Keysight Technologies Reports Fourth Quarter and Fiscal 2017 Results

About Keysight Technologies

Keysight Technologies, Inc. (NYSE: KEYS) is a leading technology company that helps its engineering, enterprise and service provider customers accelerate innovation to connect and secure the world. Keysight’s solutions optimize networks and bring electronic products to market faster and at a lower cost with offerings from design simulation, to prototype validation, to manufacturing test, to optimization in networks and cloud environments. Customers span the worldwide communications ecosystem, aerospace and defense, automotive, energy, semiconductor and general electronics end markets. Keysight generated revenues of $3.2B in fiscal year 2017. In April 2017, Keysight acquired Ixia, a leader in network test, visibility, and security. More information is available at www.keysight.com.

Additional information about Keysight Technologies is available in the newsroom at www.keysight.com/go/news and on Facebook, Google+, LinkedIn, Twitter and YouTube.

Source: IR-KEYS

 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY
     
 
Three months ended
October 31, Percent
2017 2016 Inc/(Dec)
 
Orders $ 1,027 $ 806 27 %
 
Net revenue $ 878 $ 751 17 %
 
Costs and expenses:
Cost of products and services 404 331 22 %
Research and development 139 105 32 %
Selling, general and administrative 294 211 40 %
Other operating expense (income), net   2     (3 ) (155 )%
Total costs and expenses   839     644   30 %
 
Income from operations 39 107 (64 )%
 
Interest income 2 1 119 %
Interest expense (22 ) (12 ) 87 %
Other income (expense), net   11     2   801 %
 
Income before taxes 30 98 (69 )%
 
Provision for income taxes 68 6 1,054 %
     
Net income (loss) $ (38 )   $ 92   (140 )%
 
 
Net income (loss) per share:
Basic $ (0.20 ) $ 0.54
Diluted $ (0.20 ) $ 0.53
 
Weighted average shares used in computing net income (loss) per share:
Basic 186 170
Diluted 186 172
 
 
Page 1
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY
     
 
Year ended
October 31, Percent
2017 2016 Inc/(Dec)
 
Orders $ 3,406 $ 2,953 15 %
 
Net revenue $ 3,189 $ 2,918 9 %
 
Costs and expenses:
Cost of products and services 1,487 1,294 15 %
Research and development 498 425 17 %
Selling, general and administrative 1,049 818 28 %
Other operating expense (income), net   (84 )   (25 ) 237 %
Total costs and expenses   2,950     2,512   17 %
 
Income from operations 239 406 (41 )%
 
Interest income 7 3 128 %
Interest expense (80 ) (47 ) 71 %
Other income (expense), net   13     4   335 %
 
Income before taxes 179 366 (51 )%
 
Provision for income taxes 77 31 152 %
   
Net income $ 102   $ 335   (69 )%
 
 
Net income per share:
Basic $ 0.57 $ 1.97
Diluted $ 0.56 $ 1.95
 
Weighted average shares used in computing net income per share:

Basic

180 170
Diluted 182 172
 
 
Page 2
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions, except par value and share amounts)
PRELIMINARY
   
 
October 31, October 31,
2017 2016
(unaudited)
ASSETS
 
Current assets:
Cash and cash equivalents $ 818 $ 783
Accounts receivable, net 547 437
Inventory 588 474
Other current assets   224     160  
Total current assets 2,177 1,854
 
Property, plant and equipment, net 530 512
Goodwill 1,882 736
Other intangible assets, net 855 208
Long-term investments 63 55
Long-term deferred tax assets 186 392
Other assets   240     39  
Total assets $ 5,933   $ 3,796  
 
LIABILITIES AND EQUITY
 
Current liabilities:
Current portion of long-term debt $ 10 $
Accounts payable 211 189
Employee compensation and benefits 217 183
Deferred revenue 291 180
Income and other taxes payable 28 41
Other accrued liabilities   62     51  
Total current liabilities 819 644
 
Long-term debt 2,038 1,093
Retirement and post-retirement benefits 309 405
Long-term deferred revenue 101 72
Other long-term liabilities   356     69  
Total liabilities   3,623     2,283  
 

Stockholders' Equity:

Preferred stock; $0.01 par value; 100 million shares authorized; none issued and outstanding

Common stock; $0.01 par value, 1 billion shares authorized; 188 million shares at October 31, 2017 and 172 million shares at October 31, 2016, issued

2 2

Treasury stock at cost; 2.3 million shares at October 31, 2017 and October 31, 2016, respectively

(62 ) (62 )
Additional paid-in-capital 1,786 1,242
Retained earnings 1,041 949
Accumulated other comprehensive loss   (457 )   (618 )
Total stockholders' equity   2,310     1,513  
Total liabilities and equity $ 5,933   $ 3,796  
 
