Keysight Technologies, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Fiscal second quarter and first six months ended April 30, 2021. Financial statements are unaudited; amounts are in millions except per-share data. Keysight supplies electronic design and test solutions and related services through its Communications Solutions Group (CSG) and Electronic Industrial Solutions Group (EISG).
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | H1 FY2021 | H1 FY2020 |
|---|---|---|---|---|
| Revenue | $1,221 | $895 | $2,401 | $1,990 |
| Income from operations | $235 | $102 | $447 | $305 |
| Net income | $186 | $71 | $358 | $234 |
| Diluted EPS | $0.99 | $0.37 | $1.91 | $1.23 |
| Gross margin | 60.4% | 57.7% | 60.1% | 58.9% |
| Operating margin | 19.3% | 11.4% | 18.6% | 15.3% |
Q2 revenue grew 36% year over year (products +41%; services and other +20%). H1 revenue grew 21% (products +22%; services and other +14%). Management attributed stronger results primarily to higher revenue volume; comparisons also benefit from COVID-related disruption in the prior-year periods.
- Segments, Q2: CSG revenue was $877 (up 34%) and segment operating income was $222; EISG revenue was $344 (up 42%) and segment operating income was $98. H1 segment revenue was $1,729 for CSG (up 18%) and $672 for EISG (up 29%). Segment measures exclude specified items and are not GAAP results.
- Cash flow, H1: Operating cash flow was $697, versus $495; investing cash use was $197, versus $28; financing cash use was $264, versus $220. Operating cash flow benefited from higher earnings and deferred revenue and compensation accruals; receivables, inventory and payables together used $66 of cash.
- Balance sheet, April 30: Cash and cash equivalents were $1,993 ($2,009 including restricted cash); current assets were $3,718 and current liabilities $1,288. Long-term debt was $1,790 on the balance sheet ($1,800 par value). No borrowings were outstanding on the $450 revolving facility. The company reported compliance with facility covenants.
- Capital allocation and investment: H1 capital expenditure was $61; management expected FY2021 capital spending of approximately $175, mainly to improve supply-chain resilience. H1 share repurchases totaled $240. Acquisitions used $136 net of cash acquired, including $102 for Sanjole.
Changes, outlook and notable items
- Orders rose 22% in Q2 and 15% in H1 year over year, with growth across all regions. Revenue increased across both segments and regions. Management cited strength in commercial communications, aerospace/defense/government, general electronics measurement and semiconductor measurement.
- Management pointed to longer-term customer investment in 5G/6G, next-generation automotive, IoT and defense modernization. The filing gives no specific revenue or earnings forecast for the next quarter or full year.
- COVID-19 restrictions had eased at many company sites, and production and services had ramped up. Management continued to monitor pandemic effects and the global semiconductor chip shortage.
- Effective tax rates were 10.7% for Q2 and 11.1% for H1, versus 34.9% and 24.6%. H1 tax expense included a $21 net discrete benefit; the lower rate also reflected tax credits and other tax-related factors. Tax incentives reduced H1 tax provision by $24.
- Other income/expense included a $16 loss on partial settlement of a non-U.S. pension plan. Q2 other expense was $8, compared with $22 income in the prior-year quarter. Prior-year H1 results included a $32 insurance-settlement gain, which also affects comparisons.
- Management identified no pending legal matters it currently believes are probable and reasonably possible of materially affecting the company. However, it disclosed ongoing tax examinations, including an appeal concerning a Malaysian 2008 tax assessment; Keysight had previously paid $68 in taxes and penalties and is pursuing the appeal.
Key risks and items to verify
- Whether semiconductor shortages, supply constraints, renewed COVID-19 disruptions or trade/export restrictions affect production, orders, costs or customer demand.
- Whether strong order growth converts to revenue and cash generation, particularly given working-capital variability and deferred-revenue movements.
- How sustainable earnings and margins are after accounting for the low effective tax rate, discrete tax benefits, and the prior-year insurance gain.
- Acquisition integration and performance, including Sanjole; acquired businesses contributed to goodwill and intangible assets.
- Resolution of tax matters, including the Malaysian appeal and IRS examination, and renewal of Singapore and Malaysia tax incentives in 2024 and 2025, respectively.
- Progress on the $750 stock repurchase authorization, remaining debt obligations, and planned FY2021 capital spending.