsourced the hosting of these systems to a third-party vendor. If our third-party vendor experiences shut downs or other service-related issues, it could interrupt our normal business processes including our ability to process orders, ship our products, bill and service our customers, and otherwise run our business, resulting in a material adverse effect on our revenue and operating results.

Fixed cost of sales force

We have built our direct sales force throughout the world with our own employees rather than utilizing third-party sales representatives. This action increases our fixed costs, and our results could be adversely affected during times of depressed sales.

Impairment charges for definite-lived and long-lived assets

We are required to assess recoverability of the carrying value for property, plant and equipment and other long-lived tangible assets whenever there are indicators of impairment, such as an adverse change in business climate. An impairment charge would reduce our earnings.

Historical stock option grant practices

We are subject to an SEC inquiry regarding our historical stock option practices, the outcome of which we cannot predict. It could result in significant new expenses, diversion of management’s attention from our business, commencement of formal similar, administrative or litigation actions against the Company or our current or former officers or directors, significant fines or penalties, indemnity commitments to current and former officers and directors and other material harm to our business. The SEC also may disagree with the manner in which we have accounted for and reported (or not reported) the financial impact of past option grants or other potential accounting errors, and there is a risk that its inquiry could lead to circumstances in which we may have to restate our prior financial statements, amend prior SEC filings or otherwise take actions not currently contemplated.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

The Company’s principal administrative, marketing, manufacturing and development activities are conducted at a Company-owned building in Solon, Ohio. This building is approximately 125,000 square feet and sits on approximately 26 acres of land. The Company also owns an additional facility located in Solon, Ohio that is adjacent to its executive offices. The additional facility is approximately 50,000 square feet on 5.5 acres of land and is currently being leased to others, but is available for expansion should additional space be required. Additionally, we have a number of leased facilities for our sales and service offices in the United States and overseas. We believe the facilities owned and leased are well maintained, adequately insured and suitable for their present and intended uses.

ITEM 3 — LEGAL PROCEEDINGS

As previously disclosed, in August 2006, the Company’s Board of Directors formed a Special Committee of independent directors to investigate the Company’s stock option practices since the beginning of the fiscal year ended September 30, 1995. The Committee retained independent counsel (the “Independent Counsel”) to assist it in the investigation. Following appointment of the Special Committee, the Company voluntarily notified the staff of the Securities and Exchange Commission of the Special Committee investigation. In September 2006, the Company received notice that the SEC was conducting an inquiry into the Company’s option grant practices.

In December 2006, the Company announced the Special Committee’s findings, which were adopted by the Board of Directors and were as follows:

•

There was no evidence of “backdating” annual stock option grants prior to the date of approval by the Board of Directors.

•

There was a multi-day delay by management in setting the exercise price for annual stock option grants in 2000, 2001 and 2002. The delay resulted in the options having a lower exercise price than the price on the date of Board approval.

•

Although the Special Committee determined that the terms of the Company’s stock incentive plans required the options to be priced on the date the Board approved them, there was no finding of intentional misconduct on the part of senior management or any other Keithley officer, director or employee responsible for the administration of the Company’s stock option grants.

•

Based on evidence gathered and analyzed by the Independent Counsel, the Special Committee found the dates selected by management for the annual grants in 2000-2002 are the appropriate measurement dates for accounting purposes. Accordingly, the Company was not required to record any compensation expense with respect to the annual option grants in 2000-2002, and the Company was not required to restate its financial statements as a result of these grants.

•

The Special Committee concluded that the Company’s public filings regarding annual options grants during the years reviewed were accurate; there is no evidence that the Company timed the grant date or pricing of annual stock option grants to take advantage of material non-public information; and there was no wrong doing or lack of oversight by the Company’s independent directors or the Human Resources and Compensation Committee of the Board of Directors (the “Compensation Committee”).

•

The Special Committee also reviewed the Company’s practices regarding stock option grants, other than its annual grants, which are generally grants of smaller numbers of options to new hires and to existing employees for promotions. The Special Committee concluded that management exceeded certain of the authority granted to management by the Company’s stock option plans and the Compensation Committee, but that these grants involved small numbers of shares and were largely the result of ministerial errors by management.

To the Company’s knowledge, no further action was taken by the SEC during fiscal 2010 with respect to this matter.

On October 4, 2010, a purported class action and derivative lawsuit was filed related to the then-pending merger of the Company into a subsidiary of Danaher Corporation (“Danaher”) pursuant to the Agreement and Plan of Merger, dated as of September 29, 2010, by and among the Company, Danaher and Aegean Acquisition Corp. The case, Donald Freidlander v. Danaher Corporation, Brian R. Bachman, James B. Griswold, Leon J. Hendrix, Jr., Brian J. Jackman, Joseph P. Keithley, N. Mohan Reddy, Thomas A. Saponas, Barbara V. Scherer and Keithley Instruments, Inc., was filed on October 4, 2010, in the Court of Common Pleas of Cuyahoga County, Ohio (Case No. CV 10 738257). The complaint alleged, among other things, that the Company’s directors breached their fiduciary duties in connection with the merger and that Danaher aided and abetted the Company’s directors in their alleged breaches of fiduciary duties. The relief sought by the plaintiff included a declaration that the action is properly maintainable as a derivative and class action, a declaration that the merger is unlawful and unenforceable, an injunction barring the merger, rescinding (to the extent already implemented) the merger or any of the terms thereof and the payment of costs and disbursements of the action, including attorneys’ and experts’ fees. On November 15, 2010, counsel for all parties reached an agreement in principle regarding the settlement of the Action. The parties are waiting for court approval of the settlement.

PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Shares traded on the New York Stock Exchange (the “NYSE”) under the symbol KEI. There was no established public trading market for the Class B Common Shares; however, they were readily convertible on a one-for-one basis into Common Shares.

The following table shows the high and low sales prices of the Company’s Common Shares as reported on the NYSE and the amount of cash dividends declared on the Company’s Common Shares and Class B Common Shares during the periods indicated.

														Cash Dividends
										Cash Dividends				Per Class B
		High				Low				Per Common Share				Common Share
Fiscal 2010
First Quarter		$	5.50			$	3.20			$	.0125			$	.010
Second Quarter			7.70				4.50				.0125				.010
Third Quarter			10.89				6.27				.0375				.030
Fourth Quarter			21.51				8.15				.0375				.030
Fiscal 2009
First Quarter		$	8.64			$	2.02			$	.0375			$	.030
Second Quarter			3.91				1.86				.0375				.030
Third Quarter			4.59				2.76				.0125				.010
Fourth Quarter			6.45				3.47				.0125				.010

Pursuant to the Merger Agreement, at the closing of the merger, on December 8, 2010, all Keithley Common Shares and Class B Common Shares were converted into the right to receive $21.60 per Common Share in cash, without interest and less any required withholding taxes. Accordingly, Keithley is a wholly owned subsidiary of Danaher.

Equity Compensation Plan Information as of September 30, 2010

										Number of securities remaining
		Number of securities to be				Weighted-average				available for future issuance
		issued upon exercise of				exercise price of				under equity compensation
		outstanding options,				outstanding options,				plans (excluding securities
		rights or warrants				rights or warrants				reflected in column (a))
Plan category		(a)				(b)				(c)
Equity compensation plans approved by security holders			3,127,176	(1)		$	14.65				722,669	(2)
Equity compensation plans not approved by security holders			—				—				—
Total			3,127,126	(1)		$	14.65				722,669	(2)

Stock Performance Graph

The graph below compares the five year cumulative return from investing $100 on September 30, 2005 in each of the Company’s Common Shares, the Russell 2000 Index, the Russell MicroCap and the Standard & Poor’s Information Technology Index. We included the Russell MicroCap as we believe it is a more comparable index given our current size, and also because it is the index against which the targets of certain of our incentive compensation programs are measured. The comparison assumes that all dividends are reinvested.