 
Page 3
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
PRELIMINARY
   
 
Year Ended
October 31,
2017

  2016  

 
Cash flows from operating activities:
Net income $ 102 $ 335
 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 225 134
Share-based compensation 56 49
Excess tax (benefit) deficiency from share-based plans (3 ) 5
Debt issuance expense 9
Deferred tax expense (benefit) (47 ) 17
Excess and obsolete inventory related charges 16 17
Gain on sale of land (8 ) (10 )
Asset impairment 7
Pension curtailment and settlement gains (69 )
Other non-cash expenses (income), net 10 4
Changes in assets and liabilities:
Accounts receivable (11 ) (42 )
Inventory (4 ) (22 )
Accounts payable 15 (8 )
Employee compensation and benefits (1 ) 16
Income taxes payable 3 (9 )
Retirement and post-retirement benefits (15 ) (32 )
Other assets and liabilities   28     (38 )
Net cash provided by operating activities (a)   313     416  
 
Cash flows from investing activities:
Purchases of property, plant and equipment (72 ) (91 )
Proceeds from sale of property, plant and equipment 8 10
Acquisition of businesses and intangibles assets, net of cash acquired (1,702 ) (10 )
Purchase of investments (1 )
Proceeds from sale of investments   45     1  
Net cash used in investing activities   (1,722 )   (90 )
 
Cash flows from financing activities:
Issuance of common stock under employee stock plans 51 43
Issuance of common stock under public offerings 444
Treasury stock repurchases (62 )
Proceeds from issuance of long term debt 1,069
Debt issuance costs (16 )
Proceeds from short term borrowings 212
Repayment of debt and credit facility (323 ) (1 )
Excess tax benefit (deficiency) from share-based plans   3     (5 )
Net cash provided by/(used in) financing activities   1,440     (25 )
 
Effect of exchange rate movements   4     (1 )
 
Net increase in cash and cash equivalents 35 300
 
Cash and cash equivalents at beginning of year   783     483  
 
Cash and cash equivalents at end of year $ 818   $ 783  
 
(a) Cash payments included in operating activities:
Income tax payments, net (121 ) (23 )
Interest payment on borrowings (63 ) (44 )
 
 
Page 4
 
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE EXCLUDING IMPACTS OF CURRENCY AND ACQUISITIONS
(In millions)
(Unaudited)
PRELIMINARY
                 
 
Q1'18 Guidance H1'18 Year-over-year compare Year-over-year compare

Low end

  High end Guidance Q4'17 Q4'16 Percent Inc/(Dec) FY17 FY16 Percent Inc/(Dec)
GAAP Revenue $ 762 $ 802 $ 1,748 $ 878 $ 751 17 % $ 3,189 $ 2,918 9 %
Amortization of acquisition-related balances   18   18   27   24       60     12

Non-GAAP Revenue

$ 780 $ 820 $ 1,775 $ 902 $ 751 20 % $ 3,249 $ 2,930 11 %
Less revenue from acquisition included in segment results (127 ) (260 )
Currency impacts   1       9    
Non-GAAP Core Revenue $ 776   $ 751 3 % $ 2,998   $ 2,930 2 %
 
 
 

Please refer to page 9 for discussion on our non-GAAP financial measures.

 
 
Page 5
KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP REVENUE AND OPERATING MARGIN RECONCILIATIONS
(In millions)
(Unaudited)
PRELIMINARY
       
 
Three Months Ended Year Ended
October 31, October 31,
2017 2016 2017 2016
Revenue $ 878 $ 751 $ 3,189 $ 2,918
Amortization of acquisition-related balances   24         60     12  
Non-GAAP Revenue $ 902   $ 751   $ 3,249   $ 2,930  
 
 
Three Months Ended Year Ended
October 31, October 31,
2017   2016 2017   2016
 
Income from operations, as reported $ 39 $ 107 $ 239 $ 406
Amortization of acquisition-related balances 86 10 256 56
Share-based compensation 12 10 56 49
Acquisition and integration costs 18 7 57 18
Acquisition-related compensation expense 28
Separation and related costs 2 8 20 24
Pension curtailment and settlement gains (1 ) (69 )
Northern California wildfire-related costs 16 16
Restructuring and related costs 5 11
Other   4         6     (7 )
Non-GAAP income from operations $ 181   $ 142   $ 620   $ 546  
 
 
GAAP Operating Margin 4.4 % 14 % 7 % 14 %
Non-GAAP Operating Margin 20 % 19 % 19 % 19 %
 
 
 

Please refer to page 9 for discussion on our non-GAAP financial measures.

