Keysight Technologies Reports First Quarter 2016 Results

 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
PRELIMINARY
   
 
Three Months Ended
January 31, Percent
  2016     2015   Inc/(Dec)
 
Orders $ 679 $ 691 (2 %)
 
 
Net revenue $ 721 $ 701 3 %
 
Costs and expenses:
Cost of products and services 332 318 4 %
Research and development 108 96 13 %
Selling, general and administrative 197 206 (4 %)
Other operating expense (income), net   (14 )   (6 ) 136 %
Total costs and expenses   623     614   2 %
 
Income from operations 98 87 13 %
 
Interest income 1

 

 

Interest expense (12 ) (12 ) %
Other income (expense), net   (3 )   3   (200 %)
 
Income before taxes 84 78 8 %
 
Provision for income taxes   20     8   150 %
 
Net income $ 64   $ 70   (9 %)
 
 
Net income per share:
Basic $ 0.37 $ 0.42
Diluted $ 0.37 $ 0.41
 
Weighted average shares used in computing net income per share:
Basic 171 168
Diluted 172 170
 
 
 
The preliminary income statement is estimated based on our current information.
 
 
 
Page 1
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions, except par value and share amounts)
PRELIMINARY
   
 
January 31, October 31,

 

  2016     2015  
(unaudited)
ASSETS
 
Current assets:
Cash and cash equivalents $ 572 $ 483
Accounts receivable, net 361 398
Inventory 481 487
Deferred tax assets 74 74
Other current assets   143     137  
Total current assets 1,631 1,579
 
Property, plant and equipment, net 513 518
Goodwill 698 700
Other intangible assets, net 232 246
Long-term investments 56 70
Long-term deferred tax assets 256 295
Other assets   99     100  
Total assets $ 3,485   $ 3,508  
 
LIABILITIES AND EQUITY
 
Current liabilities:
Accounts payable $ 175 $ 209
Employee compensation and benefits 135 168
Deferred revenue 185 175
Income and other taxes payable 33 50
Other accrued liabilities   79     84  
Total current liabilities 607 686
 
Long-term debt 1,099 1,099
Retirement and post-retirement benefits 255 280
Long-term deferred revenue 62 61
Other long-term liabilities   80     80  
Total liabilities   2,103     2,206  
 
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; 171 million shares at January 31, 2016
and 170 million shares at October 31, 2015, issued and outstanding 2 2
Additional paid-in-capital 1,199 1,165
Retained earnings 678 614
Accumulated other comprehensive loss   (497 )   (479 )
Total stockholders' equity   1,382     1,302  
Total liabilities and equity $ 3,485   $ 3,508  
 
 
 
The preliminary balance sheet is estimated based on our current information.
 
 
 
Page 2
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
PRELIMINARY
     
 
Three Months Ended
January 31,
  2016     2015  
 
Cash flows from operating activities:
Net income $ 64 $ 70
 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 33 23
Share-based compensation 16 29
Excess tax benefit from share-based plans (1 ) (3 )
Deferred Taxes 4 (1 )
Excess and obsolete inventory related charges 8 10
Gain on sale of land (10 )
Other non-cash expenses, net 2 (1 )
Changes in assets and liabilities:
Accounts receivable 33 36
Inventory (4 ) (9 )
Accounts payable (22 ) (13 )
Payment to Agilent, net (14 )
Employee compensation and benefits (29 ) (22 )
Income Taxes Payable 2 9
Retirement and post-retirement benefits (11 ) (17 )
Other assets and liabilities   7     (5 )
Net cash provided by operating activities (a)   92     92  
 
Cash flows from investing activities:
Investments in property, plant and equipment (34 ) (15 )
Proceeds from sale of land 10
Proceeds from sale of investment securities       1  
Net cash used in investing activities   (24 )   (14 )
 
Cash flows from financing activities:
Issuance of common stock under employee stock plans 24 4
Excess tax benefit from share-based plans   1     3  
Net cash provided by financing activities   25     7  
 
Effect of exchange rate movements   (4 )   (8 )
 
Net increase in cash and cash equivalents 89 77
 
Cash and cash equivalents at beginning of period   483     810  
 
Cash and cash equivalents at end of period $ 572   $ 887  
 
(a) Cash payments included in operating activities:
Income tax payments, net $ 8 $ 14
Restructuring payments $ 3 $ 1
 
 
The preliminary cash flow is estimated based on our current information.
 
