Keysight Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Keysight provides electronic design and test instruments, software and services, and network testing, visibility and security solutions through its Ixia business. This filing covers the fiscal third quarter and first nine months ended July 31, 2018; the fiscal year ends October 31. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended July 31, 2018 | Nine months ended July 31, 2018 |
|---|---|---|
| Orders | $1.007 billion, up 15% year over year | $2.958 billion, up 24% |
| Revenue | $1.004 billion, up 21% (20% excluding currency) | $2.831 billion, up 22% (21% excluding currency) |
| Gross margin | 56.2%, versus 49.4% | 54.2%, versus 53.1% |
| Operating income (margin) | $128 million (12.8%); prior-year loss of $4 million | $223 million (7.9%), versus $200 million (8.7%) |
| Net income | $121 million; prior-year loss of $18 million | $279 million, versus $140 million |
| Diluted EPS | $0.63, versus loss of $0.10 | $1.46, versus $0.78 |
| Operating cash flow | Not separately presented for the quarter | $320 million, versus $265 million |
Products generated $842 million of quarterly revenue and services and other generated $162 million. Quarterly growth was led by Communications Solutions Group, up 23%, and Electronic Industrial Solutions Group, up 19%. Ixia revenue was $119 million, down 1%, and its operating margin fell to 8.1% from 19.9%. Nine-month comparisons for Ixia are affected by its April 2017 acquisition and are not directly comparable.
At July 31, cash and cash equivalents were $742 million, down from $818 million at October 31, 2017; approximately $638 million was held outside the U.S. Total debt was $1.790 billion, down from $2.048 billion, following repayment of the $260 million term loan. No revolver borrowings were outstanding; the company had a $450 million revolving facility. Nine-month capital expenditures were $98 million. Financing activities used $296 million, including debt repayment and $80 million of share repurchases.
Material changes versus the prior comparable periods
- Quarterly revenue growth and higher volume and favorable mix accompanied a substantial improvement in operating income. Lower acquisition-related amortization also supported quarterly profitability.
- Nine-month operating margin declined 0.8 percentage points despite revenue growth. The comparison included prior-year gains of $68 million from a Japan pension settlement and $8 million from a land sale; current-period operating income also reflected higher people-related, restructuring and amortization costs.
- Nine-month net income benefited from a $106 million income tax benefit, including a provisional $109 million discrete benefit related to U.S. tax legislation. This makes reported earnings less representative of underlying operating performance.
- Nine-month operating cash flow rose by $55 million, while working-capital movements in receivables, inventory and payables used $85 million, compared with $7 million of cash provided in the prior year.
Outlook, commentary and risks
- Management expects overall year-over-year sales growth to continue for the remainder of fiscal 2018, while noting macroeconomic and geopolitical uncertainty, including trade and tariff risks. It provided no specific revenue or earnings guidance in this filing.
- Management cited 5G-related solutions, network access applications, network and data-center investment, and demand in aerospace, defense and government as growth drivers. It expects Ixia’s financial performance to recover after integration issues; however, its current-quarter revenue and operating income declined.
- Management anticipates approximately $140 million of fiscal 2018 capital spending, including $35–$40 million for wildfire recovery, expected to be covered by insurance. Estimated insurance recovery for wildfire losses and related investment is $115–$130 million; timing may differ from the related costs. At July 31, $26 million of probable insurance recovery was receivable.
- Key disclosed risks include cyclical and uncertain customer demand, technology and competitive change, supply and contract-manufacturing constraints, international and foreign-exchange exposure, acquisition integration, cybersecurity, and tax examinations and changes in tax incentives. The filing reports a Malaysian tax audit for 2008; Keysight paid $68 million of tax and penalties in 2017 and is appealing the assessment.
- The company stated that no pending legal matter was believed likely to have a material impact. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the provisional tax benefit and other one-time items.
- Whether Ixia revenue and margins recover, and whether integration benefits and synergies are realized.
- Whether the reported order growth converts to revenue, given longer order-to-revenue cycles for solution sales.
- Whether working-capital needs, pension funding and planned capital spending affect cash generation and liquidity.
- The final U.S. tax-law accounting, the outcome of the Malaysian tax appeal, and realization and timing of wildfire insurance recoveries.