		Fiscal Year Ending
Company/Index/Market		9/30/2005				9/30/2006				9/30/2007				9/30/2008				9/30/2009				9/30/2010
Keithley Instruments, Inc.		$	100.00			$	88.32			$	74.33			$	59.63			$	40.75			$	160.24
Russell 2000		$	100.00			$	109.92			$	123.49			$	105.60			$	95.52			$	108.27
Russell Micro Cap		$	100.00			$	107.02			$	117.39			$	90.96			$	83.75			$	89.97
S&P Information Technology		$	100.00			$	103.26			$	127.35			$	97.57			$	105.86			$	117.14

ITEM 6 — SELECTED FINANCIAL DATA

The following data has been derived from our consolidated financial statements. Consolidated Balance Sheets as of September 30, 2010 and 2009 and the related Consolidated Statements of Operations, Cash Flows and Shareholders’ Equity for each of the three years in the period ended September 30, 2010 and notes thereto appear elsewhere in this Annual Report.

(In thousands of dollars		For the years ended September 30,
except for per share data)		2010				2009				2008				2007				2006
Operating Results:
Net sales		$	126,870				102,527				152,468				143,658				155,212
Gross margin percentage			64.8	%			53.7	%(1)			58.9	%			59.8	%			61.3	%
Severance and related charges		$	(124	)			6,926				1,377				—				—
Gain on the sale of RF product line		$	(2,894	)			—				—				—				—
Gain on the sale of building		$	(1,862	)			—				—				—				—
Transaction costs associated with pending merger		$	1,250				—				—				—				—
Income (loss) before income taxes		$	25,397				(19,366	)			(4,356	)			(1,685	)			9,913
Provision (benefit) for income taxes		$	519				31,138	(2)			(1,943	)			(1,336	)			1,552
Net income (loss)		$	24,878				(50,504	)			(2,593	)			(349	)			8,361
Basic earnings (loss) per share		$	1.58				(3.23	)			(0.16	)			(0.02	)			0.51
Diluted earnings (loss) per share		$	1.53				(3.23	)			(0.16	)			(0.02	)			0.50
Common Stock Information:
Cash dividends per Common Share		$	0.100				0.100				0.150				0.150				0.150
Cash dividends per Class B Common Share		$	0.080				0.080				0.120				0.120				0.120
Weighted average number of shares outstanding- diluted			16,228				15,648				15,854				16,207				16,567
At fiscal year-end:
Dividend payout ratio			6.5	%			n/m				n/m				n/m				30.0	%
Shareholders’ equity per share		$	3.51				2.14				6.12				6.76				7.03
Closing market price		$	21.51				5.54				8.37				10.60				12.75
Balance Sheet Data:
Total assets		$	104,656				73,102				137,978				146,406				148,892
Current ratio			3.4				2.9				3.3				3.8				4.2
Short-term debt		$	—				—				23				799				872
Long-term obligations		$	22,428				19,382				12,939				11,102				9,792
Shareholders’ equity		$	56,935				36,610				103,302				113,024				116,503
Total debt-to-capital			0.0	%			0.0	%			0.0	%			0.7	%			0.7	%
Other Data:
Return on average shareholders’ equity			53.2	%			-72.2	%			-2.4	%			-0.3	%			7.3	%
Return on average total assets			28.0	%			-47.9	%			-1.8	%			-0.2	%			5.7	%
Return on net sales			19.6	%			-49.3	%			-1.7	%			-0.2	%			5.4	%
Number of employees at year end			490				557				696				698				673
Sales per employee		$	242.3				163.7				218.7				209.6				234.5
Cash flow:
Net cash provided by (used in) operating activities		$	18,904				(5,416	)			1,706				5,641				5,985
Ten-year compound annual growth rate:
Net sales			(1.7	)%			0.2	%			2.6	%			1.5	%			2.7	%
Net income			1.7	%			n/m				n/m				n/m				n/m

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In Thousands of Dollars except for per share information.

Introduction and Overview

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide investors with an understanding of the operating performance and financial condition of Keithley Instruments, Inc. A discussion of our business, including our strategy for growth, products and competition, is included in Part I of this Form 10-K.

Business Overview

Our business is to design, develop, manufacture and market complex electronic instruments and systems geared to the specialized needs of engineers at electronics manufacturers and academic institutions for research, product development, high-performance production testing and process monitoring. Our primary products are integrated systems used to source, measure, connect, control or communicate electrical direct current (DC) and alternating current (AC) signals. Our product offerings include integrated systems solutions, along with instruments and data acquisition modules that can be used as system components or stand-alone solutions. Our customers are engineers, technicians and scientists in manufacturing, product development and research functions. During fiscal 2010, approximately 35 percent of our orders were received from the semiconductor industry; approximately five percent came from the wireless communications customer group; approximately 25 percent came from the precision electronics customer group, which includes customers in automotive, computers and peripherals, medical equipment, aerospace and defense, and manufacturers of components; and approximately 25 percent came from research and education customers. The remainder of orders came 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 industry segment.

The most important factors influencing our ability to grow revenue are (i) our customers’ spending patterns as they invest in new capacity or upgrade manufacturing lines for new product offerings, (ii) our ability to offer interrelated products with differentiated value that solve our customers’ most compelling test challenges, and (iii) our success in penetrating key accounts with our globally deployed sales and service team. We continue to believe that our strategy of pursuing a focused set of applications will allow us to grow faster than the overall test and measurement industry.

Many of the industries we serve, including the semiconductor, wireless communications and precision electronic components industries, have historically been very cyclical and have experienced periodic downturns followed by periods of secular growth. Our customers across all industries and geographies demonstrated reduced order patterns, beginning in the fourth quarter of fiscal 2008 and continuing through mid-fiscal year 2009. In response to these conditions, we took various cost reduction actions beginning in the fourth quarter of fiscal 2008 and continuing through the first quarter of fiscal 2010 to reduce our future operating expenses. These actions included headcount reductions, a hiring freeze with the exception of a few critical replacements, reductions in our capital expenditures, and travel and other discretionary spending, a pay reduction for the majority of U.S. exempt employees and unpaid days off for U.S. non-exempt employees, the suspension of the annual bonus program for management and lower sales commissions payments to the sales force, the suspension of the Company’s 401(k) match and the exit of our S600 series product line. In addition, we sold substantially all of the assets related to our RF product line. Global semiconductor device sales have now exceeded levels achieved just prior to the financial crisis that began in the fall of calendar 2008, and we have experienced sequential increases in orders from our customers since the second quarter of fiscal 2009. Because of that improvement coupled with the previous cost reduction measures that are still in place, effective January 1, 2010, we restored compensation levels and work hours for U.S. exempt and non-exempt employees, respectively, reinstated the Company’s 401(k) match, and recorded variable costs for both annual and long-term incentive plans. The Company recorded approximately $7,000 of expense during fiscal year 2010 as a result of the aforementioned costs.

