Keysight Technologies Reports Fourth-Quarter and Fiscal 2015 Results
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Keysight Technologies Reports Fourth-Quarter and Fiscal 2015 Results

Highlights:

SANTA ROSA, Calif. — (BUSINESS WIRE) — November 19, 2015 — Keysight Technologies, Inc. (NYSE: KEYS) today reported strong operating results despite mixed end market conditions. Non-GAAP revenue of $756 million for the fourth fiscal quarter ended Oct. 31, 2015, declined 1 percent compared with one year ago.(2) Currency had a negative year-over-year impact of 4 percentage points on revenue, while acquisitions contributed 4 percentage points of growth.

Compared to last year, results across end markets were mixed. Communications market revenues grew 3 percent, while aerospace & defense market revenues declined 5 percent versus a high point driven by the post-sequestration recovery. Industrial, computer, and semiconductor market revenues declined 2 percent as strength in computer and semiconductor markets was offset by softer industrial spending. Regionally, sales grew on a core basis in Asia Pacific and Japan with declines in the Americas and Europe.

Fourth-quarter GAAP gross margin of 56 percent increased 1.5 percentage points year-over-year. Non-GAAP gross margin of 58 percent increased 1.9 percentage points as the mix of R&D and software revenues improved.(1) Expenses increased due to acquisitions and higher R&D investment in support of key growth initiatives.

Fourth-quarter non-GAAP operating income was $157 million, or 20.7 percent of revenue.(1) Non-GAAP net income was $122 million, or $0.71 per share,(1) which excludes a tax benefit of $201 million and other net adjustments of $46 million. The tax benefit resulted primarily from a tax ruling obtained from Singapore that allows Keysight to amortize the value of the intellectual property acquired from Agilent in the separation. Fourth-quarter GAAP operating income was $111 million, or 14.8 percent of revenue. GAAP net income was $277 million, or $1.61 per share.

For fiscal 2015, non-GAAP revenue of $2.9 billion declined 2 percent and was flat on a core basis as currency had a negative year-over-year impact of 3 percentage points, while acquisitions contributed 1 percentage point of growth.(2) Fiscal 2015 non-GAAP operating income was $559 million, or 19.5 percent of revenue.(1) Full-year non-GAAP net income was $432 million, or $2.52 per share,(1) which excludes GAAP to non-GAAP net adjustments of $81 million. Fiscal 2015 GAAP operating income was $431 million, or 15.1 percent of revenue. Full-year GAAP net income was $513 million, or $3.00 per share.

“Our strong Q4 performance contributed to a solid first year as an independent company,” said Ron Nersesian, Keysight president and CEO. “Our team’s operational discipline drove excellent earnings results in Q4 and throughout the year, while we completed the separation and closed our first major acquisition with Anite. We have also established a consistent track record of meeting our guidance commitments over the past several quarters.”

“Looking forward, our recently announced organizational structure is the next step in driving increased focus on customer solutions and accelerating our growth initiatives in 2016,” added Nersesian. “While we maintain our expectations for market growth of 2 percent in 2016, recent macro data has tempered our expectations for the first half of the year.”

Revenues and earnings are typically softer in Keysight’s first fiscal quarter. Consistent with this seasonality, first-quarter 2016 non-GAAP revenue is expected to be in the range of $702 million to $742 million.(2) First-quarter non-GAAP earnings per share are expected to be in the range of $0.44 to $0.58.(3)

Webcast

Keysight’s management will present more details about its fourth-quarter FY2015 financial results on a conference call with investors today at 1:30 p.m. PT. This event will be webcast in listen-only mode. Listeners may log on and select Q4 2015 Keysight Technologies Inc. Earnings Conference Call in the Investor News & Events – Upcoming Events section at www.investor.keysight.com. The webcast will remain on the company site for 90 days.

A telephone replay of the conference call will be available at approximately 4:30 p.m. PT, Nov. 19 through Nov. 24 by dialing +1 855 859 2056 (or +1 404 537 3406 from outside the U.S.) and entering pass code 47979140.

About Keysight Technologies

Keysight Technologies (NYSE: KEYS) is a global electronic measurement technology and market leader helping to transform its customers’ measurement experience through innovations in wireless, modular, and software solutions. Keysight’s electronic measurement instruments, systems, software and services are used in the design, development, manufacture, installation, deployment and operation of electronic equipment. The business had revenues of $2.9 billion in fiscal year 2014. Information about Keysight is available at www.keysight.com.

