Item 1. Condensed Consolidated Financial Statements (Unaudited)

88K characters. Original on sec.gov · Markdown

Item 1. Condensed Consolidated Financial Statements (Unaudited)

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share data)

(Unaudited)


	Three Months Ended
	January 31,
		2022		2021
Revenue:
Products		$	1,030	$	970
Services and other		220		210
Total revenue		1,250		1,180
Costs and expenses:
Cost of products		360		392
Cost of services and other		86		81
Total costs		446		473
Research and development		210		199
Selling, general and administrative		326		301
Other operating expense (income), net		(3)		(5)
Total costs and expenses		979		968
Income from operations		271		212
Interest income		1		1
Interest expense		(20)		(20)
Other income (expense), net		12		2
Income before taxes		264		195
Provision for income taxes		35		23
Net income		$	229	$	172

Net income per share:
Basic		$	1.25	$	0.93
Diluted		$	1.24	$	0.92

Weighted average shares used in computing net income per share:
Basic		183		186
Diluted		184		188

The accompanying notes are an integral part of these condensed consolidated financial statements.

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)


	Three Months Ended
	January 31,
		2022		2021
Net income		$	229	$	172
Other comprehensive income (loss):

Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $(1) and $(5)		4		18
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of zero		—		—
Foreign currency translation, net of tax benefit (expense) of zero		(21)		31
Net defined benefit pension cost and post retirement plan costs:
Change in net actuarial loss, net of tax expense of $2 and $5		8		14

Other comprehensive income (loss)		(9)		63
Total comprehensive income		$	220	$	235

The accompanying notes are an integral part of these condensed consolidated financial statements.

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share data)

(Unaudited)


	January 31, 2022		October 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	1,977	$	2,052

Accounts receivable, net	708		735
Inventory	804		777
Other current assets	319		270
Total current assets	3,808		3,834
Property, plant and equipment, net	672		650
Operating lease right-of-use assets	218		227
Goodwill	1,623		1,628
Other intangible assets, net	250		272
Long-term investments	65		70
Long-term deferred tax assets	695		711
Other assets	397		389
Total assets	$	7,728	$	7,781
LIABILITIES AND EQUITY
Current liabilities:

Accounts payable	$	294	$	287
Employee compensation and benefits	247		355
Deferred revenue	495		478
Income and other taxes payable	86		74
Operating lease liabilities	40		41
Other accrued liabilities	95		74
Total current liabilities	1,257		1,309

Long-term debt	1,791		1,791
Retirement and post-retirement benefits	154		167
Long-term deferred revenue	190		187
Long-term operating lease liabilities	183		191
Other long-term liabilities	343		352
Total liabilities	3,918		3,997
Commitments and contingencies (Note 12)

Stockholders’ equity:
Preferred stock; $0.01 par value; 100 million shares authorized; none issued and outstanding	—		—
Common stock; $0.01 par value; 1 billion shares authorized; 198 million shares at January 31, 2022 and 197 million shares at October 31, 2021 issued	2		2
Treasury stock at cost; 16.2 million shares at January 31, 2022 and 15.1 million shares at October 31, 2021	(1,631)		(1,425)
Additional paid-in-capital	2,231		2,219
Retained earnings	3,659		3,430
Accumulated other comprehensive loss	(451)		(442)
Total stockholders' equity	3,810		3,784
Total liabilities and equity	$	7,728	$	7,781

The accompanying notes are an integral part of these condensed consolidated financial statements.

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)


	Three Months Ended
	January 31,
	2022		2021
Cash flows from operating activities:
Net income	$	229	$	172
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	30		28
Amortization	27		59
Share-based compensation	50		43
Deferred tax expense	9		1
Excess and obsolete inventory-related charges	6		7

Other non-cash expense (income), net	5		7
Changes in assets and liabilities:
Accounts receivable	25		(38)
Inventory	(32)		—
Accounts payable	(4)		4
Employee compensation and benefits	(117)		(54)
Deferred revenue	28		50
Income taxes payable	14		(1)
Retirement and post-retirement benefits	(9)		(1)
Other assets and liabilities	(37)		18
Net cash provided by operating activities	224		295

Cash flows from investing activities:
Investments in property, plant and equipment	(42)		(28)
Acquisition of businesses and intangible assets, net of cash acquired	(7)		(96)