Our focus during the past several years has continued to center on building long-term relationships and strong collaborative partnerships with our global customers to serve their measurement needs. Toward that end, we rely primarily upon employing our own sales personnel to sell our products, and using sales representatives, to whom we pay a commission, in areas where we believe it is not cost-beneficial to employ our own people. This sales channel strategy allows us to build a sales network of focused, highly trained sales engineers who specialize in measurement expertise and problem-solving for customers and enhances our ability to sell our products to customers with worldwide operations. We believe our ability to serve our customers has been strongly enhanced by deploying our own employees throughout the United States, Europe and Asia. As a substantial portion of our selling costs are fixed, we expect that selling through our own sales force will be favorable to earnings during times of strong sales, but will be unfavorable during times of depressed sales.

We continue to believe that both the semiconductor and wireless areas drive change within the electronics industry. These technology changes create many opportunities for us and we continued the introduction of new products and enhancements during fiscal 2010. Our research and education customers’ work involves advanced materials research in areas including nanotechnology, organic materials and thin film research. These materials are ultimately used in the next generation of semiconductors and cutting-edge electronic devices. Additionally, our semiconductor customers include large integrated device manufacturers and foundries, fabless manufacturers as well as solar cell developers. We believe these customers will continue to generate demand because they continually are improving existing devices or developing new devices that in turn, create new measurement requirements.

On December 8, 2010, the Company completed the transactions contemplated by the Merger Agreement, pursuant to which Aegean Acquisition Corp. was merged into the Company and each outstanding Common Share and Class B Common Share of the Company was converted into the right to receive $21.60 per share in cash. Also pursuant to the Merger Agreement, all outstanding stock options, restricted award units and performance award units were, at the time of closing, fully vested and cancelled in exchange for the merger consideration of $21.60 for each underlying Common Share, less any exercise price per share.

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.

Use of estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that 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 period. Actual results could differ materially from those estimates.

Revenue recognition:

Keithley Instruments, Inc. recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Delivery is considered to have been met when title and risk of loss have transferred to the customer. Upon shipment, a provision is made for estimated costs that may be incurred for product warranties and sales returns. Revenue earned from service contracts is recognized ratably over the contractual service periods and is not material to the Company’s consolidated results. Shipping and handling costs are recorded as Cost of goods sold in the Consolidated Statements of Operations.

Inventories:

Inventories are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard, which approximates actual cost on a first-in, first-out basis. We periodically review our recorded inventory and estimate a reserve for obsolete or slow-moving items. If actual demand and market conditions are less favorable than those projected by management, additional reserves may be required. If actual market conditions are more favorable than anticipated, our cost of sales will be lower than expected in that period.

Income taxes:

Keithley is subject to taxation from federal, state and international jurisdictions. The annual provision for income taxes and the determination of the resulting deferred tax assets and liabilities involves a significant amount of judgment by management. Judgment also is applied in determining whether the deferred tax assets will be realized in full or in part. In evaluating our ability to recover our net deferred tax assets, which totaled $2,601 at September 30, 2010, we considered all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of pretax operating income in each tax jurisdiction, the reversal of book versus tax differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with plans and estimates we are using to manage the underlying business.

We have established a valuation allowance against deferred tax assets, including net operating losses, or NOLs, in the United States and in certain foreign jurisdictions which may not be realized due to the uncertainty of future profit levels in the respective jurisdictions. We intend to maintain this valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance, until such NOLs are utilized or until such NOLs expire. Our income tax expense recorded in the future will be reduced to the extent of offsetting decreases in our valuation allowance. The realization of certain tax credits and the remaining deferred tax asset is dependent upon achieving future forecasted taxable income. If actual results are significantly less than our forecast, an additional valuation allowance may be recorded against the remaining net deferred tax assets, which totaled $2,601 at September 30, 2010. An increase in the valuation allowance would result in additional income tax expense in such period and could have a material impact on our future earnings and financial position. In addition, the calculation of our tax liabilities involves uncertainties in the application of complex tax regulations in various tax jurisdictions. We recognize potential liabilities for anticipated tax issues based upon our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine that the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge of income tax expense would result.

Pension plans:

Our retirement benefit plans are a significant cost of doing business and their related obligations will inherently be settled far in future periods. Therefore, the ultimate amount of those obligations is subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by us. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied to determine service cost and interest cost to arrive at pension income or expense for the year. Because the assumption regarding the rate of return on plan assets is a long-term estimate, it can differ materially from the actual return realized on plan assets in any given year, particularly when markets are highly volatile. We have analyzed the rates of return on assets used and determined that the rates we use are reasonable based on the plans’ historical performance relative to the overall markets in the countries where the plans are in place, as well as the plans’ asset allocation between equities and fixed income investments. Assumed discount rates are used in measurements of the projected and accumulated benefit obligations, and the service and interest cost components of net periodic pension cost. See Note H to Consolidated Financial Statements for further details.

The discount rate for the United States plan was determined as of the September 30, 2010, measurement date by constructing a portfolio of bonds with cash flows from coupon payments and maturities matching the projected benefit payments under the Plan. Bonds considered in constructing the model portfolio are rated AA- or higher by Standard & Poor’s. Callable bonds were excluded from consideration in this analysis. The longest maturity of any bond included in the data is August 15, 2037. Benefit payments beyond 2037 were discounted back to this year using interest rates taken from the Citigroup Pension Discount Curve Comparison to Above Median as of September 30, 2010. The matching bond portfolio produces coupon income in excess of what is needed to meet early period benefit payments. The excess coupon income is accumulated as interest, based on the Citigroup Pension Discount Curve Comparison to Above Median as of September 30, 2010, until such time as it is used to pay benefits.

The discount rates used in determining the recorded liability as of year end for our United States pension plan were 5.375% for 2010, 6.0% for 2009 and 7.0% for 2008. The 62.5 and 100 basis point decrease from 2009 to 2010 and 2008 to 2009, respectively, reflects the decline in interest rates stemming from the global economic crisis that began in late fiscal 2008 and continued in fiscal 2010; this situation pushed bond yields lower than previous levels. The discount rates for our German pension plan were 4.5% for 2010, 6.5% for 2009 and 6.25% for 2008. The decrease in the fiscal 2010 rate reflects the reduction in yields for corporate bonds during the year. The slight increase in the fiscal 2009 rate reflects the change in spread between government and highly-rated Corporate bond yields for Euro instruments having durations similar to the German pension liability.

Actual rate of return on United States plan assets was 11.1% for fiscal 2010 compared to an expected rate of return of 8.0%. A 0.25% increase (decrease) in the expected rate of return would have produced a $116 decrease (increase) in fiscal 2010 expense.

The pension plan assets in Germany are invested through an insurance company. The insurance company directs the investments for this insurance contract. Because of the type of investments in the insurance contract, an expected rate of return of 4.5% was assumed. Management will continue to assess the expected long-term rate of return on plan assets and discount rate assumptions for both the United States plan and the non-U.S. plans based on relevant market conditions as prescribed by U.S. GAAP and will make adjustments to the assumptions as appropriate. Pension income or expense is allocated to Cost of goods sold, Selling, general and administrative expenses, and Product development expenses in the accompanying Consolidated Statements of Operations.

Stock compensation plans:

We grant non-cash compensation in the form of non-qualified stock options, performance award units and restricted share units. In accordance with U.S. GAAP, the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates. We use an expected stock-price volatility assumption primarily based upon observed historical volatility of Keithley’s stock price, as there is not a substantial enough market for exchange-traded options. For stock options granted during fiscal year 2010, we used a stock-price volatility assumption of 63%. With regard to the weighted-average expected option life assumption, we consider several factors, including the historical option exercise behavior of our employees, historical cancellation rates of past options, and the current life of options outstanding and vested. During fiscal year 2010, we used an expected life assumption of 4.75 years. We also are required to estimate an expected forfeiture rate when recognizing compensation cost. We review this rate during each reporting period and adjust it when necessary based upon our past history of actual forfeitures. The total estimated unrecognized compensation at September 30, 2010 was $1,658 and was expected to be recognized over a weighted average period of 2.5 years.

