Keysight Technologies Reports Second Quarter 2017 Results

About Keysight Technologies

Keysight Technologies is a leading technology company that helps its engineering, enterprise and service provider customers optimize networks and bring electronic products to market faster and at a lower cost. Keysight’s solutions go where the electronic signal goes, 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 $2.9B in fiscal year 2016. 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
	April 30,						Percent
		2017			2016		Inc/(Dec)

Orders	$	805		$	761		6	%


Net revenue	$	753		$	731		3	%

Costs and expenses:
Cost of products and services		340			325		5	%
Research and development		119			108		11	%
Selling, general and administrative		256			207		23	%
Other operating expense (income), net		(4	)		(4	)	(1	%)
Total costs and expenses		711			636		12	%

Income from operations		42			95		(56	%)

Interest income		2			—		—
Interest expense		(24	)		(12	)	105	%
Other income (expense), net		2			4		(43	%)

Income before taxes		22			87		(75	%)

Income taxes benefit		(27	)		(1	)	2679	%

Net income	$	49		$	88		(45	%)


Net income per share:
Basic	$	0.28		$	0.52
Diluted	$	0.27		$	0.51

Weighted average shares used in computing net income per share:
Basic		177			170
Diluted		179			172



The preliminary income statement is estimated based on our current information.

Page 1


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY


	Six Months Ended
	April 30,						Percent
		2017			2016		Inc/(Dec)

Orders	$	1,500		$	1,440		4	%


Net revenue	$	1,479		$	1,452		2	%

Costs and expenses:
Cost of products and services		662			654		1	%
Research and development		227			216		5	%
Selling, general and administrative		469			407		15	%
Other operating expense (income), net		(83	)		(18	)	358	%
Total costs and expenses		1,275			1,259		1	%

Income from operations		204			193		6	%

Interest income		3			1		160	%
Interest expense		(36	)		(24	)	52	%
Other income (expense), net		3			1		201	%

Income before taxes		174			171		1	%

Provision for income taxes		16			19		(17	%)

Net income	$	158		$	152		4	%


Net income per share:
Basic	$	0.91		$	0.89
Diluted	$	0.90		$	0.88

Weighted average shares used in computing net income per share:
Basic		174			171
Diluted		176			172



The preliminary income statement is estimated based on our current information.

Page 2


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions, except par value and share amounts)
PRELIMINARY


				April 30,			October 31,
					2017			2016
				(unaudited)
ASSETS

Current assets:
	Cash and cash equivalents			$	983		$	783
	Short-term investments				40			—
	Accounts receivable, net				518			437
	Inventory				585			474
	Other current assets				188			160
		Total current assets			2,314			1,854

Property, plant and equipment, net					545			512
Goodwill					1,702			736
Other intangible assets, net					918			208
Long-term investments					60			55
Long-term deferred tax assets					345			392
Other assets					130			39
		Total assets		$	6,014		$	3,796

LIABILITIES AND EQUITY

Current liabilities:
	Short-term borrowings and current portion of long-term debt			$	170		$	—
	Accounts payable				180			189
	Employee compensation and benefits				212			183
	Deferred revenue				235			180
	Income and other taxes payable				22			41
	Other accrued liabilities				57			51
		Total current liabilities			876			644

Long-term debt					2,156			1,093
Retirement and post-retirement benefits					374			405
Long-term deferred revenue					91			72
Other long-term liabilities					345			69
		Total liabilities			3,842			2,283

Total 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; 187 million shares at April 30, 2017 and 172 million shares at October 31, 2016, issued				2			2
	Treasury stock at cost; 2.3 million shares at April 30, 2017 and October 31, 2016 respectively				(62	)		(62	)
	Additional paid-in-capital				1,730			1,242
	Retained earnings				1,097			949
	Accumulated other comprehensive loss				(595	)		(618	)
		Total stockholders' equity			2,172			1,513
			Total liabilities and equity	$	6,014		$	3,796




The preliminary balance sheet is estimated based on our current information.