Net cash used in investing activities	(49)		(124)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	31		28
Payment of taxes related to net share settlement of equity awards	(72)		(49)
Treasury stock repurchases	(206)		(20)
Payment of acquisition-related contingent consideration	—		(2)


Net cash used in financing activities	(247)		(43)

Effect of exchange rate movements	(4)		8

Net increase (decrease) in cash, cash equivalents, and restricted cash	(76)		136
Cash, cash equivalents, and restricted cash at beginning of period	2,068		1,767
Cash, cash equivalents, and restricted cash at end of period	$	1,992	$	1,903

Supplemental cash flow information:
Interest payments	$	—	$	—
Income tax paid, net	$	12	$	22
Investments in property, plant and equipment included in accounts payable	$	34	$	13

The accompanying notes are an integral part of these condensed consolidated financial statements.

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(in millions, except number of shares in thousands)

(Unaudited)


	Common Stock					Treasury Stock
	Number of Shares	Par Value		Additional Paid-in Capital		Number of Shares	Treasury Stock at Cost		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balance as of October 31, 2021	197,248	$	2	$	2,219	(15,094)	$	(1,425)	$	3,430	$	(442)	$	3,784
Net income	—	—		—		—	—		229		—		229
Other comprehensive income (loss), net of tax	—	—		—		—	—		—		(9)		(9)
Issuance of common stock	947	—		31		—	—		—		—		31
Taxes related to net share settlement of equity awards	—	—		(72)		—	—		—		—		(72)
Share-based compensation	—	—		53		—	—		—		—		53
Repurchase of common stock	—	—		—		(1,129)	(206)		—		—		(206)
Balance as of January 31, 2022	198,195	$	2	$	2,231	(16,223)	$	(1,631)	$	3,659	$	(451)	$	3,810

Balance as of October 31, 2020	195,661	$	2	$	2,110	(10,732)	$	(752)	$	2,536	$	(599)	$	3,297
Net income	—	—		—		—	—		172		—		172
Other comprehensive income (loss), net of tax	—	—		—		—	—		—		63		63
Issuance of common stock	1,193	—		28		—	—		—		—		28
Taxes related to net share settlement of equity awards	—	—		(49)		—	—		—		—		(49)
Share-based compensation	—	—		45		—	—		—		—		45
Repurchase of common stock	—	—		—		(137)	(20)		—		—		(20)
Balance as of January 31, 2021	196,854	$	2	$	2,134	(10,869)	$	(772)	$	2,708	$	(536)	$	3,536

The accompanying notes are an integral part of these condensed consolidated financial statements.

KEYSIGHT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview. Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product development lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.

Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarters.

Basis of Presentation**.** We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The accompanying financial statements and information should be read in conjunction with our Annual Report on Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our financial position as of January 31, 2022 and October 31, 2021, results of operations for the three months ended January 31, 2022 and 2021, and cash flows for the three months ended January 31, 2022 and 2021.

Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

Update to Significant Accounting Policies. Except as set forth in the "new accounting pronouncements" section below, there have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

New Accounting Pronouncements.

ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the Financial Accounting Standards Board (“FASB”) issued guidance that requires entities to apply Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We adopted this guidance effective November 1, 2021. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements.

Other amendments to GAAP that do not require adoption until a future date are not expected to have a material impact on our condensed consolidated financial statements upon adoption.

2. REVENUE

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by geographic region, end market, and timing of revenue recognition, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregated revenue is presented for each of our reportable segments, Communications Solutions Group ("CSG") and Electronics Industrial Solutions Group ("EISG").


	Three Months Ended
	January 31,
	2022						2021
	CSG		EISG		Total		CSG		EISG		Total
	(in millions)
Region
Americas	$	404	$	79	$	483	$	401	$	67	$	468
Europe	143		83		226		132		70		202
Asia Pacific	331		210		541		319		191		510
Total revenue	$	878	$	372	$	1,250	$	852	$	328	$	1,180

End Market
Aerospace, Defense & Government	$	294	$	—	$	294	$	294	$	—	$	294
Commercial Communications	584		—		584		558		—		558
Electronic Industrial	—		372		372		—		328		328
Total revenue	$	878	$	372	$	1,250	$	852	$	328	$	1,180

