Keysight Technologies, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020; comparisons are with the three months ended January 31, 2019, unless otherwise noted. Keysight provides electronic design and test solutions and related services. It reorganized its reporting structure into Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $1.095 billion | $1.006 billion |
| Gross margin | 59.8% | 57.4% |
| Operating income / margin | $203 million / 18.5% | $121 million / 12.0% |
| Net income | $163 million | $114 million |
| Diluted EPS | $0.86 | $0.60 |
| Operating cash flow | $197 million | $240 million |
- Revenue rose 9% year over year, or 8% excluding acquisitions; orders increased 12% to $1.141 billion, or 11% excluding acquisitions. Product revenue was $902 million and services and other revenue was $193 million.
- Management attributed revenue growth to strength in CSG, particularly aerospace, defense and government and commercial communications, alongside EISG growth. Current revenue was approximately 75% CSG and 25% EISG.
- Cash, cash equivalents and restricted cash totaled $1.693 billion at quarter-end, including approximately $1.274 billion held outside the U.S. Capital expenditures were $32 million; operating cash flow less capital expenditures was $165 million. Cash increased $93 million from October 31, 2019.
- Long-term debt was $1.788 billion, comprising senior notes due 2024, 2027 and 2029. No borrowings were outstanding under the $450 million revolving credit facility, which expires February 2022; the company reported covenant compliance.
- Current assets were $3.326 billion and current liabilities $982 million. The company reported total assets of $6.841 billion and total stockholders’ equity of $3.127 billion.
Changes, outlook and notable items
- Gross margin increased 2 percentage points; operating margin rose 7 points. Higher revenue volume and favorable mix supported margins, while people-related costs increased. R&D expense increased 8% to $187 million.
- Net income growth reflected stronger revenue and mix as well as a $32 million operating gain from wildfire-related insurance proceeds. Keysight received $37 million of proceeds; it expects no further material wildfire-related proceeds or expenses.
- Operating cash flow fell from $240 million to $197 million, with working capital movements—including accounts receivable, inventory and accounts payable—using $65 million, compared with $20 million provided in the prior-year quarter.
- Keysight expected approximately $125 million of capital spending for fiscal 2020. Its estimated annual effective tax rate for FY2020 was 17.1%, excluding discrete items; the quarterly effective rate was 19.1%, versus 5.2% a year earlier. The comparison includes a $23 million discrete tax benefit in Q1 FY2019.
- Management cited continued customer investment in 5G, next-generation automotive, IoT and defense modernization, while monitoring trade, tariffs, economic conditions and the coronavirus outbreak. The filing warns that pandemic-related restrictions, shutdowns, supply-chain disruption, order delays or cancellations could adversely affect results. No specific revenue or EPS guidance was provided in the supplied filing text.
- Tax matters include a Malaysian audit appeal concerning 2008 intellectual-property gains; Keysight had paid $68 million in tax and penalties in 2017 and expected a decision during FY2020. The company also noted that tax incentives, including Malaysia’s, require renewal or application. Management reported no pending legal matters it believed were reasonably likely to have a material impact.
- Keysight adopted lease accounting on November 1, 2019, recording approximately $155 million of operating lease right-of-use assets and $164 million of lease liabilities, without a material impact on earnings or cash flows. Management concluded disclosure controls were effective.
Investor verification priorities
- Assess how much operating-margin and earnings growth depended on the non-recurring $32 million wildfire-related gain.
- Review the decline in operating cash flow and working-capital use, including inventory growth and the timing of customer collections and supplier payments.
- Monitor order trends, customer spending and execution in 5G, aerospace/defense, semiconductor measurement and other end markets, especially amid coronavirus and trade-related uncertainty.
- Track the Malaysian tax appeal, tax-incentive renewals and any changes in the estimated annual effective tax rate.
- Evaluate capital allocation: $76 million of treasury-stock repurchases in the quarter, $335 million remaining under the repurchase authorization at January 31, 2020, and $1.788 billion of debt.