Keysight Technologies, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Fiscal second quarter and six months ended April 30, 2019; comparisons are to the corresponding 2018 periods. Amounts are in U.S. dollars, millions except per-share data.
Business context and performance
Keysight provides electronic design and test solutions, products, software, and related services to communications, networking, and electronics markets. Its three reportable segments are Communications Solutions Group (CSG), Electronic Industrial Solutions Group (EISG), and Ixia Solutions Group.
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Orders | $1,121; +14% | $987 | $2,137; +10% | $1,951 |
| Revenue | $1,090; +10% | $990 | $2,096; +15% | $1,827 |
| Gross margin | 59.5% | 54.5% | 58.5% | 52.8% |
| Operating income / margin | $185 / 17.0% | $86 / 8.7% | $306 / 14.6% | $69 / 3.8% |
| Net income | $153 | $64 | $267 | $158 |
| Diluted EPS | $0.80 | $0.34 | $1.40 | $0.83 |
Q2 revenue comprised $911 of products and $179 of services and other. Management attributed growth principally to higher volume and favorable mix. CSG led revenue growth, supported by commercial communications; EISG also grew, while Ixia’s strong Q2 growth followed prior-year integration challenges. Q2 segment revenue was $676 for CSG, $299 for EISG, and $115 for Ixia.
Cash flow, liquidity, and debt
- First-half operating cash flow was $461, versus $282 a year earlier. Capital expenditures were $60; investing cash outflow was $49. Derived operating cash flow less capital expenditures was $401.
- Cash, cash equivalents, and restricted cash totaled $1,280 at April 30, 2019, up from $917 at October 31, 2018; about $844 was held outside the U.S. Balance-sheet cash and cash equivalents were $1,277.
- Total debt was $1,792: $500 current and $1,292 long-term. The $450 revolving facility had no borrowings outstanding, and Keysight reported covenant compliance. Cash and restricted cash exceeded total debt by approximately $512, a derived comparison.
- Management said available cash, operating cash generation, capital-market access, and credit lines should meet liquidity requirements for at least the next 12 months.
Material changes and unusual items
- Keysight adopted ASC 606 on November 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption increased reported first-half revenue by $17 and net income by $11 versus amounts without adoption, affecting period comparability.
- First-half 2019 tax expense was $46, including a $29 discrete tax benefit; the estimated FY2019 effective tax rate was 23.3% excluding discrete items. The prior-year first-half tax benefit was $98, including a $103 benefit related primarily to U.S. tax-law changes, making year-over-year earnings comparisons less directly comparable.
- Share repurchases totaled $70 in the first half. Keysight repurchased 343,722 shares during Q2 under its authorization.
- Wildfire-related costs were immaterial in the first half. Keysight had received $90 of insurance proceeds to date and estimated an additional $30–$40 in FY2019; timing and realization remain uncertain.
Outlook, commentary, and risks
Management described strong next-generation R&D investment across end markets and said it remained confident in those markets, while monitoring trade, tariff, monetary, and fiscal developments. It cited continued investment in leading-edge technologies and operational-efficiency work. The filing does not provide specific revenue or EPS guidance. Expected FY2019 capital spending, including wildfire recovery, was approximately $135.
Key disclosed risks include economic and market cyclicality, customer spending and order timing, competition and rapid technology change, returns on investments in 5G and other emerging technologies, China-related trade restrictions and export controls, supply-chain and contract-manufacturing dependence, foreign-exchange exposure, cybersecurity, and tax uncertainty. Keysight was appealing a Malaysian tax assessment associated with 2008; it had paid $68 in taxes and penalties in 2017 and stated that it disputed the assessment. Management reported no pending legal matters it believed probable of materially affecting the business or financial results.
Important facts for investors to verify
- How much reported growth and earnings improvement reflects underlying demand and margins versus ASC 606 timing and the unusually large prior-year tax benefit.
- Whether orders convert to revenue as expected, particularly given longer order-to-revenue cycles for solution sales, and whether growth across CSG, EISG, and Ixia is sustained.
- The impact of trade restrictions, tariffs, export controls, and market cyclicality on customers, suppliers, and Keysight’s China-related activity.
- Cash conversion, inventory growth, capital spending, and the timing of estimated wildfire insurance recoveries.
- Potential developments in the Malaysian tax appeal, other tax examinations, and the renewal and continued availability of tax incentives.