Keysight Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 31, 2015. The unaudited statements cover Keysight’s first year as an independent public company following its November 2014 separation from Agilent. Prior-year results were prepared on a combined basis and include allocated Agilent costs, so comparisons are not fully like-for-like.
Business context and operating performance
Keysight provides electronic measurement instruments, systems, software and related services to communications and electronics industries. Its reportable segments are Measurement Solutions and Customer Support and Services.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Orders | $685 million | $722 million | $2,073 million | $2,203 million |
| Revenue | $665 million | $757 million | $2,106 million | $2,171 million |
| Operating income | $100 million | $121 million | $320 million | $339 million |
| Net income | $70 million | $107 million | $236 million | $291 million |
| Diluted EPS | $0.41 | $0.64 | $1.38 | $1.74 |
| Gross margin | 55.6% | 54.7% | 55.5% | 55.3% |
| Operating margin | 15.0% | 16.0% | 15.2% | 15.6% |
Q3 revenue declined 12% year over year, or 8% excluding currency effects; nine-month revenue declined 3%, and was flat excluding currency effects. Q3 orders fell 5% (1% excluding currency); nine-month orders fell 6% (3% excluding currency). Product revenue was $557 million in Q3 and $1,783 million for nine months; services and other revenue was $108 million and $323 million, respectively.
Q3 Measurement Solutions revenue fell 14% to $564 million, while Customer Support and Services revenue was flat at $101 million. Management cited communications-market weakness, including wireless manufacturing and wireless R&D, and Q3 aerospace and defense weakness. Industrial, computer and semiconductor test also declined in Q3. Customer services benefited from calibration and used-equipment sales, partly offset by lower equipment-repair revenue.
Cash flow, balance sheet and debt
- Operating cash flow: $295 million for the first nine months, down from $362 million. Investing activities used $72 million, including $66 million of capital expenditures; financing activities used $22 million. Cash increased $190 million to $1.00 billion.
- Liquidity: Current assets were $1.983 billion and current liabilities were $620 million at July 31, 2015. Approximately $875 million of cash was held outside the United States. Management said available cash, operating cash generation, capital-market access and credit lines should meet liquidity needs for at least 12 months.
- Debt: Long-term debt was $1.099 billion, comprising $499 million of 3.30% senior notes due 2019 and $600 million of 4.55% senior notes due 2024. Keysight had no borrowings under its unsecured revolving facility, increased to $450 million in July 2015, and reported covenant compliance.
- Capital spending: The company expected fiscal 2015 capital expenditures of approximately $95 million.
Material changes and unusual items
- Interest expense was $12 million for Q3 and $35 million for nine months, versus zero in the comparative 2014 periods, reflecting senior notes issued in October 2014.
- The nine-month 2015 tax provision benefited by $31 million from a Singapore tax-rate incentive, approximately $0.18 per diluted share. A further $6 million benefit related to fiscal 2014 was recorded. The reported effective tax rate was 17.7% for nine months; management estimated 20.1% excluding discrete items.
- As a subsequent event, Singapore officially sanctioned tax treatment for amortization of approximately $4.4 billion of acquired intellectual property. Keysight expected to record a deferred tax asset and income tax benefit of approximately $186–$208 million in the quarter ending October 31, 2015, net of uncertain tax benefits.
- Keysight acquired Anite on August 13, 2015, for approximately $600 million in cash. The U.K.-based wireless test and software business is intended to expand wireless design and test offerings and add a Network Test opportunity. Purchase accounting was still in progress.
- Q3 restructuring charges were $11 million. Programs included a targeted reduction of approximately 85 employees and voluntary early retirement elections by approximately 160 employees. Management expected about $18 million of annual net savings and anticipated completing most actions by the end of fiscal Q1 2016.
- Separation-related costs were $3 million in Q3 and $15 million for nine months. Management estimated another $12–$17 million through fiscal 2016. Ongoing incremental costs of operating independently were estimated at approximately $20 million annually before tax.
Outlook, commentary and risks
Management expected Q4 to be seasonally stronger than Q3, consistent with historical patterns, but noted mixed macroeconomic indicators. It cited a 2%–3% long-term growth rate for its markets. No specific revenue or earnings guidance was provided in the filing. The Anite acquisition was expected to broaden offerings; integration and realizing expected benefits remain execution considerations.
Key risks include cyclical and uncertain customer spending, order volatility and cancellations, competitive and pricing pressure, foreign-exchange exposure, supply-chain and outsourcing dependence, and the need to develop products as technology and standards change. Other notable exposures include international operations, tax incentives and tax examinations, pension funding, acquisition integration, debt and liquidity needs, and obligations associated with the recent separation from Agilent. Management reported no pending legal matters it believed were reasonably likely to have a material impact. Disclosure controls were assessed as effective, with no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether orders and revenue stabilize, particularly in communications and Asia Pacific, and whether the expected seasonal Q4 improvement occurs.
- Whether the $18 million expected annual restructuring savings are achieved and how restructuring, separation and independent-company costs affect margins.
- The amount and timing of the anticipated $186–$208 million Singapore-related tax benefit, including any uncertain-tax-benefit adjustments and continuing incentive conditions.
- How the Anite acquisition is financed and integrated, and its effect on cash, debt, earnings and future results.
- Cash availability and repatriation costs, given that approximately $875 million was held outside the United States, alongside the $1.099 billion of debt and acquisition cash outlay.
- Comparability of reported year-over-year results: 2014 included Agilent allocations, while 2015 includes standalone costs, new interest expense and different tax effects.