Keysight Technologies Reports Second Quarter 2016 Results

In addition, other risks that Keysight faces include those detailed in Keysight’s filings with the Securities and Exchange Commission, including our Form 10-Q for the fiscal quarter ended Jan. 31, 2016. Forward-looking statements are based on the beliefs and assumptions of Keysight’s management and on currently available information. Keysight undertakes no responsibility to publicly update or revise any forward-looking statement.

Non-GAAP Measures

Keysight uses a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall performance of the business, for making operating decisions and for forecasting and planning for future periods. The definition of these non-GAAP financial measures may differ from similarly titled measures used by others, and such non-GAAP measures should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. Keysight generally uses non-GAAP financial measures to facilitate management’s comparisons to historic operating results, to competitors’ operating results and to guidance provided to investors. In addition, Keysight believes that the use of these non-GAAP financial measures provides greater transparency to investors of information used by management in its financial and operational decision-making.

⁽¹⁾ Non-GAAP gross margin, non-GAAP income from operations, non-GAAP net income, and non-GAAP net income per share 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. Keysight also excludes 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. Earnings per share is based on diluted shares. Reconciliations between non-GAAP gross margin and GAAP gross margin and non-GAAP income from operations and GAAP income from operations is set forth on page 6 and the reconciliation between non-GAAP net income and GAAP net income is set forth on page 7 respectively of the attached tables, along with additional information regarding the use of this non-GAAP measure.

⁽²⁾ Non-GAAP revenue excludes the impact of fair value adjustment to acquisition-related deferred revenue balances for the Anite acquisition. Non-GAAP revenue as projected for Q3 FY16 also excludes the impact of fair value adjustment to acquisition-related deferred revenue balances. Core revenue is defined as non-GAAP revenue excluding the impact of currency and revenue from acquisitions until the first anniversary of the acquisition closing date. Reconciliation between GAAP revenue, non-GAAP revenue and core revenue is provided on page 5 and reconciliation between GAAP and non-GAAP revenue by region and GAAP and non-GAAP revenue by market is provided on page 9 and page 10 of the attached tables, respectively, along with additional information regarding the use of these non-GAAP measures.

⁽³⁾ Non-GAAP earnings per share as projected for Q3 FY16 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. Most of these excluded amounts pertain to events that have not yet occurred and are not currently possible to estimate with a reasonable degree of accuracy. Therefore, no reconciliation to GAAP amounts has been provided. Keysight is utilizing a fixed long-term projected non-GAAP tax rate. When projecting this long-term rate, Keysight excludes 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, Keysight evaluates its 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 long-term non-GAAP tax rate eliminates the effects of non-recurring and period specific items. This tax rate could be subject to 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.

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
	April 30,						Percent
		2016			2015		Inc/(Dec)

Orders	$	761		$	697		9	%


Net revenue	$	731		$	740		(1	%)

Costs and expenses:
Cost of products and services		325			324		—	%
Research and development		108			96		12	%
Selling, general and administrative		207			192		8	%
Other operating expense (income), net		(4	)		(5	)	(28	%)
Total costs and expenses		636			607		5	%

Income from operations		95			133		(29	%)

Interest income	â”�				1		(100	%)
Interest expense		(12	)		(11	)	9	%
Other income (expense), net		4			(1	)	(500	%)

Income before taxes		87			122		(29	%)

Provision (benefit) for income taxes		(1	)		26		(104	%)

Net income	$	88		$	96		(8	%)


Net income per share:
Basic	$	0.52		$	0.57
Diluted	$	0.51		$	0.56

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.


Page 1




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


	Six months ended
	April 30,						Percent
		2016			2015		Inc/(Dec)

Orders	$	1,440		$	1,388		4	%


Net revenue	$	1,452		$	1,441		1	%

Costs and expenses:
Cost of products and services		654			642		2	%
Research and development		216			192		13	%
Selling, general and administrative		407			398		2	%
Other operating expense (income), net		(18	)		(11	)	62	%
Total costs and expenses		1,259			1,221		3	%

Income from operations		193			220		(12	%)

Interest income		1			1		—	%
Interest expense		(24	)		(23	)	4	%
Other income (expense), net		1			2		(50	%)

Income before taxes		171			200		(15	%)

Provision for income taxes		19			34		(44	%)

Net income	$	152		$	166		(8	%)


Net income per share:
Basic	$	0.89		$	0.99
Diluted	$	0.88		$	0.97

Weighted average shares used in computing net income per share:
Basic		171			168
Diluted		172			171



The preliminary income statement is estimated based on our current information.


