Keysight Technologies, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. Keysight became an independent public company on November 1, 2014; prior-period figures include Agilent allocations and may not represent standalone costs. The filing also reports fourth-quarter results, but is an annual report rather than a standalone Q4 filing.
Business context and financial performance
Keysight sells electronic measurement instruments, systems, software and related services, principally to communications, aerospace and defense, and industrial, computer and semiconductor markets. It reports Measurement Solutions and Customer Support and Services segments. Revenue was 35% U.S. and 65% international.
| Metric | FY2015 | FY2014 | Change or context |
|---|---|---|---|
| Net revenue | $2.856 billion | $2.933 billion | Down 3%; approximately flat excluding currency, with acquisitions adding about 1 percentage point |
| Orders | $2.853 billion | $2.963 billion | Down 4%; currency reduced the comparison by 4 percentage points |
| Gross margin | 55.6% | 55.2% | Up slightly |
| Operating income / margin | $431 million / 15.1% | $469 million / 16.0% | Income down 8%; margin down 0.9 percentage points |
| Income before taxes | $388 million | $475 million | Down 18% |
| Net income / diluted EPS | $513 million / $3.00 | $392 million / $2.35 | Net income increased despite lower pretax income, principally due to tax benefits |
| Operating cash flow | $376 million | $563 million | Down $187 million |
| Cash and cash equivalents | $483 million | $810 million | Down $327 million |
| Working capital | $893 million | $1.081 billion | Down $188 million |
| Long-term debt | $1.099 billion | $1.099 billion | Fixed-rate senior notes; no borrowings under the $450 million revolving facility |
Products generated $2.408 billion of revenue and services and other generated $448 million. Measurement Solutions revenue was $2.461 billion, down 3%; Customer Support and Services revenue was $401 million, essentially flat. Service-segment operating margin fell to 17.9% from 23.1%, while Measurement Solutions margin was 19.8% versus 20.1%.
Fourth quarter: Revenue was $750 million versus $762 million in Q4 FY2014; operating income was $111 million versus $130 million; net income was $277 million versus $101 million. The annual filing does not separately explain the Q4 net-income increase; the full-year tax benefit is a major factor to investigate.
Material changes, outlook and notable items
- Communications revenue weakened, particularly wireless manufacturing after strong prior-year 4G infrastructure demand and continued smartphone/device manufacturing weakness. Aerospace and defense revenue was approximately flat; industrial, computer and semiconductor revenue also declined year over year.
- Foreign exchange reduced FY2015 revenue growth by 4 percentage points. Revenue grew 3% in the Americas but declined in Europe, Japan and Asia Pacific excluding Japan.
- Keysight acquired Anite in August 2015 for approximately $558 million net of cash acquired, funded with existing cash. Anite contributed $25 million in revenue and a $14 million net loss from acquisition through year-end. Acquisition and integration costs were $14 million; preliminary purchase accounting included $317 million of goodwill and $244 million of intangible assets. Keysight also acquired Electroservices for $16 million net of cash acquired.
- The FY2015 income-tax benefit was $125 million, compared with tax expense of $83 million in FY2014. The effective rate was a benefit of 32%, substantially affected by Singapore tax incentives; total tax-incentive benefits were $250 million, including $1.21 per diluted share from one-time retroactive incentives. This materially boosted reported net income.
- Operating cash flow declined partly because FY2015 included $46 million of interest payments, $48 million of pension contributions, $40 million of income-tax payments and net payments to Agilent, compared with different prior-year cash-flow timing. Investing cash outflow was $671 million, including $574 million for acquisitions and $92 million of capital expenditures.
- Management estimated long-term market growth of 2%–3%, while noting mixed macroeconomic indicators. It planned continued R&D investment and emphasized wireless communications, software, modular solutions and services. This is a market view, not formal company revenue or earnings guidance.
- Workforce reduction and voluntary early-retirement programs were expected to produce approximately $18 million in annual net savings; most actions were expected to be completed by the end of Q1 FY2016. Additional separation-related costs of $12–$17 million were expected through FY2016.
- Management stated that available cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least twelve months. Approximately $338 million of cash was held outside the U.S.; repatriation could incur U.S. taxes. The company reported no material pending legal matters expected to materially affect results.
Risks and contingencies
- Demand is exposed to economic cycles, seasonal order patterns, technology spending, customer cancellations, pricing pressure and the semiconductor and communications markets. Backlog was $779 million, nearly unchanged from $781 million, and management cautioned it is not a reliable medium- or long-term indicator.
- International operations, foreign exchange, supplier concentration, outsourced manufacturing and IT, and potential supply shortages may affect costs, deliveries and operations. Hedging covers exposures on a rolling period of up to twelve months, not longer-term currency risk.
- Debt covenants, pension funding, environmental remediation and indemnities, tax audits and the uncertain continuation or renewal of tax incentives could affect cash flow and earnings. The company also disclosed risks relating to acquisition integration, intellectual property, cybersecurity, regulation and catastrophic events.
- Keysight was still a recently separated company; historical periods included allocated Agilent expenses. Standalone costs were estimated to be approximately $15 million higher annually on a pretax basis, apart from identified one-time separation costs.
Most important facts for investors to verify
- How much of the $513 million net income and $3.00 diluted EPS reflects recurring operations versus the exceptional Singapore tax benefits; reconcile pretax income, tax provision and Q4 earnings.
- Whether underlying demand and orders stabilize after the 4% order decline, especially in communications and wireless manufacturing, and whether reported growth remains positive excluding currency and acquisition effects.
- Anite’s post-acquisition revenue, profitability, integration progress and purchase-accounting revisions, given its initial $14 million net loss and substantial goodwill and intangible assets.
- Cash conversion and liquidity after the acquisition: operating cash flow fell to $376 million, cash to $483 million, and $338 million was held abroad; confirm expected pension, debt-service and restructuring cash needs.
- Progress toward the stated $18 million annual restructuring savings, the expected FY2016 separation costs, and whether services-segment margins recover.
- Renewal and conditions of Singapore and other tax incentives, the potential effect of tax examinations, and the implications of the $50 million of unrecognized tax benefits.