Keysight Technologies, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Fiscal quarter and six months ended April 30, 2022. Amounts are in millions of dollars except per-share data and percentages. Keysight provides electronic design and test solutions, software, and related services. Its reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1,351 | $1,221 | $2,601 | $2,401 |
| Gross margin | 63.6% | 60.4% | 63.9% | 60.1% |
| Operating income | $327 | $235 | $598 | $447 |
| Operating margin | 24.2% | 19.3% | 23.0% | 18.6% |
| Net income | $258 | $186 | $487 | $358 |
| Diluted EPS | $1.41 | $0.99 | $2.65 | $1.91 |
- Quarterly revenue rose 11% year over year; six-month revenue rose 8%. Foreign exchange reduced growth by approximately 2 and 1 percentage points, respectively.
- Quarterly segment revenue: CSG $963 (up 10%) and EISG $388 (up 13%). Segment operating income was $271 and $118, respectively; segment income excludes specified items including share-based compensation, acquisition-related amortization, and interest.
- For the six months, operating cash flow was $522, versus $697 a year earlier. Capital expenditures were $95, compared with $61. Investing cash use was $142; financing cash use was $527, including $484 in treasury-stock repurchases.
- At April 30, cash, cash equivalents and restricted cash were $1,900, including $1,886 of balance-sheet cash. Long-term debt was $1,792 (face value $1,800); the $750 revolving facility had no borrowings. Current assets were $3,886 and current liabilities $1,360.
Changes and management commentary
- Profitability improved year over year. Management attributed higher margins and income mainly to increased revenue volume, favorable mix, lower variable people-related costs, and lower acquisition-related amortization, partly offset by higher material costs and higher R&D, SG&A, and tax expense.
- Orders were $1,458 in Q2, up 9%, and $2,953 for six months, up 16%. Quarterly orders grew in the Americas and Asia Pacific, while Europe declined, primarily due to Russia-related cancellations.
- Supply-chain constraints limited access to some components, delayed deliveries, and raised procurement costs. Inventory increased to $810 from $777 at October 31, 2021, partly reflecting higher material costs and stock build to secure supply. Non-cancellable supplier commitments increased to $518 from $444.
- Keysight suspended Russian operations following sanctions; Russia accounted for approximately 1% of FY2021 revenue. The company recorded a $3 impairment on Russian long-lived assets.
- Management cited continued customer investment in 5G/6G, next-generation automotive, IoT, and defense modernization, while cautioning that macroeconomic, geopolitical, pandemic, and supply-chain conditions remain uncertain.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance for a future quarter is provided in the supplied filing text. Keysight expects FY2022 capital spending of approximately $240–$260 and expects available cash, operating cash generation, and access to capital markets and credit lines to meet foreseeable cash needs.
- Key risks include component shortages and delivery delays, inflation and economic volatility, geopolitical tensions and trade restrictions, customer order cancellations, foreign-exchange exposure, and the ability to attract and retain personnel.
- Centripetal Networks disputes include pending royalty arbitration and patent cases in the United States and Germany, plus an ITC complaint seeking possible import restrictions. Keysight denies the allegations and intends to defend itself; outcomes are uncertain.
- A U.S. State Department consent agreement imposed a $6.6 penalty over three years, of which $2.5 is suspended and designated for remediation; $1.1 had been paid by April 30, 2022. A Malaysian 2008 tax assessment remains under appeal. Management said unrecognized tax benefits could decrease by about $34 within 12 months, potentially benefiting the effective tax rate.
- Singapore and Malaysia tax incentives reduced the six-month tax provision by $39; the incentives are due for renewal in 2024 and 2025, respectively. The quarterly effective tax rate rose to 16.1% from 10.7%, partly reflecting fewer discrete tax benefits.
Important facts for investors to verify
- Whether supply constraints ease, and how inventory growth, supplier commitments, and delivery delays affect margins and cash conversion.
- Whether orders convert into revenue, particularly given the quarterly regional divergence and Russia-related cancellations.
- The sustainability of margin expansion amid higher material costs and increased R&D and SG&A spending.
- Cash-flow trends and capital allocation, including substantial buybacks: $495 repurchased in the first six months under a $1,200 authorization.
- Developments in Centripetal litigation/arbitration, the Malaysian tax appeal, and renewal of the Singapore and Malaysia tax incentives.