The final number of common shares to be issued pursuant to the performance award units is determined at the end of each three-year performance period. The awards granted in fiscal year 2008 vested on September 30, 2010. The performance criteria related to these awards were met and resulted in a payout at 100 percent of target in November 2010 for those awards measured on return on assets. Additionally, it was determined that the subset of these awards measured on return on invested capital achieved a payout at 125 percent of target and were issued accordingly in November 2010. The awards granted in fiscal year 2008 could be adjusted in 25 percent increments and ranged from a maximum of twice the initial award, as specified in the agreement, to a minimum of zero units depending upon the level of attainment of performance thresholds. During fiscal 2010, we recorded expenses of $1,099 relating to the 2008-2010 awards. We granted no performance award units during fiscal 2009.

During fiscal 2010, the Company granted performance award units to officers and key employees. The performance award unit agreements provide for the award of performance units with each unit representing the right to receive one of the Company’s Common Shares to be issued after the applicable award period. The final number of units awarded for this grant was to be determined, as of September 30, 2012, based upon the Company’s total shareholder return over the performance period compared to the Russell MicroCap Index and could range from a minimum of no units to a maximum of twice the initial award. The weighted average fair value for these performance units was $6.73 and was determined using a Monte Carlo simulation model incorporating the following assumptions:

Risk-free interest rate			1.25	%
Volatility			78	%

The Company recognizes the estimated cost of these awards, as determined under the simulation model, over the performance period, with no adjustment in future periods based upon the actual shareholder return over the performance period. During fiscal 2010, we recorded expenses of $164 relating to the 2010-2012 awards.

Our future earnings can fluctuate throughout the performance period specified in the agreements depending upon our estimate of the number of awards we expect will be issued upon the completion of the performance period.

Restructuring and cost reduction programs:

We expense costs associated with exit and disposal activities designed to restructure operations and reduce ongoing costs of operations when we incur the related liabilities or when other triggering events occur. After the appropriate level of management having the authority approves the detailed cost reduction or restructuring plan, we establish accruals for underlying activities by estimating employee termination costs. Our estimates are based upon factors including affected employees’ length of service, any statutory requirements, contract provisions, salary level, and health care benefit choices. As part of our assessment of exit and disposal activities, we also analyze the carrying value of any affected long-lived assets for impairment and reductions in the estimated useful lives. We believe our estimates and assumptions used to calculate the costs associated with these restructuring provisions are appropriate, and although we do not anticipate significant changes, actual costs could differ from the estimates should we make changes to the nature or timing of the plans.

Results of Operations

The following discussion should be read in conjunction with the Financial Statements and Supplementary Data included in Item 8 of this Annual Report.

Percent of net sales for the years ended September 30:

		2010				2009				2008
Net sales			100.0	%			100.0	%			100.0	%
Cost of goods sold			35.2				43.8				41.1
Inventory write off and accelerated depreciation for exit of product line			0.0				2.5				0.0
Gross profit			64.8				53.7				58.9
Selling, general and administrative expenses			38.1				48.4				43.6
Product development expenses			9.6				17.6				16.7
Gain on the sale of RF product line			(2.3	)			—				—
Gain on the sale of building			(1.5	)			—				—
Severance and related charges			—				6.8				0.9
Operating income (loss)			20.9				(19.1	)			(2.3	)
Investment income			0.1				0.3				1.0
Interest expense			—				(0.1	)			—
Transaction costs associated with pending merger			(1.0	)			—				—
Impairment of long-term investments			—				—				(1.7	)
Earnings (loss) before income taxes			20.0				(18.9	)			(3.0	)
Provision (benefit) for income taxes			0.4				30.4				(1.3	)
Net income (loss)			19.6	%			(49.3	)%			(1.7	)%

We recorded net income of $24,878, or $1.53 per diluted share, for fiscal 2010, and net losses of $50,504, or $3.23 per diluted share, for fiscal 2009 and $2,593, or $0.16 per diluted share, for fiscal 2008.

Net sales were $126,870 in 2010 compared with $102,527 in 2009 and $152,468 in 2008. The 24 percent increase in sales in 2010 was substantially driven by stronger customer demand, including demand for production-related applications as well as an increase in large dollar orders compared the prior year. The weak worldwide economic conditions that began during the latter part of fiscal 2008 intensified considerably in the first quarter of 2009 as the U.S. financial markets froze and persisted throughout the duration of fiscal 2009 as global markets reacted and responded. Our customers responded with reduced demand in fiscal 2009 for products in all industries and all geographic regions served. On a relative basis, demand in fiscal 2009 for products used in research and development declined from fiscal 2008 levels less significantly than demand for products used in production for our customers in each of the semiconductor, wireless and precision electronics industries.

Geographically, fiscal 2010 sales increased 26 percent in the Americas, 35 percent in Asia and 9 percent in Europe, all as compared to our respective 2009 results. For fiscal 2009, sales declined 29 percent in the Americas, 34 percent in Asia and likewise fell 35 percent in Europe, all as compared to our respective 2008 results. The effect of a weaker U.S. dollar positively impacted sales growth by approximately one percentage point in fiscal 2010 and four percentage points in fiscal 2008. The stronger U.S. dollar negatively affected sales by two percentage points in fiscal 2009.

Cost of goods sold as a percentage of net sales was 35.2%, 43.8% and 41.1% in 2010, 2009 and 2008, respectively. The decrease in costs as a percentage of sales in 2010 was driven by the increase in sales volumes, favorable product mix and lower manufacturing costs primarily as a result of the various cost cutting measures undertaken in fiscal 2009 and the first quarter of fiscal 2010. The increase in costs as a percentage of sales in 2009 was driven by the lower sales volumes that were not fully offset by these cost cutting measures. During 2009, we exited our S600 product line, and as a result, recorded $2,540 of charges for inventory write offs and accelerated depreciation on related production equipment. Foreign exchange hedging had a minimal effect on Cost of goods sold in 2009, 2008, and 2007.

Selling, general and administrative expenses of $48,385 declined $1,379, or three percent, in 2010 as compared to 2009 levels, and decreased 16,649, or 25 percent in 2009 from $66,413 in 2008. The decrease in 2010 over 2009 was the result of cost reductions put in place in 2009 offset by the restoration of employee compensation to full levels beginning January 1, 2010 and the reinstatement of the 401(k) match retroactive to January 1, 2010 as well as $1,099 in fiscal 2010 of stock based compensation expense for performance-based stock awards that were previously not expected to payout. The sharp decline in 2009 was principally attributable to worldwide headcount reductions and other concerted cost-containment measures which began in September 2008 and continued throughout the entirety of fiscal 2009. Additionally, we recorded reversals of $950 during fiscal 2009 for previously-accrued performance-based stock awards that either did not vest during fiscal 2009 or were no longer expected to vest due to the poor financial performance.

Product development expenses of $12,145 in 2010 decreased 33 percent from $18,024 in 2009 and decreased 29 percent in 2009 from $25,504 in 2008. The decline from 2009 to 2010 was attributable to targeted reductions in spending coupled with headcount reduction related to the sale of the RF product line. The decline from 2008 to 2009 was attributable to targeted reductions in spending coupled with headcount reductions in response to lower customer demand, as well as the aforementioned exit of the S600 product line.

