Keysight Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended April 30, 2015. Keysight, a provider of electronic measurement solutions, became a stand-alone public company on November 1, 2014. Fiscal 2014 comparative results include expenses allocated by former parent Agilent, so they are not fully like-for-like with stand-alone 2015 results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $740m | $743m | $1,441m | $1,414m |
| Operating income | $128m | $127m | $209m | $218m |
| Net income | $96m | $110m | $166m | $184m |
| Diluted EPS | $0.56 | $0.66 | $0.97 | $1.10 |
| Gross margin | 56.3% | 55.9% | 55.5% | 55.7% |
| Operating margin | 17.4% | 17.1% | 14.5% | 15.4% |
Q2 revenue was flat year over year as reported and up 3% excluding currency effects; six-month revenue rose 2% reported and 5% excluding currency. Product revenue increased 1% in Q2 and 3% for six months; services and other revenue declined 6% and 4%, respectively. Orders fell 11% in Q2 and 6% for six months (down 8% and 4% excluding currency).
Q2 operating income was broadly stable, while net income declined. Six-month operating income fell despite revenue growth. Q2 interest expense was $11m and six-month expense $23m, versus none in the comparative periods, reflecting senior notes issued in October 2014. R&D expense rose 7% in both periods; SG&A declined 4% in Q2 but increased 2% for six months.
Segments: Measurement Solutions revenue was $638m in Q2, essentially flat, and $1,244m for six months, up 2%; six-month segment operating income increased to $239m from $230m. Customer Support and Services revenue fell 1% in Q2 and 2% for six months, while segment operating income declined 30% and 31%, respectively, to $18m and $31m. Its margin pressure reflected higher people and infrastructure costs and a less favorable service mix.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $160m, versus $275m a year earlier. Capital expenditure was $31m; investing cash outflow was $30m. Financing cash outflow was $38m, including $49m returned to Agilent. Cash increased $84m to $894m.
- At April 30, cash and cash equivalents were $894m, current assets $1,927m and current liabilities $631m. Long-term debt was $1,099m, unchanged from October 31, 2014; cash was therefore below debt. Approximately $763m of cash was held outside the U.S.
- Debt consists of $499m of 3.30% senior notes due 2019 and $600m of 4.55% senior notes due 2024. The company had no borrowings under its $300m unsecured revolving credit facility and reported compliance with its covenants.
- Inventory was $476m, down from $498m at October 31, 2014. Management said it expects approximately $100m of capital expenditures for fiscal 2015.
Outlook, risks and unusual items
- Management estimates long-term market growth of 3%–4%, but described near-term markets as softened, particularly communications. It expects mixed aerospace and defense conditions and cited mixed macroeconomic indicators. No specific quarterly revenue or earnings guidance is provided in the filing.
- Management plans continued R&D investment and operational savings initiatives over the next 24 months. It estimates incremental annual stand-alone costs of approximately $20m pre-tax and additional separation costs of $15m–$20m through fiscal 2016.
- A finalized Singapore tax incentive reduced current tax provision by $21m and benefited six-month diluted EPS by approximately $0.12; a further $6m discrete tax benefit related to fiscal 2014 added approximately $0.03 per diluted share. The incentive is due for renewal in fiscal 2024. The six-month effective tax rate was 17.2%; management estimated a 20.6% annual rate excluding discrete items.
- Key risks include weaker or volatile customer demand, order declines in several end markets, currency exposure, competition and product-cycle execution, supply-chain and outsourcing dependence, and the costs and operational risks of being newly independent from Agilent. The filing also highlights tax, pension, cybersecurity, environmental, intellectual-property, and separation-related indemnification risks.
- Keysight reported ordinary-course legal matters but no pending matters it believed reasonably possible of materially affecting the business or financial results. Foreign deferred-tax allocation discussions with Agilent continued; the filing states that material changes to unrecognized tax benefits could be possible within 12 months, despite a separate note saying such a change was not considered reasonably possible.
Most important facts for investors to verify
- Whether falling orders—especially in communications and Asia Pacific excluding Japan—translate into lower revenue in subsequent quarters.
- Whether Customer Support and Services can stabilize margins and operating income after the marked six-month decline.
- How operating cash flow performs relative to net income, capital spending, pension contributions and debt service.
- Whether the Singapore incentive’s benefits recur and how Agilent-related tax allocation discussions affect deferred tax balances and future tax rates.
- Actual stand-alone costs, remaining separation expenses, and progress and savings from planned cost-reduction programs.
- Cash availability and tax consequences of the substantial offshore cash balance, alongside the company’s $1,099m debt and revolving-credit covenants.