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Keysight Technologies Reports First-Quarter 2015 Results

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Keysight Technologies, Inc. (NYSE:KEYS) today reported revenues of $701 million for the first fiscal quarter ended Jan. 31, 2015, up 4 percent compared with one year ago. First-quarter GAAP net income was $70 million, or $0.41 per share. First-quarter GAAP operating margin was 12 percent.

During the first quarter, Keysight had share-based compensation of $29 million, separation costs of $7 million, intangible amortization of $2 million, and a tax benefit of $11 million. Excluding these items and $1 million of other net benefits, Keysight reported first-quarter non-GAAP net income of $96 million, or 0.56 per share.(1) First-quarter non-GAAP operating margin was 17 percent.(1)

“I was very pleased with our performance in our first quarter as an independent company,” said Ron Nersesian, Keysight president and CEO. “Our team did an exceptional job in executing the separation with no significant issues. In parallel, we delivered revenue and profit above the midpoint of our guidance.

“Looking ahead, our solid stabilization and strong operating performance allows us to focus even more intently on accelerating growth while maintaining our business model,” Nersesian added.

Keysight generated $92 million in cash from operations in the quarter. First-quarter ROIC was 30 percent.(3)

Keysight’s second-quarter 2015 revenues are expected to be in the range of $720 million to $760 million. Second-quarter non-GAAP earnings are expected to be in the range of $0.56 to $0.70 per share.(2)

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.

Keysight’s management will present more details about its first-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 Q1 2015 Keysight Technologies, Inc. Results 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 4:15 p.m. PT, Feb. 19 through March 3 by dialing +1 855 859 2056 (or +1 404 537 3406 from outside the United States) and entering pass code 56366702.

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 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-K for the fiscal year ended Oct. 31, 2014. 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 net income, non-GAAP operating margin and non-GAAP net income per share exclude primarily the impacts of share-based compensation, separation costs and non-cash intangible amortization. Non-GAAP net income and non-GAAP net income per share, also excludes any tax benefits 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 net income and GAAP net income is set forth on page 4 of the attached tables along with additional information regarding the use of this non-GAAP measure.

(2) Non-GAAP earnings per share as projected for Q2FY15 excludes primarily the impacts of share-based compensation, separation costs and non-cash intangible amortization. We also exclude any tax benefits 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. 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.

(3) Return on invested capital (ROIC) is a non-GAAP measure and is defined as income from operations less other (income) expense and taxes, annualized, divided by the average of the two most recent quarter-end balances of assets less net current liabilities. The reconciliation of ROIC can be found on page 6 of the attached tables, along with additional information regarding the use of this non-GAAP measure.

NOTE TO EDITORS: Further technology, corporate citizenship and executive news is available at www.keysight.com/go/news.

Source: IR-KEYS

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

Three Months Ended

January 31, Percent
2015 2014 Inc/(Dec)
Orders $ 691 $ 699 (1 %)
Net revenue $ 701 $ 671 4 %
Costs and expenses:
Cost of products and services 318 299 6 %
Research and development 96 90 7 %
Selling, general and administrative 206 191 8 %
Total costs and expenses 620 580 7 %
Income from operations 81 91 (11 %)
Interest expense (12 )
Other income (expense), net 9 1 800 %
Income before taxes 78 92 (15 %)
Provision for income taxes 8 18 (56 %)
Net income $ 70 $ 74 (5 %)
Net income per share:
Basic $ 0.42 $ 0.44
Diluted $ 0.41 $ 0.44
Weighted average shares used in computing net income per share:(a)
Basic 168 167
Diluted 170 167

(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 January 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 CONSOLIDATED BALANCE SHEET
(In millions, except par value and share amounts)
(Unaudited)
PRELIMINARY
January 31, October 31,
2015 2014
ASSETS
Current assets:
Cash and cash equivalents $ 887 $ 810
Accounts receivable, net 309 357
Receivable from Agilent 1 23
Inventory 491 498
Deferred tax assets 82 83
Other current assets 108 79
Total current assets 1,878 1,850
Property, plant and equipment, net 455 470
Goodwill 381 392
Other intangible assets, net 16 18
Long-term investments 59 63
Long-term deferred tax assets 135 163
Other assets 91 94
Total assets $ 3,015 $ 3,050
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 158 $ 173
Payable to Agilent 64 125
Employee compensation and benefits 146 167
Deferred revenue 176 175
Income and other taxes payable 60 72
Other accrued liabilities 82 57
Total current liabilities 686 769
Long-term debt 1,099 1,099
Retirement and post-retirement benefits 187 213
Long-term deferred revenue 66 69
Other long-term liabilities 59 131
Total liabilities 2,097 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; 168 million shares at January 31, 2015
and 167 million shares at October 31, 2014, issued and outstanding

2 2
Additional paid-in-capital 1,111

1,002
Retained earnings 171 101
Accumulated other comprehensive loss (366 ) (336 )
Total stockholders’ equity 918 769
Total liabilities and equity $ 3,015 $ 3,050
The preliminary balance sheet is estimated based on our current information.