Timing of Revenue Recognition
Revenue recognized at a point in time	$	730	$	322	$	1,052	$	712	$	284	$	996
Revenue recognized over time	148		50		198		140		44		184
Total revenue	$	878	$	372	$	1,250	$	852	$	328	$	1,180

Our point-in-time revenues are generated predominantly from the sale of various types of design and test software and hardware, and per-incident repair and calibration services. Perpetual software and the portion of term software subscription revenue in this category represents revenue recognized up front upon transfer of control at the time of electronic delivery. Revenue on per-incident repair and calibration services is recognized when services are performed. Over-time revenues are generated predominantly from the repair and calibration contracts, extended warranties, technical support for hardware and software, certain software subscription and Software as a Service ("SaaS") product offerings, and professional services. Technical support for software and when-and-if available software updates and upgrades are sold either together with our software licenses and software subscriptions, including SaaS, or separately as part of our customer support programs.

Additionally, we provide custom solutions that include combinations of hardware, software, software subscriptions, installation, professional services, and other support services, and revenue may be recognized either up front on delivery or over time depending upon the terms of the contract.

Contract Balances

Contract assets

Contract assets consist of unbilled receivables and are recorded when revenue is recognized in advance of scheduled billings to our customers. These amounts are primarily related to solutions and support arrangements when transfer of control has occurred but we have not yet invoiced. The contract assets balances were $89 million and $84 million as of January 31, 2022 and October 31, 2021, respectively, and is included in "accounts receivables, net" and "other assets" in our condensed consolidated balance sheet.

Contract costs

We capitalize direct and incremental costs incurred to acquire contracts for which the associated revenue is expected to be recognized in future periods. We have determined that certain employee and third-party representative commission programs meet the requirements to be capitalized. These costs are initially deferred and typically amortized over the term of the customer contract which corresponds to the period of benefit. Capitalized contract costs were $41 million and $39 million as of January 31, 2022 and October 31, 2021, respectively, and are included in “other current assets” and “other assets” in the condensed

consolidated balance sheet. The amortization expense associated with these costs was $22 million and $18 million for the three months ended January 31, 2022 and 2021, respectively.

Contract liabilities

Our contract liabilities consist of deferred revenue that arises when we receive consideration in advance of providing the goods or services promised in the contract. Contract liabilities are primarily generated from customer deposits received in advance of shipments for products or rendering of services and are recognized as revenue when services are provided to the customer. We classify deferred revenue as current or non-current based on the timing of when we expect to recognize revenue.

The following table provides a roll-forward of our contract liabilities, current and non-current:


	Three Months Ended
	January 31,
	2022
	(in millions)
Balance at October 31	$	665

Deferral of revenue billed in current period, net of recognition	233

Revenue recognized that was deferred as of the beginning of the period	(208)
Foreign currency translation impact	(5)
Balance at January 31	$	685

Remaining Performance Obligations

Our remaining performance obligations, excluding contracts that have an original expected duration of one year or less, was approximately $398 million as of January 31, 2022, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. As of January 31, 2022, we expect to fulfill 40 percent of these unsatisfied performance obligations during the remainder of 2022, 34 percent during 2023, and 26 percent thereafter.

3. SHARE-BASED COMPENSATION

Keysight accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including restricted stock units ("RSUs"), 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 (“LTP”) Program, based on estimated fair values. The impact of share-based compensation expense on our condensed consolidated statement of operations was as follows:


	Three Months Ended
	January 31,
		2022		2021
		(in millions)
Cost of products and services		$	8	$	7
Research and development		11		9
Selling, general and administrative		32		27
Total share-based compensation expense		$	51	$	43

Share-based compensation capitalized within inventory was $3 million and $2 million at January 31, 2022 and January 31, 2021.

Performance awards based on total shareholder return ("TSR") are valued using a Monte Carlo simulation model, which requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. The valuation is done once every year in the first quarter at the time of annual grants. The following assumptions were used to estimate the fair value of TSR-based performance awards:


	Three Months Ended
	January 31,
		2022		2021
Volatility of Keysight shares		36	%	36	%
Volatility of index		23	%	23	%
Price-wise correlation with selected peers		67	%	67	%

The estimated fair value of RSUs and the financial metrics-based performance awards is determined based on the market price of Keysight’s common stock on the grant date. The compensation cost for financial metrics-based performance awards reflects the cost of awards that are probable to vest at the end of the performance period.

