Keysight Technologies, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017. The filing also reports fourth-quarter results for the three months ended October 31, 2017. Keysight provides electronic design, test, measurement, network visibility and security solutions, plus related services.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $3.189 billion | $2.918 billion |
| Income from operations | $239 million | $406 million |
| Operating margin | 7.5% | 13.9% |
| Net income | $102 million | $335 million |
| Diluted earnings per share | $0.56 | $1.95 |
| Operating cash flow | $313 million | $416 million |
| Cash and cash equivalents | $818 million | $783 million |
| Long-term debt, carrying value | $2.038 billion | $1.093 billion |
Revenue grew 9%; acquisitions contributed about 7 percentage points of growth. Orders increased 15% to $3.406 billion, including about 9 percentage points from acquisitions. Gross margin fell to 53.4% from 55.7%. Product revenue was $2.664 billion and services and other revenue was $525 million. Capital expenditures were $72 million; operating cash flow less capital expenditures was approximately $241 million.
Cash was $818 million, against $2.048 billion of total debt carrying value, or approximately $1.230 billion of net debt on that basis. Working capital was $1.358 billion. About $767 million of cash was held outside the United States. Management said available cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least 12 months.
Fourth-quarter revenue was $878 million and gross profit was $474 million; operating income was $39 million and net loss was $38 million, or $0.20 per diluted share. The quarter’s operating results included wildfire-related costs and other acquisition-related and amortization effects.
Segments and material changes
- Communications Solutions Group: Revenue of $1.738 billion, down 1%; commercial communications growth, including 5G and data-center demand, was offset by a 6% decline in aerospace, defense and government.
- Electronic Industrial Solutions Group: Revenue of $836 million, up 8%, led by semiconductor measurement and automotive and energy markets.
- Services Solutions Group: Revenue of $419 million, up 4%, with growth in calibration and used-equipment sales partly offset by lower repair revenue.
- Ixia: Acquired April 18, 2017 for $1.622 billion net of cash acquired; contributed network test, visibility and security products. The filing’s segment disclosures use different presentations for Ixia revenue, including acquisition-related amortization; the reported figures are not directly comparable to a full-year segment history.
- ScienLab: Acquired August 31, 2017 for $60 million net of cash acquired, adding automotive and electric-vehicle/battery testing capabilities.
Net income fell sharply despite revenue growth. Management attributed the decline principally to acquisition-related amortization; other pressures included higher acquisition and integration costs, increased SG&A and R&D, wildfire costs, and higher interest expense. Interest expense rose to $80 million from $47 million. The effective tax rate was 43%, including a $68 million payment for a disputed Malaysia tax assessment. A $68 million Japanese pension settlement gain partially offset operating costs.
Outlook, risks and unusual items
- Management said expanded technology offerings, acquisitions and increased R&D investment position Keysight for growth, with focus on next-generation digital and electronic technologies and operational efficiency. The filing gives no quantified revenue or earnings guidance.
- Unfilled backlog was approximately $950 million, up from $807 million; management expected a majority to convert to revenue within six months, while cautioning that backlog is not a reliable medium- or long-term indicator.
- Northern California wildfires disrupted the Santa Rosa headquarters. Keysight recorded $16 million of net costs in FY2017 and estimated total losses and expenses of $80–$110 million, which management believed would be recoverable under insurance. Recovery timing and recognized insurance amounts remained uncertain; management expected disruption to affect FY2018 first-half revenue seasonality.
- Keysight is appealing the $68 million Malaysia tax payment, including tax and penalties, and said it believes it has defenses to the assessment. Tax examinations, tax-incentive changes and the then-proposed U.S. tax legislation could affect future tax expense.
- Key risks include cyclical and seasonal demand, rapid technological change and competition, supplier and contract-manufacturing dependence, foreign-exchange and geopolitical exposure, acquisition integration, debt and covenant requirements, cybersecurity, and environmental and legal contingencies. The company reported no pending legal matter it believed reasonably likely to have a material impact.
- Debt includes $500 million of 3.30% notes due 2019, $600 million of 4.55% notes due 2024, $700 million of 4.60% notes due 2027, and a $260 million variable-rate term loan. The $450 million revolving facility had no borrowings outstanding at year-end. The company paid no dividends.
Investor facts to verify
- How much of revenue and orders growth is sustainable organically after separating acquisition contributions and purchase-accounting effects?
- What insurance proceeds will be collected for wildfire losses, on what timetable, and what residual costs or operational disruption will remain?
- What is the outcome and potential additional exposure from the Malaysia tax appeal and other open tax positions?
- Are Ixia integration, cost synergies and growth assumptions tracking expectations, and how will acquisition-related amortization affect reported earnings?
- How will debt service, cash held abroad and operating cash flow affect liquidity and capital-allocation flexibility?