Grade: D — Significant Concerns
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-12-17) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Clean opinion (auditor since 2013)
One-line verdict: Keysight delivered $5.4B in revenue (+8%) with strong 62% gross margins and $1.4B in operating cash flow, but two red flags fire: accounts receivable outpaced revenue for two consecutive years, and goodwill plus intangibles surged 58% to $4.7B (80% of equity) after the $1.5B Spirent acquisition. The M-Score of -2.57 and F-Score of 1.32 are both safely in the clean zone. Cash flow quality is solid at 1.66x net income. The D grade is driven by the balance sheet loading from the Spirent deal rather than any operational concern.
| Metric | Result |
|---|---|
| Red Flags | **2** |
| Watch Items | **2** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.57** (safe -- below -2.22 threshold) |
| F-Score (Fraud Probability) | **1.32** (0.49% probability) |
| Altman Z-Score | **5.33** (safe zone) |
| Auditor | PricewaterhouseCoopers LLP -- Unqualified opinion |
| Fiscal Year | 2025 (ended October 31, 2025) |
| Report Date | 2026-04-05 |
Electronic Test and Measurement Recovery
Keysight has two reportable segments: Communications Solutions Group (CSG, ~69% of revenue) and Electronic Industrial Solutions Group (EISG, ~31%). Per the filing: "Revenue of $5,375 million for 2025 increased 8 percent compared to 2024. Revenue increased in both the Communications Solutions Group and the Electronic Industrial Solutions Group."
This follows a rough FY2024 where "Revenue of $4,979 million for 2024 decreased 9 percent compared to 2023." The company is recovering from a cyclical downturn in test equipment demand.
Net income was "$850 million, $614 million, and $1,057 million in 2025, 2024, and 2023, respectively." The FY2025 increase was "primarily driven by higher revenue and net gains on equity investments and derivative instruments and lower income tax provisions."
Geographic growth was broad: Americas +7%, Europe +2%, Asia Pacific +11%.
Profitability and Margins
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $5.4B | $5.5B | $5.0B | $5.4B | +8% YoY |
| Gross Profit | $3.5B | $3.5B | $3.1B | $3.3B | +7% |
| Gross Margin | 63.7% | 64.6% | 62.9% | 62.1% | Declining |
| Net Income | $1.1B | $1.1B | $0.6B | $0.9B | +38% |
| Net Margin | 20.7% | 19.3% | 12.3% | 15.8% | Recovery |
| ROE | 27.0% | 22.7% | 12.0% | 14.5% | Recovery |
Per the filing: "Gross margin decreased 1 percentage point in 2025 compared to 2024, primarily driven by the impact of tariffs and unfavorable mix, partially offset by favorable pricing, higher revenue volume, and lower restructuring costs."
Tariffs are a notable headwind. The filing flags these explicitly as a margin pressure -- this is a real-world operational factor, not an accounting distortion.
Cash Flow: Clean and Consistent
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $1.4B | $1.1B | $1.4B |
| Net Income | $1.1B | $0.6B | $0.9B |
| **CFFO / Net Income** | **1.33** | **1.71** | **1.66** |
| CapEx | -$0.2B | -$0.2B | -$0.1B |
| Free Cash Flow | $1.2B | $0.9B | $1.3B |
Per the filing: "Net cash provided by operating activities increased $357 million in 2025 compared to 2024." Non-cash items include depreciation of $131M, amortization of $145M, and share-based compensation of $162M. Accruals are negative at -4.9%, confirming that reported earnings are backed by cash.
The Spirent Acquisition: $1.5B Balance Sheet Impact
The major event in FY2025 was the acquisition of Spirent Communications for $1.4B net of cash. Per the filing: "Goodwill of $653 million and $45 million was assigned to the Communications Solutions Group and Electronic Industrial Solutions Group reportable segments, respectively, reflecting the expected benefits and synergies."
Additionally, Keysight acquired Synopsys OSG for $578M, Riscure for approximately $298M goodwill, and smaller deals. Total acquisition spending in FY2025 was $2.0B.
This drove goodwill from $2.4B to $3.4B and intangible assets from $607M to $1.3B. Combined goodwill plus intangibles of $4.7B equal 80% of equity.