Page 3


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
PRELIMINARY


			Six Months Ended
			April 30,
				2017			2016

Cash flows from operating activities:
	Net income		$	158		$	152

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			73			67
	Share-based compensation			31			29
	Excess tax benefit from share-based plans			(2	)		—
	Debt issuance expense			9			—
	Deferred taxes			(13	)		3
	Excess and obsolete inventory related charges			6			11
	Gain on sale of land			(8	)		(10	)
	Asset impairment			7			—
	Other non-cash expenses, net			1			2
	Changes in assets and liabilities:
		Accounts receivable		10			(3	)
		Inventory		(10	)		(11	)
		Accounts payable		(17	)		(27	)
		Employee compensation and benefits		—			11
		Income taxes payable		(7	)		2
		Retirement and post-retirement benefits, net		(74	)		(25	)
		Other assets and liabilities		(13	)		8
Net cash provided by operating activities ^(a)				151			209

Cash flows from investing activities:
	Investments in property, plant and equipment			(33	)		(62	)
	Acquisition of businesses & intangibles assets, net of cash acquired			(1,622	)		(10	)
	Proceeds from sale of land			8			10
	Proceeds from sale of investments			4			—
	Other investing activities			1			—
Net cash used in investing activities				(1,642	)		(62	)

Cash flows from financing activities:
	Issuance of common stock under employee stock plans			21			24
	Issuance of common stock under public offering			444			—
	Treasury stock repurchases			—			(40	)
	Proceeds from short term borrowings			170			—
	Proceeds from long term borrowings			1,069			—
	Debt Issuance costs			(16	)		—
	Excess tax benefit from share-based plans			2			—
Net cash provided by/(used in) financing activities				1,690			(16	)

Effect of exchange rate movements				1			6

Net increase in cash and cash equivalents				200			137

Cash and cash equivalents at beginning of the period				783			483

Cash and cash equivalents at end of the period			$	983		$	620

	^(a) Cash payments included in operating activities:
		Income tax payments, net		34			8
		Interest payment on senior notes		22			22

The preliminary cash flow is estimated based on our current information.


Page 4


KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE EXCLUDING IMPACTS OF CURRENCY AND ACQUISITIONS
(In millions)
(Unaudited)
PRELIMINARY

	Guidance for Q3'17				Year-over-year compare
	Low end		High end		Q2'17			Q2'16		Percent Inc/(Dec)
GAAP Revenue	$	810	$	850	$	753		$	731	3	%
Acquisition-related fair value adjustments		30		30		5			4
Non-GAAP Revenue	$	840	$	880	$	758		$	735	3	%
Less revenue from acquisition included in segment results						(12	)		—
Currency impacts						3			—
Non-GAAP Core Revenue					$	749		$	735	2	%



Non-GAAP revenue is defined to exclude the fair value adjustments to the acquisition-related deferred revenue balances.

Non-GAAP core revenue is defined as non-GAAP revenue excluding the impact of currency and acquisitions completed within the last twelve months.

Management believes that these measures provide useful information to investors by reflecting an additional way of viewing aspects of Keysight's operations that, when reconciled to the corresponding GAAP measures, help our investors to better identify underlying growth trends in our business and facilitate easier comparisons of our revenue performance with prior and future periods and to our peers. We excluded the effect of recent acquisitions because the nature, size and number of these can vary dramatically from period to period and between us and our peers, which we believe may obscure underlying business trends and make comparisons of long-term performance difficult.


The preliminary reconciliation of GAAP to Non-GAAP core revenue is based on our current information.


Page 5


KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP REVENUE AND OPERATING MARGIN RECONCILIATIONS
(In millions, except where noted)
(Unaudited)
PRELIMINARY

	Three Months ended						Six Months ended
	April 30,						April 30,
		2017			2016			2017			2016
Revenue	$	753		$	731		$	1,479		$	1,452
Acquisition-related fair value adjustments		5			4			5			9
Non-GAAP Revenue	$	758		$	735		$	1,484		$	1,461


	Three Months ended						Six Months ended
	April 30,						April 30,
		2017			2016			2017			2016
Income from operations, as reported	$	42		$	95		$	204		$	193
Amortization of intangibles		18			11			28			22
Share-based compensation expense		13			13			31			29
Acquisition and integration costs		21			5			27			7
Acquisition-related compensation expense		28			—			28			—
Acquisition-related fair value adjustments		8			4			8			9
Separation and related costs		8			5			14			10
Japan pension settlement gain		—			—			(68	)		—
Restructuring and related costs		1			—			3			—
Other		8			2			—			(6	)
Non-GAAP income from operations	$	147		$	135		$	275		$	264


GAAP Operating Margin		6	%		13	%		14	%		13	%
Non-GAAP Operating Margin		19	%		18	%		19	%		18	%


Non GAAP revenue is defined to exclude the fair value adjustments to the acquisition-related deferred revenue balances.