4. INCOME TAXES

The following table provides details of income taxes (in millions, except percentages):


	Three Months Ended
	January 31,
			2022			2021
		(in millions)
Income before taxes			$	264		$	195
Provision for income taxes			$	35		$	23
Effective tax rate			13.1		%	11.6		%

The tax expense for the three months ended January 31, 2022 was higher compared to the same period last year, primarily due to an increase in income before taxes and a decrease in discrete tax benefits, partially offset by a change in the jurisdictional mix of non-U.S. earnings which increased the earnings taxed at the incentive tax rates in 2022.

The income tax expense included a net discrete benefit of $8 million and $11 million for the three months ended January 31, 2022 and 2021, respectively. The decrease in discrete tax benefit for the three months ended January 31, 2022 was primarily due to a one-time benefit from U.S. state R&D credits recorded in 2021 and an increase in prior year non-U.S. tax liabilities, partially offset by an increase in discrete benefit from stock compensation.

Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore and Malaysia, that have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions. The Singapore tax incentive is due for renewal in 2024, and the Malaysia incentive is due for renewal in 2025. The impact of the tax incentives decreased the income tax provision by $19 million and $10 million for the three months ended January 31, 2022 and 2021, respectively. The increase in tax benefit for the three months ended January 31, 2022 is primarily due to a change in the jurisdictional mix of non-U.S. earnings, which increased the earnings taxed at incentive tax rates in 2022.

The open tax years for the U.S. federal income tax return and most state income tax returns are from November 1, 2017 through the current tax year. For the majority of our foreign entities, the open tax years are from November 1, 2016 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.

Keysight’s fiscal year 2018 U.S. federal income tax return is currently under examination by the Internal Revenue Service. The Tax Cuts and Jobs Act was enacted in December 2017 and imposed a one-time U.S. tax on foreign earnings not previously repatriated to the U.S., known as the Transition Tax, which was reported in Keysight’s 2018 U.S. federal income tax return.

The company is being audited in Malaysia for the 2008 tax year. This tax year pre-dates our separation from Agilent. However, pursuant to the agreement between Agilent and Keysight pertaining to tax matters, as finalized at the time of separation, for certain entities, including Malaysia, any historical tax liability is the responsibility of Keysight. In the fourth quarter of fiscal year 2017, Keysight paid income taxes and penalties of $68 million on gains related to intellectual property rights. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed, and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company. Our appeals to both the Special Commissioners of Income Tax and the High Court in Malaysia have been unsuccessful. We have filed a Notice of Appeal with the Court of Appeal.

At this time, management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If the resolution of any tax issues addressed in our current open examinations are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period in which such resolution occurs.

5. NET INCOME PER SHARE

The following table presents the calculation of basic and diluted net income per share (in millions, except per-share amounts):


	Three Months Ended
	January 31,
			2022		2021
		(in millions)
Net income			$	229	$	172
Basic weighted-average shares			183		186
Potential common shares— stock options and other employee stock plans			1		2
Diluted weighted-average shares			184		188
Net income per share - basic			$	1.25	$	0.93
Net income per share - diluted			$	1.24	$	0.92

Diluted shares outstanding include the dilutive effect of in-the-money options and non-vested RSUs. The diluted effect of such awards is calculated based on the average share price of each period using the treasury stock method, except where the inclusion of such awards would have an anti-dilutive impact.

6. GOODWILL AND OTHER INTANGIBLE ASSETS

The goodwill balance as of January 31, 2022 and October 31, 2021 and the activity for the three months ended January 31, 2022 for each of our reportable operating segments were as follows:


	CSG		EISG		Total
	(in millions)
Goodwill at October 31, 2021	$	1,069	$	559	$	1,628
Foreign currency translation impact	(5)		(2)		(7)
Goodwill arising from acquisitions	—		2		2
Goodwill at January 31, 2022	$	1,064	$	559	$	1,623

As of January 31, 2022 and October 31, 2021, accumulated impairment losses on goodwill was $709 million.

