Keysight Technologies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020. This annual filing also reports fourth-quarter results. Keysight provides electronic design, test and measurement products, software and related services. Its two reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $4.221 billion | $4.303 billion |
| Operating income | $765 million | $711 million |
| Net income | $627 million | $621 million |
| Diluted EPS | $3.31 | $3.25 |
| Gross margin | 60.0% | 58.9% |
| Operating margin | 18.1% | 16.5% |
| Cash from operating activities | $1.016 billion | $998 million |
| Capital expenditures | $117 million | $120 million |
| Cash and cash equivalents at year-end | $1.756 billion | $1.598 billion |
| Long-term debt at year-end | $1.789 billion | $1.788 billion |
Revenue declined 2% year over year; product revenue fell 3% while services and other revenue rose 5%. Net income increased about 1%. Higher margins and earnings despite lower revenue reflected favorable mix, lower variable compensation and reduced discretionary, travel and marketing spending, partly offset by lower sales volume. FY2020 operating cash flow included working-capital movements and pension contributions, including a $100 million contribution to the U.S. defined-benefit plan.
CSG generated $3.132 billion of revenue, down 1% on the segment basis reported by management; EISG generated $1.089 billion, down 4%. CSG operating income was $773 million and EISG operating income was $296 million. Revenue held flat in commercial communications as continued 5G investment offset pandemic disruption; aerospace, defense and government revenue declined 5%. EISG weakness in automotive, energy and general electronics was partly offset by semiconductor growth.
Fourth-quarter revenue was $1.220 billion versus $1.120 billion in Q4 FY2019; net income was $217 million versus $195 million, and diluted EPS was $1.15 versus $1.02.
Liquidity, debt and capital allocation
Working capital was $2.293 billion, compared with $2.212 billion a year earlier. Keysight reported $1.756 billion cash and $1.789 billion long-term debt at year-end; it had no borrowings under its $450 million revolving credit facility, which expires in February 2022. Senior notes comprise $600 million due 2024 at 4.55%, $700 million due 2027 at 4.60%, and $500 million due 2029 at 3.00%. Management said available cash, operating cash flow and access to capital markets and credit lines should meet liquidity needs for at least 12 months.
Investing cash use was $442 million, including $357 million net for acquisitions and intangible assets. Financing cash use was $413 million, primarily reflecting $411 million of share repurchases. The company repurchased 4.27 million shares during FY2020, nearly exhausting its $500 million authorization; the board approved a new $750 million authorization on November 18, 2020. Keysight does not currently pay dividends and does not anticipate cash dividends in the foreseeable future.
Outlook, risks and notable items
- Management reported pandemic-related site closures and supply-chain disruptions, but said production and services had ramped back up. It expected COVID-19 demand and supply headwinds to continue for the next few quarters, while remaining confident in long-term market trends and ongoing customer investment in technologies including 5G, 400G, advanced semiconductors, automotive, IoT and defense modernization. No quantitative earnings or revenue guidance was provided.
- Unfilled backlog rose to $1.709 billion from $1.380 billion; management expected most to convert to revenue within six months, while cautioning backlog is not a reliable medium- or long-term indicator.
- COVID-19, global economic volatility, trade restrictions and export controls, customer spending, supply-chain availability, competition, execution of new technologies and acquisitions, cybersecurity, foreign exchange, tax exposures and pension assumptions are among the material risks discussed.
- FY2020 included a $32 million operating gain from the final insurance settlement related to the 2017 Northern California wildfires. Keysight acquired Eggplant for $319 million net of cash acquired and two other businesses for $38 million; acquisition-related goodwill and intangible assets increased.
- The effective tax rate was 18%, versus 13% in FY2019. The company cited a prior-year tax-reserve release and acquired-entity integration effects. Singapore tax incentives are due for renewal in 2024; Malaysia’s incentive was confirmed for renewal for 2021–2025. A Malaysian tax audit relating to 2008 remains under appeal.
- Contractual obligations totaled $2.983 billion, including $1.800 billion of senior-note principal and $349 million of commitments to contract manufacturers and suppliers. The filing reported no material off-balance-sheet arrangements and no pending legal matter management believed reasonably likely to have a material impact.
Key facts for investors to verify
- Whether revenue and order trends recover as pandemic-related disruptions ease, and whether the higher backlog converts on the expected timetable.
- How margins and cash generation hold up if cost reductions unwind or demand weakens; distinguish recurring performance from the wildfire insurance gain and pandemic-related savings.
- Eggplant integration, acquisition returns and the effect of acquired intangible amortization and goodwill on reported results.
- Debt maturities, cash availability across jurisdictions, pension funding needs and the planned use of the new share-repurchase authorization.
- Tax-audit outcomes, renewal of Singapore incentives and other material contingent exposures.