Forward-Looking Statements

This news release contains forward-looking statements as defined in the Securities Exchange Act of 1934 and is subject to the safe harbors created therein. The forward-looking statements contained herein include, but are not limited to, information regarding Keysight’s future revenues, earnings and profitability; the future demand for the company’s products and services; and customer expectations. These forward-looking statements involve risks and uncertainties that could cause Keysight’s results to differ materially from management’s current expectations. Such risks and uncertainties include, but are not limited to, unforeseen changes in the strength of our customers’ businesses; unforeseen changes in the demand for current and new products, technologies, and services; customer purchasing decisions and timing, and the risk that we are not able to realize the savings or benefits expected from integration and restructuring activities.

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 July 31, 2015. 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 operating income, 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. In addition, non-GAAP net income and non-GAAP net income per share 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. Reconciliation between non-GAAP gross margin and GAAP gross margin, non-GAAP net income and GAAP net income for Q4’15 and FY2015, is set forth on pages 5-6 of the attached tables, along with additional information regarding the use of this non-GAAP measure.

(2) Revenues, excluding the impact of fair value adjustment to acquisition-related deferred revenue balances for the Anite acquisition are a non-GAAP measure. A reconciliation between GAAP revenue and non-GAAP revenue and non-GAAP revenue excluding currency and acquisitions (core basis) is provided on page 8 of the attached tables, along with additional information regarding the use of this non-GAAP measure.

(3) Non-GAAP earnings per share as projected for Q1 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. Beginning in Q1 FY16, Keysight intends to utilize a fixed long-term projected non-GAAP tax rate. When projecting this long-term rate, Keysight will 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, Keysight will evaluate 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 should eliminate 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. 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.

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
  2015     2014   Inc/(Dec)
 
Orders $ 780 $ 760 3 %
 
 
Net revenue $ 750 $ 762 (2 %)
 
Costs and expenses:
Cost of products and services 327 343 (5 %)
Research and development 105 91 16 %
Selling, general and administrative 212 198 7 %
Other operating expense (income), net   (5 )   —   —
Total costs and expenses   639     632   1 %
 
Income from operations 111 130 (15 %)
 
Interest expense (11 ) (3 ) 267 %
Other income (expense), net   1     6   (83 %)
 
Income before taxes 101 133 (24 %)
 
Provision (benefit) for income taxes   (176 )   32   (650 %)
 
Net income $ 277   $ 101   174 %
 
 
Net income per share:
Basic $ 1.63 $ 0.60
Diluted $ 1.61 $ 0.60
 
Weighted average shares used in computing net income per share:(a)
Basic 170 167
Diluted 172 167
 
 
(a) On November 1, 2014, Agilent Technologies, Inc. distributed 167 million shares of Keysight common stock to existing holders of Agilent common stock. Basic and diluted net income per share for all periods through October 31, 2014 is calculated using the shares distributed on November 1, 2014.
 
The preliminary income statement is estimated based on our current information.
 
 
 
Page 1
 
 
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
PRELIMINARY
     
 
Year Ended
October 31, Percent
  2015     2014   Inc/(Dec)
(unaudited)
Orders $ 2,853 $ 2,963 (4 %)
 
 
Net revenue $ 2,856 $ 2,933 (3 %)
 
Costs and expenses:
Cost of products and services 1,264 1,313 (4 %)
Research and development 387 361 7 %
Selling, general and administrative 793 790 — %
Other operating expense (income), net   (19 )   —   —
Total costs and expenses   2,425     2,464   (2 %)
 
Income from operations 431 469 (8 %)
 
Interest income 1 — —
Interest expense (46 ) (3 ) 1433 %
Other income (expense), net   2     9   (78 %)
 
Income before taxes 388 475 (18 %)
 
Provision (benefit) for income taxes   (125 )   83   (251 %)
 
Net income $ 513   $ 392   31 %
 
 
Net income per share:
Basic $ 3.04 $ 2.35
Diluted $ 3.00 $ 2.35
 
Weighted average shares used in computing net income per share:(a)
Basic 169 167
Diluted 171 167
 
 
(a) On November 1, 2014, Agilent Technologies, Inc. distributed 167 million shares of Keysight common stock to existing holders of Agilent common stock. Basic and diluted net income per share for all periods through October 31, 2014 is calculated using the shares distributed on November 1, 2014.
 