Other intangible assets as of January 31, 2022 and October 31, 2021 consisted of the following:


	January 31, 2022						October 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(in millions)
Developed technology	$	973	$	878	$	95	$	969	$	866	$	103
Backlog	17		17		—		17		17		—
Trademark/Tradename	36		29		7		36		28		8
Customer relationships	389		248		141		389		235		154

Total amortizable intangible assets	1,415		1,172		243		1,411		1,146		265
In-Process R&D	7		—		7		7		—		7
Total	$	1,422	$	1,172	$	250	$	1,418	$	1,146	$	272

During the three months ended January 31, 2022, we used $7 million, net of cash acquired, for acquisitions activity, and recognized goodwill and other intangible assets of $2 million and $5 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. Goodwill for the acquisitions was assigned to the Electronics Industrial Solutions Group.

Goodwill is assessed for impairment on a reporting unit basis at least annually in the fourth quarter of each year, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The company has not identified any triggering events that indicate an impairment of goodwill for the three months ended January 31, 2022.

During the three months ended January 31, 2022, other intangible assets decreased $1 million due to the impact of foreign exchange translation. Amortization of other intangible assets was $26 million and $58 million for the three months ended January 31, 2022 and 2021, respectively.

Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:


	Amortization expense
	(in millions)
2022 (remainder)	$	75
2023	$	79
2024	$	39
2025	$	22
2026	$	12
Thereafter	$	16

7. FAIR VALUE MEASUREMENTS

The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The guidance establishes a fair value hierarchy that prioritizes inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.

Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2022 and October 31, 2021 were as follows:


	Fair Value Measurements at
	January 31, 2022										October 31, 2021
	Total		Level 1		Level 2		Level 3		Other		Total		Level 1		Level 2		Level 3		Other
	(in millions)
Assets:
Short-term
Cash equivalents
Money market funds	$	1,186	$	1,186	$	—	$	—	$	—	$	1,296	$	1,296	$	—	$	—	$	—
Derivative instruments (foreign exchange contracts)	5		—		5		—		—		6		—		6		—		—
Long-term
Derivative instruments (interest rate swaps)	56		—		56		—		—		48		—		48		—		—
Equity investments	56		56		—		—		—		60		60		—		—		—
Equity investments - other	10		—		—		—		10		10		—		—		—		10
Total assets measured at fair value	$	1,313	$	1,242	$	61	$	—	$	10	$	1,420	$	1,356	$	54	$	—	$	10
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	4	$	—	$	4	$	—	$	—	$	4	$	—	$	4	$	—	$	—
Long-term
Deferred compensation liability	24		—		24		—		—		24		—		24		—		—
Total liabilities measured at fair value	$	28	$	—	$	28	$	—	$	—	$	28	$	—	$	28	$	—	$	—

Net realized gains (losses) on sale of our equity investments were zero for both the three months ended January 31, 2022 and 2021. Net unrealized losses on our equity investments were $4 million and $2 million for the three months ended January 31, 2022 and 2021, respectively.

8. DERIVATIVES

We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.

Cash Flow Hedges

We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities based on a rolling period of up to twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance.

In fiscal 2020, we entered into forward starting interest rate swaps with an aggregate notional amount of $600 million associated with future interest payments on anticipated debt issuances through fiscal year 2024. The contract terms allow us to lock-in a treasury rate on anticipated debt issuances. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance.

Non-designated Hedges

Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments.

The number of open foreign exchange forward contracts designated as "cash flow hedges" and "not designated as hedging instruments" was 225 and 60, respectively, as of January 31, 2022. The aggregated notional amounts by currency and designation as of January 31, 2022 were as follows:


	Derivatives in Cash Flow Hedging Relationships		Derivatives Not Designated as Hedging Instruments
	Forward Contracts			Forward Contracts
Currency	Buy/(Sell)			Buy/(Sell)
	(in millions)
Euro	$	44		$	39
British Pound	18			(93)
Singapore Dollar	26			27

Malaysian Ringgit	99			9
Japanese Yen	(110)			(70)
Other currencies	16			(10)
Total	$	93		$	(98)

Derivative instruments are subject to master netting arrangements and are disclosed gross in the condensed consolidated balance sheet. The gross fair values and balance sheet presentation of derivative instruments held as of January 31, 2022 and October 31, 2021 were as follows:


