Keysight Technologies, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; comparisons are to the three months ended January 31, 2018 unless noted. Amounts are in millions except per-share data. The filing is unaudited.
Business context and results
Keysight sells electronic design and test products and related services to communications, aerospace, defense, government, electronics and networking markets. It reorganized its services business into customer- and end-market-aligned segments during the quarter; prior segment results were revised to match the new structure.
| Metric | Q1 FY2019 | Q1 FY2018 | Change/comment |
|---|---|---|---|
| Orders | $1,016 | $964 | +5% reported; +7% excluding currency and divestitures |
| Net revenue | $1,006 | $837 | +20% reported; +22% excluding currency and divestitures |
| Product revenue | $837 | $684 | +22% |
| Services and other revenue | $169 | $153 | +11% |
| Gross margin | 57.4% | 50.7% | +6.7 percentage points |
| Operating income (loss) | $121 | $(17) | Operating margin 12.0%, versus (2.0)% |
| Net income | $114 | $94 | Diluted EPS $0.60 versus $0.50 |
| Operating cash flow | $240 | $171 | Higher by $69 |
| Capital expenditures | $31 | $24 | Net cash used in investing activities was $29 versus $24 |
Financial position and segment performance
- At January 31, cash and cash equivalents were $1,098; cash, cash equivalents and restricted cash totaled $1,102. Current assets were $2,544 and current liabilities $1,400.
- Total debt was $1,790, including $499 classified as short-term and $1,291 long-term. No borrowings were outstanding under the $450 revolving credit facility, and the company reported compliance with its covenants.
- Communications Solutions Group revenue was $623 (+25%); Electronic Industrial Solutions Group revenue was $257 (+13%); Ixia Solutions Group revenue was $129 (+1%), including $3 of acquisition-related amortization in segment revenue reporting. Ixia operating income declined to $12 from $18.
- Research and development expense rose 16% to $173; selling, general and administrative expense declined 2% to $288.
Material changes and unusual items
- Keysight adopted ASC 606 on November 1, 2018 using the modified retrospective method; prior-year results were not restated. Adoption increased Q1 FY2019 reported revenue by $14 and net income by $10 versus amounts that would have been reported without adoption, primarily reflecting software license revenue timing. The filing says it does not expect a material revenue impact for the remainder of FY2019.
- The prior-year comparison includes a $117 income tax benefit, primarily from U.S. tax-law changes. Q1 FY2019 income tax expense was $6, including a $23 net discrete benefit; the reported effective tax rates were 5.2% and 515.8%, respectively. Management estimated a FY2019 annual effective tax rate of 23.2%, excluding discrete items.
- Management attributed improved operating results mainly to higher revenue volume, favorable mix, and lower acquisition/integration and wildfire-related costs, partly offset by higher people-related costs and increased R&D investment.
- Q1 FY2019 included $40 of share repurchases. The company repurchased 686,398 shares at a reported average price of $58.26.
Outlook, risks and contingencies
- Management expected continued sales growth, citing R&D investment, acquisitions and demand for next-generation digital and electronic technologies. It did not provide specific revenue or earnings guidance in the supplied filing text.
- Expected FY2019 capital spending was approximately $135. The company expected to contribute about $23 to non-U.S. defined benefit plans during the remainder of the year.
- Management estimated additional wildfire-related insurance proceeds of $30–$40 during FY2019. Timing and recovery remain uncertain; no gain contingency was recognized. Q1 received $22 of insurance proceeds.
- The company is appealing a Malaysian tax assessment relating to 2008; it had paid $68 in taxes and penalties in 2017 and disputes the assessment. It could not estimate the range of possible changes in unrecognized tax benefits.
- Management reported no pending legal matter it believed reasonably likely to have a material impact. Risks discussed include rapid technological change and competition, cyclical demand, trade and geopolitical uncertainty, supply and outsourcing constraints, foreign-exchange exposure, cybersecurity, tax examinations, and integration of Ixia.
Key facts for investors to verify
- How much reported revenue and earnings growth reflects underlying demand versus ASC 606 timing, currency, divestitures and the unusually favorable prior-year tax comparison.
- Whether order growth converts to revenue, particularly as solution sales have longer order-to-revenue cycles; review the disclosed order trends by region and segment.
- Whether Ixia’s weaker margins and operating income improve as integration proceeds, and whether expected synergies are realized.
- Cash conversion and liquidity needs, including the $499 short-term debt classification, planned capital spending, pension contributions and share repurchases.
- Outcome and timing of the Malaysian tax appeal and wildfire insurance recoveries, including whether estimated proceeds are received.