Keysight Technologies 10-Q 2022-04-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-36334

KEYSIGHT TECHNOLOGIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Registrant’s telephone number, including area code: (800) 829-4444

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the exchange act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a)of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock outstanding at May 27, 2022 was 179,945,914.

TABLE OF CONTENTS

PART I**. FINANCIAL INFORMATION**

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share data)

(Unaudited)

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)

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)

Showing the first 8K of 103K characters. Open the full section

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, earnings from our foreign subsidiaries, remediation activities, new solution and service introductions, the ability of our solutions to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our completed acquisitions and other transactions, our transition to lower-cost regions, the existence of political or economic instability, increasing geopolitical tension in regions outside of the U.S., including the conflict between Russia and Ukraine, the impact of increased trade tension and tightening of export control regulations, the impact of compliance with the August 3, 2021 Consent Agreement with the Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, Department of State, the impact of new and ongoing litigation, continued impacts to the supply chain, impacts related to endemic and pandemic conditions, net zero emissions commitments, the impact of volatile weather caused by environmental conditions such as climate change, increases in attrition and our ability to retain key personnel, and our estimated or anticipated future results of operations that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including but not limited to those risks and uncertainties discussed in Part II Item 1A and elsewhere in this Form 10-Q.

Basis of Presentation

The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows. 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 quarter periods.

Overview and Executive Summary

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.

We invest in research and development ("R&D") to align our business with available markets and position the company for growth. Our R&D efforts focus on improvements to existing software and hardware products and development to support new software and hardware product introductions and complete customer solutions aligned to the industries we serve. We anticipate that we will continue to have significant R&D expenditures in order to maintain our competitive position with a

continuous flow of innovative, high-quality software, customer solutions, products and services. We remain committed to investment in R&D and have focused our development efforts on strategic opportunities to capture future growth.

Supply chain disruptions and the challenging geopolitical and macro-economic environment

Our global operations have been affected by many headwinds, including the pandemic, ongoing global supply chain disruptions, market volatility, increased geopolitical tensions, including the conflict between Russia and Ukraine, and inflationary pressures. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain components, which in some cases is impacting our ability to manufacture products, causing delays in delivery of our solutions to our customers and higher material procurement costs. We have been able to navigate through this environment on the strength of our strong portfolio and global teams application of the Keysight Leadership Model, which enables us to deliver consistent value to our customers.

In February 2022, the U.S. imposed economic sanctions and other restrictions on Russia following its invasion of Ukraine. As a result, we have suspended our operations in Russia. Our business in Russia was not material to our results and accounted for approximately 1 percent of total revenue for the fiscal year ended October 31, 2021.

For discussion of risks related to supply chain, geopolitical and macro-economic environment related challenges on our operations, business results and financial condition, see “Item 1A. Risk Factors.”

Three and six months ended April 30, 2022 and 2021

Total orders for the three and six months ended April 30, 2022 were $1,458 million and $2,953 million, respectively, an increase of 9 percent and 16 percent compared to the same periods last year. For the three months ended April 30, 2022, orders grew in Asia Pacific and the Americas, partially offset by a decline in Europe primarily due to Russia cancellations. For the six months ended April 30, 2022, orders grew across all regions. Foreign currency movements had an unfavorable impact of 1 percentage point on year-over-year order growth for both the three and six months ended April 30, 2022. Orders associated with acquisitions had an immaterial impact on the year-over-year order growth for both the three and six months ended April 30, 2022.

Revenue for the three and six months ended April 30, 2022 was $1,351 million and $2,601 million, respectively, an increase of 11 percent and 8 percent compared to the same periods last year. Foreign currency movements for the three and six months ended April 30, 2022 had an unfavorable impact of 2 percentage points and 1 percentage point, respectively, on the year-over-year revenue growth. Revenue associated with acquisitions had an immaterial impact on the year-over-year revenue growth for both the three and six months ended April 30, 2022. For the three and six months ended April 30, 2022, revenue for both the Communications Solutions Group and the Electronic Industrial Solutions Group increased year-over-year driven by strength in all end markets and regions. Revenue from the Communications Solutions Group and the Electronic Industrial Solutions Group represented 71 percent and 29 percent, respectively, of total revenue for both the three and six months ended April 30, 2022.

Net income for the three and six months ended April 30, 2022 was $258 million and $487 million, respectively, compared to $186 million and $358 million, respectively, for the same periods last year. The increase in net income for the three and six months ended April 30, 2022 was primarily driven by higher revenue volume, lower amortization of acquisition-related balances, lower variable people-related costs and favorable mix, partially offset by increases in selling, general and administrative, income tax and R&D expenses.