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
             
 
October 31, October 31,
  2015     2014  
(unaudited)
ASSETS
 
Current assets:
Cash and cash equivalents $ 483 $ 810
Accounts receivable, net 398 357
Receivable from Agilent — 23
Inventory 487 498
Deferred tax assets 74 83
Other current assets   137     79  
Total current assets 1,579 1,850
 
Property, plant and equipment, net 518 470
Goodwill 700 392
Other intangible assets, net 246 18
Long-term investments 70 63
Long-term deferred tax assets 295 163
Other assets   100     94  
Total assets $ 3,508   $ 3,050  
 
LIABILITIES AND EQUITY
 
Current liabilities:
Accounts payable $ 209 $ 173
Payable to Agilent — 125
Employee compensation and benefits 168 167
Deferred revenue 175 175
Income and other taxes payable 50 72
Other accrued liabilities   93     57  
Total current liabilities 695 769
 
Long-term debt 1,099 1,099
Retirement and post-retirement benefits 280 213
Long-term deferred revenue 61 69
Other long-term liabilities   71     131  
Total liabilities   2,206     2,281  
 

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; 170 million shares at October 31, 2015 and 167 million shares at October 31, 2014, issued and outstanding

2 2
Additional paid-in-capital 1,156 1,002
Retained earnings 614 101
Accumulated other comprehensive loss   (470 )   (336 )
Total stockholders' equity   1,302     769  
Total liabilities and equity $ 3,508   $ 3,050  
 
 
 
The preliminary balance sheet is estimated based on our current information.
 
 
 
Page 3
 
 
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
PRELIMINARY
           
 
Year ended
October 31,
  2015     2014  
(unaudited)
Cash flows from operating activities:
Net income $ 513 $ 392
 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 99 84
Share-based compensation 55 43
Excess tax benefit from share-based plans (4 ) (4 )
Deferred taxes (158 ) 23
Excess and obsolete inventory related charges 28 33
Other non-cash expenses, net 14 (1 )
Changes in assets and liabilities:
Accounts receivable (20 ) (25 )
Inventory (25 ) (31 )
Accounts payable 18 32
Payment to Agilent, net (28 ) 23
Employee compensation and benefits 6 30
Income and other taxes payable (6 ) 63
Retirement and post-retirement benefits (38 ) (32 )
Other assets and liabilities   (78 )   (67 )
Net cash provided by operating activities (a)   376     563  
 
Cash flows from investing activities:
Investments in property, plant and equipment (92 ) (70 )
Proceeds from sale of property, plant and equipment 1 —
Purchase of Investments (7 ) —
Acquisition of businesses and intangible assets, net of cash acquired (574 ) (11 )
Change in restricted cash and cash equivalents, net — (2 )
Proceeds from sale of investment securities 1 -
Other   —     1  
Net cash used in investing activities   (671 )   (82 )
 
Cash flows from financing activities:
Issuance of common stock under employee stock plans 26 —
Proceeds from short term borrowings — 2
Repayment of debts and credit facility — (37 )
Issuance of senior notes — 1,099
Debt issuance costs — (10 )
Net transfers from Agilent — 217
Excess tax benefit from share-based plans 4 4
Return of Capital to Agilent   (49 )   (940 )
Net cash provided by/(used in) financing activities   (19 )   335  
 
Effect of exchange rate movements   (13 )   (6 )
 
Net increase/(decrease) in cash and cash equivalents (327 ) 810
 
Cash and cash equivalents at beginning of period   810     —  
 
Cash and cash equivalents at end of period $ 483   $ 810  
 
(a) Cash payments included in operating activities:
Income tax payments, net $ (40 ) $ (4 )
Interest payments $ (46 ) $ -
 
 
The preliminary cash flow is estimated based on our current information.
 
 
 
Page 4
 
 
 
KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION FROM GAAP TO NON-GAAP
THREE MONTHS ENDED OCTOBER 31, 2015
(Unaudited)
PRELIMINARY       NON-GAAP ADJUSTMENTS
                 
(in millions, except per share amounts) GAAP

Restructuring and Related Costs

Intangible Amortization

Acquisition and Integration Costs

Acquisition related fair value adjustments

Separation Costs

Share Based Compensation

Asset Impairment

Adjustment for Taxes (a)

Non-GAAP
% of revenue % of revenue
Net Revenue $ 750 100 % ─ ─ ─ 6 ─ ─ ─ ─ $ 756 100 %
 
