Keysight Technologies Reports Fourth Quarter 2018 Results

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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
	2018			2017			Inc/(Dec)

Orders	$	1,124		$	1,027		9	%


Net revenue	$	1,047		$	878		19	%

Costs and expenses:
Cost of products and services		460			404		14	%
Research and development		154			139		12	%
Selling, general and administrative		308			294		4	%
Goodwill impairment		709			-		—
Other operating expense (income), net		(15	)		2		—
Total costs and expenses		1,616			839		93	%

Income (loss) from operations		(569	)		39		—

Interest income		4			2		70	%
Interest expense		(20	)		(22	)	(9	)%
Other income (expense), net		1			11		(91	)%

Income (loss) before taxes		(584	)		30		—

Provision (benefit) for income taxes	$	(470	)	$	68		—

Net loss	$	(114	)	$	(38	)	208	%


Net loss per share:
Basic	$	(0.61	)	$	(0.20	)
Diluted	$	(0.61	)	$	(0.20	)

Weighted average shares used in computing net loss per share:
Basic		187			186
Diluted		187			186




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


	Year ended
	October 31,						Percent
		2018			2017		Inc/(Dec)

Orders	$	4,082		$	3,406		20	%


Net revenue	$	3,878		$	3,189		22	%

Costs and expenses:
Cost of products and services		1,756			1,487		18	%
Research and development		607			498		22	%
Selling, general and administrative		1,185			1,049		13	%
Goodwill impairment		709			-		—
Other operating expense (income), net		(33	)		(84	)	(60	)%
Total costs and expenses		4,224			2,950		43	%

Income (loss) from operations		(346	)		239		—

Interest income		12			7		61	%
Interest expense		(83	)		(80	)	3	%
Other income (expense), net		6			13		(60	)%

Income (loss) before taxes		(411	)		179		—

Provision (benefit) for income taxes	$	(576	)	$	77		—

Net income	$	165		$	102		61	%


Net income per share:
Basic	$	0.88		$	0.57
Diluted	$	0.86		$	0.56

Weighted average shares used in computing net income per share:
Basic		187			180
Diluted		191			182




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


	October 31,			October 31,
	2018			2017
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	913		$	818
Accounts receivable, net		624			547
Inventory		619			588
Other current assets		222			224
Total current assets		2,378			2,177

Property, plant and equipment, net		555			530
Goodwill		1,171			1,882
Other intangible assets, net		645			855
Long-term investments		46			63
Long-term deferred tax assets		750			186
Other assets		279			240
Total assets	$	5,824		$	5,933

LIABILITIES AND EQUITY

Current liabilities:
Short-term and current portion of long-term debt	$	499		$	10
Accounts payable		242			211
Employee compensation and benefits		276			217
Deferred revenue		334			291
Income and other taxes payable		42			28
Other accrued liabilities		69			62
Total current liabilities		1,462			819

Long-term debt		1,291			2,038
Retirement and post-retirement benefits		224			309
Long-term deferred revenue		127			101
Other long-term liabilities		287			356
Total liabilities		3,391			3,623

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; 191 million shares at October 31, 2018,
and 188 million shares at October 31, 2017, issued		2			2
Treasury stock at cost; 4.4 million shares at October 31, 2018 and
2.3 million shares at October 31, 2017		(182	)		(62	)
Additional paid-in-capital		1,889			1,786
Retained earnings		1,212			1,041
Accumulated other comprehensive loss		(488	)		(457	)
Total stockholders' equity		2,433			2,310
Total liabilities and equity	$	5,824		$	5,933



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

	Year ended
	October 31,
	2018			2017
	(unaudited)
Cash flows from operating activities:
Net income	$	165		$	102

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		103			92
Amortization		207			133
Share-based compensation expense		59			56
Debt issuance expense		-			9
Deferred tax expense (benefit)		(789	)		(47	)
Excess and obsolete inventory-related charges		25			16
Gain on sale of assets and divestitures		(20	)		(8	)
Goodwill impairment		709			-
Other assets impairment		5			7
Pension curtailment and settlement expense (gain)		1			(69	)
Other non-cash expenses (income), net		10			10
Changes in assets and liabilities:
Accounts receivable		(89	)		(11	)
Inventory		(61	)		(4	)
Accounts payable		22			15
Employee compensation and benefits		63			(1	)
Deferred revenue		75			90
Income taxes payable		181			3
Retirement and post-retirement benefits		(127	)		(15	)
Other assets and liabilities		16			(50	)
Net cash provided by operating activities ^(a)		555			328

Cash flows from investing activities:
Purchases of property, plant and equipment		(132	)		(72	)
Proceeds from the sale of property, plant and equipment		-			8
Acquisitions of businesses and intangible assets, net of cash acquired		(11	)		(1,702	)
Proceeds from divestitures		29			-
Proceeds from the sale of investments		-			45
Other investing activities		(2	)		(1	)
Net cash used in investing activities		(116	)		(1,722	)

Cash flows from financing activities:
Issuance of common stock under employee stock plans		64			51
Issuance of common stock under public offerings		-			444
Payment of taxes related to net share settlement of equity awards		(18	)		(12	)
Treasury stock repurchases		(120	)		-
Proceeds from issuance of long-term debt		-			1,069
Debt issuance costs		-			(16	)
Proceeds from short-term borrowings		40			212
Repayment of debt and credit facility		(300	)		(323	)
Other financing activities		(1	)		-
Net cash provided by /(used in) financing activities		(335	)		1,425

