Keysight Technologies, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 31, 2021. Amounts are in millions of U.S. dollars, except per-share data and percentages. The filing is unaudited. Keysight provides electronic design and test solutions and related services through its Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $1,246 (+23%) | $1,011 | $3,647 (+22%) | $3,001 |
| Gross margin | 63.2% | 59.9% | 61.2% | 59.2% |
| Operating income | $284 | $182 | $731 | $487 |
| Operating margin | 22.7% | 18.0% | 20.0% | 16.2% |
| Net income | $254 | $176 | $612 | $410 |
| Diluted EPS | $1.36 | $0.93 | $3.27 | $2.16 |
| Orders | $1,310 (+23%) | Not stated | $3,865 (+17%) | Not stated |
Quarterly product revenue was $1,021, up 26%; services and other revenue was $225, up 14%. Q3 revenue increased across both segments. CSG revenue was $875 (+15%) and EISG revenue was $371 (+48%). For the nine months, CSG revenue was $2,604 (+17%) and EISG revenue was $1,043 (+35%).
Gross-margin improvement reflected higher volume and lower acquisition-related amortization; lower warranty costs also helped Q3. Operating expenses increased: Q3 R&D rose 23% to $207 and selling, general and administrative expense rose 17% to $302. Management attributed increases primarily to investment in growth technologies, variable compensation, infrastructure and acquired-business costs.
Cash flow, liquidity and debt: For the first nine months, operating cash flow was $954 versus $678 a year earlier; investing cash outflow was $238 versus $379; financing cash outflow was $317 versus $198. Cash, cash equivalents and restricted cash were $2,170 at July 31, compared with $1,767 at October 31, 2020. Long-term debt carrying value was $1,791; debt at par was $1,800. No revolving-facility borrowings were outstanding. The company reported $750 of unsecured revolving capacity, expiring July 2026, and compliance with its covenants. Management said available cash, operating cash flow and access to capital and credit should meet liquidity needs for at least 12 months.
Fiscal 2021 capital spending was expected to be approximately $170. Share repurchases totaled $320 for the nine months under a $750 authorization. No dividend is currently paid.
Changes, outlook and notable items
- Year-over-year comparisons benefited from a soft prior-year period affected by COVID-19-related site closures and supply-chain disruption. Management reported sequential recovery, reopened most sites and ramped production and service operations.
- Management cited continued customer investment in 5G/6G, next-generation automotive, IoT, semiconductor technologies and defense modernization, and expressed confidence in long-term secular market trends. The filing gives no specific revenue or earnings guidance for the next quarter.
- Global semiconductor shortages and supply constraints prompted advance purchasing. Commitments to contract manufacturers and suppliers rose to $465 from $349 at October 31, 2020; other purchase commitments increased to $62 from $52.
- Tax expense included discrete tax benefits of $26 in Q3 and $46 for the nine months. The nine-month effective tax rate was 9.0%, versus 17.2%; tax incentives reduced the nine-month provision by $41. These benefits affected reported earnings and may not represent a recurring rate.
- Keysight acquired Sanjole for $102 net of cash acquired and undertook other acquisition activity costing $34 net of cash acquired during the nine months. A $16 loss arose from partial settlement of the Netherlands defined-benefit plan.
- On August 3, 2021, the company agreed to a $6.6 penalty to resolve alleged export-control violations; $2.5 was suspended. The agreement also requires a special compliance officer for three years.
Principal risks and contingencies
- COVID-19 and variants could disrupt company, supplier or customer operations; the filing specifically flags the global semiconductor shortage and the potential effects of renewed restrictions.
- Trade restrictions, tariffs and U.S.-China tensions may affect customers, suppliers and demand. Management reported that China trade restrictions partly offset commercial-communications growth.
- Demand volatility, customer spending, competition, technology transitions, and the ability to bring new solutions to market create risks to revenue and margins. Supply shortages, longer lead times and advance purchase commitments also raise inventory and fulfillment risks.
- Foreign-exchange movements, tax examinations and changes to tax incentives may affect results. The Malaysian 2008 tax dispute remains under appeal; management stated it believes it has defenses and has provided for expected examination adjustments.
- Ordinary-course litigation and investigations remain subject to uncertain outcomes. Management did not identify other pending matters it believed likely to have a material impact, but noted adverse outcomes could cause damages or injunctive relief.
Investor verification priorities
- Assess how much earnings growth and the 9.0% nine-month effective tax rate depend on discrete tax benefits and tax incentives, including their renewal requirements.
- Monitor semiconductor availability, supplier commitments, inventory and delivery performance, given increased capacity-related purchase commitments.
- Compare order growth with subsequent revenue conversion and evaluate whether strong EISG growth and recovery from the prior-year COVID-affected comparison persist.
- Review cash generation and capital allocation, including $320 of repurchases, planned capital spending of approximately $170, and the new $750 revolving facility.
- Track the costs and compliance obligations under the export-control consent agreement, the Malaysian tax appeal, and any material developments in other legal or tax matters.