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.



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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.



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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.



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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.


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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.



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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.


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