We provide non-GAAP income from operations and non-GAAP operating margin in order to provide meaningful supplemental information regarding our operational performance and our prospects for the future. These supplemental measures exclude primarily the impacts of share-based compensation, restructuring and related costs, separation and related costs, acquisition and integration costs, acquisition-related compensation expense, acquisition-related fair value adjustments, Japan pension settlement gain and non-cash intangible amortization. Some of the exclusions may be beyond the control of management. Further, some may be less predictable than revenue derived from our core businesses (the day to day business of selling our products and services). These reasons provide the basis for management's belief that the measures are useful.

Our management uses non-GAAP measures to evaluate the performance of our core businesses, to estimate future core performance and to compensate employees. Since management finds this measure to be useful, we believe that our investors benefit from seeing our results “through the eyes” of management in addition to seeing our GAAP results. This information facilitates management’s internal comparisons to our historical operating results as well as to the operating results of our competitors.

Readers are reminded that non-GAAP numbers are merely a supplement to, and not a replacement for, GAAP financial measures. They should be read in conjunction with the GAAP financial measures. It should be noted as well that our non-GAAP information may be different from the non-GAAP information provided by other companies.

The preliminary reconciliation from income from operations to Non-GAAP income from operations is estimated based on our current information.


Page 6


KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP NET INCOME AND DILUTED EPS RECONCILIATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY


			Three Months ended												Six Months ended
			April 30,												April 30,
			2017						2016						2017						2016
			Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income			$	49		$	0.27		$	88		$	0.51		$	158		$	0.90		$	152		$	0.88
	Non-GAAP adjustments:
		Amortization of intangibles		18			0.10			11			0.06			28			0.16			22			0.13
		Share-based compensation expense		13			0.07			13			0.08			31			0.18			29			0.17
		Acquisition and integration costs		31			0.17			5			0.03			37			0.21			5			0.03
		Acquisition-related compensation expense		28			0.16			—			—			28			0.16			—			—
		Acquisition-related fair value adjustments		8			0.05			4			0.02			8			0.05			9			0.05
		Separation and related costs		8			0.05			5			0.03			14			0.08			10			0.06
		Japan pension settlement gain		—			—			—			—			(68	)		(0.39	)		—			—
		Restructuring and related costs		1			0.01			—			—			3			0.01			—			—
		Other		8			0.04			2			0.01			—			—			(4	)		(0.02	)
		Adjustment for taxes ^(a)		(50	)		(0.28	)		(22	)		(0.13	)		(27	)		(0.16	)		(22	)		(0.13	)
Non-GAAP Net income			$	114		$	0.64		$	106		$	0.61		$	212		$	1.20		$	201		$	1.17

Weighted average shares outstanding - diluted				179						172						176						172

^(a) The adjustment for taxes excludes tax benefits that management believes are not directly related to ongoing operations and which are either isolated or cannot be expected to occur again with any regularity or predictability. For the three and six months ended April 30, 2017 and 2016, management uses a non-GAAP effective tax rate of 17%, which we believe to be indicative of on-going operations.

Historical amounts are reclassified to conform with current presentation.

We provide non-GAAP net income and non-GAAP net income per share amounts in order to provide meaningful supplemental information regarding our operational performance and our prospects for the future. These supplemental measures exclude, primarily the impacts of share-based compensation, restructuring and related costs, separation and related costs, acquisition and integration costs, acquisition-related fair value adjustments, acquisition-related compensation expense, Japan pension settlement gain and non-cash intangible amortization. Some of the exclusions may be beyond the control of management. Further, some may be less predictable than revenue derived from our core businesses (the day to day business of selling our products and services). These reasons provide the basis for management's belief that the measures are useful.

Amortization of intangibles includes non-cash intangible amortization recognized in connection with acquisitions.

Share-based compensation includes expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.

