Keysight Technologies Reports Third Quarter 2022 Results

Source: IR-KEYS

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

	Three months ended
	July 31,						Percent
		2022			2021		Inc/(Dec)

Orders	$	1,461		$	1,310		12	%

Revenue	$	1,376		$	1,246		10	%

Costs and expenses:
Cost of products and services		499			458		9	%
Research and development		206			207		(1	)%
Selling, general and administrative		317			302		5	%
Other operating expense (income), net		(3	)		(5	)	(44	)%
Total costs and expenses		1,019			962		6	%

Income from operations		357			284		26	%

Interest income		4			1		660	%
Interest expense		(20	)		(20	)	(1	)%
Other income (expense), net		5			5		1	%

Income before taxes		346			270		29	%

Provision for income taxes		8			16		(50	)%

Net income	$	338		$	254		33	%


Net income per share:
Basic	$	1.89		$	1.38
Diluted	$	1.87		$	1.36

Weighted average shares used in computing net income per share:
Basic		179			184
Diluted		181			186

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

	Nine months ended
	July 31,						Percent
		2022			2021		Inc/(Dec)

Orders	$	4,414		$	3,865		14	%

Revenue	$	3,977		$	3,647		9	%

Costs and expenses:
Cost of products and services		1,437			1,415		2	%
Research and development		626			615		2	%
Selling, general and administrative		962			900		7	%
Other operating expense (income), net		(3	)		(14	)	(80	)%
Total costs and expenses		3,022			2,916		4	%

Income from operations		955			731		31	%

Interest income		6			2		271	%
Interest expense		(59	)		(59	)	—
Other income (expense), net		15			(1	)	—

Income before taxes		917			673		36	%

Provision for income taxes		92			61		52	%

Net income	$	825		$	612		35	%


Net income per share:
Basic	$	4.56		$	3.31
Diluted	$	4.52		$	3.27

Weighted average shares used in computing net income per share:
Basic		181			185
Diluted		182			187

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

	July 31,			October 31,
		2022			2021

ASSETS

Current assets:
Cash and cash equivalents	$	1,847		$	2,052
Accounts receivable, net		882			735
Inventory		837			777
Other current assets		395			270
Total current assets		3,961			3,834

Property, plant and equipment, net		668			650
Operating lease right-of-use assets		225			227
Goodwill		1,606			1,628
Other intangible assets, net		216			272
Long-term investments		73			70
Long-term deferred tax assets		661			711
Other assets		442			389
Total assets	$	7,852		$	7,781

LIABILITIES AND EQUITY

Current liabilities:
Accounts payable	$	328		$	287
Employee compensation and benefits		275			355
Deferred revenue		496			478
Income and other taxes payable		63			74
Operating lease liabilities		40			41
Other accrued liabilities		110			74
Total current liabilities		1,312			1,309

Long-term debt		1,792			1,791
Retirement and post-retirement benefits		131			167
Long-term deferred revenue		200			187
Long-term operating lease liabilities		192			191
Other long-term liabilities		305			352
Total liabilities		3,932			3,997

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; 199 million shares at July 31, 2022 and 197 million shares at October 31, 2021 issued		2			2
Treasury stock at cost; 19.7 million shares at July 31, 2022 and 15.1 million shares at October 31, 2021		(2,148	)		(1,425	)
Additional paid-in-capital		2,311			2,219
Retained earnings		4,255			3,430
Accumulated other comprehensive loss		(500	)		(442	)
Total stockholders' equity		3,920			3,784
Total liabilities and equity	$	7,852		$	7,781

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

	Nine months ended
	July 31,
		2022			2021

Cash flows from operating activities:
Net income	$	825		$	612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		88			87
Amortization		80			149
Share-based compensation		102			83
Deferred tax expense (benefit)		19			(49	)
Excess and obsolete inventory-related charges		18			20
Loss on settlement of pension plan		-			16
Other non-cash expense (income), net		30			7
Changes in assets and liabilities:
Accounts receivable		(166	)		(64	)
Inventory		(88	)		(30	)
Accounts payable		41			10
Employee compensation and benefits		(81	)		(12	)
Deferred revenue		69			86
Income taxes payable		(59	)		8
Retirement and post-retirement benefits		(21	)		5
Other assets and liabilities		(111	)		26
Net cash provided by operating activities ^(a)		746			954