Cost of products and services   327   43.5 %   (1)

 

(2)   (1)   (3)   (1)   (2) ─ ─   317 42.0 %
Gross Profit 423 56.5 % 1 2 1 9 1 2 ─ ─ 439 58.0 %

 

Research and development 105 14.0 % (1) ─ ─ ─ ─ (1) ─ ─ 103 13.6 %
Selling, general and administrative 212 28.2 % (2) (6) (13) ─ (5) (3) ─ ─ 183 24.2 %
Other operating expense (income), net   (5 ) -0.5 % ─ ─ ─ ─   1  

─

─

─   (4) -0.5 %
 
Income from operations 111 14.8 % 4 8 14 9 5 6 ─ ─ 157 20.7 %
Other income(expense), net   (10 ) -1.4 % ─ ─   (2) ─ ─

─

 

2

─   (10) -1.3 %
 
Income before taxes 101 13.4 % 4 8 12 9 5 6 2 ─ 147 19.4 %
 
Provision (benefit) for taxes (176 ) -23.5 % ─ ─ ─ ─ ─ ─ ─ 201 25 3.3 %
Effective tax rate   -175 %                     17%  
 
Net income $ 277   36.9 %   4   8   12   9   5   6   2   (201) $ 122 16.1 %
 
Net income per share - Basic and Diluted:
 
Basic $ 1.63 $ 0.02 $ 0.05 $ 0.07 $ 0.05 $ 0.03 $ 0.04 $ 0.01 $ (1.18) $ 0.72
Diluted $ 1.61 $ 0.02 $ 0.05 $ 0.07 $ 0.05 $ 0.03 $ 0.03 $ 0.01 $ (1.16) $ 0.71
 
Weighted average shares used in computing net income (loss) per share:
 
Basic 170 170 170 170 170 170 170 170 170 170
Diluted 172 172 172 172 172 172 172 172 172 172
 

(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, 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 three months ended October 31, 2015 and 2014, management uses a non-GAAP effective tax rate of 17% and 16%, respectively, 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.
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.
Intangible amortization include non-cash intangible amortization recognized in connection with acquisitions.
Asset impairments and write-downs include assets that have been written-down to their fair value.
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 FROM GAAP TO NON-GAAP
YEAR ENDED OCTOBER 31, 2015
(Unaudited)
PRELIMINARY       NON-GAAP ADJUSTMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 
(in millions, except per share amounts) GAAP

Restructuring and Related Costs

Intangible Amortization

Acquisition and Integration Costs

Acquisition related fair value adjustments

Separation Costs

Share Based Compensation

Asset Impairment

Other

Adjustment for Taxes (a)

  Non-GAAP
% of revenue % of revenue
Net Revenue $ 2,856 100 % ─ ─ ─ 6 ─ ─ ─ ─ ─ $ 2,862 100 %
 
Cost of products and services   1,264   44.3 %   (4)   (7)   (1)   (3)   (2)   (12)   (1) ─ ─   1,234 43.1 %
Gross Profit 1,592 55.7 % 4 7 1 9 2 12 1 ─ ─ 1,628 56.9 %
 
Research and development 387 13.5 % (1) ─ ─ ─ (1) (9) ─ ─ ─ 376 13.1 %
Selling, general and administrative 793 27.8 % (9) (7) (15) ─ (19) (34) ─ (1) ─ 708 24.7 %
Other operating expense (income), net   (19 ) -0.6 % ─ ─ ─ ─   2 ─ ─   2 ─   (15) -0.5 %
 
Income from operations 431 15.1 % 14 14 16 9 20 55 1 (1) ─ 559 19.5 %
Other income(expense), net   (43 ) -1.5 % ─ ─   (1) ─ ─ ─   4   1 ─   (39) -1 %
 
Income before taxes 388 13.6 % 14 14 15 9 20 55 5 ─ ─ 520 18.2 %
 
Provision (benefit) for taxes (125 ) -4.4 % ─ ─ ─ ─ ─ ─ ─ ─ 213 88 3.1 %
Effective tax rate   -32 %                       17%  
 
Net income $ 513   18.0 %   14   14   15   9   20   55   5 ─   (213) $ 432 15.1 %
 
Net income per share - Basic and Diluted:
 