Outlook

Our first-to-market solutions strategy enables customers to develop new technologies and accelerate innovation and provides a platform for long-term growth. Our customers are expected to continue to make R&D investments in certain next-generation technologies, such as 5G/6G, next-generation automotive, internet of things ("IoT") and defense modernization, which are still in the early market stages. We continue to closely monitor the current macro environment related to trade, tariffs, monetary and fiscal policies, endemic and pandemic conditions, and the related global supply chain challenges and increasing geopolitical tension in regions outside of the U.S., including the conflict between Russia and Ukraine. We remain confident in our long-term secular market growth trends and the strength of our operating model.

Critical Accounting Policies and Estimates

Effective November 1, 2021, we adopted ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers that requires entities to apply Accounting Standards Codification Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The adoption of this guidance did not have a material impact to our condensed consolidated financial statements. See Note 1, "Overview and Summary of Significant Accounting Policies," to the condensed consolidated financial statements for further details. There were no other material changes during the three and six months ended April 30, 2022 to the critical accounting

estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

Adoption of New Accounting Pronouncements

See Note 1, "Overview and Summary of Significant Accounting Policies," to the condensed consolidated financial statements for a description of new accounting pronouncements.

Currency Exchange Rate Exposure

Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our condensed consolidated balance sheet and statement of operations. We experience some fluctuations within individual lines of the condensed consolidated balance sheet and condensed consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge short-term currency movements based on a rolling period of up to twelve months. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.

Results from Operations - Three and six months ended April 30, 2022 and 2021

A summary of our results is as follows:

Revenue

Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Returns are recorded in the period received from the customer and historically have not been material.

The following table provides the percent change in revenue for the three and six months ended April 30, 2022 by geographic region and the impact of foreign currency movements as compared to the same periods last year.

Gross Margin, Operating Margin and Income before taxes

Gross margin for the three and six months ended April 30, 2022 increased 3 percentage points and 4 percentage points, respectively, compared to the same periods last year, primarily driven by lower amortization of acquisition-related balances, favorable mix, lower variable people-related costs and higher revenue volume, partially offset by higher material costs.

R&D expense for the three and six months ended April 30, 2022 increased 1 percent and 3 percent, respectively, compared to the same periods last year, primarily driven by greater investments in key growth opportunities in our end markets and leading-edge technologies as well as incremental costs of acquired businesses, partially offset by lower variable people-related costs. As a percentage of revenue, R&D expense was 16 percent for both the three and six months ended April 30, 2022, as compared to 17 percent for the same periods last year.

Selling, general and administrative expense for the three and six months ended April 30, 2022 increased 7 percent and 8 percent, respectively, compared to the same periods last year, primarily driven by higher investments in sales resources, infrastructure-related, marketing and travel-related costs and incremental costs of acquired businesses, partially offset by lower variable people-related costs.

Other operating expense (income), net for the three and six months ended April 30, 2022 was expense of $3 million and zero, respectively, compared to income of $4 million and $9 million for the same periods last year. The increase in other operating expense (income), net for both three and six months ended April 30, 2022 was primarily driven by asset impairment charges related to suspension of our Russia operations.

Operating margin for the three and six months ended April 30, 2022 increased 5 percentage points and 4 percentage points, respectively, compared to the same periods last year, primarily driven by gross margin gains and lower operating expenses as a percentage of sales.

Interest income for the three and six months ended April 30, 2022 was $1 million and $2 million, respectively, as compared to zero and $1 million, respectively, for the comparable periods last year and primarily relates to interest earned on our cash balances. Interest expense for both the three and six months ended April 30, 2022 and 2021 was $19 million and $39 million, respectively, and primarily relates to interest on our senior notes.

Other income (expense), net for the three and six months ended April 30, 2022 was an expense of $2 million and income of $10 million, respectively, compared to an expense of $8 million and $6 million, respectively, for the same periods last year and primarily includes income related to our defined benefit and post-retirement benefit plans and the change in fair value of our equity investments. The increase in net other income for the six months ended April 30 2022 compared to the same period last year was primarily due to a prior-period loss on a partial settlement of a non-U.S. pension plan, lower amortization of net actuarial losses, partially offset by change in fair value of our equity investments and currency loss.

As of April 30, 2022, our headcount was approximately 14,500 compared to approximately 14,000 at April 30, 2021.

Income Taxes

The following table provides details of income taxes:

The income tax expense for the three and six months ended April 30, 2022 was higher compared to the same periods last year, primarily due to an increase in income before taxes and a decrease in discrete tax benefits.