 
 
Page 6
 
KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP NET INCOME AND DILUTED EPS RECONCILIATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY
               
 
Three Months ended Year ended
October 31, October 31,
2017 2016 2017 2016
Net Income  

Diluted
EPS (b)

Net Income  

Diluted
EPS

Net Income  

Diluted
EPS

Net Income  

Diluted
EPS

 
GAAP Net income (loss) $ (38 ) $ (0.20 ) $ 92 $ 0.53 $ 102 $ 0.56 $ 335 $ 1.95
Non-GAAP adjustments:
Amortization of acquisition-related balances 86 0.46 10 0.06 256 1.41 56 0.32
Share-based compensation expense 12 0.06 10 0.06 56 0.31 49 0.28
Acquisition and integration costs 18 0.10 7 0.04 67 0.37 17 0.10
Acquisition-related compensation expense 28 0.15
Separation and related costs 2 0.01 8 0.05 20 0.11 24 0.14
Pension curtailment and settlement gains (1 ) (0.01 ) (69 ) (0.38 )
Northern California wildfire-related costs 16 0.08 16 0.09
Restructuring and related costs 5 0.03 11 0.06
Other (6 ) (0.03 ) (4 ) (0.02 ) (7 ) (0.04 )
Adjustment for taxes (a)   41     0.21     (17 )   (0.10 )   (21 )   (0.13 )   (55 )   (0.32 )
Non-GAAP Net income $ 135   $ 0.71   $ 110   $ 0.64   $ 462   $ 2.53   $ 419   $ 2.43  
 
Weighted average shares outstanding - diluted 186 172 182 172
 
(a) For the three months ended October 31, 2017 and October 31, 2016, management uses a non-GAAP effective tax rate of 17%. For the twelve months ended October 31, 2017 and October 31, 2016, management uses a non-GAAP effective tax rate of 18% and 17%, respectively. Historical amounts are reclassified to conform with current presentation.
 

(b) EPS impact on Non-GAAP adjustments and Non-GAAP net income is based on an adjusted share count of 189 million.

 

Please refer to page 9 for discussion on our non-GAAP financial measures.

 
 
Page 7
 
KEYSIGHT TECHNOLOGIES, INC.
SEGMENT RESULTS INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY
           
 
Communications Solutions Group

 

YoY

YoY

Q4'17 Q4'16 % Chg FY17 FY16 % Chg
Revenue $ 462 $ 442 4 % $ 1,738 $ 1,752 (1 )%
Gross Margin, % 62.9 % 60.3 % 61.5 % 60.8 %
Income from Operations $ 98 $ 75 $ 311 $ 314
Operating Margin, % 21 % 17 % 18 % 18 %
 
 
Electronic Industrial Solutions Group YoY YoY
Q4'17 Q4'16 % Chg FY17 FY16 % Chg
Revenue $ 206 $ 201 3 % $ 836 $ 776 8 %
Gross Margin, % 61.3 % 59.6 % 61.1 % 59.2 %
Income from Operations $ 45 $ 47 $ 199 $ 169
Operating Margin, % 22 % 23 % 24 % 22 %
 
 
Ixia Solutions Group YoY YoY
Q4'17 Q4'16 % Chg FY17 FY16 % Chg
Revenue $ 124 $ 256
Gross Margin, % 76.2 % 76.6 %
Income from Operations $ 20 $ 42
Operating Margin, % 16 % 17 %
 
 
Services Solutions Group

YoY

YoY
Q4'17 Q4'16 % Chg FY17 FY16 % Chg
Revenue $ 110 $ 108 2 % $ 419 $ 402 4 %
Gross Margin, % 42.6 % 42.2 % 41.2 % 40.9 %
Income from Operations $ 18 $ 20 $ 68 $ 63
Operating Margin, % 16 % 18 % 16 % 16 %
 
Net revenue for our segments excludes the impact of amortization of acquisition-related balances of $24 million and $59 million for Q4'17 and FY17 for Ixia Solutions Group, respectively. For Communications Solutions Group zero for Q4'17 and Q4'16 and $1 million and $12 million for FY17 and FY16 respectively. Segment revenue and income from operations are consistent with the respective non-GAAP measures as discussed on Page 9.
 
 
Page 8
Non-GAAP Financial Measures
 
Management uses both GAAP and non-GAAP financial measures to analyze and assess the overall performance of the business, to make operating decisions and to forecast and plan for future periods. We believe that our investors benefit from seeing our results “through the eyes of management” in addition to seeing our GAAP results. This information enhances investors’ understanding of the continuing performance of our business and facilitates comparison of performance to our historical and future periods.
 
Our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies, including industry peer companies, limiting the usefulness of these measures for comparative purposes.
 
These non-GAAP measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. The discussion below presents information about each of the non-GAAP financial measures and the company’s reasons for including or excluding certain categories of income or expenses from our non-GAAP results. In future periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, adjustments for these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual.
 