Cash flows from investing activities:
Investments in property, plant and equipment		(127	)		(101	)
Acquisition of businesses and intangible assets, net of cash acquired		(33	)		(136	)
Purchase of investments		(30	)		-
Other investing activities		-			(1	)
Net cash used in investing activities		(190	)		(238	)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans		63			59
Payment of taxes related to net share settlement of equity awards		(74	)		(53	)
Treasury stock repurchases		(723	)		(320	)
Payment of acquisition-related contingent consideration		-			(2	)
Other financing activities		-			(1	)
Net cash used in financing activities		(734	)		(317	)

Effect of exchange rate movements		(27	)		4

Net increase (decrease) in cash, cash equivalents, and restricted cash		(205	)		403
Cash, cash equivalents and restricted cash at beginning of period		2,068			1,767
Cash, cash equivalents and restricted cash at end of period	$	1,863		$	2,170


^(a) Cash payments included in operating activities:
Interest payments	$	37		$	37
Income tax paid, net	$	157		$	100

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

Communications Solutions Group							YoY
	Q3'22			Q3'21			% Chg
Revenue	$	970		$	875		11	%
Gross margin, %		67	%		66	%
Income from operations	$	288		$	224
Operating margin, %		30	%		26	%


Electronic Industrial Solutions Group							YoY
	Q3'22			Q3'21			% Chg
Revenue	$	406		$	371		10	%
Gross margin, %		61	%		64	%
Income from operations	$	127		$	115
Operating margin, %		31	%		31	%


Segment revenue and income from operations are consistent with the respective non-GAAP financial measures as discussed on last page.

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KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF CORE REVENUE
(In millions)
(Unaudited)
PRELIMINARY

	Year-over-year compare
	Q3'22			Q3'21		Percent Inc/(Dec)
Revenue	$	1,376		$	1,246	10	%
Adjustments:
Revenue from acquisitions or divestitures		(2	)		-
Currency impacts		33			-
Core Revenue	$	1,407		$	1,246	13	%



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

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

	Three months ended												Nine months ended
	July 31,												July 31,
	2022						2021						2022						2021
	Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income	$	338		$	1.87		$	254		$	1.36		$	825		$	4.52		$	612		$	3.27
Non-GAAP adjustments:
Amortization of acquisition-related balances		26			0.14			33			0.18			78			0.43			147			0.79
Share-based compensation		26			0.14			19			0.10			103			0.56			84			0.45
Acquisition and integration costs		2			0.01			2			0.01			7			0.04			8			0.04
Restructuring and others		13			0.07			2			0.01			34			0.19			27			0.15
Adjustment for taxes ^(a)		(42	)		(0.22	)		(24	)		(0.12	)		(45	)		(0.25	)		(52	)		(0.28	)
Non-GAAP Net income	$	363		$	2.01		$	286		$	1.54		$	1,002		$	5.49		$	826		$	4.42

Weighted average shares outstanding - diluted		181						186						182						187


^(a) For both the three and nine months ended July 31, 2022 and 2021, management uses a non-GAAP effective tax rate of 12%.

Please refer last page for details on the use of 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 generally relates to an acquisition and 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. We may not have non-GAAP revenue in all periods.

Core Revenue is GAAP/non-GAAP revenue (as applicable) excluding the impact of foreign currency changes and revenue associated with material acquisitions or divestitures completed 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.

Free cash flow includes net cash provided by operating activities adjusted for investments in property, plant & equipment.

Non-GAAP Income from Operations, Non-GAAP Net Income and Non-GAAP Diluted EPS may include the following types of adjustments:

�nbsp;	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 other acquisition and integration 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.

�nbsp;	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.

�nbsp;	Restructuring and others: 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 also exclude “others”, not normal, recurring, cash operating income/expenses 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 do not anticipate occurring as part of our normal business. While not all-inclusive, examples of such items would include net unrealized gains on equity investments still held, significant non-recurring events like realized gains or losses associated with our employee benefit plans, costs and recoveries related to unusual events, gain on sale of assets/divestitures, etc. 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.

�nbsp;	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 fourth quarter and fiscal 2022 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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