Keysight Technologies, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended October 31, 2016. This 10-K reports full-year results; the fourth-quarter figures are identified separately below. Keysight provides electronic design and test equipment, software and related services. Its three reporting segments are Communications Solutions Group (CSG), Electronic Industrial Solutions Group (EISG) and Services Solutions Group (SSG). The company reported approximately 10,300 employees and generated 65% of revenue outside the United States.
Financial performance and position
- Revenue: $2.918 billion, up 2% from $2.856 billion in FY2015. Product revenue was $2.440 billion; services and other revenue was $478 million.
- Profit and margins: Operating income was $406 million, down from $431 million; operating margin was 13.9%, versus 15.1%. Net income was $335 million, versus $513 million, and diluted EPS was $1.95, versus $3.00. Gross margin was 55.7%, essentially flat with 55.6%.
- Cash flow: Cash provided by operations was $416 million, compared with $376 million in FY2015. Investing activities used $90 million, including $91 million of capital expenditures; financing activities used $25 million.
- Liquidity and debt: Cash and cash equivalents were $783 million, up from $483 million; working capital was $1.210 billion. Long-term debt was $1.100 billion, consisting of $500 million of 3.30% notes due 2019 and $600 million of 4.55% notes due 2024. No borrowings were outstanding under the $450 million revolving credit facility.
- Fourth quarter: Revenue was $751 million, operating income $107 million, net income $92 million and diluted EPS $0.53.
Changes versus the prior comparable year
- Orders increased 3% to $2.953 billion, with growth across all segments and regions. Acquisitions contributed five percentage points to order growth; currency reduced growth by one point.
- Revenue growth was acquisition-led: acquisitions contributed approximately five percentage points, implying a decline excluding acquisitions. Management cited weakness in the smartphone supply chain and industry restructuring and consolidation, partly offset by 5G demand and data-center expansion.
- CSG revenue rose 3% to $1.752 billion, with acquisitions adding approximately eight percentage points to segment growth. EISG revenue rose 2% to $776 million; SSG was nearly flat at $402 million. SSG operating income fell to $63 million from $72 million, and its operating margin declined to 15.6% from 17.9%.
- Net income fell substantially despite higher revenue, in part because FY2015 included a large tax benefit from retroactively approved Singapore tax incentives. FY2015’s effective tax rate was a benefit of 32%; FY2016’s was 8%.
Outlook, commentary and risks
- Management estimated the long-term growth rate of its markets at 2%–3%, while describing near-term macroeconomic indicators as mixed. No specific earnings or revenue guidance was provided in the filing.
- Management emphasized investment in wireless communications, 5G, software, industry-focused solutions and services, alongside operational-efficiency efforts. R&D expense rose 10% to $425 million, or 15% of revenue.
- The company expects additional separation-related infrastructure optimization costs of approximately $25 million–$35 million through FY2018; it recognized $24 million in FY2016. Anite-related acquisition and integration costs were $18 million in FY2016.
- Key risks include economic and technology-spending weakness, product cycles and competition, reliance on contract manufacturers and specialized suppliers, international and currency exposure, cybersecurity and operational disruptions, and tax uncertainty. About $556 million of cash was held outside the U.S.; repatriation could incur U.S. taxes, net of applicable credits.
- Other items to note: Keysight repurchased $62 million of shares under a $200 million authorization and paid no dividends. Backlog was $807 million, up from $779 million, with most expected to convert to revenue within six months; management cautioned that backlog is not a reliable medium- or long-term indicator. The company reported no pending legal matters it believed reasonably likely to have a material impact. Auditors reported effective internal control over financial reporting.
Most important facts for investors to verify
- How much of future growth is organic, given that acquisitions contributed about five percentage points to FY2016 revenue growth while revenue excluding acquisitions declined.
- Whether smartphone-supply-chain weakness and industry consolidation persist, and whether 5G and data-center demand can offset them.
- The sustainability of the 8% effective tax rate, including the effects of foreign tax incentives, repatriation and ongoing tax examinations; FY2015’s unusually favorable tax benefit makes earnings comparisons less representative.
- Cash accessibility and potential repatriation taxes, pension funding needs, and the company’s capacity to service $1.1 billion of fixed-rate debt alongside contractual commitments.
- Whether SSG’s margin decline and planned investment in calibration and asset-management capacity deliver improved profitability.
- Integration progress and returns from Anite, including acquisition-related amortization and integration costs.
Comparability note: Keysight became independent from Agilent in November 2014; earlier historical results include allocated Agilent costs and may not represent standalone results. Segment presentation was also reorganized in FY2016, with prior periods revised to conform.