Keysight Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended January 31, 2015 (fiscal Q1 2015). Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted. Keysight became an independent public company on November 1, 2014, so the prior-year comparison is based on combined historical results that included costs allocated by Agilent.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Orders | $691 | $699 | Down 1%; up 1% excluding currency |
| Net revenue | $701 | $671 | Up 4%; up 7% excluding currency |
| Product revenue | $596 | $563 | Up 6% |
| Services and other revenue | $105 | $108 | Down 3% |
| Gross margin | 54.6% | 55.4% | Down 0.8 percentage points |
| Operating income / margin | $81 / 11.6% | $91 / 13.6% | Income down $10; margin down 2.0 points |
| Net income | $70 | $74 | Down $4 |
| Diluted EPS | $0.41 | $0.44 | Prior-period share count reflects shares distributed at separation |
| Operating cash flow | $92 | $135 | Down $43 |
| Capital expenditures | $15 | $11 | Investing cash outflow totaled $14 |
Higher inventory charges and wireless manufacturing pricing pressure weighed on gross margin, partly offset by lower warranty charges. Increased spending, separation costs and lower gross margin contributed to the operating-margin decline. Interest expense was $12, compared with none in the prior-year quarter, reflecting the senior notes. The effective tax rate was 10.1%, including a $10 net discrete tax benefit; the prior-year rate was 19.5%, including a $9 net discrete tax expense.
Segments and markets
- Measurement Solutions: Revenue was $606, up 6% (up 8% excluding currency); segment operating income was $107 versus $99. Segment operating margin increased to 17.7% from 17.2%.
- Customer Support and Services: Revenue was $95, down 2% (up 1% excluding currency); segment operating income fell to $13 from $19. Segment operating margin declined to 13.7% from 20.0%, reflecting service mix and higher costs.
- Communications test, about 33% of revenue, and aerospace and defense, about 25%, grew. Industrial, computer and semiconductor test, about 42%, declined.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $887 at January 31, 2015, up from $810 at October 31, 2014; approximately $686 was held outside the U.S.
- Current assets were $1,892 and current liabilities were $700. Total assets were $3,029; total liabilities were $2,111; equity was $918.
- Long-term debt was $1,099: $499 of 3.30% notes due 2019 and $600 of 4.55% notes due 2024. The $300 unsecured revolving facility had no borrowings outstanding; Keysight reported covenant compliance.
- Operating, investing and financing cash flows were $92, $(14) and $7, respectively. Cash increased by $77, including an $8 foreign-exchange effect. The company paid approximately $14 to Agilent during the quarter; substantially all of the $64 payable to Agilent at quarter-end was paid after quarter-end.
Outlook, commentary and risks
- Management described a near-term slow-growth electronic measurement environment and estimated long-term market growth of 3%–4%. It expected steady communications growth, mixed aerospace and defense conditions, and a return to modest growth in industrial, computer and semiconductor markets.
- Management expected approximately $100 of capital expenditures for fiscal 2015 and approximately $32 of contributions to non-U.S. defined-benefit plans during the remainder of the year. It stated available cash, operating cash generation and access to capital and credit should meet liquidity needs for at least 12 months.
- Incremental annual pre-tax costs of operating independently were estimated at approximately $20. Additional non-recurring separation costs of $20–$25 were expected through fiscal 2016. Q1 separation costs were $7.
- Key exposures include market cyclicality and order uncertainty, pricing and inventory risk, foreign-currency movements, international operations, outsourcing and supply-chain performance, and dependence on successful new products. The company also identified separation-related risks, including transition-service dependence, indemnification and tax matters, and the need to establish independent systems. Its IT transition from Agilent occurred during Q1.
- Approximately 76% of Q1 revenue was generated in U.S. dollars. Management’s sensitivity analyses indicated hypothetical adverse 10% foreign-exchange or interest-rate movements would not have a material effect, but currency exposure is not fully hedged over periods beyond the rolling 12-month hedge horizon.
- Keysight reported no pending legal matters it believed were reasonably likely to have a material impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether orders stabilize or improve, particularly in communications test and industrial, computer and semiconductor test, and in Europe and Japan.
- Whether gross-margin pressure, including inventory charges and wireless pricing, persists and whether the support-services margin recovers.
- Actual cash generation and capital spending relative to the $100 fiscal-year estimate, including pension contributions and post-quarter payment to Agilent.
- Progress and final costs of the Agilent separation, transition services and independent systems, along with any changes to the stated tax assumptions or separation-related obligations.
- How much of overseas cash can be accessed for U.S. needs and whether foreign-exchange exposure, tax matters or other contingencies change materially.