Keysight Technologies Reports Fourth Quarter and Fiscal 2016

Keysight Technologies Reports Fourth Quarter and Fiscal 2016 Results

About Keysight Technologies

Keysight Technologies (NYSE: KEYS) helps customers bring breakthrough electronic products and systems 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 the network. Customers span the worldwide communications ecosystem, internet infrastructure, aerospace & defense, automotive, semiconductor and general electronics end markets. Keysight generated revenues of $2.9B in fiscal year 2016. More information is available at www.keysight.com.

Additional information about Keysight Technologies is available in the newsroom at www.keysight.com/go/news.

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
	2016			2015			Inc/(Dec)

Orders	$	806		$	780		3	%


Net revenue	$	751		$	750		—	%

Costs and expenses:
Cost of products and services		331			332		—	%
Research and development		105			105		1	%
Selling, general and administrative		211			206		2	%
Other operating expense (income), net		(3	)		(4	)	1	%
Total costs and expenses		644			639		1	%

Income from operations		107			111		(3	%)

Interest income		1			—		—	%
Interest expense		(12	)		(11	)	(1	%)
Other income (expense), net		2			1		15	%

Income before taxes		98			101		(3	%)

Provision (benefit) for income taxes		6			(176	)	(103	%)

Net income	$	92		$	277		(67	%)


Net income per share:
Basic	$	0.54		$	1.63
Diluted	$	0.53		$	1.61

Weighted average shares used in computing net income per share:
Basic		170			170
Diluted		172			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)
PRELIMINARY


	Year ended
	October 31,						Percent
	2016			2015			Inc/(Dec)
	(unaudited)
Orders	$	2,953		$	2,853		3	%


Net revenue	$	2,918		$	2,856		2	%

Costs and expenses:
Cost of products and services		1,294			1,269		2	%
Research and development		425			387		10	%
Selling, general and administrative		818			787		4	%
Other operating expense (income), net		(25	)		(18	)	37	%
Total costs and expenses		2,512			2,425		4	%

Income from operations		406			431		(6	%)

Interest income		3			1		136	%
Interest expense		(47	)		(46	)	1	%
Other income (expense), net		4			2		81	%

Income before taxes		366			388		(6	%)

Provision (benefit) for income taxes		31			(125	)	(124	%)

Net income	$	335		$	513		(35	%)


Net income per share:
Basic	$	1.97		$	3.04
Diluted	$	1.95		$	3.00

Weighted average shares used in computing net income per share:
Basic		170			169
Diluted		172			171


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


	October 31,			October 31,
	2016			2015
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	783		$	483
Accounts receivable, net		437			398
Inventory		474			487
Deferred tax assets		—			74
Other current assets		160			137
Total current assets		1,854			1,579

Property, plant and equipment, net		512			518
Goodwill		736			700
Other intangible assets, net		208			246
Long-term investments		52			70
Long-term deferred tax assets		392			295
Other assets		46			100
Total assets	$	3,800		$	3,508

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable	$	189		$	209
Employee compensation and benefits		183			168
Deferred revenue		180			175
Income and other taxes payable		41			50
Other accrued liabilities		51			84
Total current liabilities		644			686

Long-term debt		1,100			1,099
Retirement and post-retirement benefits		405			280
Long-term deferred revenue		72			61
Other long-term liabilities		70			80
Total liabilities		2,291			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; 172 million shares at October 31, 2016 and 170 million shares at October 31, 2015, issued		2			2
Treasury stock at cost; 2.3 million shares at October 31, 2016 and zero shares at October 31, 2015		(62	)		—
Additional paid-in-capital		1,242			1,165
Retained earnings		949			614
Accumulated other comprehensive loss		(622	)		(479	)
Total stockholders' equity		1,509			1,302
Total liabilities and equity	$	3,800		$	3,508


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

Page 3


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


	Year ended
	October 31,
	2016			2015
	(unaudited)
Cash flows from operating activities:
Net income	$	335		$	513

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		134			99
Share-based compensation		49			55
Excess tax loss (benefit) from share-based plans		5			(4	)
Deferred taxes		1			(163	)
Excess and obsolete inventory related charges		17			28
Gain on sale of land		(10	)		—
Other non-cash expenses, net		4			14
Changes in assets and liabilities:
Accounts receivable		(42	)		(20	)
Inventory		(22	)		(25	)
Accounts payable		(8	)		18
Payment to Agilent, net		—			(28	)
Employee compensation and benefits		16			6
Income taxes payable		7			2
Retirement and post-retirement benefits liability		(27	)		(38	)
Other assets and liabilities		(43	)		(81	)
Net cash provided by operating activities ^(a)		416			376

Cash flows from investing activities:
Investments in property, plant and equipment		(91	)		(92	)
Acquisition of businesses and intangible assets, net of cash acquired		(10	)		(574	)
Proceeds from sale of property, plant and equipment		10			1
Purchase of investments		—			(7	)
Other investing activities		1			1
Net cash used in investing activities		(90	)		(671	)

Cash flows from financing activities:
Issuance of common stock under employee stock plans		43			26
Treasury stock repurchases		(62	)		—
Repayment of debt		(1	)		—
Return of capital to Agilent		—			(49	)
Excess tax benefit (loss) from share-based plans		(5	)		4
Net cash used in financing activities		(25	)		(19	)