During fiscal 2010, we recorded $2,894 for the gain on the sale of substantially all of the Company’s RF assets to Agilent. Additionally, we recorded $1,862 for the gain on the sale of a facility located on Bainbridge Road in Solon, Ohio, during fiscal 2010. No such gains were realized during fiscal 2009 or 2008.

During 2010, we recorded $124 of income for the reversal of previously accrued expenses related to the 2009 severance and related charges. In 2009, we recorded expenses of $6,926 for costs associated with severance and related charges compared to expenses of $1,377 in 2008 for costs associated with the first reduction in our global workforce. See Note K for further discussion.

Investment income was $95 in 2010, $303 in 2009 and $1,603 in 2008. The 2010 reduction from 2009 levels was driven mostly by a more conservative investment portfolio comprised principally of certificates of deposits and money market funds. The 2009 reduction from 2008 levels was driven mostly by lower average cash and investment levels coupled with a more conservative investment portfolio comprised principally of certificates of deposits and money market funds. See Note D for further details. Interest expense was $23 in 2010, $52 in 2009 and $70 in 2008.

During fiscal 2010, we recorded $1,250 for transaction costs associated with the pending merger with Danaher. These costs were incurred primarily for legal fees and strategic advisory expenses.

The effective tax rate for fiscal 2010, including discrete items, was two percent, and was lower than the U.S. statutory rate primarily because we recognized income in the U.S. with no corresponding tax expense as a result of fully reserved tax assets and benefited from the carryback of the net operating losses generated in fiscal 2009. We also recorded tax expense on certain profitable foreign jurisdictions. See Note J for further discussion.

The effective tax rate for fiscal 2009, including discrete items, was 161 percent, and was substantially driven by a valuation allowance of $29,967 recorded in the first quarter against U.S. deferred tax assets, as well as $6,307 of tax expense on a U.S. loss without tax benefit. We also recorded tax expense on certain profitable foreign jurisdictions. See Note J for further discussion.

The effective tax rate for fiscal 2008, including discrete items, was a benefit of 42.8 percent. The effective benefit in 2008 was greater than the U.S. statutory rate due to the recognition of current year research tax credits, state and local tax benefits and the recognition of benefits associated with prior year adjustments. These benefits were partially offset by the net impact of losses in foreign jurisdiction which are not available for a tax benefit and U.S. tax on foreign remittances. See Note J for further discussion.

Our financial results are affected by foreign exchange rate fluctuations. Generally, a weakening U.S. dollar versus foreign currency favorably impacts our foreign currency denominated sales. A strengthening U.S. dollar has an unfavorable effect. This foreign exchange effect cannot be precisely isolated since many other factors affect our foreign sales and earnings. These factors include product offerings and pricing policies of Keithley and our competition, whether competition is foreign or U.S. based, changes in technology, product and customer mix, and local and worldwide economic conditions.

We utilize hedging techniques designed to mitigate the short-term effect of exchange rate fluctuations on operations and balance sheet positions by entering into foreign exchange forward contracts. We do not speculate in foreign currencies or derivative financial instruments, and hedging techniques do not increase our exposure to foreign exchange rate fluctuations.

Financial Condition, Liquidity and Capital Resources

Working Capital

The following table summarizes working capital as of September 30:

		2010				2009
Current assets:
Cash and cash equivalents		$	50,790			$	24,114
Restricted cash			537				569
Short-term investments			3,912				759
Refundable income taxes			1,030				466
Accounts receivable and other, net			19,111				11,738
Total inventories			9,072				9,937
Deferred income taxes			659				303
Other current assets			1,518				1,753
Total current assets			86,629				49,639
Current liabilities:
Short-term debt			—				—
Accounts payable			5,903				4,916
Accrued payroll and related expenses			11,602				5,648
Other accrued expenses			5,166				5,424
Income taxes payable			2,622				1,122
Total current liabilities			25,293				17,110
Working capital		$	61,336			$	32,529

Working capital increased during fiscal year 2010 by $28,807, substantially driven by a $36,990 increase in current assets from September 30, 2009. The increase in current assets was caused by the combined effect of $26,676 increase in Cash and cash equivalents, driven primarily by operating activities and proceeds from the sale of the RF product line and Bainbridge Road facility in Solon, Ohio, $3,153 of more short-term investments and $7,373 of higher accounts receivable resulting from increased customer sales. Current liabilities increased from 2009 to 2010 by $8,183. The increased levels in current liabilities resulted primarily from an increase in accrued employee incentives and sales commissions.

Sources and Uses of Cash

The following table is a summary of our Consolidated Statements of Cash Flows:

		2010				2009				2008
Cash provided by (used in):
Operating activities		$	18,904			$	(5,416	)		$	1,706
Investing activities			8,966				9,178				16,031
Financing activities			(1,374	)			(2,029	)			(8,844	)

Operating activities. Cash provided by operating activities was $18,904 in fiscal year 2010 compared to cash used in operations of $5,416 for fiscal year 2009. Cash from operating activities is net income (loss) adjusted for certain non-cash expenses and changes in assets and liabilities. During fiscal year 2010, operating cash flows resulted primarily from a net income of $24,878 offset by an increase in accounts receivable, deferred income taxes and the gain on the sale of assets $7,384, $1,168 and $4,755, respectively, and augmented by non-cash charges from depreciation, stock-based compensation and accrued employee incentives. We also made a $2,000 contribution to our U.S. pension plan. During fiscal 2009, the net use of cash in operating activities stemmed primarily from the net loss which was not fully offset by non-cash charges and reductions in working capital. We also made $750 of voluntary contributions to our U.S. pension plan. During fiscal year 2008, operating cash flows resulted primarily from a decrease in accounts receivable, and the positive impact of non-cash charges from depreciation, stock-based compensation and assets impairment charges. This was partially offset by non-cash charges for deferred taxes, an increase in inventory, and $1,500 in contributions to the Company’s U.S. pension plan in fiscal 2008.

Investing activities. Cash provided by investing activities was $8,966 in fiscal year 2010 compared to $9,178 in fiscal year 2009. Cash flows from investing activities consist primarily of the sale of assets related to the RF product line and the Bainbridge Facility, the purchase and sale of investments and purchases of property, plant and equipment. Capital spending declined to $713 in 2010 from $1,994 in 2009 as we curtailed spending in response to the difficult economic conditions experienced throughout the prior year. In 2010, the Company had proceeds from the sale of assets totaling $12,800. This was comprised of the completed sale of the RF product line assets to Agilent for a cash purchase price of $9,000 and $3,800 for the sale of the Company’s Bainbridge Facility. We purchased $3,153 of short-term investments in fiscal year 2010 versus $759 in fiscal year 2009, while sales of short-term investments generated $0 in cash in fiscal 2010 versus $12,500 last year. As a result, during fiscal 2010 we increased investments due to an increase in overall cash by $3,153, compared to liquidating approximately $11,741 of investments to provide cash for operations and other activities in fiscal year 2009. The increase in these investment activities directly relate to the improved operational performance in fiscal year 2010 compared to fiscal year 2009. Additionally, in fiscal year 2009 we used $569 in connection with pledges against outstanding letters of credit as required under our existing credit arrangement. See Note E for details.

Financing activities. Cash used for financing activities in fiscal year 2010 was $1,374 versus $2,029 in fiscal year 2009. During fiscal year 2010, we repurchased $12 of our Common Shares compared to $787 in fiscal year 2009. See Note C for further details. Cash dividends in fiscal year 2010 of $1,535 were comparable with the $1,521 incurred in fiscal year 2009.