Fair Values of Derivative Instruments
Assets Derivatives					Liabilities Derivatives
	Fair Value					Fair Value
Balance Sheet Location	January 31, 2022		October 31, 2021		Balance Sheet Location	January 31, 2022		October 31, 2021
(in millions)
Derivatives designated as hedging instruments:
Cash flow hedges
Foreign exchange contracts
Other current assets	$	4	$	5	Other accrued liabilities	$	3	$	1
Interest rate swap contracts:
Other assets	56		48

Derivatives not designated as hedging instruments:
Foreign exchange contracts
Other current assets	1		1		Other accrued liabilities	1		3
Total derivatives	$	61	$	54		$	4	$	4

The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and for those not designated as hedging instruments in our condensed consolidated statement of operations was as follows:


	Three Months Ended
	January 31,
			2022		2021
		(in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Interest rate swap contracts:
Gain (loss) recognized in accumulated other comprehensive income (loss)			$	8	$	21
Foreign exchange contracts:
Gain (loss) recognized in accumulated other comprehensive income (loss)			$	(3)	$	2
Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings:
Cost of products			$	1	$	(1)
Selling, general and administrative			$	(1)	$	1






Derivatives not designated as hedging instruments:
Gain (loss) recognized in:
Cost of products			$	—	$	1
Other income (expense), net			$	3	$	(4)

The estimated amount at January 31, 2022 expected to be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months is zero.

9. DEBT

The following table summarizes the components of our long-term debt:


	January 31, 2022		October 31, 2021
	(in millions)
2024 Senior Notes at 4.55% ($600 face amount less unamortized costs of $1 and $1)	$	599	$	599
2027 Senior Notes at 4.60% ($700 face amount less unamortized costs of $4 and $4)	696		696
2029 Senior Notes at 3.00% ($500 face amount less unamortized costs of $4 and $4)	496		496
Total debt	$	1,791	$	1,791

Short-Term Debt

Revolving Credit Facility

On July 30, 2021, we entered into a new credit agreement that amended and restated our existing credit agreement dated February 15, 2017 in its entirety, and provides for a $750 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”) that will expire on July 30, 2026 and bears interest at an annual rate of LIBOR + 1 percent along with a facility fee of 0.125 percent per annum. In addition, the new credit agreement permits the company, subject to certain customary conditions, on one or more occasions to request to increase the total commitments under the Revolving Credit Facility by up to $250 million in the aggregate. We may use amounts borrowed under the facility for general corporate purposes. As of January 31, 2022 and October 31, 2021, we had no borrowings outstanding under the Revolving Credit Facility. We were in compliance with the covenants of the Revolving Credit Facility during the three months ended January 31, 2022.

Long-Term Debt

There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the three months ended January 31, 2022 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. We were in compliance with the covenants of our senior notes during the three months ended January 31, 2022.

As of January 31, 2022 and October 31, 2021, we had $41 million and $40 million, respectively, of outstanding letters of credit and surety bonds unrelated to the credit facility that were issued by various lenders.

The fair value of our long-term debt, which is calculated from quoted prices that are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeded the carrying value less debt issuance costs by approximately $139 million and $178 million as of January 31, 2022 and October 31, 2021, respectively.

10. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS

For the three months ended January 31, 2022 and 2021, our net pension and post-retirement benefit cost (benefit) was comprised of the following:


	Pensions
	U.S. Defined Benefit Plans				Non-U.S. Defined Benefit Plans				U.S. Post-Retirement Benefit Plan
	Three Months Ended
	January 31,
	2022		2021		2022		2021		2022		2021
	(in millions)
Service cost—benefits earned during the period	$	6	$	6	$	3	$	4	$	—	$	—
Interest cost on benefit obligation	6		5		4		4		1		1
Expected return on plan assets	(15)		(13)		(15)		(20)		(4)		(3)

Amortization of net actuarial loss	3		6		6		10		—		3


Net periodic benefit cost (benefit)	$	—	$	4	$	(2)	$	(2)	$	(3)	$	1

We record the service cost component of net periodic benefit cost (benefit) in the same line item as other employee compensation costs. The non-service components of net periodic benefit cost (benefit), such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are recorded within "other income (expense), net" in the condensed consolidated statement of operations.

We did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan during the three months ended January 31, 2022 and 2021. We contributed $3 million to our non-U.S. defined benefit plans during each of the three months ended January 31, 2022 and 2021.