Effect of exchange rate movements		(1	)		(13	)

Net increase/(decrease) in cash and cash equivalents		300			(327	)

Cash and cash equivalents at beginning of the year		483			810

Cash and cash equivalents at end of the year	$	783		$	483

^(a) Cash payments included in operating activities:
Income tax payments, net	$	23		$	40
Interest payments on senior notes	$	44		$	46

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

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


						Percent							Percent
	Q4'16			Q4'15		Inc/(Dec)		FY16			FY15		Inc/(Dec)
GAAP Revenue	$	751		$	750	—	%	$	2,918		$	2,856	2	%
Acquisition-related fair value adjustments		—			6				12			6
Non-GAAP Revenue	$	751		$	756	-1	%	$	2,930		$	2,862	2	%
Currency Impacts		(9	)		—				(7	)		—
Non-GAAP Revenue, net of currency impacts	$	742		$	756	-2	%	$	2,923		$	2,862	2	%
Less revenue from acquisitions included in segment results		(4	)		—				(139	)		—
Non-GAAP Core Revenue	$	738		$	756	-2	%	$	2,784		$	2,862	-3	%



Non GAAP revenue is defined to exclude the fair value adjustments to the Anite 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 OPERATING MARGIN RECONCILIATIONS
(In millions, except where noted)
(Unaudited)
PRELIMINARY


Reconciliation of Income from Operations to Non-GAAP Income from Operations

	Three Months ended						Year ended
	October 31,						October 31,
	2016			2015			2016			2015

Income from operations, as reported	$	107		$	111		$	406		$	431
Intangible amortization		10			8			44			14
Share-based compensation		10			6			49			55
Acquisition and integration costs		7			14			18			16
Acquisition-related fair value adjustments		—			9			12			9
Separation and related costs		8			5			24			20
Restructuring and related costs		—			4			—			14
Other		—			—			(7	)		—
Non-GAAP income from operations	$	142		$	157		$	546		$	559

Revenue	$	751		$	750		$	2,918		$	2,856
Acquisition related fair value adjustments		—		$	6		$	12		$	6
Non GAAP Revenue	$	751		$	756		$	2,930		$	2,862

GAAP Operating Margin		14	%		15	%		14	%		15	%
Non GAAP Operating Margin		19	%		21	%		19	%		20	%

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 fair value adjustments, asset impairments and non-cash intangible amortization. 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.

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												Year ended
	October 31,												October 31,
	2016						2015						2016						2015
	Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income	$	92		$	0.53		$	277		$	1.61		$	335		$	1.95		$	513		$	3.00
Non-GAAP adjustments:
Intangible amortization		10			0.06			8			0.05			44			0.25			14			0.08
Share-based compensation		10			0.06			6			0.03			49			0.28			55			0.32
Acquisition and integration costs		7			0.04			12			0.07			17			0.10			15			0.09
Acquisition-related fair value adjustments		—			—			9			0.05			12			0.07			9			0.05
Separation and related costs		8			0.05			5			0.03			24			0.14			20			0.12
Restructuring and related costs		—			—			4			0.02			—			—			14			0.08
Other		—			—			2			0.01			(7	)		(0.04	)		5			0.03
Adjustment for taxes ^(a)		(17	)		(0.10	)		(201	)		(1.16	)		(55	)		(0.32	)		(213	)		(1.25	)
Non-GAAP Net income	$	110		$	0.64		$	122		$	0.71		$	419		$	2.43		$	432		$	2.52

Weighted average shares outstanding - diluted		172						172						172						171


^(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, including a tax benefit of $197M resulted from a tax ruling obtained from Singapore that allows Keysight to amortize the value of the intellectual property acquired from Agilent in the separation for the quarter and year ended October 31, 2015. For the year ended October 31, 2016 and 2015, 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, asset impairments and non-cash intangible amortization. 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 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 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.

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					YoY
	Q4'16		Q4'15		% Chg	FY16		FY15		% Chg
Revenue	$	442	$	453	-2%	$	1,752	$	1,703	3%
Gross Margin, %		60%		61%			61%		60%
Income from Operations	$	75	$	89		$	314	$	329
Operating Margin, %		17%		20%			18%		19%


Electronic Industrial Solutions Group					YoY					YoY
	Q4'16		Q4'15		% Chg	FY16		FY15		% Chg
Revenue	$	201	$	200	1%	$	776	$	758	2%
Gross Margin, %		60%		60%			59%		58%
Income from Operations	$	47	$	48		$	169	$	158
Operating Margin, %		23%		24%			22%		21%


Services Solutions Group					YoY					YoY
	Q4'16		Q4'15		% Chg	FY16		FY15		% Chg
Revenue	$	108	$	103	5%	$	402	$	401	— %
Gross Margin, %		42%		43%			41%		43%
Income from Operations	$	20	$	20		$	63	$	72
Operating Margin, %		18%		20%			16%		18%

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 Communications Solutions Group excludes the impact of fair value adjustments to acquisition related deferred revenue balances for the Anite acquisition of $0 million for Q4'16 and $6 million for Q4'15, respectively. The same was $12 million for FY16 and $6 million for FY15. 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 fair value adjustments, asset impairments and non-cash intangible amortization.

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

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