Keysight Technologies, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended January 31, 2022; unaudited. Comparisons are with the three months ended January 31, 2021 unless stated otherwise. Keysight supplies electronic design and test solutions and related services. Its reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $1,250 million | $1,180 million | +6% |
| Products / services and other revenue | $1,030 million / $220 million | $970 million / $210 million | +6% / +5% |
| Gross margin | 64.3% | 59.9% | +4 percentage points |
| Operating income / margin | $271 million / 21.7% | $212 million / 18.0% | Income +27%; margin +4 points |
| Net income | $229 million | $172 million | +33% |
| Diluted EPS | $1.24 | $0.92 | +35% |
| Operating cash flow | $224 million | $295 million | Down $71 million |
Revenue grew across all regions. Foreign currency reduced reported revenue growth by 1 percentage point. Orders were $1,495 million, up 22%, with growth across all regions. EISG revenue increased 13% to $372 million, led by semiconductor, automotive and energy demand; CSG revenue increased 3% to $878 million. Management attributed improved gross and operating margins mainly to lower acquisition-related amortization, favorable mix and higher volume, partly offset by higher material costs. Net income growth also reflected lower amortization and higher volume; higher R&D, SG&A and tax expense partially offset these benefits.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $1,992 million at January 31, 2022, versus $2,068 million at October 31, 2021. Cash and cash equivalents alone were $1,977 million.
- Long-term debt was $1,791 million carrying value ($1,800 million par value). The company had no borrowings on its $750 million revolving credit facility, which expires in July 2026, and reported covenant compliance.
- Operating cash flow was $224 million; investing activities used $49 million, including $42 million in capital expenditures; financing activities used $247 million, including $206 million of share repurchases and $72 million of taxes on net share settlement of equity awards.
- Operating cash flow fell despite higher net income, mainly because of higher variable compensation and payroll-related payments, prepaid assets and lower cash inflow from deferred revenue. Inventory increased to $804 million from $777 million, partly reflecting supply constraints and efforts to secure supply.
Outlook, risks and notable items
- Management expressed confidence in long-term secular market growth and cited continued customer investment opportunities in 5G/6G, next-generation automotive, IoT and defense modernization. The filing gives no specific revenue or EPS guidance for the next quarter.
- Fiscal 2022 capital spending was expected to be approximately $240 million to $260 million, with capacity and technology investments increasing. Management said available cash, operating cash generation and access to capital markets and credit lines should meet foreseeable cash needs.
- COVID-19-related supply-chain constraints were delaying component procurement, manufacturing and customer deliveries. Management also highlighted uncertainty from macroeconomic conditions, trade restrictions, geopolitical tensions, tariffs and foreign-exchange movements.
- A Consent Agreement resolving alleged export-control violations imposed a $6.6 million penalty over three years; $2.5 million was suspended and designated for remediation. Keysight had paid $1.1 million by January 31, 2022. Management said ordinary-course litigation was not then expected to have a material impact, while noting outcomes are uncertain.
- Tax matters include an IRS examination of the 2018 federal return and a disputed Malaysia 2008 tax assessment. Keysight’s appeals to two Malaysian bodies were unsuccessful; it filed a further appeal. Management said it had made adequate provision but could not predict examination outcomes. Singapore and Malaysia tax incentives reduced Q1 tax expense by $19 million and are due for renewal in 2024 and 2025, respectively.
- On February 24, 2022, Keysight announced that COO Satish Dhanasekaran would become CEO and president effective May 1, 2022; Ron Nersesian would become executive chair.
Important facts for investors to verify
- Whether supply constraints ease, and whether strong orders convert to revenue without delivery delays or cancellations.
- Whether inventory growth and weaker operating cash flow persist, and how planned capital spending affects cash generation.
- Progress and remaining costs under the export-control Consent Agreement, and developments in the Malaysia tax appeal and tax-incentive renewals.
- Execution of the CEO transition and continued investment in growth markets while sustaining margins.