Keysight Technologies, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; comparative period is the three months ended January 31, 2015. Keysight provides electronic design and test solutions, related software, and support services. Anite, acquired in August 2015, is included from its acquisition date.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Orders | $679 million | $691 million | Down 2% |
| Net revenue | $721 million | $701 million | Up 3% |
| Operating income | $98 million | $87 million | Up 13% |
| Net income | $64 million | $70 million | Down 9% |
| Diluted EPS | $0.37 | $0.41 | Down 10% |
| Gross margin | 54.3% | 54.6% | Down 0.3 percentage points |
| Operating margin | 13.6% | 12.4% | Up 1.2 percentage points |
| Operating cash flow | $92 million | $92 million | Flat |
| Capital expenditures | $34 million | $15 million | Up $19 million |
- Product revenue was $601 million, up 1%; services and other revenue was $120 million, up 14%.
- Cash and cash equivalents were $572 million at quarter-end, versus $483 million at October 31, 2015. Approximately $410 million was held outside the United States.
- Long-term debt was $1.099 billion, comprising $499 million of 3.30% notes due 2019 and $600 million of 4.55% notes due 2024. Cash less long-term debt was approximately negative $527 million. The $450 million revolving credit facility was undrawn; the company reported covenant compliance.
- Operating cash flow less capital expenditures was approximately $58 million, compared with $77 million in the prior-year quarter. Cash increased by $89 million during the quarter.
- Current assets were $1.626 billion and current liabilities $602 million. The filing reports no borrowings under the credit facility or Anite overdraft facility.
Material changes versus prior period
- Revenue growth included approximately 6 percentage points from acquisitions; foreign exchange reduced reported growth by 2 percentage points. On a currency-adjusted basis, revenue grew 5%.
- Orders declined 2% as reported; acquisitions contributed 6 percentage points of order growth, while foreign exchange reduced the comparison by 3 percentage points. Currency-adjusted orders increased 1%.
- Net income fell despite higher operating income, principally alongside a higher income tax provision: $20 million versus $8 million. The effective tax rate was 23.7%, compared with 10.1%; the prior-year provision included a $10 million net discrete tax benefit, versus a $1 million net discrete expense this quarter.
- Operating income included a $10 million gain on the sale of a U.K. land tract. Management attributed the operating-margin improvement mainly to lower share-based compensation and the land-sale gain, partly offset by lower gross margin.
- Research and development expense increased 13% to $108 million, primarily reflecting Anite. Selling, general and administrative expense decreased 3% to $200 million, including lower share-based compensation and people-related costs.
- Communications revenue grew 5% including Anite, but declined excluding Anite amid smartphone supply-chain softness and customer restructuring. Aerospace and defense revenue decreased 1%; industrial, computer and semiconductor revenue grew 3%.
Outlook, management commentary and risks
- Management estimated long-term market growth of 2%–3%, while describing near-term conditions as slow-growth and macroeconomic indicators as mixed. It expected cautious wireless R&D and manufacturing spending, continued softness in industrial, computer and semiconductor markets, and uncertainty in international aerospace and defense markets.
- No specific quarterly revenue or EPS guidance is provided in the filing. Management estimated an annual effective tax rate of 22% excluding discrete items and 23.7% including them; tax incentives reduced this quarter’s tax provision by $8 million, or about $0.05 per diluted share.
- Management expected approximately $90 million of capital expenditures for FY2016 and approximately $29 million of contributions to non-U.S. defined benefit plans during the remainder of the year. It said available cash, operating cash generation, capital-market access and credit lines should meet liquidity needs for at least the next 12 months.
- Workforce-reduction and voluntary pre-retirement programs were expected to generate approximately $18 million in net annual savings. Severance payments were largely complete; current-quarter restructuring charges were immaterial. Management expected another $7 million–$12 million of separation-related costs through the remainder of FY2016.
- The board authorized a new share repurchase program of up to $200 million after quarter-end; purchases may be initiated, suspended or discontinued at the company’s discretion.
- Key disclosed risks include uncertain global demand and order timing, customer and industry consolidation, foreign-exchange exposure, acquisition integration, supply-chain and manufacturing constraints, tax examinations and uncertain tax positions, pension funding, cybersecurity and IT disruption, and potential liabilities associated with the Agilent separation. The company reported no pending legal matter it believed reasonably likely to have a material impact.
Investor facts to verify
- Whether underlying revenue and order trends excluding Anite support reported growth, particularly in communications and the smartphone supply chain.
- Whether the $10 million land-sale gain, lower share-based compensation and acquisition-related costs affect the sustainability of operating-margin performance.
- Whether cash generation covers planned capital expenditures, debt service, pension contributions and the authorized buyback, considering the location and potential tax cost of overseas cash.
- How the higher effective tax rate, tax incentives, Agilent tax-allocation discussions and uncertain tax positions may affect future earnings and cash taxes.
- Progress on Anite integration and delivery of the expected $18 million annual restructuring savings, alongside management’s cautious near-term market outlook.