The income tax expense for the three and six months ended April 30, 2022 included a net discrete benefit of $1 million and $9 million, respectively. The income tax expense for the three and six months ended April 30, 2021 included a net discrete benefit of $10 million and $21 million, respectively. The discrete tax benefit for the three months ended April 30, 2021 included the impact of one-time integration activities for acquired entities that did not reoccur in the three months ended April 30, 2022. The decrease in discrete tax benefit for the six months ended April 30, 2022 is due to the impact of the one-time integration activities for acquired entities and the one-time benefit from U.S. state R&D credits recorded in the six months ended April 30, 2021 that did not reoccur in the six months ended April 30, 2022, partially offset by an increase in discrete benefit from stock compensation in the six months ended April 30, 2022.

Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore and Malaysia, that will expire or 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 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 $39 million and $24 million for the six months ended April 30, 2022 and 2021, respectively. The increase in tax benefit for the six months ended April 30, 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.

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 believes that it is reasonably possible that the balance of unrecognized tax benefits will decrease by approximately $34 million in the next twelve months, which, if realized, will result in a benefit to the effective tax rate. This potential decrease is expected to arise from the anticipated conclusion of corporate income tax examinations as well as the lapse of statutes of limitations in various jurisdictions for tax years that include uncertain corporate income tax positions. The outcome of corporate income tax examinations cannot be predicted with certainty. Given the numerous tax years and matters that remain subject to examination in various tax jurisdictions, the ultimate resolution of current and future tax examinations could be inconsistent with management’s current expectations. If this were to occur, it could have an impact on our effective tax rate in the period in which such examinations are resolved.

We do not recognize deferred taxes for temporary differences expected to impact the GILTI tax expense in future years. We recognize the tax expense related to GILTI in each year in which the tax is incurred.

Segment Overview

We have two reportable operating segments, the Communications Solutions Group and the Electronic Industrial Solutions Group. 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.

Communications Solutions Group

The Communications Solutions Group serves customers spanning the worldwide commercial communications and aerospace, defense, and government end markets. The group’s solutions consist of electronic design and test software, electronic measurement instruments, systems and related services. These solutions are used in the simulation, design, validation, manufacturing, installation, and optimization of electronic equipment and networks.

Revenue

The Communications Solutions Group revenue for the three and six months ended April 30, 2022 increased 10 percent and 6 percent, respectively, when compared to the same periods last year. Revenue grew in both the commercial communications and the aerospace, defense and government end markets. Foreign currency movements had an unfavorable impact of 1 percentage point on year-over-year revenue growth for both the three and six months ended April 30, 2022. For both the three and six months ended April 30, 2022, revenue grew across all regions.

The commercial communications end market revenue for the three and six months ended April 30, 2022 increased 11 percent and 8 percent, respectively, year-over-year, and represented 70 percent and 68 percent, respectively, of the total Communications Solutions Group revenue. The revenue growth was driven by strong market demand across the communications ecosystem. Revenue grew across all the regions for both the three and six months ended April 30, 2022. We continue to see ongoing investments in 5G and other wireless and wired communications technologies, fueled by new standards and the redesign of every aspect of communications systems, including wireless access, infrastructure, wireline technologies, data centers and the cloud.

The aerospace, defense and government end market revenue for the three and six months ended April 30, 2022 increased 7 percent and 4 percent, respectively year-over-year, and represented 30 percent and 32 percent, respectively, of the total Communications Solutions Group revenue. For the three months ended April 30, 2022, revenue grew across the Americas and Europe, while Asia Pacific was flat. For the six months ended April 30, 2022, revenue growth in Asia Pacific and Europe was partially offset by a slight decline in the Americas. The revenue growth was driven by strong customer demand and continued investment in signal monitoring, cyber, space, satellite and new commercial technologies like 5G and early 6G research applications, partially offset by the impact of supply chain constraints.

Gross Margin and Operating Margin

Gross margin for both the three and six months ended April 30, 2022 increased 2 percentage points as compared to the same periods last year, primarily driven by favorable mix, lower variable people-related costs and higher revenue volume, partially offset by higher material costs.

R&D expense for the three and six months ended April 30, 2022 increased 2 percent and 3 percent, respectively, compared to the same periods last year, primarily driven by greater investments in key growth opportunities in our end markets

and leading-edge technologies as well as incremental costs of acquired businesses, partially offset by lower variable people-related costs.

Selling, general and administrative expense for the three and six months ended April 30, 2022 increased 9 percent and 10 percent, respectively, compared to the same periods last year, primarily driven by higher investments in sales resources, higher infrastructure-related, marketing and travel-related costs, and incremental costs of acquired businesses, partially offset by lower variable people-related costs.