Acquisition and Integration costs include all incremental expenses incurred to effect a business combination that have been expensed during the period. Such acquisition costs may include advisory, legal, accounting, valuation, and other professional or consulting fees. Such integration costs may include expenses directly related to integration of business and facility operations, information technology systems and infrastructure and other employee-related costs.

Acquisition related compensation expense include amounts paid to redeem certain of Ixia's outstanding unvested stock-based compensation awards as of the date of the Merger Agreement which were determined to relate to post-Merger service periods and expensed in Keysight's consolidated financial statements.

Acquisition-related fair value adjustments includes business combination accounting effects from the acquisition including reduction in revenue and increase in cost of sales due to the respective estimated fair value adjustments to deferred revenue and inventory.

Separation and related costs include all incremental expenses incurred in order to effect the separation of Keysight from Agilent, including the cost of new hires specifically required to operate two separate companies. The intent is to only include in non-GAAP expenses what would not have been incurred if we had no plan to spin-off. These costs include, among other things, branding, legal, accounting and other advisory fees and other costs to separate and transition from Agilent.

Japan Pension settlement gain represents the gain recognized related to the dissolution of our Japanese Employees’ Pension Fund in December 2016 and transfer of the related assets and obligations to the Japanese government.

Restructuring and related costs include incremental expenses incurred in the period associated with publicly announced major restructuring programs, usually aimed at material changes in business and/or cost structure. Such costs may include one-time termination benefits, asset impairments, facility-related costs and contract termination fees. and other one time reorganization costs.

Management uses non-GAAP measures to evaluate the performance of our core businesses, to estimate future core performance and to compensate employees. Since management finds this measure to be useful, we believe that our investors benefit from seeing our results “through the eyes” of management in addition to seeing our GAAP results. This information facilitates management’s internal comparisons to our historical operating results as well as to the operating results of our competitors.

Management recognizes that items such as amortization of intangibles, restructuring charges etc. can have a material impact on our cash flows and/or our net income. Our GAAP financial statements including our 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 items 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 GAAP income statement. The non-GAAP numbers focus instead upon the core business of the company, which is only a subset, albeit a critical one, of the company’s performance.

Readers are reminded that non-GAAP numbers are merely a supplement to, and not a replacement for, GAAP financial measures. They should be read in conjunction with the GAAP financial measures. It should be noted as well that our non-GAAP information may be different from the non-GAAP information provided by other companies.

The preliminary reconciliation from GAAP to Non-GAAP net income is estimated based on our current information.

Page 7


KEYSIGHT TECHNOLOGIES, INC.
SEGMENT RESULTS INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY



Communications Solutions Group							YoY
	Q2'17			Q2'16			% Chg
Revenue	$	424		$	446		-5	%
Gross Margin, %		61.3	%		61.1	%
Income from Operations	$	75		$	84
Operating Margin, %		18	%		19	%


Electronic Industrial Solutions Group							YoY
	Q2'17			Q2'16			% Chg
Revenue	$	220		$	193		14	%
Gross Margin, %		61.8	%		59.4	%
Income from Operations	$	57		$	40
Operating Margin, %		26	%		21	%


Ixia Solutions Group							YoY
	Q2'17			Q2'16			% Chg
Revenue	$	12			—		—
Gross Margin, %		77.1	%		—		—
Income (loss) from Operations	$	(2	)		—		—
Operating Margin, %		-13	%		—		—


Services Solutions Group							YoY
	Q2'17			Q2'16			% Chg
Revenue	$	102		$	96		6	%
Gross Margin, %		40.9	%		39.3	%
Income from Operations	$	17		$	11
Operating Margin, %		16	%		11	%


Segment data reflect the results of our reportable segments under Keysight's management reporting system which are not necessarily in conformity with GAAP financial measures. Net revenue for our segments, Communications Solutions Group and Ixia Solutions Group excludes the impact of fair value adjustments to acquisition-related deferred revenue balances of $1 million and $4 million for Q2'17, and $4 million and zero for Q2'16, respectively. Income from operations of our reporting segments exclude, primarily the impacts of share-based compensation, restructuring and related costs, separation and related costs, acquisition and integration costs, acquisition-related compensation expense, acquisition-related fair value adjustments, Japan pension settlement gain and non-cash intangible amortization.

The preliminary segment information is estimated based on our current information.


Page 8

« Previous Page 1 | 2 | 3 | 4 Next Page »