The Company amended its credit agreement in March 2010. The revised facility consisted of a $5,000 debt facility ($0 outstanding at September 30, 2010) that provided unsecured, multi-currency revolving credit at various interest rates based on Prime or LIBOR. The agreement did not contain debt covenants, but required cash to be pledged against outstanding borrowings and stand-by letters of credit. We were required to pay a facility fee of 0.25% per annum on the total amount of the commitment. The expiration date had been extended to March 31, 2012, but the credit agreement was terminated on December 8, 2010. The Company had a number of other such credit facilities in various currencies and for standby letters of credit aggregating $1,734 ($83 outstanding at September 30, 2010).

At September 30, 2010, we had total unused lines of credit with domestic and foreign banks aggregating $6,114. See Note E for further details. Under certain provisions of the former debt agreement, we were required to comply with various financial ratios and covenants.

Our stock repurchase program expired on February 28, 2009 and was not renewed or replaced. Accordingly, we have been unable to repurchase Common Shares since such date. See Note C for more details.

During 2011, we expect to finance capital spending and working capital requirements with cash and short-term investments on hand and cash provided by operations.

Set forth below is a table of information with respect to the Company’s contractual obligations as of September 30, 2010:

		Payments Due by Period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Short-Term Debt		$	—			$	—			$	—			$	—			$	—
Operating Lease Obligations (a)			5,367				1,890				2,081				786				610
Payments Under Deferred Compensation Agreements (b)			2,250				193				296				156				1,605
Pension Benefits (c)			—				—				(c	)			(c	)			(c	)
Non-cancelable Purchase Commitments		$	288			$	288				—				—				—
Total Contractual Obligations		$	7,905			$	2,371			$	2,377			$	942			$	2,215

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recently Adopted Accounting Pronouncements

In February 2007, the FASB issued guidance which allows companies to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. The guidance was effective for fiscal years beginning after November 15, 2007. The Company adopted the guidance effective October 1, 2008, and the adoption did not have a material impact on its Consolidated Financial Statements.

In March 2008, the FASB issued updates to guidance, amending and expanding the disclosure requirements related to the use of derivative instruments and hedging activities to provide improved transparency into the uses and financial statement impact of derivative instruments and hedging activities. The new disclosure provisions were adopted by the Company in the second quarter of fiscal 2009. See Note F for the required disclosures related to derivative instruments and hedging activities.

In April 2009, the FASB issued authoritative guidance for disclosures about derivative instruments and hedging activities. The guidance is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s results of operations. The Company adopted the guidance in the third quarter of fiscal 2009. Adoption did not have an effect on its consolidated results of operations, financial position or cash flows.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) to serve as the single source of authoritative U.S. GAAP. The ASC supersedes all the existing non-SEC accounting and reporting standards upon its effective date and, subsequently, the FASB will not issue new standards in the form of Statements, Staff Positions, or Emerging Issues Task Force Abstracts. The guidance is not intended to change or alter existing U.S. GAAP. The guidance became effective for the Company in the fourth quarter of fiscal 2009. Adoption did not have an impact on its consolidated results of operations, financial position or cash flows.

In May 2009, the FASB issued authoritative guidance which establishes general standards for accounting and disclosure of events occurring subsequent to the balance sheet date but prior to issuance of the financial statements. The guidance is not intended to result in significant change to current practice. The Company adopted the guidance in the fourth quarter of fiscal 2009. Adoption did not have an effect on its consolidated results of operations, financial position or cash flows.

In September 2006, the FASB issued guidance that requires that employers recognize the funded status of defined benefit pension and other postretirement benefit plans as a net asset or liability on the balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as a component of net periodic benefit cost. Companies are required to measure plan assets and benefit obligations as of their fiscal year end. The Company adopted the presentation requirements of the guidance in fiscal 2007, which resulted in a net charge to other comprehensive income of $1,975. We adopted the measurement date provisions in fiscal 2009, and as a result, recorded a charge of $105 to retained earnings. See Note H for additional information related to the change in measurement date provisions.

In September 2006, the FASB issued authoritative guidance which established a framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair value measurements. The guidance is applicable to other accounting pronouncements that require or permit fair value measurements. Accordingly, the guidance did not require any new fair value measurements. However, for some entities, the application changed current practice. The guidance became effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, the FASB provided a one-year deferral for the implementation for nonfinancial assets and liabilities. The Company adopted the guidance effective October 1, 2008, except with respect to nonfinancial assets and liabilities, and the adoption did not have a material impact on its Consolidated Financial Statements. The Company adopted the guidance related to nonfinancial assets and liabilities effective October 1, 2009, which resulted in expanded disclosures in its consolidated financial statements. In January 2010, the FASB issued updates to the guidance that is intended to improve disclosures about fair value measurements. The Company adopted the guidance effective January 1, 2010. Adoption did not have a material impact on its consolidated financial statements.

In December 2008, the FASB issued updates to the guidance which is intended to enhance disclosures regarding assets in defined benefit pension or other postretirement plans. The updates are effective for the Company in the fourth quarter of fiscal 2010. The Company the adopted the guidance effective July 1, 2010. Adoption did not have a material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued updates to guidance that address accounting for variable interest entities. These updates to ASC 810 are effective for the Company in the first quarter of fiscal 2011. The Company is currently assessing the impact that adoption will have on its consolidated results of operations, financial position, or cash flows.

In October 2009, the FASB issued ASU 2009-13, updates to address revenue recognition for multiple-deliverable revenue arrangements that include software elements. The new guidance is effective for the Company in fiscal 2011. The Company is currently assessing the impact that adoption will have on its consolidated results of operations, financial position, or cash flows.

In April 2010, the FASB issued ASU 2010-17, updates to address revenue recognition for arrangements in which a vendor satisfies its performance obligations over time, with all or a portion of the consideration contingent on future events, referred to as “milestones.” The new guidance is effective for the Company in fiscal 2011. The Company is currently assessing the impact that adoption will have on its consolidated results of operations, financial position, or cash flows.

In July 2010, the FASB issued ASU 2010-20, updates to guidance that address disclosures about the credit quality of financing receivables and the allowance for credit losses. The new guidance amends ASC Topic 310 and is effective for the Company in the first quarter of fiscal 2011. The Company is currently assessing the impact that adoption will have on its consolidated results of operations, financial position, or cash flows.

ITEM 7A		— QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 nor, therefore, on our results of operations, financial position or cash flows.

The Company maintains a short-term investment portfolio consisting primarily of various money market funds and certificates of deposit (CDs) with numerous institutions and differing maturity dates. A decline in interest rates would generally not change the value of these investments as they mature, but would decrease earnings on future CDs purchased with cash or proceeds from other matured CDs. During fiscal 2010, the amount of short-term investments has increased in terms of both dollars and as a percentage of total current assets. However, in management’s opinion, a 10 percent decline in interest rates would not have a material impact on our consolidated results of operations, financial position or cash flows.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Keithley Instruments, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Keithley Instruments, Inc. and its subsidiaries at September 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in management’s report on internal control over financial reporting included in Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio
December 13, 2010

Consolidated Statements of Operations

For the years ended September 30, 2010, 2009 and 2008 (In Thousands of Dollars Except for Per Share Data)