Page 2




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


				April 30,			October 31,
					2016			2015
				(unaudited)
ASSETS

Current assets:
	Cash and cash equivalents			$	620		$	483
	Accounts receivable, net				408			398
	Inventory				475			487
	Deferred tax assets				75			74
	Other current assets				159			137
		Total current assets			1,737			1,579

Property, plant and equipment, net					531			518
Goodwill					731			700
Other intangible assets, net					226			246
Long-term investments					58			70
Long-term deferred tax assets					264			295
Other assets					108			100
		Total assets		$	3,655		$	3,508

LIABILITIES AND EQUITY

Current liabilities:
	Accounts payable			$	168		$	209
	Employee compensation and benefits				174			168
	Deferred revenue				198			175
	Income and other taxes payable				39			50
	Other accrued liabilities				73			84
		Total current liabilities			652			686

Long-term debt					1,100			1,099
Retirement and post-retirement benefits					250			280
Long-term deferred revenue					69			61
Other long-term liabilities					84			80
		Total liabilities			2,155			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 April 30, 2016
		and 170 million shares at October 31, 2015, issued			2			2
	Treasury stock at cost; 1.6 million shares at April 30, 2016 and zero				(42	)		—
		shares at October 31, 2015
	Additional paid-in-capital				1,211			1,165
	Retained earnings				766			614
	Accumulated other comprehensive loss				(437	)		(479	)
		Total stockholders' equity			1,500			1,302
			Total liabilities and equity	$	3,655		$	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)
(Unaudited)
PRELIMINARY


			Six Months Ended
			April 30,
				2016			2015

Cash flows from operating activities:
	Net income		$	152		$	166

Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			67			46
	Share-based compensation			29			42
	Excess tax benefit from share-based plans			—			(3	)
	Deferred Taxes			3			13
	Excess and obsolete inventory related charges			11			17
	Gain on sale of land			(10	)		—
	Other non-cash expenses, net			2			1
	Changes in assets and liabilities:
		Accounts receivable		(3	)		(5	)
		Inventory		(11	)		(17	)
		Accounts payable		(27	)		1
		Payment to Agilent, net		—			(28	)
		Employee compensation and benefits		11			7
		Income taxes payable		2			3
		Retirement and post-retirement benefits		(20	)		(21	)
		Other assets and liabilities		3			(62	)
Net cash provided by operating activities ^(a)				209			160

Cash flows from investing activities:
	Investments in property, plant and equipment			(62	)		(31	)
	Acquisition of businesses and intangible assets, net of cash acquired			(10	)		—
	Proceeds from sale of land			10			—
	Proceeds from sale of investment securities			—			1
Net cash used in investing activities				(62	)		(30	)

Cash flows from financing activities:
	Issuance of common stock under employee stock plans			24			8
	Treasury stock repurchases			(40	)		—
	Return of Capital to Agilent			—			(49	)
	Excess tax benefit from share-based plans			—			3
Net cash used in financing activities				(16	)		(38	)

Effect of exchange rate movements				6			(8	)

Net increase in cash and cash equivalents				137			84

Cash and cash equivalents at beginning of period				483			810

Cash and cash equivalents at end of period			$	620		$	894

	^(a) Cash payments included in operating activities:
		Income tax payments, net	$	8		$	22
		Restructuring payments	$	3		$	1
		Interest payments on senior notes	$	22		$	24

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


Page 4




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



						Percent
	Q2'16			Q2'15		Inc/(Dec)
GAAP Revenue	$	731		$	740	-1	%
Acquisition related fair value adjustments		4			—	—
Non-GAAP Revenue	$	735		$	740	-1	%
Currency Impacts		3			—	—
Non-GAAP Revenue, net of currency impacts	$	738		$	740	—	%
Less revenue from acquisitions included in segment results		(51	)		—	—
Core Revenue	$	687		$	740	-7	%

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 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 5




KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP GROSS PROFIT AND INCOME FROM OPERATIONS RECONCILIATION
THREE AND SIX MONTHS ENDED APRIL 30, 2016
(In millions)
(Unaudited)
PRELIMINARY

Reconciliation of Gross Profit to Non-GAAP Gross Profit

	Three Months Ended						Six Months Ended
	April 30,						April 30,
		2016			2015			2016			2015

Gross Profit, as reported	$	406		$	416		$	798		$	799
Intangible amortization		10			2			19			4
Acquisition and integration costs		1			—			1			—
Acquisition related fair value adjustments		4			—			9			—
Separation and related costs		—			—			—			1
Share based compensation		4			4			7			8
Other		—			—			2			—
Non-GAAP Gross Profit	$	425		$	422		$	836		$	812

GAAP Gross Margin		55.5	%		56.3	%		54.9	%		55.5	%
Non-GAAP Gross Margin		57.8	%		57.1	%		57.2	%		56.4	%



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

	Three Months Ended						Six Months Ended
	April 30,						April 30,
		2016			2015			2016			2015

Income from operations, as reported	$	95		$	133		$	193		$	220
Intangible amortization		11			2			22			4
Acquisition and integration costs		5			—			7			—
Acquisition related fair value adjustments		4			—			9			—
Separation and related costs		5			5			10			12
Share based compensation		13			13			29			42
Other		2			1			(6	)		—
Non-GAAP income from operations	$	135		$	154		$	264		$	278

Income from operations as a percent of revenue		13.0	%		18.0	%		13.3	%		15.3	%
Non GAAP income from operations income as a percent of revenue		18.3	%		20.9	%		18.1	%		19.3	%

We provide non-GAAP gross profit, non GAAP gross margin, non-GAAP income from operations and non -GAAP income from operations as a percent of revenue 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.






