Keysight Technologies, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended July 31, 2016. Unaudited. Keysight supplies electronic design and test instruments, systems, software and related services. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $715 | $665 | $2,167 | $2,106 |
| Operating income | $106 | $100 | $299 | $320 |
| Net income | $91 | $70 | $243 | $236 |
| Diluted EPS | $0.53 | $0.41 | $1.41 | $1.38 |
| Gross margin | 56.8% | 55.6% | 55.6% | 55.5% |
| Operating margin | 14.9% | 15.0% | 13.8% | 15.2% |
- Q3 revenue increased 7%; nine-month revenue increased 3%. Acquisitions contributed approximately 5 and 6 percentage points of revenue growth, respectively. Excluding currency, growth was 7% and 4%.
- Orders were $707 in Q3 and $2,147 for nine months, up 3% and 4%; acquisitions contributed 6 and 7 percentage points of order growth.
- Q3 operating income and net income improved year over year; nine-month operating income declined while net income rose modestly. The lower nine-month operating margin reflected acquisition-related amortization, integration costs and Anite’s cost structure.
- Q3 and nine-month effective tax rates were 5.9% and 9.2%, versus 19.0% and 17.7%. Management attributed the reduction primarily to cash repatriation and realization of foreign tax credits.
Cash, debt and liquidity
- Cash and cash equivalents were $664 at July 31, 2016, compared with $483 at October 31, 2015; approximately $462 was held outside the U.S.
- Nine-month operating cash flow was $277, down from $295. Investing cash outflow was $76 and financing cash outflow was $25. Cash increased by $181 over the period.
- Long-term debt was $1,100, comprising $500 of 3.30% senior notes due 2019 and $600 of 4.55% senior notes due 2024. No borrowings were outstanding on the $450 revolving credit facility; the company reported covenant compliance.
- Management said cash, operating cash generation and access to capital markets and credit lines were expected to meet liquidity needs for at least the next 12 months. Capital expenditures were $76 for nine months; expected full-year FY2016 capex was approximately $95.
Business and material changes
- Communications Solutions Group revenue was $424 in Q3 and $1,310 for nine months; Electronic Industrial Solutions Group revenue was $191 and $575; Services Solutions Group revenue was $103 and $294.
- Communications revenue excluding acquisitions declined, with smartphone supply-chain weakness and customer restructuring and consolidation offsetting strength in 5G and data-center expansion. Anite, acquired in August 2015, materially contributed to reported growth.
- Services revenue grew 2% in Q3 but declined 1% for nine months; its nine-month operating margin fell 3 percentage points to 14.7%. Electronic Industrial Solutions had stronger margins and operating income in both comparisons.
- The company repurchased 2.3 million shares for $62 during the first nine months under a $200 authorization. Approximately $138.5 remained available at quarter-end.
Outlook, commentary, risks and unusual items
- Management estimated long-term market growth of 2%–3%, while noting mixed near-term macroeconomic indicators. It emphasized innovative solutions, R&D investment and operational efficiency; the filing provides no specific revenue or earnings guidance.
- Keysight expected approximately $25 of additional separation-related infrastructure optimization costs through FY2018, including about $7 in Q4 FY2016, with most remaining costs expected in FY2017.
- Unusual or notable items included a $10 gain on sale of land in the nine-month period, a $5 reduction in warranty accruals from lower-than-expected historical charges, and $12 of nine-month acquisition and integration costs. The low tax rate also benefited from tax incentives, which reduced nine-month tax provision by $27.
- Principal disclosed risks include uncertain economic and technology spending, cyclical demand and customer cancellations, pricing and competitive pressure, supply-chain and outsourcing disruptions, foreign currency exposure, acquisition integration, tax examinations and incentives, pension funding, cybersecurity, and potential liabilities associated with the Agilent separation. The company reported no pending legal matter it believed reasonably likely to have a material impact.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, particularly in Communications and following the Anite acquisition.
- Whether communications-market weakness persists and whether the cited strength in 5G and data-center demand offsets it.
- Sustainability of the unusually low effective tax rate, tax incentives and cash repatriation benefits; also monitor ongoing Agilent tax-allocation discussions and tax audits.
- Availability and location of cash for U.S. needs, alongside $1.1 billion of debt and planned capital spending and share repurchases.
- Execution and costs of Anite integration and the separation-related optimization program, and the effect of acquired-intangible amortization on margins.