		2010				2009				2008
Net sales		$	126,870			$	102,527			$	152,468
Cost of goods sold			44,645				44,890				62,623
Inventory writedowns and accelerated depreciation for exit of product line			—				2,540				—
Gross profit			82,225				55,097				89,845
Selling, general and administrative expenses			48,385				49,764				66,413
Product development expenses			12,145				18,024				25,504
Gain on the sale of RF product line			(2,894	)			—				—
Gain on the sale of building			(1,862	)			—				—
Severance and related charges			(124	)			6,926				1,377
Operating income (loss)			26,575				(19,617	)			(3,449	)
Investment income			95				303				1,603
Interest expense			(23	)			(52	)			(70	)
Transaction costs associated with pending merger			(1,250	)			—				—
Impairment of long-term investments			—				—				(2,620	)
Earnings (loss) before income taxes			25,397				(19,366	)			(4,536	)
Provision (benefit) for income taxes			519				31,138				(1,943	)
Net income (loss)		$	24,878			$	(50,504	)		$	(2,593	)
Basic earnings (loss) per share		$	1.58			$	(3.23	)		$	(0.16	)
Diluted earnings (loss) per share		$	1.53			$	(3.23	)		$	(0.16	)

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

Consolidated Balance Sheets

As of September 30, 2010 and 2009 (In Thousands of Dollars Except for Share Data)

		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	50,790			$	24,114
Restricted cash			537				569
Short-term investments			3,912				759
Refundable income taxes			1,030				466
Accounts receivable and other, net of allowance for doubtful accounts of $649 and $598 as of September 30, 2010 and 2009, respectively			19,111				11,738
Inventories:
Raw materials			6,060				5,760
Work in process			768				613
Finished products			2,244				3,564
Total inventories			9,072				9,937
Deferred income taxes			659				303
Prepaid expenses			1,518				1,753
Total current assets			86,629				49,639
Property, plant and equipment, at cost:
Land			923				1,325
Buildings and leasehold improvements			10,819				18,053
Manufacturing, laboratory and office equipment			26,242				34,703
			37,984				54,081
Less-Accumulated depreciation and amortization			32,271				42,981
Total property, plant and equipment, net			5,713				11,100
Deferred income taxes			1,942				748
Intangible assets			—				910
Other assets			10,372				10,705
Total assets		$	104,656			$	73,102
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	5,903			$	4,916
Accrued payroll and related expenses			11,602				5,648
Other accrued expenses			5,166				5,424
Income taxes payable			2,622				1,122
Total current liabilities			25,293				17,110
Long-term deferred compensation			180				2,111
Long-term income taxes payable			2,985				2,852
Other long-term liabilities			19,263				14,419
Commitments and contingencies (See Note L)
Shareholders’ equity:
Common Shares, stated value $.0125:
Authorized — 80,000,000; issued and outstanding — 15,031,420 and 14,950,093 in 2010 and 2009, respectively			188				187
Class B Common Shares, stated value $.0125:
Authorized — 9,000,000; issued and outstanding — 2,150,502 in 2010 and 2009			27				27
Capital in excess of stated value			41,495				39,121
Retained earnings			51,972				28,629
Accumulated other comprehensive loss			(21,170	)			(15,900	)
Common Shares held in treasury, at cost			(15,577	)			(15,454	)
Total shareholders’ equity			56,935				36,610
Total liabilities and shareholders’ equity		$	104,656			$	73,102

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

Consolidated Statements of Shareholders’ Equity

For the years ended September 30, 2010, 2009 and 2008 (In Thousands of Dollars Except for Per Share Data)

										Capital								Accumulated				Common
						Class B				in excess								other				Shares				Total
		Common				Common				of stated				Retained				comprehensive				held in				shareholders’
		Shares				Shares				value				earnings				loss				treasury				equity
Balance September 30, 2007		$	182			$	27			$	36,436			$	85,676			$	(946	)		$	(8,351	)		$	113,024
Comprehensive Loss:
Net loss															(2,593	)
Translation adjustment																			85
Pension liability adjustment																			(720	)
Net unrealized gain on derivative securities																			132
Net unrealized investment loss																			(424	)
Total comprehensive loss																											(3,520	)
Stock-based compensation											1,832																1,832
Cash dividends:
Common Shares ($.15 per share)															(2,049	)											(2,049	)
Class B Common Shares ($.12 per share)															(258	)											(258	)
Adoption of FIN 48															(17	)											(17	)
Shares issued under stock plans, net of taxes			2								451																453
Common Shares acquired for settlement of deferred Directors’ fees											234												(234	)			—
Common Shares reissued in settlement of Director’s fees											(23	)											23				—
Repurchase of Common Shares																							(6,163	)			(6,163	)
Balance September 30, 2008			184				27				38,930				80,759				(1,873	)			(14,725	)			103,302
Comprehensive Loss:
Net loss															(50,504	)
Translation adjustment																			424
Pension liability adjustment																			(14,756	)
Net unrealized gain on derivative Securities																			(137	)
Net unrealized investment gain																			442
Total comprehensive loss																											(64,531	)
Stock-based compensation											(53	)															(53	)
Implementation of pension measurement date change															(105	)											(105	)
Cash dividends:
Common Shares ($.10 per share)															(1,349	)											(1,349	)
Class B Common Shares ($.08 per share)															(172	)											(172	)
Shares issued under stock plans, net of taxes			3								302																305
Common Shares acquired for settlement of deferred Directors’ fees											228												(228	)			—
Common Shares reissued in settlement of Director’s fees											(286	)											286				—
Repurchase of Common Shares																							(787	)			(787	)
Balance September 30, 2009			187				27				39,121				28,629				(15,900	)			(15,454	)			36,610
Comprehensive Income:
Net income															24,878
Translation adjustment																			302
Pension liability adjustment																			(5,555	)
Net unrealized gain on derivative Securities																			(17	)
Total comprehensive income																											19,608
Stock-based compensation											2,092																2,092
Cash dividends:
Common Shares ($.10 per share)															(1,363	)											(1,363	)
Class B Common Shares ($.08 per share)															(172	)											(172	)
Shares issued under stock plans, net of taxes			1								171																172
Common Shares acquired for settlement of deferred Directors’ fees											158												(158	)			—
Common Shares reissued in settlement of Director’s fees											(47	)											47				—
Repurchase of Common Shares																							(12	)			(12	)
Balance September 30, 2010		$	188			$	27			$	41,495			$	51,972			$	(21,170	)		$	(15,577	)		$	56,935

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

Consolidated Statements of Cash Flows

For the years ended September 30, 2010, 2009 and 2008 (In Thousands of Dollars)

		2010				2009				2008
Cash flows from operating activities:
Net income (loss)		$	24,878			$	(50,504	)		$	(2,593	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			2,157				3,626				4,157
Amortization			47				280				210
Deferred income taxes			(1,332	)			30,412				(3,174	)
Deferred compensation			236				18				(76	)
Stock-based compensation			2,092				(53	)			1,832
Non-cash charges for exit of product line			—				4,498				—
Gain on the sale of assets			(4,756	)			—				—
Loss on the disposition/impairment of assets			284				110				2,775
Change in current assets and liabilities:
Refundable income taxes			(562	)			(191	)			516
Accounts receivable and other			(7,384	)			5,494				2,330
Inventories			(957	)			5,945				(5,210	)
Prepaid expenses			(62	)			465				(90	)
Other current liabilities			4,399				(5,541	)			1,208
Other operating activities			(136	)			25				(179	)
Net cash provided by (used in) operating activities			18,904				(5,416	)			1,706
Cash flows from investing activities:
Proceeds from the sale of assets			12,800				—				—
Capital expenditures			(713	)			(1,994	)			(3,831	)
Restricted cash			32				(569	)			—
Purchase of investments and other			(3,153	)			(759	)			(13,225	)
Proceeds from maturities and sales of investments			—				12,500				33,087
Net cash provided by investing activities			8,966				9,178				16,031
Cash flows from financing activities:
Net repayment of short-term debt			0				(25	)			(861	)
Proceeds from employee stock purchase and option plans			201				212				347
Tax benefit of stock purchase and stock-based compensation arrangements			(28	)			92				140
Repurchase of Common Shares			(12	)			(787	)			(6,163	)
Cash dividends			(1,535	)			(1,521	)			(2,307	)
Net cash used in financing activities			(1,374	)			(2,029	)			(8,844	)
Effect of changes in foreign currency exchange rates on cash and cash equivalents			180				308				292
Increase in cash and cash equivalents			26,676				2,041				9,185
Cash and cash equivalents at beginning of period			24,114				22,073				12,888
Cash and cash equivalents at end of period		$	50,790			$	24,114			$	22,073
Supplemental disclosures of cash flow information
Cash paid during the year for:
Income taxes		$	227			$	1,229			$	1,945
Interest			29				53				59

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands of Dollars Except for Per-Share Data)

Note A — Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of Keithley Instruments, Inc. and its subsidiaries (“Keithley” or “Company”). Intercompany transactions have been eliminated.