For the remainder of 2022, we do not expect to contribute to our U.S. defined benefit plan and U.S. post-retirement benefit plan, and we expect to contribute $7 million to our non-U.S. defined benefit plans. The ultimate amounts we will contribute depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors.

11. SUPPLEMENTAL FINANCIAL INFORMATION

The following tables provide details of selected balance sheet items:

Cash, cash equivalents, and restricted cash


	January 31, 2022		October 31, 2021
	(in millions)
Cash and cash equivalents	$	1,977	$	2,052

Restricted cash included in other assets	15		16
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	1,992	$	2,068

Restricted cash primarily relates to deficit reduction contributions to an escrow account for one of our non-U.S. defined benefit pension plans and deposits held as collateral against bank guarantees.

Inventory


	January 31, 2022		October 31, 2021
	(in millions)
Finished goods	$	331	$	329
Purchased parts and fabricated assemblies	473		448
Total inventory	$	804	$	777

The increase in inventory for the three months ended January 31, 2022, is primarily driven by incremental provisions to secure supply in the current supply-constrained environment.

Property, plant and equipment


	January 31, 2022		October 31, 2021
	(in millions)
Land	$	60	$	61
Buildings and leasehold improvements	816		785
Machinery and equipment	1,340		1,328
Total property, plant and equipment	2,216		2,174
Accumulated depreciation of property, plant and equipment	(1,544)		(1,524)
Property, plant and equipment, net	$	672	$	650

The increase in property, plant and equipment, net, for the three months ended January 31, 2022, is primarily driven by increased capital spending for capacity and technology investments. Asset impairments were zero for the three months ended January 31, 2022 and 2021. Depreciation expense was $30 million and $28 million for the three months ended January 31, 2022 and 2021, respectively.

Leases

Operating lease expense was $13 million for both the three months ended January 31, 2022 and 2021. Variable lease expense was $4 million and $5 million for the three months ended January 31, 2022 and 2021, respectively. Cash paid for operating leases was $13 million for both the three months ended January 31, 2022 and 2021. Right-of-use ("ROU") assets obtained in exchange for operating lease obligations was $5 million and $41 million for the three months ended January 31, 2022 and 2021, respectively. The decrease in ROU assets was primarily driven by reassessment of a lease term in the prior year triggered by significant leasehold improvements.

Standard warranty

Our warranties on products sold through direct sales channels are primarily for one year. Warranties for products sold through distribution channels are primarily for three years. We accrue for standard warranty costs based on historical trends in warranty charges. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.

Activity related to the standard warranty accrual, which is included in other accrued and other long-term liabilities in our condensed consolidated balance sheet, is as follows:


	Three Months Ended
	January 31,
	2022		2021
	(in millions)
Beginning balance	$	34	$	33
Accruals for warranties, including change in estimates	7		9
Settlements made during the period	(6)		(7)
Ending balance	$	35	$	35

Accruals for warranties due within one year	$	21	$	21
Accruals for warranties due after one year	14		14
Ending balance	$	35	$	35

12. COMMITMENTS AND CONTINGENCIES

Commitments

During the three months ended January 31, 2022, there were no material changes to the purchase commitments as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Contingencies

On August 3, 2021, we entered into a Consent Agreement with the Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, Department of State to resolve alleged violations of the Arms Export Control Act and the International Traffic in Arms Regulations ("ITAR"). Pursuant to the Consent Agreement, we were assessed a penalty of $6.6 million to be paid over three years, $2.5 million of which is suspended and designated for remediation activities, including employment of a special compliance officer for three years. We have paid $1.1 million of the assessed amount as of January 31, 2022. We are also involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial

and environmental matters, which arise in the ordinary course of business. Although there are no matters pending that we currently believe are probable and reasonably possible of having a material impact to our business, consolidated financial position, results of operations or cash flows, the outcome of litigation is inherently uncertain and the outcome is difficult to predict. An adverse outcome in any outstanding lawsuit or proceeding could result in significant monetary damages or injunctive relief. If adverse results are above management’s expectations or are unforeseen, management may not have accrued for the liability, which could impact our results in a financial period.

13. STOCKHOLDERS' EQUITY

Stock Repurchase Program

On November 18, 2021, our board of directors approved a new stock repurchase program authorizing the purchase of up to $1,200 million of the company’s common stock, replacing the previously approved November 2020 program, under which $77 million remained. Under our stock repurchase program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date.