Notably, as part of Spirent regulatory conditions, Keysight divested Spirent's "high-speed ethernet, network security, and channel emulation business lines" to Viavi Solutions for $399M. Assets held for sale included "$55 million of goodwill" and "$346 million of other intangible assets."
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 64 days, +1 day YoY |
| A2 | AR vs Revenue Growth | **FAIL** | **AR outpaced revenue for 2 consecutive years** |
| A3 | Revenue vs CFFO | PASS | Revenue +8.0%, CFFO +33.9% |
| B1 | Inventory vs COGS | PASS | Inventory +2.7% vs COGS +10.4% |
| B2 | CapEx vs Revenue | PASS | CapEx -16.9% vs revenue +8.0% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 44.2% |
| B4 | Gross Margin | PASS | Gross margin 62.1%, -0.8pp |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.66 |
| C2 | Free Cash Flow | PASS | FCF $1.3B, FCF/NI = 1.51 |
| C3 | Accruals Ratio | PASS | -4.9%. Low accruals |
| C4 | Cash vs Debt | WATCH | Cash $1.9B covers 67% of $2.8B debt |
| D1 | Goodwill + Intangibles | **FAIL** | **$4.7B = 80% of equity** |
| D2 | Leverage | PASS | Debt/EBITDA = 1.9x |
| D3 | Soft Asset Growth | PASS | Other assets +5.8% vs revenue +8.0% |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | WATCH | Goodwill+Intangibles surged 58% YoY |
| F1 | Beneish M-Score | PASS | M-Score = -2.57 |
Key Risks from the 10-K
1. Integration of Multiple Acquisitions
Keysight spent $2.0B on acquisitions in a single year. Integrating Spirent, Synopsys OSG, Riscure, and AnaPico simultaneously creates execution risk. The filing warns about "difficulties in managing the integration of acquired companies that have not adopted similar operating and financial controls, procedures, and policies."
2. Tariff and Trade Policy Exposure
The filing explicitly flags tariffs as a margin headwind. With 69% of revenue international and centralized accounting in India and Malaysia, the filing warns: "If conditions change in those countries, it may adversely affect operations, including impairing our ability to pay our suppliers."
3. Excess and Obsolete Inventory Charges Growing
"Excess and obsolete inventory charges were $43 million in 2025, $35 million in 2024, and $27 million in 2023." This 59% increase over two years signals either product lifecycle acceleration or demand forecasting challenges.
4. Accumulated Impairment of $709M
While no goodwill was impaired in recent years, the filing notes "accumulated impairment losses on goodwill were $709 million as recorded within the CSG reportable segment" -- evidence that past acquisitions have destroyed value.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $5.4B | $5.5B | $5.0B | $5.4B |
| Net Income | $1.1B | $1.1B | $0.6B | $0.9B |
| Gross Margin | 63.7% | 64.6% | 62.9% | 62.1% |
| Net Margin | 20.7% | 19.3% | 12.3% | 15.8% |
| CFFO | $1.1B | $1.4B | $1.1B | $1.4B |
| CFFO/NI | 1.02 | 1.33 | 1.71 | 1.66 |
| FCF | $1.0B | $1.2B | $0.9B | $1.3B |
| Cash | $2.0B | $2.5B | $1.8B | $1.9B |
| Total Debt | $2.0B | $2.0B | $2.0B | $2.8B |
Summary
Grade: D. Two red flags, both acquisition-driven rather than operational.
Keysight triggers fails on AR-vs-revenue (two consecutive years of AR outpacing sales) and goodwill at 80% of equity (from $2.0B in acquisitions this year alone). The E2 watch for 58% goodwill surge confirms the rapid balance sheet loading.
Operationally, this is a well-run business: 62% gross margins, CFFO consistently exceeding net income, negative accruals, strong FCF, and an M-Score well into the clean zone. The Z-Score of 5.33 shows no financial distress.
The key question is whether Keysight's acquisition spree creates value or destroys it. The $709M in accumulated goodwill impairments on prior CSG acquisitions suggests the track record is mixed. Watch (1) Spirent integration progress and whether the $653M CSG goodwill holds, (2) tariff impacts on margins, (3) the growing E&O inventory charges, and (4) debt coverage -- cash covers only 67% of the now-$2.8B debt load.
**Disclaimer**: This report is based on Keysight's fiscal year 2025 10-K filed with the SEC on December 17, 2025. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade D means significant concerns were detected that warrant investigation.