Keysight Technologies, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 31, 2022. Amounts are in U.S. dollars; financial statements are unaudited. Keysight provides electronic design and test products and related services. Its reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Key financial results
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $1.376B | $1.246B | $3.977B | $3.647B |
| Gross margin | 63.8% | 63.2% | 63.9% | 61.2% |
| Operating income | $357M | $284M | $955M | $731M |
| Operating margin | 25.9% | 22.7% | 24.0% | 20.0% |
| Net income | $338M | $254M | $825M | $612M |
| Diluted earnings per share | $1.87 | $1.36 | $4.52 | $3.27 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $746M | $954M |
- Quarterly revenue rose 10% year over year; nine-month revenue increased 9%. Products contributed $1.140B and services and other revenue $236M in Q3.
- Q3 revenue increased 11% at CSG to $970M and 10% at EISG to $406M. Nine-month growth was 8% at CSG and 12% at EISG.
- Q3 orders were $1.461B, up 12%; nine-month orders were $4.414B, up 14%. Foreign exchange reduced reported revenue growth by approximately 3 percentage points in Q3 and 2 points for the nine-month period.
- Cash and cash equivalents were $1.847B at July 31, versus $2.052B at October 31, 2021. Total debt was $1.792B; no borrowings were outstanding on the $750M revolving credit facility. The company reported compliance with debt covenants.
- Current assets were $3.961B and current liabilities $1.312B. Inventory increased to $837M from $777M, primarily reflecting higher material costs and stock-building to secure supply.
Material changes and cash flows
- Net income rose 33% in Q3 and 35% for the nine months. Management attributed the improvement mainly to higher revenue volume, favorable mix, lower variable people-related costs and lower acquisition-related amortization; Q3 also benefited from lower income tax expense. Higher material costs and higher SG&A partly offset gains.
- Gross and operating margins improved year over year. EISG gross margin fell 2 percentage points in both comparison periods, primarily due to higher material costs; CSG margins increased.
- Nine-month operating cash flow declined to $746M from $954M despite higher earnings. Management cited greater working-capital use, including receivables and inventory, higher supplier deposits, tax payments and payroll-related payments.
- Nine-month investing cash use was $190M, including $127M of capital expenditures and $33M for acquisitions. Financing cash use was $734M, including $723M of share repurchases. Cash, cash equivalents and restricted cash decreased by $205M during the period.
- Keysight repurchased 4.65M shares for $723M in the first nine months under a $1.2B authorization. Approximately $477M remained available at July 31, 2022.
Outlook, risks and unusual items
- The filing text does not provide a clear formal near-term revenue or earnings forecast. Management expressed confidence in long-term secular growth and cited customer investment opportunities in 5G/6G, mobility, industrial IoT and defense modernization.
- Fiscal 2022 capital-spending expectations were reduced to $170M–$210M from the previously estimated $240M–$260M; management attributed the change to procurement issues related to supply-chain challenges.
- Management said supply constraints were delaying shipments and increasing material costs. Inflation, foreign exchange movements, geopolitical tensions, trade restrictions, pandemic-related disruption and the risk of increased China-Taiwan tensions were identified as uncertainties.
- Keysight decided to permanently exit Russia following the invasion of Ukraine and related sanctions. For the first nine months, it recorded $11M of pretax expenses related to the exit, including $7M of asset impairment and other liquidation-related costs.
- Q3 and nine-month tax provisions included net discrete tax benefits of $38M and $47M, respectively. Singapore and Malaysia tax incentives reduced the nine-month provision by $63M; renewal is due in 2024 and 2025, respectively.
- The Inflation Reduction Act was enacted August 16, 2022, after quarter-end. The filing notes a 15% corporate minimum tax effective for Keysight beginning November 1, 2023, and a 1% excise tax on stock repurchases after December 31, 2022; the company was evaluating the effects.
- Supplier and contract-manufacturer non-cancellable commitments increased to $536M from $444M, reflecting capacity purchases, supply shortages and higher material costs.
- Legal matters include a $6.6M export-control consent-agreement penalty, of which $2.5M was suspended for remediation, and patent-infringement cases brought by Centripetal Networks in the U.S., Germany and before the ITC. Keysight denies the allegations and intends to defend them. Management said it did not currently expect these matters to have a material impact, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether supply constraints ease, shipment delays improve and inventory and supplier commitments convert into sales without excess or obsolete stock.
- Whether operating cash flow recovers as working-capital outflows moderate, and how continued repurchases compare with investment and liquidity needs.
- The durability of margin improvement given higher material costs, and the differing gross-margin trends in CSG and EISG.
- The impact of tax incentives, discrete tax benefits, the Malaysia tax dispute and the Inflation Reduction Act on future effective tax rates and repurchases.
- Developments in the Centripetal litigation and export-control remediation, as well as geopolitical, currency and trade risks.