Effect of exchange rate movements		(9	)		4

Net increase in cash and cash equivalents		95			35

Cash and cash equivalents at beginning of year		818			783

Cash and cash equivalents at end of year	$	913		$	818


^(a) Cash payments included in operating activities:
Income tax payments, net	$	(27	)	$	(121	)
Interest payment on borrowings	$	(79	)	$	(64	)


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KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE GUIDANCE AND NON GAAP CORE REVENUE
(In millions)
(Unaudited)
PRELIMINARY

	Q1'19 Guidance				Year-over-year compare								Year-over-year compare

	Low end		High end		Q4'18			Q4'17			Percent Inc/(Dec)		FY18			FY17			Percent Inc/(Dec)
GAAP Revenue	$	962	$	982	$	1,047		$	878		19	%	$	3,878		$	3,189		22	%
Amortization of acquisition-related balances		3		3		4			24					36			60
Non-GAAP Revenue	$	965	$	985	$	1,051		$	902		16	%	$	3,914		$	3,249		20	%
Less: Revenue from acquisition or divestitures included in segment results						(2	)		(4	)				(230	)		(6	)
:Currency impacts						5			-					(30	)		-
Non-GAAP Core Revenue					$	1,054		$	898		17	%	$	3,654		$	3,243		13	%



Non GAAP core revenue excludes impact of currency and revenue from acquisitions or divestitures closed within the last twelve months.

Please refer page 8 for discussion on our non-GAAP financial measures.


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



Communications Solutions Group							YoY
	Q4'18			Q4'17			% Chg
Revenue	$	566		$	462		23	%
Gross margin, %		63.7	%		62.9	%
Income from operations	$	155		$	98
Operating margin, %		27	%		21	%


Electronic Industrial Solutions Group							YoY
	Q4'18			Q4'17			% Chg
Revenue	$	249		$	206		21	%
Gross margin, %		60.6	%		61.3	%
Income from operations	$	63		$	45
Operating margin, %		26	%		22	%


Ixia Solutions Group							YoY
	Q4'18			Q4'17			% Chg
Revenue	$	115		$	124		-7	%
Gross margin, %		70.5	%		76.2	%
Income from operations	$	-		$	20
Operating margin, %		0	%		16	%


Services Solutions Group							YoY
	Q4'18			Q4'17			% Chg
Revenue	$	121		$	110		10	%
Gross margin, %		40.9	%		42.6	%
Income from operations	$	16		$	18
Operating margin, %		13	%		16	%



Net revenue for Ixia Solutions Group excludes the impact of amortization of acquisition-related balances of $4 million and $24 million for Q4'18 and Q4'17, respectively. Segment revenue and income from operations are consistent with the respective non-GAAP measures as discussed on Page 8.



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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,
	2018						2017						2018						2017
	Net Income			Diluted EPS ^(a)			Net Income			Diluted EPS ^(a)			Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income (loss)	$	(114	)	$	(0.61	)	$	(38	)	$	(0.20	)	$	165		$	0.86		$	102		$	0.56
Non-GAAP adjustments:
Goodwill impairment		709			3.71			-			-			709			3.72			-			-
Amortization of acquisition-related balances		55			0.28			86			0.46			265			1.38			256			1.41
Share-based compensation expense		11			0.06			12			0.06			59			0.31			56			0.31
Acquisition and integration costs		7			0.03			18			0.10			49			0.25			67			0.37
Legal settlement		25			0.13			-			-			25			0.13			-			-
Acquisition-related compensation expense		-			-			-			-			-			-			28			0.15
Separation and related costs		-			-			2			0.01			2			0.01			20			0.11
Pension curtailment and settlement expense (gains)		1			0.01			(1	)		(0.01	)		1			0.01			(69	)		(0.38	)
Northern California wildfire-related costs		-			-			16			0.08			7			0.04			16			0.09
Restructuring and related costs		1			0.01			5			0.03			17			0.09			11			0.06
Gain on divestitures		(12	)		(0.06	)		-			-			(20	)		(0.10	)		-			-
Other		6			0.04			(6	)		(0.03	)		16			0.09			(4	)		(0.02	)
Adjustment for taxes ^(b)		(496	)		(2.59	)		41			0.21			(677	)		(3.55	)		(21	)		(0.13	)
Non-GAAP Net income	$	193		$	1.01		$	135		$	0.71		$	618		$	3.24		$	462		$	2.53

Weighted average shares outstanding - diluted		187						186						191						182

(a) EPS impact on Non-GAAP adjustments and non-GAAP Net income is based on an adjusted shares outstanding of 191 million and 189 million for three months ended October 31, 2018 and 2017, respectively.

(b) For the three and twelve months ended October 31, 2018 management uses a non-GAAP effective tax rate of 12% and 14%, respectively. For the three and twelve months ended October 31, 2017 management uses a non-GAAP effective tax rate of 17% and 18%, respectively. Historical amounts are reclassified to conform with current presentation.


Please refer page 8 for discussion on our non-GAAP financial measures.



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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 and divested 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.

•	Goodwill Impairment charges: We exclude goodwill impairment charges from our non-GAAP financial measures, as such charges are non-recurring and do not reduce company's liquidity. In addition, the company's peer industry group companies may record impairment charges at different times, excluding such charges permits more accurate comparison of company's financial performance with those of its peers.

•	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, litigation settlements, significant realized gains or losses associated with our employee benefit plans, gain on sale of assets and small divestitures etc.

•	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 third fiscal quarter of 2018 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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