Keysight Technologies, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. Although the request references 2019 Q4, this is an annual filing; quarterly figures below identify the fourth quarter specifically. Amounts are in U.S. dollars.
Business context
Keysight sells electronic design, test and measurement products, software, network test and security solutions, and related services to communications, aerospace and defense, automotive, semiconductor and other customers. It reported approximately 13,600 employees and no customer representing 10% or more of revenue. In FY2019, it reported three segments: Communications Solutions Group (CSG), Electronic Industrial Solutions Group (EISG), and Ixia Solutions Group (ISG).
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $4.303 billion | $3.878 billion |
| Income (loss) from operations | $711 million | $(394) million |
| Operating margin | 16.5% | (10.2)% |
| Net income | $621 million | $165 million |
| Diluted EPS | $3.25 | $0.86 |
| Operating cash flow | $998 million | $555 million |
| Cash and cash equivalents at year-end | $1.598 billion | $913 million |
| Working capital | $2.212 billion | $916 million |
| Long-term debt | $1.788 billion | $1.291 billion |
| Total gross margin | 58.9% | 54.4% |
Revenue rose 11% year over year; orders increased 9% to $4.441 billion. Product revenue was $3.554 billion and services and other revenue was $749 million. FY2019 segment revenue was $2.688 billion for CSG, $1.135 billion for EISG and $480 million for ISG in the consolidated revenue disaggregation. The segment reporting tables use a different ISG measure that includes acquisition-related amortization adjustments.
Fourth-quarter FY2019 revenue was $1.120 billion, operating income $208 million, net income $195 million and diluted EPS $1.02. In Q4 FY2018, revenue was $1.047 billion, operating loss $580 million and net loss $114 million.
Cash, cash equivalents and restricted cash totaled $1.600 billion at year-end; approximately $1.108 billion was held outside the U.S. The company reported no borrowings on its $450 million revolving facility. It issued $500 million of 3.00% senior notes due 2029 and repaid $500 million of short-term debt, including the notes maturing in October 2019. FY2019 investing cash outflow was $196 million and financing cash outflow was $122 million. Capital expenditures were $120 million.
Material changes and unusual items
- Revenue growth was driven principally by CSG, up 12%; EISG grew 6% and ISG grew 9%. CSG commercial communications revenue increased 21%, with demand tied to 5G and next-generation data-center testing. CSG aerospace, defense and government revenue was flat; EISG semiconductor measurement revenue was also flat.
- FY2019 operating results improved sharply against FY2018, which included a $709 million goodwill impairment charge for ISG. FY2019 gross margin also benefited from volume, solution mix and lower warranty costs. R&D expense rose 10% to $688 million as the company invested in growth markets and leading-edge technologies.
- The effective tax rate was 13% in FY2019 versus 140% in FY2018. FY2018 tax results included significant one-time U.S. and Singapore tax effects; the 2019 rate also benefited from earnings in lower-tax foreign jurisdictions. Singapore tax incentives reduced FY2019 income taxes by $47 million.
- Adoption of ASC 606 increased FY2019 reported revenue by $20 million and net income by $13 million versus results without adoption; prior-year comparisons were not restated. The company also retrospectively changed presentation of pension costs.
- Keysight acquired Prisma Telecom Testing for $88 million net of cash acquired to expand its 5G test portfolio. In Q1 FY2020 it moved ISG into CSG, creating two reportable segments going forward.
- Backlog was approximately $1.380 billion at year-end, up from $1.311 billion. Management expected most of it to convert to revenue within six months but cautioned that backlog is not a reliable medium- or long-term indicator.
Outlook, risks and contingencies
Management gave no specific numerical earnings or revenue guidance in the provided filing text. It cited continued customer investment in emerging technologies—including 5G, next-generation automotive, IoT and defense modernization—and ongoing operational-efficiency efforts, while noting near-term macroeconomic uncertainty and monitoring trade, tariffs, and monetary and fiscal policy. Management said it remained confident in its strategy.
Key risks include technology and standards changes, cyclical customer spending, competition, supply-chain and manufacturing constraints, and geopolitical or trade restrictions—particularly involving China. Other significant exposures include foreign exchange, cybersecurity and IT disruption, pension funding, changing tax rules and uncertain tax positions. Gross unrecognized tax benefits were $226 million; the company was appealing a $68 million Malaysia tax assessment paid in 2017. Management said pending legal matters were not then believed reasonably likely to have a material impact.
Wildfire-related recovery produced $37 million of insurance proceeds after year-end, expected to generate an approximately $32 million other operating gain in Q1 FY2020. No further material wildfire-related proceeds or expenses were expected. The company expected adoption of the new lease standard in November 2019 to recognize approximately $145–$165 million of right-of-use assets and lease liabilities.
Important facts for investors to verify
- How much of FY2019 earnings growth reflects recurring operations versus the absence of FY2018’s $709 million ISG goodwill impairment and the unusually low 2019 tax rate.
- Whether ISG sustains improved profitability: its FY2019 operating margin was 5.9%, and its goodwill valuation depends on forecast cash flows and market assumptions.
- How 5G, data-center, automotive and defense demand develops, and whether trade restrictions or slower customer spending affect orders and backlog conversion.
- The eventual outcome of the Malaysia tax appeal, other tax audits and the renewal of Singapore tax incentives, due in 2024.
- Debt, cash availability and commitments, including the $410 million of supplier commitments and the geographic concentration of cash outside the U.S.
- The realization and timing of the expected Q1 FY2020 wildfire insurance gain and the effects of ASC 606 and lease-standard adoption on comparability.