Nature of operations

Keithley’s business is to design, develop, manufacture and market complex electronic instruments and systems to serve 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 direct current (DC) or optical signals. 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 industry segment.

On November 30, 2009, the Company closed its transaction with Agilent Technologies, Inc. (“Agilent”) with respect to the sale of its RF product line. Accordingly, our business did not include those operations following the closing date.

Revenue recognition

Keithley Instruments, Inc. recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Delivery is considered to have been met when title and risk of loss have transferred to the customer. Upon shipment, a provision is made for estimated costs that may be incurred for product warranties and sales returns. Revenue earned from service is recognized ratably over the contractual service periods and is not material to the Company’s consolidated results. Shipping and handling costs are recorded as Cost of goods sold in the Consolidated Statements of Operations.

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 functional currency 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 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.

Advertising

Advertising production and placement costs are expensed when incurred. Advertising expenses were $4,956, $5,043 and $7,985 in 2010, 2009 and 2008, respectively.

Intangible assets

Intangible assets include software costs related to our RF product line, which was sold to Agilent in November 2009. Prior to the sale, the asset was amortized over the estimated economic life of the software products, which was estimated to be five years. At each balance sheet date, the unamortized cost of the software was compared to its net realizable value. The net realizable value was the estimated future gross revenues from the software product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support. The excess of the unamortized cost over the net realizable value would then have been recognized as an impairment loss. Amortization expense is recorded as “Cost of goods sold” in the Consolidated Statements of Operations and was $47, $280 and $210 in 2010, 2009 and 2008, respectively.

Product development expenses

Expenditures for product development are charged to expense as incurred.

Fair Value Measurements

Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.

•

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.

Cash and cash equivalents

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company’s cash equivalents and investments are diversified with numerous financial institutions which management believes to have acceptable credit ratings. These investments are primarily money-market funds and short term certificates of deposit. The recorded amount of these investments approximates fair value determined based on Level 1 and 2 inputs as defined under U.S. GAAP. Cash flows resulting from hedging transactions are classified in the same category as the cash flows from the item being hedged.

Restricted cash

Effective March 31, 2010, the Company amended its $5,000 credit agreement. While the agreement does not contain debt covenants, the Company is required to pledge cash against outstanding borrowings and letters of credit. See Note E for further details.

Accounts receivable and allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience by industry and regional economic data. We review our allowance for doubtful accounts periodically, and all customer account balances are reviewed for collectability. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. The changes in the allowance for doubtful accounts for fiscal years ending September 30, 2010, 2009 and 2008 are as follows:

		2010				2009				2008
Balance at beginning of year		$	598			$	555			$	500
Additions			59				79				63
Write-offs, net of recoveries			(5	)			(43	)			(6	)
Foreign exchange revaluation			(3	)			7				(2	)
Balance at end of year		$	649			$	598			$	555

Inventories

Inventories are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard, which approximates actual cost on a first-in, first-out basis. The Company provides inventory allowances based on excess and obsolete inventories determined primarily by future demand forecasts. The allowance is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of Cost of goods sold. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. See Note K for further details.

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation is provided over periods approximating the estimated useful lives of the assets. Substantially all manufacturing, laboratory and office equipment is depreciated by the double declining balance method over periods of 3 to 10 years. Buildings are depreciated by the straight-line method over periods of 23 to 45 years. Leasehold improvements are amortized over the shorter of the asset lives or the terms of the leases. Depreciation expense was $2,157, $3,626 and $4,157 in fiscal 2010, 2009 and 2008, respectively.

Capitalized software

Certain internal and external costs incurred to acquire or create internal use software are capitalized. Capitalized software is included in property, plant and equipment and is depreciated over 3 to 5 years after it is placed in service.

Impairment of long-lived assets

Long-lived assets are reviewed for impairment when events or circumstances indicate costs may not be recoverable. Impairment exists when the carrying value of the assets is greater than the pretax undiscounted future cash flows expected to be provided by the asset. If impairment exists, the asset is written down to its fair value. Fair value is determined through quoted market values or through the calculation of the pretax present value of future cash flows expected to be provided by the asset.

Capital stock

The Company has two classes of stock. Each Class B Common Share has ten times the voting power of a Common Share, but the Class B Common Shares are entitled to cash dividends of no more than 80% of the cash dividends on the Common Shares. Holders of Common Shares, voting as a class, elect one-fourth of the Company’s Board of Directors and participate with holders of Class B Common Shares in electing the balance of the Directors and in voting on all other corporate matters requiring shareholder approval. Additional Class B Common Shares may be issued only to holders of such shares for stock dividends or stock splits. These shares are convertible at any time to Common Shares on a one-for-one basis.

The number of Common Shares, Class B Common Shares and Common Shares held in treasury is shown below:

						Class B				Common Shares
		Common Shares				Common Shares				held in treasury
Balance at September 30, 2007			14,580,978				2,150,502				(740,048	)
Common Shares acquired for settlement of deferred Directors’ fees			—				—				(26,162	)
Common Shares reissued in settlement of directors’ fees			—				—				1,616
Shares issued under stock plans			141,607				—				—
Repurchase of Common Shares			—				—				(636,600	)
Balance at September 30, 2008			14,722,585				2,150,502				(1,401,194	)
Common Shares acquired for settlement of deferred Directors’ fees			—				—				(64,643	)
Common Shares reissued in settlement of directors’ fees			—				—				34,530
Shares issued under stock plans			227,508				—				—
Repurchase of Common Shares			—				—				(166,733	)
Balance at September 30, 2009			14,950,093				2,150,502				(1,598,040	)
Common Shares acquired for settlement of deferred Directors’ fees			—				—				(28,658	)
Common Shares reissued in settlement of directors’ fees			—				—				5,890
Shares issued under stock plans			81,327				—				—
Repurchase of Common Shares			—				—				(2,649	)
Balance at September 30, 2010			15,031,420				2,150,502				(1,623,457	)

Accumulated other comprehensive loss

The components of accumulated other comprehensive loss, net of taxes, at September 30, 2010, 2009 and 2008 are as follows:

		2010				2009				2008
Translation adjustment		$	1,973			$	1,671			$	1,247
Net unrealized (loss) gain on derivative securities			(108	)			(91	)			46
Net unrealized investment loss			—				—				(442	)
Benefit plan obligation			(23,035	)			(17,480	)			(2,724	)
Accumulated other comprehensive loss		$	(21,170	)		$	(15,900	)		$	(1,873	)