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.



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 gross profit and income from operations to Non-GAAP gross profit and income from operations is estimated based on our current information.



Page 6




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

			Three months ended										Six months ended
			April 30,										April 30,
			2016						2015				2016						2015
			Net Income			Diluted EPS			Net Income		Diluted EPS		Net Income			Diluted EPS			Net Income			Diluted EPS

GAAP Net income			$	88		$	0.51		$	96	$	0.56	$	152		$	0.88		$	166		$	0.97
	Non-GAAP adjustments:
		Intangible amortization		11			0.06			2		0.01		22			0.13			4			0.02
		Share Based Compensation		13			0.08			13		0.08		29			0.17			42			0.25
		Acquisition and integration costs		5			0.03			—		—		5			0.03			—			—
		Acquisition related fair value adjustments		4			0.02			—		—		9			0.05			—			—
		Separation and related costs		5			0.03			5		0.03		10			0.06			12			0.07
		Other		2			0.01			3		0.01		(4	)		(0.02	)		2			0.01
		Adjustment for taxes ^(a)		(22	)		(0.13	)		1		0.01		(22	)		(0.13	)		(10	)		(0.06	)
Non-GAAP Net income			$	106		$	0.61		$	120	$	0.70	$	201		$	1.17		$	216		$	1.26

Weighted average shares outstanding - diluted				172						171				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. For the six months ended April 30, 2016 and 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 7




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



Keysight
	Q2'16			Q2'15			Q1'16
Revenue	$	735		$	740		$	726
Gross Margin, %		57.8	%		57.1	%		56.6	%
Income from Operations	$	135		$	154		$	129
Operating Margin, %		18.3	%		20.9	%		17.8	%


Measurement Solutions
	Q2'16			Q2'15			Q1'16
Revenue	$	639		$	638		$	631
Gross Margin, %		60.6	%		59.3	%		59.2	%
Income from Operations	$	124		$	136		$	116
Operating Margin, %		19.5	%		21.3	%		18.3	%


Customer Support and Services
	Q2'16			Q2'15			Q1'16
Revenue	$	96		$	102		$	95
Gross Margin, %		39.3	%		43.8	%		39.6	%
Income from Operations	$	11		$	18		$	13
Operating Margin, %		11.2	%		18.2	%		13.9	%

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.





Non-GAAP revenue for Measurement Solutions excludes the impact of fair value adjustments to acquisition related deferred revenue balances for the Anite acquisition of $4M for Q2'16, $5M for Q1'16 and zero for Q2'15, respectively.


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 8




KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF NON-GAAP REVENUE BY REGION
(in millions)
(Unaudited)
PRELIMINARY

	GAAP Revenue			Acquisition related fair value adjs	NON-GAAP Revenue
			Percent				Percent
Revenue by Region	Q2'16	Q2'15	Inc/(Dec)	Q2'16	Q2'16	Q2'15	Inc/(Dec)

Americas	$ 257	$ 282	-9%	$ 1	$ 258	$ 282	-8%
Europe	136	123	11%	1	137	123	11%
Japan	85	92	-7%	—	85	92	-7%
Asia Pacific ex-Japan	253	243	4%	2	255	243	4%
Total Revenue	$ 731	$ 740	-1%	$ 4	$ 735	$ 740	-1%


Non GAAP Revenue is defined to exclude the fair value adjustments to acquisition related deferred revenue balances for the Anite acquisition.


The preliminary reconciliation of revenue by region is estimated based on our current information.


Page 9




KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF NON-GAAP REVENUE BY MARKET
(In millions)
(Unaudited)
PRELIMINARY

	GAAP Revenue						Acquisition related fair value adjs		Non-GAAP Revenue
					Percent								Percent
	Q2'16		Q2'15		Inc/(Dec)		Q2'16		Q2'16		Q2'15		Inc/(Dec)
Aerospace & Defense		160	$	156	3	%	$	—	$	160	$	156	3	%
Industrial/Computer/Semi-conductor		323		337	-4	%		—		323		337	-4	%
Communications		248		247	—	%		4		252		247	2	%
Total Revenue	$	731	$	740	-1	%	$	4	$	735	$	740	-1	%



Non GAAP Revenue is defined to exclude the fair value adjustments to acquisition related deferred revenue balances for the Anite acquisition.

The preliminary Non GAAP revenue by market information is estimated based on our current information.


Page 10

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