Keysight Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2023. This is an annual report, not a standalone fourth-quarter earnings report. Keysight provides design and test hardware, software, and services to communications, aerospace and defense, automotive, semiconductor, and other electronics markets.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $5.464 billion | $5.420 billion | +1% |
| Gross margin | 64.6% | 63.7% | +0.9 percentage points |
| Operating income | $1.358 billion | $1.334 billion | +2% |
| Operating margin | 24.8% | 24.6% | +0.2 percentage points |
| Net income | $1.057 billion | $1.124 billion | -6% |
| Diluted EPS | $5.91 | $6.18 | -4% |
| Operating cash flow | $1.408 billion | $1.144 billion | +$264 million |
Services and other revenue rose 9% to $1.128 billion and increased to 21% of revenue; product revenue declined 1% to $4.336 billion. Higher gross margin reflected pricing and favorable mix, partly offset by warranty costs. Net income fell primarily because of higher income tax, R&D, and SG&A expense; higher interest income and revenue partly offset those increases. The effective tax rate rose to 22% from 13%, largely reflecting U.S. capitalization of research and experimental expenditures.
- Segments: Communications Solutions Group (CSG) revenue fell 3% to $3.685 billion, with commercial communications weakness partly offset by aerospace, defense, and government growth. Electronic Industrial Solutions Group (EISG) revenue increased 10% to $1.779 billion, with growth across its markets and regions.
- Orders and backlog: Orders declined 13% to $5.190 billion. Backlog fell to approximately $2.290 billion from $2.550 billion, as shipments and revenue outpaced orders.
- Margins and investment: R&D expense was $882 million, or 16% of revenue. Management cites continued investment in growth markets and leading-edge technologies.
- Cash flow and spending: Investing activities used $288 million, including $196 million in capital expenditures and $85 million, net of acquired cash, for acquisitions. Operating cash flow included $107 million of proceeds from termination of interest-rate swaps.
- Liquidity and debt: Cash, cash equivalents, and restricted cash totaled $2.488 billion; cash and cash equivalents on the balance sheet were $2.472 billion. Debt was $1.794 billion carrying value ($1.8 billion par), including $599 million of notes due in 2024. The $750 million revolving facility had no borrowings outstanding. Management said available cash, operating cash generation, and access to credit and capital markets should meet foreseeable needs.
Changes, outlook, and notable matters
- FY2023 revenue growth slowed markedly from 10% in FY2022 to 1%; orders reversed from 12% growth in FY2022 to a 13% decline. Management attributed softer demand to customer spending caution, post-pandemic inventory dynamics, inflation, higher rates, currency movements, geopolitical tensions, and trade restrictions.
- Management expects customers to continue investing in technologies including 5G/early 6G, high-speed data centers, satellite networks, AI/ML, next-generation vehicle technologies, industrial IoT, and defense modernization. It expressed confidence in long-term market trends but did not provide a clear numerical revenue or earnings forecast in the supplied filing text.
- In November 2023, after year-end, Keysight acquired 50.6% of ESI Group for approximately $512 million and made a tender offer for the remaining shares. The offer was to be primarily funded with approximately $457 million placed in escrow.
- The company repurchased 4.914 million shares for $702 million during FY2023. A new $1.5 billion repurchase authorization was approved in March 2023. Keysight stated it does not currently pay dividends and does not anticipate cash dividends in the foreseeable future.
- FY2024 capital spending was expected to be approximately $150 million, down from $196 million in FY2023, mainly due to lower capacity-expansion investment. The filing also identified $4.602 billion of specified cash requirements, including debt, leases, purchase commitments, and other liabilities.
- Unusual and contingent items: The filing reports a $45 million unrealized loss on foreign-exchange forwards associated with the ESI acquisition. The 2021 ITAR consent agreement carried a $6.6 million penalty; the suspended portion was satisfied through qualifying compliance spending. Keysight is defending U.S., German, and ITC patent-infringement proceedings brought by Centripetal Networks; management did not consider pending matters probable and reasonably possible of having a material impact, while noting outcomes remain uncertain.
- Tax and regulatory risks: A Malaysia tax dispute relating to fiscal 2008 remained unresolved; a Court of Appeal decision was expected February 29, 2024. Singapore tax incentives expire July 31, 2024, and Malaysia incentives expire October 31, 2025. The filing also highlights export-control and sanctions exposure, including the discontinuation of Russian operations.
- Audit and controls: PwC issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting. The audit identified U.S. defined-benefit obligations, including the discount-rate assumption, as a critical audit matter.
Important facts for investors to verify
- Whether order trends and the lower backlog stabilize or translate into further revenue weakness, especially in commercial communications and Asia Pacific.
- Whether ESI Group’s tender offer and integration proceed as planned, and the resulting cash use, financing needs, and strategic returns.
- The effect of the higher tax rate and expiration or renewal of Singapore and Malaysia tax incentives on future earnings and cash taxes.
- The status and potential financial or operational effects of the Centripetal litigation and the Malaysia tax dispute.
- Debt refinancing or repayment of the $600 million 2024 notes, and whether liquidity remains adequate after the ESI transaction and contractual commitments.
- Inventory levels and purchase commitments: inventory rose to $985 million from $858 million while orders declined, increasing the importance of demand and obsolescence monitoring.