 
 
Page 3
               
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION FROM GAAP TO NON-GAAP
THREE MONTHS ENDED JANUARY 31, 2016
(Unaudited)
PRELIMINARY
NON-GAAP ADJUSTMENTS
 

 

 

 

 

 

 

 

 

(in millions, except per share amounts) GAAP

Intangible
Amortization

   

Acquisition and
Integration Costs

   

Acquisition related
fair value
adjustments

 

Separation
and
related Costs

   

Share Based

Compensation

    Other  

Adjustment
for Taxes (a)

    Non-GAAP
% of revenue % of revenue
Net Revenue $ 721 100 %

5

$ 726 100 %
 
Cost of products and services   332   46.0 %   (11 )  

   

 

      (3 )     (3 )  

      315   43.4 %
Gross Profit 389 54.0 % 11

5

3 3

411 56.6 %
 
Research and development 108 15.0 %

(3 )

105 14.5 %
Selling, general and administrative 197 27.4 %

(2 )

(5 ) (10 ) 1

181 24.9 %

Other operating expense (income), net

  (14 ) -2.0 %

   

   

 

   

      10    

      (4 ) -0.6 %
 
Income from operations 98 13.6 % 11 2 5 5 16 (8 )

129 17.8 %
Other income(expense), net   (14 ) -1.9 %

      (2 )  

 

   

      2    

      (14 ) -1.9 %
 
Income before taxes 84 11.7 % 11

5 5 16 (6 )

115 15.8 %
 
Provision for taxes 20 2.8 %

20 2.8 %
Effective tax rate   24 %                                           17 %  
 
Net income $ 64   8.9 %   11    

      5     5       16       (6 )  

    $ 95   13.1 %
 
Net income per share - Basic and Diluted:
 
Basic $ 0.37 $ 0.07 $ - $ 0.03 $ 0.03 $ 0.10 $ (0.04 ) $ - $ 0.56
Diluted $ 0.37 $ 0.07 $ - $ 0.03 $ 0.03 $ 0.09 $ (0.04 ) $ - $ 0.55
 
Weighted average shares used in computing net income (loss) per share:
 
Basic 171 171
Diluted 172 172
 
(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 months ended January 31, 2016, management uses a non-GAAP effective tax rate of 17%, that 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, among other things, charges related to the amortization of intangibles, the impact of restructuring and related costs, asset impairments, acquisition and integration costs, share based compensation, separation and related costs and acquisition related fair value adjustments. Some of the exclusions, such as impairments, 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.
Intangible amortization include 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 which 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 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
Other includes gain on sale of land, miscellaneous items like litigation settlements, and assets that have been written down to their fair value. It also includes one time restructuring costs associated with publicly announced major restructuring programs, usually aimed at material changes in business and/or cost structure.
 
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 our management’s internal comparisons to our historical operating results as well as to the operating results of our competitors.
 
Our management recognizes items such as amortization of intangibles, restructuring charges etc. that 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 4
             
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION FROM GAAP TO NON-GAAP
THREE MONTHS ENDED JANUARY 31, 2015
(Unaudited)
PRELIMINARY
NON-GAAP ADJUSTMENTS
 

 

 

 

 

 

(in millions, except per share amounts) GAAP

Intangible
Amortization

   

Separation

and related
Costs

   

Share Based

Compensation

    Other    

Adjustment

for Taxes (a)

      Non-GAAP
% of revenue % of revenue
Net Revenue $ 701 100 %

$ 701 100 %
 
Cost of products and services   318   45.4 %   (2 )     (1 )     (4 )  

   

        311   44.4 %
Gross Profit 383 54.6 % 2 1 4

390 55.6 %
 
Research and development 96 13.7 %

(4 ) (1 )

91 13.0 %
Selling, general and administrative 206 29.4 %

(7 ) (21 ) 1

179 25.6 %
Other operating expense (income), net   (6 ) -0.9 %

      1    

      1      

        (4 ) -0.5 %
 
Income from operations 87 12.4 % 2 7 29 (1 )

124 17.6 %
Other income(expense), net   (9 ) -1.3 %

   

   

   

   

        (9 ) -1.2 %
 
Income before taxes 78 11.1 % 2 7 29 (1 )

115 16.4 %
 
Provision for taxes 8 1.1 %

11 19 2.8 %
Effective tax rate   10 %                                     17 %  
 
Net income $ 70   10.0 %   2       7       29       (1 )       (11 )     $ 96   13.6 %
 
