Keysight Technologies, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021; comparative period ended January 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Keysight provides electronic design and test solutions, instruments, software, and related services. Its reportable segments are Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG). The company reported that its essential production facilities were open during the quarter despite COVID-19 restrictions.
- Orders were $1.223 billion, up 7% year over year; acquisitions and foreign currency each contributed 1 percentage point to growth.
- Revenue was $1.180 billion, up 8% (7% excluding currency effects and acquisitions). Products revenue rose 7% to $970 million; services and other revenue rose 9% to $210 million.
- Net income was $172 million versus $163 million; diluted EPS was $0.92 versus $0.86. The effective tax rate declined to 11.6% from 19.1%.
Financial metrics and material changes
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Gross margin | 59.9% | 59.8% |
| Operating income / margin | $212 million / 18.0% | $203 million / 18.5% |
| Operating cash flow | $295 million | $197 million |
| Capital expenditures | $28 million | $32 million |
| Cash, cash equivalents and restricted cash, quarter-end | $1.903 billion | $1.693 billion |
| Long-term debt, quarter-end | $1.790 billion | $1.790 billion |
Cash and cash equivalents on the balance sheet were $1.887 billion at January 31, 2021. Current assets were $3.566 billion and current liabilities $1.124 billion. The company had no borrowings on its $450 million revolving facility, which expires February 15, 2022, and reported covenant compliance. Operating cash flow increased year over year; the filing attributes the change in part to working-capital movements and the prior-period insurance gain being reflected as an investing cash flow.
- CSG revenue increased 4% to $852 million; segment operating income increased 11% to $224 million. Aerospace, defense and government revenue rose 20%, while commercial communications revenue fell 3%, with China trade restrictions cited as a key factor.
- EISG revenue increased 18% to $328 million, or 15% excluding acquisitions; segment operating income increased 32% to $96 million. Semiconductor and general electronics measurement growth was partly offset by weakness in automotive and energy.
- Overall operating margin fell 0.5 percentage point. Management cited unfavorable mix and higher warranty costs, as well as the absence of a prior-year $32 million insurance settlement gain. The gain had benefited Q1 FY2020 operating results.
- Keysight acquired Sanjole for $96 million net of $11 million cash acquired. The preliminary allocation included $41 million of goodwill and $51 million of intangible assets.
Outlook, commentary and risks
- Management expressed confidence in long-term growth opportunities, including 5G, next-generation automotive, IoT and defense modernization, but did not provide specific next-quarter revenue or earnings guidance in the supplied filing text.
- Fiscal 2021 capital spending was expected to be approximately $175 million. The estimated annual effective tax rate for FY2021 was 16.9%, excluding discrete items.
- Management said liquidity, operating cash generation and access to capital markets and credit lines should meet requirements for at least the next 12 months. It expected $6 million of non-U.S. pension contributions for the remainder of FY2021; potential U.S. plan contributions were under evaluation and not required.
- Key uncertainties include COVID-19 effects on customers, suppliers and operations; global economic volatility; U.S.-China trade and export restrictions; component availability and supply-chain capacity; foreign-exchange exposure; and the success and integration of acquisitions. Currency hedges generally cover a rolling period of up to 12 months.
- Tax matters include an IRS examination of the 2018 U.S. federal return and a Malaysian tax dispute concerning 2008. Keysight previously paid $68 million in Malaysian taxes and penalties and has appealed to the High Court; management said it believed it had defenses and had made adequate provisions for tax examinations.
- The company reported ordinary-course legal proceedings but no pending matters it believed were probable and reasonably possible of materially affecting its financial position, results or cash flows. It cautioned that litigation outcomes are inherently uncertain.
Important facts for investors to verify
- Whether order growth converts into revenue, particularly given the contrasting trends in commercial communications and aerospace, defense and government.
- How much of EISG’s growth and future performance depends on acquisitions, and whether Sanjole integration delivers expected benefits.
- Whether margins recover from unfavorable mix and higher warranty costs, and how results compare after accounting for the prior-year insurance gain.
- The sustainability of operating cash flow and the planned capital spending and share repurchases; a new program authorized up to $750 million, with $20 million repurchased in the quarter.
- Developments in the Malaysian tax appeal, the IRS examination, and renewal of tax incentives, including Singapore’s incentive due for renewal in 2024.
- COVID-19, trade restrictions, supply-chain conditions and customer spending trends that could affect demand, delivery and cash collection.