Non-GAAP Revenue includes recognition of acquired deferred revenue that was written down to fair value in purchase accounting. Management believes that excluding fair value purchase accounting adjustments more closely correlates with the ordinary and ongoing course of the acquired company’s operations and facilitates analysis of revenue growth and business trends.
 

Non-GAAP Core Revenue is non-GAAP revenue (see Non-GAAP Revenue above) excluding the impact of foreign currency changes and revenue associated with businesses acquired within the last twelve months. We exclude the impact of foreign currency changes as currency rates can fluctuate based on factors that are not within our control and can obscure revenue growth trends. As the nature, size and number of acquisitions can vary significantly from period to period and as compared to our peers, we exclude revenue associated with recently acquired businesses to facilitate comparisons of revenue growth and analysis of underlying business trends.

 

Non-GAAP Income from Operations, Non-GAAP Net Income and Non-GAAP Diluted EPS may include the following types of adjustments:

 

Share-based Compensation Expense: We exclude share-based compensation expense from our non-GAAP financial measures because share-based compensation expense can vary significantly from period to period based on the company’s share price, as well as the timing, size and nature of equity awards granted. Management believes the exclusion of this expense facilitates the ability of investors to compare the company’s operating results with those of other companies, many of which also exclude share-based compensation expense in determining their non-GAAP financial measures.
 

Acquisition-related Items: We exclude the impact of certain items recorded in connection with business combinations from our non-GAAP financial measures that are either non-cash or not normal, recurring operating expenses due to their nature, variability of amounts and lack of predictability as to occurrence or timing. These amounts may include non-cash items such as the amortization of acquired intangible assets and amortization of items associated with fair value purchase accounting adjustments, including recognition of acquired deferred revenue (see Non-GAAP Revenue above). We also exclude transaction and certain other cash costs associated with business acquisitions that are not normal recurring operating expenses, including amortization of amounts paid to redeem acquires’ unvested stock-based compensation awards, and legal, accounting and due diligence costs. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
 

Separation and Related Costs: We exclude all incremental expenses incurred to effect the separation of Keysight from Agilent. We exclude expenses that would not have been incurred if we had no plan to spin-off including, among other things, branding, legal, accounting and advisory fees, costs to resize and optimize our infrastructure and other costs to separate and transition from Agilent. We believe that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the company’s current operating performance or comparisons to our operating performance in other periods.
 

Restructuring and Related Costs: We exclude incremental expenses associated with restructuring initiatives, usually aimed at material changes in the business or cost structure. Such costs may include employee separation costs, asset impairments, facility-related costs, contract termination fees, and costs to move operations from one location to another. These activities can vary significantly from period to period based on the timing, size and nature of restructuring plans; therefore, we do not consider such costs to be normal, recurring operating expenses. We believe that these costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of the company’s current operating performance or comparisons to our operating performance in other periods.
 

Northern California wildfire related costs and Other Items: We exclude certain other significant income or expense items that may occur occasionally and are not normal, recurring, cash operating from our non-GAAP financial measures. Such items are evaluated on an individual basis based on both quantitative and qualitative factors and generally represent items that we would not anticipate occurring as part of our normal business on a regular basis. While not all-inclusive, examples of certain other significant items excluded from non-GAAP financial measures would be: costs related to unusual disaster like Northern California wildfires, significant realized gains or losses associated with our employee benefit plans, significant litigation-related loss contingency accruals and settlement fees or gains associated with other disputed matters.
 

Estimated Tax Rate: We utilize a consistent methodology for long-term projected non-GAAP tax rate. When projecting this long-term rate, we exclude any tax benefits or expenses that are not directly related to ongoing operations and which are either isolated or cannot be expected to occur again with any regularity or predictability. Additionally, we evaluate our current long-term projections, current tax structure and other factors, such as existing tax positions in various jurisdictions and key tax holidays in major jurisdictions where Keysight operates. This tax rate could change in the future for a variety of reasons, including but not limited to significant changes in geographic earnings mix including acquisition activity, or fundamental tax law changes in major jurisdictions where Keysight operates. The above reasons also limit our ability to reasonably estimate the future GAAP tax rate and provide a reconciliation of the expected non-GAAP earnings per share for the fourth quarter of fiscal 2017 to the GAAP equivalent.
 
Management recognizes these items can have a material impact on our cash flows and/or our net income. Our GAAP financial statements, including our Condensed Consolidated Statement of Cash Flows, portray those effects. Although we believe it is useful for investors to see core performance free of special items, investors should understand that the excluded costs are actual expenses that may impact the cash available to us for other uses. To gain a complete picture of all effects on the company’s profit and loss from any and all events, management does (and investors should) rely upon the Condensed Consolidated Statement of Operations prepared in accordance with GAAP. The non-GAAP measures focus instead upon the core business of the company, which is only a subset, albeit a critical one, of the company’s performance.
 
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