Net income per share - Basic and Diluted:
 
Basic $ 0.42 $ 0.01 $ 0.04 $ 0.17 $ (0.01 ) $ (0.07 ) $ 0.57
Diluted $ 0.41 $ 0.01 $ 0.04 $ 0.17 $ (0.01 ) $ (0.06 ) $ 0.56
 
Weighted average shares used in computing net income (loss) per share:
 
Basic 168 168
Diluted 170 170
 
(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 months ended January 31, 2015, management uses a non-GAAP effective tax rate of 17%, that 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, among other things, charges related to the amortization of intangibles, the impact of restructuring and related costs, asset impairments, acquisition and integration costs, share based compensation, separation and related costs and acquisition related fair value adjustments. Some of the exclusions, such as impairments, 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.
Intangible amortization include 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 which 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 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
 
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 our management’s internal comparisons to our historical operating results as well as to the operating results of our competitors.
 
Our management recognizes items such as amortization of intangibles, restructuring charges etc. that 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 5
   
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE EXCLUDING CURRENCY IMPACTS AND M&A
(In millions)
(Unaudited)
PRELIMINARY
 
 
 
Percent
Q1'16 Q1'15 Inc/(Dec)
GAAP Revenue $ 721 $ 701 3 %
Acquisition related fair value adjustments   5    
Non-GAAP Revenue $ 726 $ 701 4 %
Currency Impacts   16    
Non-GAAP Revenue, net of currency impacts $ 742 $ 701 6 %
Less revenue from acquisitions included in segment results   (45 )  
Core Revenue $ 697   $ 701 (-1 %)
 
 
 
 
 
Non GAAP Revenue is defined to exclude the fair value adjustments to acquisition related deferred revenue balances for the Anite acquisition.
 
Core revenue is defined as Non- GAAP revenue excluding the impact of currency and acquisitions.
 
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 and divestitures 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 Core revenue is based on our current information.
 
 
Page 6
     
KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP RESULTS INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY
 
 
 
Keysight
Q1'16 Q1'15 Q4'15
Revenue $ 726 $ 701 $ 756
Gross Margin, % 56.6 % 55.6 % 58.0 %
Income from Operations $ 129 $ 124 $ 157
Operating Margin, % 17.8 % 17.6 % 20.7 %
 
 
Measurement Solutions
Q1'16 Q1'15 Q4'15
Revenue $ 631 $ 606 $ 653
Gross Margin, % 59.2 % 57.6 % 60.3 %
Income from Operations $ 116 $ 110 $ 137
Operating Margin, % 18.3 % 18.2 % 21.0 %
 
 
Customer Support and Services
Q1'16 Q1'15 Q4'15
Revenue $ 95 $ 95 $ 103
Gross Margin, % 39.6 % 42.0 % 43.1 %
Income from Operations $ 13 $ 14 $ 20
Operating Margin, % 13.9 % 14.3 % 19.5 %
 
 
Income from operations reflect the results of our reportable segments under Keysight's management reporting system which are not necessarily in conformity with GAAP financial measures. Income from operations of our reporting segments exclude, among other things, charges related to the amortization of intangibles, share based compensation, restructuring and related costs, asset impairment, acquisition and integration costs, acquisition related fair value adjustments and separation and related costs.
 
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 segment information is estimated based on our current information.
 
 
 
Page 7
   
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATIONS OF NON-GAAP REVENUE BY REGION
(in millions)
(Unaudited)
PRELIMINARY
 
 
 
Percent
Non-GAAP Revenue by Region Q1'16 Q1'15 Inc/(Dec)
 
Americas $ 274 $ 264 4 %
Europe 143 135 6 %
Japan 79 69 13 %
Asia Pacific ex-Japan   230   233 (-1 %)
Total Revenue $ 726 $ 701 4 %
 
 
 
 
The preliminary reconciliation of revenue by region is estimated based on our current information.
 
 
 
Page 8
   
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF NON-GAAP REVENUE BY MARKET
(In millions)
(Unaudited)
PRELIMINARY
 
 
Percent
Q1'16 Q1'15 Inc/(Dec)
Aerospace & Defense $ 171 $ 174 (-1 %)
Industrial/Computer/Semi-conductor 308 298 3 %
Communications   247   229 8 %
Non-GAAP Revenue $ 726 $ 701 4 %
 
 
 
The preliminary Non GAAP revenue by market information is estimated based on our current information.
 
 
Page 9

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