Keysight Technologies, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. Keysight provides electronic design, test, network visibility and security solutions, plus related services. The company reported four segments in FY2018; Ixia was acquired in April 2017, so year-over-year comparisons include a changing acquisition base.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $3.878 billion | $3.189 billion |
| Orders | $4.082 billion | $3.406 billion |
| Gross margin | 54.7% | 53.4% |
| Operating income (loss) | $(346) million | $239 million |
| Net income | $165 million | $102 million |
| Diluted EPS | $0.86 | $0.56 |
| Cash from operating activities | $555 million | $328 million |
| Cash and cash equivalents | $913 million | $818 million |
| Working capital | $916 million | $1.358 billion |
| Total debt, carrying amount | $1.790 billion | $2.048 billion |
Revenue rose 22% (20% excluding currency effects); acquisitions contributed 6 percentage points of growth. Orders increased 20%, with growth across segments and regions. Product revenue grew 21% and services and other revenue 24%.
Reported profitability requires careful interpretation: a $709 million Ixia goodwill impairment drove the operating loss and FY2018 operating margin of negative 8.9%, despite higher revenue and gross margin. A $576 million income tax benefit resulted in positive net income despite a $411 million pretax loss. The filing attributes significant tax benefits to Singapore restructuring and incentives, including $567 million of tax incentive impact; $2.75 of the $2.97 diluted EPS benefit from incentives was described as one-time.
Operating cash flow improved by $227 million year over year. Investing activities used $116 million, while financing activities used $335 million, including $260 million of term-loan repayment and $120 million of share repurchases. Cash and cash equivalents included $782 million held outside the U.S. The company had no revolving-credit borrowings at year-end. The $500 million 3.30% senior notes mature in October 2019; total principal debt outstanding was $1.8 billion.
Material changes and segment results
- Communications Solutions Group: Revenue of $2.037 billion, up 17%, driven by 5G-related solutions, network and data-center demand, and improvement in aerospace, defense and government markets.
- Electronic Industrial Solutions Group: Revenue of $965 million, up 15%, with growth in general electronics measurement, automotive and energy, and semiconductor measurement.
- Ixia Solutions Group: Revenue of $451 million; reported operating income was $21 million versus $42 million in the partial prior-year period. Management cited weaker-than-expected market growth and longer-than-expected contract-manufacturing transition. The annual goodwill test resulted in a $709 million impairment.
- Services Solutions Group: Revenue of $461 million, up 10%; operating income was $68 million, broadly flat, as higher costs offset revenue growth.
Backlog increased to approximately $1.275 billion from $950 million. Management expects a majority to convert to revenue within six months, while cautioning backlog is not a reliable medium- or long-term indicator. The company repurchased 2.075 million shares for $120 million and authorized a new $350 million repurchase program in March 2018.
Outlook, risks and unusual items
Management expects continued sales growth, citing R&D investment and expanded markets, including 5G, automotive and network test. No quantified revenue or earnings guidance is provided. Management also noted macroeconomic and geopolitical uncertainty, including trade and tariff risks, and a focus on operational efficiency.
- Tax and contingencies: The effective tax rate was 140%, reflecting the large tax benefit alongside a pretax loss. The company is appealing a $68 million Malaysia tax and penalty assessment paid in 2017; it reported $249 million of unrecognized tax benefits including interest and penalties. Tax incentives, particularly Singapore’s, are subject to conditions and future renewal.
- Litigation: Keysight settled the Centripetal Networks patent case for a $25 million payment for past damages and a royalty-bearing license through December 31, 2021; the payment was expensed and paid in FY2018.
- Wildfires: FY2018 wildfire-related costs were $7 million net of estimated insurance recoveries. At year-end, $24 million of insurance receivable was recorded; estimated total recovery was $125–$135 million, subject to timing and realization.
- Other risks: The filing highlights technology and market cyclicality, supply-chain and contract-manufacturer dependence, international and China-related trade exposure, cybersecurity, foreign exchange, pension funding, and possible further goodwill impairment.
- Reporting changes: In the first quarter of FY2019, the services business was reorganized into the Communications and Electronic Industrial segments, leaving three reportable segments.
Important facts for investors to verify
- How much of FY2018 earnings and EPS reflects one-time Singapore tax benefits, and what is the sustainable tax rate?
- Whether Ixia’s revenue, operating performance and integration progress support the remaining goodwill balance after the impairment.
- How Keysight plans to refinance or repay the $500 million notes maturing in October 2019.
- Whether backlog converts as expected and whether order growth continues independent of acquisitions and currency movements.
- How the Malaysia tax appeal, Singapore incentive conditions, and wildfire insurance recovery develop.