Page 2

KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
PRELIMINARY
Three Months
Ended
January 31,
2015
Cash flows from operating activities:
Net income $ 70
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 23
Share-based compensation 29
Excess tax benefit from share-based plans (3 )
Deferred taxes (1 )
Excess and obsolete inventory and inventory related charges 10
Other non-cash expenses, net (1 )
Changes in assets and liabilities:

Accounts receivable

36
Inventory (5 )
Accounts payable (13 )
Payment to Agilent, net (14 )
Employee compensation and benefits (22 )
Other assets and liabilities (17 )
Net cash provided by operating activities (a) 92
Cash flows from investing activities:
Investments in property, plant and equipment (15 )
Proceeds from sale of investment securities 1
Net cash used in investing activities (14 )
Cash flows from financing activities:
Issuance of common stock under employee stock plans 4
Excess tax benefit from share-based plans 3
Net cash provided by financing activities 7
Effect of exchange rate movements (8 )
Net increase in cash and cash equivalents 77
Cash and cash equivalents at beginning of period 810
Cash and cash equivalents at end of period $ 887
(a) Cash payments included in operating activities:
Restructuring payments 1
Income tax payments, net 14
The preliminary cash flow is estimated based on our current information.

Page 3

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

PRELIMINARY

Three Months Ended
January 31,
2015 2014
Net Income Diluted EPS

Net Income

Diluted EPS

GAAP Net income $ 70 $ 0.41 $ 74 $ 0.44
Non-GAAP adjustments:
Restructuring and other related costs (3 ) (0.02 )
Intangible amortization 2 0.01 2 0.01
Transformational initiatives 1 0.01
Acquisition and integration costs 1 0.01
Separation costs 7 0.04 8 0.05
Share Based Compensation 29 0.17 17 0.10
Other (1 ) (0.01 )
Adjustment for taxes (a) (11 ) (0.06 ) (1 ) (0.01 )
Non-GAAP Net income $ 96 $ 0.56 $ 99 $ 0.59

(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 three months ended January 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 charges, acquisition and integration costs, transformational initiatives, share based compensation and separation costs. 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 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.

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.

Transformational initiatives include expenses incurred in the period associated with targeted cost reduction activities such as manufacturing transfers, small site consolidations, reorganizations, insourcing or outsourcing of activities. Such costs may include move and relocation costs, one-time termination benefits and other one-time reorganization costs.

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.

Separation 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.

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.

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 that items such as amortization of intangibles, restructuring charges 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 non-GAAP net income and diluted EPS reconciliation is estimated based on our current information.

Page 4

KEYSIGHT TECHNOLOGIES, INC.
SEGMENT INFORMATION
(In millions, except where noted)
(Unaudited)
PRELIMINARY
Measurement Solutions
Q1’15 Q1’14 Q4’14
Orders $ 607 $ 607 $ 678
Revenue $ 606 $ 574 $ 663
Gross Margin, % 57.6 % 57.8 % 57.6 %
Income from Operations $ 107 $ 99 $ 144
Customer Support and Services
Q1’15 Q1’14 Q4’14
Orders $ 84 $ 92 $ 82
Revenue $ 95 $ 97 $ 99
Gross Margin, % 42.0 % 46.3 % 45.7 %
Income from Operations $ 13 $ 19 $ 24

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, the impact of restructuring charges, transformational initiatives, acquisition and integration costs and separation costs.

In general, recorded orders represent firm purchase commitments from our customers with established terms and conditions for products and services that will be delivered within six months.

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 5

KEYSIGHT TECHNOLOGIES, INC.
RECONCILIATION OF ROIC
(In millions)
(Unaudited)
PRELIMINARY
KEYSIGHT KEYSIGHT KEYSIGHT
Numerator: Q1’15 Q1’14 Q4’14
Non-GAAP income from operations $ 120 $ 118 $ 168
Less:
Taxes and Other (income)/expense 15 19 23
Quarterly return (a) 105 99 145
Quarter return annualized $ 420 $ 396 $ 580
Denominator:
Segment assets (b) $ 1,805 $ 1,929 $ 1,976
Less:
Net current liabilities (c) 462 508 498
Invested capital $ 1,343 $ 1,421 $ 1,478
Average invested capital $ 1,411 $ 1,441 $ 1,469
ROIC 30 % 28 % 39 %

ROIC calculation:(annualized current quarter segment return)/(average of the two most recent quarter-end balances of Segment Invested Capital)

(a) Quarterly return is equal to non-GAAP net income of $96 million plus net interest expense after tax of $9 million for Q1’15, net income of $99 million plus net interest expense after tax of zero for Q1’14 and $143 million plus net interest expense after tax of $2 million for Q4’14. Please see “Non-GAAP Net Income and Diluted EPS Reconciliations” for a reconciliation of non-GAAP net income to GAAP net income.

(b) Segment assets consist of inventory, accounts receivable, property plant and equipment, gross goodwill and other intangibles, deferred taxes and allocated corporate assets.

(c) Includes accounts payable, employee compensation and benefits, deferred revenue, certain other accrued liabilities and allocated corporate liabilities.

Return on Invested Capital (ROIC) is a non-GAAP measure that management believes provides useful supplemental information for management and the investor. ROIC is a tool by which we track how much value we are creating for our shareholders. Management uses ROIC as a performance measure for our businesses, and our senior managers’ compensation is linked to ROIC improvements as well as other performance criteria. We believe that ROIC provides our management with a means to analyze and improve their business, measuring segment profitability in relation to net asset investments. We acknowledge that ROIC may not be calculated the same way by every company. When we complete a major acquisition, we may adjust invested capital for the relevant segment in the quarter when the acquisition occurred. We compensate for this limitation by monitoring and providing to the reader a full GAAP income statement and balance sheet.

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 of ROIC is based on our current information.

Page 6

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