For the three months ended January 31, 2022, we repurchased 1,128,733 shares of common stock for $206 million. For the three months ended January 31, 2021, we repurchased 137,200 shares of common stock for $20 million.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component and related tax effects for the three months ended January 31, 2022 and 2021 were as follows:


	Foreign currency translation			Net defined benefit pension cost and post retirement plan costs					Unrealized gains (losses) on derivatives		Total
			Actuarial losses			Prior service credits
	(in millions)
As of October 31, 2021	$	(20)		$	(456)		$	(6)	$	40	$	(442)
Other comprehensive income (loss) before reclassifications	(21)			—			—		5		(16)
Amounts reclassified out of accumulated other comprehensive gain (loss)	—			10			—		—		10
Tax benefit (expense)	—			(2)			—		(1)		(3)
Other comprehensive income (loss)	(21)			8			—		4		(9)
As of January 31, 2022	$	(41)		$	(448)		$	(6)	$	44	$	(451)

As of October 31, 2020	$	(10)		$	(600)		$	(5)	$	16	$	(599)
Other comprehensive income (loss) before reclassifications	31			—			—		23		54
Amounts reclassified out of accumulated other comprehensive gain (loss)	—			19			—		—		19
Tax benefit (expense)	—			(5)			—		(5)		(10)
Other comprehensive income (loss)	31			14			—		18		63
As of January 31, 2021	$	21		$	(586)		$	(5)	$	34	$	(536)

Reclassifications out of accumulated other comprehensive loss for the three months ended January 31, 2022 and 2021 were as follows:


Details about accumulated other comprehensive loss components	Amounts reclassified from other comprehensive loss					Affected line item in statement of operations
	Three Months Ended
	January 31,
		2022		2021
		(in millions)
Unrealized gain (loss) on derivatives		$	1	$	(1)		Cost of products
		(1)		1			Selling, general and administrative
		—		—			Benefit (provision) for income tax
		—		—			Net of Income tax

Net defined benefit pension cost and post retirement plan costs:
Net actuarial loss		(10)		(19)


		2		5			Benefit (provision) for income tax
		(8)		(14)			Net of income tax

Total reclassifications for the period		$	(8)	$	(14)

An amount in parentheses indicates a reduction to income and an increase to the accumulated other comprehensive loss.

Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 10, "Retirement Plans and Post-Retirement Benefit Plans").

14. SEGMENT INFORMATION

We report our results in two reportable segments: Communications Solutions Group ("CSG") and Electronic Industrial Solutions Group ("EISG"). The results of our reportable segments are based on our management reporting system and are not necessarily in conformity with GAAP. The performance of each segment is measured based on several metrics, including income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to each of the segments.

The profitability of each of the segments is measured after excluding share-based compensation expense, amortization of acquisition-related balances, acquisition and integration costs, restructuring costs, interest income, interest expense and other items as noted in the reconciliations below.


	Three Months Ended
	January 31,
	2022						2021
	CSG		EISG		Total		CSG		EISG		Total
	(in millions)

Revenue	$	878	$	372	$	1,250	$	852	$	328	$	1,180
Segment income from operations	$	237	$	114	$	351	$	224	$	96	$	320

The following table reconciles total reportable operating segments’ income from operations to our income before taxes, as reported:


	Three Months Ended
	January 31,
	2022		2021
	(in millions)
Total reportable operating segments' income from operations	$	351	$	320
Share-based compensation	(51)		(43)
Amortization of acquisition-related balances	(26)		(58)
Acquisition and integration costs	(3)		(3)

Restructuring and other	—		(4)
Income from operations, as reported	271		212
Interest income	1		1
Interest expense	(20)		(20)
Other income (expense), net	12		2
Income before taxes, as reported	$	264	$	195

15. SUBSEQUENT EVENT

Keysight announced on February 24, 2022, that Ron Nersesian will retire as President and Chief Executive Officer of Keysight effective May 1, 2022, and on that date, Satish Dhanasekaran, current Chief Operating Officer of the company, will become President and Chief Executive Officer, as well as join the Keysight Board of Directors. Additionally, Mr. Nersesian will remain as Executive Chair of the Board.

Previous: Cover and table of contents · Next: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)