Basic $ 3.04 $ 0.08 $ 0.08 $ 0.09 $ 0.05 $ 0.12 $ 0.33 $ 0.03 $ - $ (1.27) $ 2.55
Diluted $ 3.00 $ 0.08 $ 0.08 $ 0.09 $ 0.05 $ 0.12 $ 0.32 $ 0.03 $ - $ (1.25) $ 2.52
 
Weighted average shares used in computing net income (loss) per share:
 
Basic 169 169 169 169 169 169 169 169 169 169 169
Diluted 171 171 171 171 171 171 171 171 171 171 171
 

(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 year ended October 31, 2015 and 2014, management uses a non-GAAP effective tax rate of 17% and 16%, respectively, 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.
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.
Intangible amortization include non-cash intangible amortization recognized in connection with acquisitions.
Asset impairments and write-downs include assets that have been written-down to their fair value.
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 6
 
 
 
KEYSIGHT TECHNOLOGIES, INC.
NON-GAAP SEGMENT INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY
     
Measurement Solutions
Q4'15 Q4'14 Q3'15
Revenue $ 653 $ 663 $ 564
Gross Margin, % 60.3 % 57.7 % 59.1 %
Income from Operations $ 137 $ 145 $ 104
 
 
 
 
Customer Support and Services
Q4'15 Q4'14 Q3'15
Revenue $ 103 $ 99 $ 101
Gross Margin, % 43.1 % 45.0 % 42.7 %
Income from Operations $ 20 $ 23 $ 20
 
 
 
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, the impact of restructuring charges, 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.
 
 
 
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KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF REVENUE EXCLUDING THE IMPACT OF ACQUISITION AND CURRENCY
(In Millions)
(Unaudited)
PRELIMINARY
           
 
 
Percent Percent
Q4'15 Q4'14 Inc/(Dec) FY15 FY14 Inc/(Dec)
GAAP Revenue $ 750 $ 762 -2 % $ 2,856 $ 2,933 -3 %
Acquisition related fair value adjustments   6     — —   6     — —
Non-GAAP Revenue $ 756 $ 762 -1 % $ 2,862 $ 2,933 -2 %
Less Currency Impacts   28     — —   99     — —
Non-GAAP Revenue excluding currency impacts $ 784 $ 762 3 % $ 2,961 $ 2,933 1 %
Less revenue from acquisitions included in segment results   (32 )   — —   (36 )   — —
Core Revenue $ 752   $ 762 -1 % $ 2,925   $ 2,933 — %
 
 
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.

RECONCILIATIONS OF CORE REVENUE BY REGION

RECONCILIATION OF REVENUE EXCLUDING THE IMPACT OF ACQUISITION AND CURRENCY

(in millions)

(Unaudited)

PRELIMINARY

       
NON GAAP Revenue

Revenue from
acquisition and
divestitures (a)

Currency
Adjustments (a)

Core Revenue
  Year-over-Year     Year-over-Year

Revenue by Region

Q4'15   Q4'14 % Change   Q4'15 Q4'15 Q4'15   Q4'14   % Change  
 
Americas $ 294 $ 304 -3 % $ 10 $ (2 ) $ 286 $ 304 -6 %
Europe 137 144 -5 % 8 (10 ) 139 144 -3 %
Japan 79 86 -8 % - (10 ) 89 86 2 %
Asia Pacific ex-Japan   246     228 8 %   14   (6 )   238     228 5 %
Total Revenue $ 756 $ 762 -1 % $ 32 $ (28 ) $ 752 $ 762 -1 %
 
 
 
(a) We compare the year-over-year change in revenue excluding the effect of M&A and foreign currency rate fluctuations to assess the performance of our underlying business. To determine the impact of currency fluctuations, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the actual exchange rate in effect during the respective prior periods.
 
Core revenue is defined as Non- GAAP revenue excluding the impact of currency and M&A.
 
The preliminary reconciliation of Core revenue by region excluding the impact of M&A and currency adjustments 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
Q4'15 Q4'14 Inc/(Dec)
Aerospace & Defense $ 168 $ 177 -5 %
Industrial/Computer/Semi-conductor 332 337 -2 %
Communications   256   248 3 %
Non-GAAP Revenue $ 756 $ 762 -1 %
 
 
 
The preliminary Non GAAP revenue by market information is estimated based on our current information.
 
 
Page 10


Contact:

Keysight Technologies, Inc.
EDITORIAL CONTACT:
Amy Flores, +1 408-236-1594
Email Contact
or
INVESTOR CONTACT:
Jason Kary, +1 707-577-6916
Email Contact