Other operating expense (income), net for the three and six months ended April 30, 2022 was income of $3 million and $5 million, respectively, compared to income of $3 million and $7 million, respectively, for the same periods last year.

Operating margin for the three months ended April 30, 2022 increased 3 percentage points, compared to the same period last year, primarily driven by gross margin gains and lower operating expenses as a percentage of sales. Operating margin for the six months ended April 30,2022 increased 2 percentage points, compared to the same period last year, primarily driven by gross margin gains.

Electronic Industrial Solutions Group

The Electronic Industrial Solutions Group provides test and measurement solutions and related services across a broad set of electronic industrial end markets, focusing on high-value applications in the automotive and energy industries and measurement solutions for consumer electronics, education, general electronics design and manufacturing, and semiconductor design and manufacturing. The group provides electronic measurement instruments, design and test software and systems and related services used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment, and automated software test that include artificial intelligence and machine learning to automatically identify, build and execute tests critical to digital business success and a strong customer experience.

Revenue

The Electronic Industrial Solutions Group revenue for both the three and six months ended April 30, 2022 increased 13 percent compared to the same periods last year. Foreign currency movements had an unfavorable impact of 2 percentage points on the year-over-year revenue growth for both the three and six months ended April 30, 2022. The revenue growth was driven by continued investments in next-generation semiconductor and new mobility technologies coupled with improved macro conditions in the automotive market. Revenue grew across all regions for both the three and six months ended April 30, 2022.

Gross Margin and Operating Margin

Gross margin for the three and six months ended April 30, 2022 decreased 2 percentage points and 1 percentage point, respectively, compared to the same periods last year, primarily driven by higher material costs, partially offset by higher revenue volume and lower variable people-related costs.

R&D expense for the three months ended April 30, 2022 decreased 3 percent compared to the same period last year, primarily driven by lower variable people-related costs, partially offset by greater investments in key growth opportunities in our end markets and leading-edge technologies. R&D expense for the six months ended April 30, 2022 was flat compared to the same period last year, primarily driven by lower variable people-related costs offset by greater investments in key growth opportunities in our end markets and leading-edge technologies.

Selling, general and administrative expense for the three and six months ended April 30, 2022 increased 3 percent and 5 percent, respectively, compared to the same periods last year, primarily due to higher investments in sales resources and higher infrastructure and marketing-related costs, partially offset by lower variable and other people-related costs.

Other operating expense (income), net for both the three and six months ended April 30, 2022 and 2021 was income of $1 million and $2 million, respectively.

Operating margin for both the three and six months ended April 30, 2022 increased 2 percentage points compared to the same periods last year, primarily driven by lower operating expenses as a percentage of sales, partially offset by gross margin declines.

Financial Condition

Liquidity and Capital Resources

Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Under certain circumstances, U.S. and local government regulations may limit our ability to move cash balances to meet cash needs.

Overview of Cash Flows

Our key cash flow activities were as follows:

Operating Activities

Cash flows from operating activities can fluctuate significantly from period to period as working capital needs, the timing of payments for income taxes, variable pay, pension funding and other items impact reported cash flows.

Net cash provided by operating activities decreased $175 million during the six months ended April 30, 2022 compared to the same period last year.

• Net income for the six months ended April 30, 2022 increased $129 million compared to the same period last year. Non-cash adjustments to net income were lower by $18 million primarily due to a $62 million decrease in amortization expense and a prior-period loss of $16 million on a partial settlement of a non-U.S. pension plan, partially offset by a $31 million increase in deferred tax expense, a $13 million increase in share-based compensation expense and a $16 million increase in other non-cash adjustments, which was primarily driven by an increase in unrealized loss on equity investments and asset impairment charges related to suspension of our Russia operations.

• The aggregate of accounts receivable, inventory and accounts payable used net cash of $107 million during the first six months of fiscal 2022 compared to net cash used of $66 million in the same period last year, primarily due to higher inventory driven by higher material procurement costs and incremental stock build-up to secure supply, higher revenue volume, net of collections and payments. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.

• Other movements in assets and liabilities used net cash of $95 million during the first six months of fiscal 2022 compared to net cash provided of $150 million in the same period last year, primarily due to higher variable compensation and other payroll-related payments, net of accruals, higher income tax payments and higher prepaid inventory deposits driven by supply chain constraints.

Investing Activities

Net cash changes in investing activities primarily relate to investments in property, plant and equipment and acquisitions of businesses to support our growth.

Net cash used in investing activities decreased $55 million during the six months ended April 30, 2022 compared to the same period last year. For the six months ended April 30, 2022, we used $17 million, net of cash acquired, for acquisition activity. For the six months ended April 30, 2021, we used $102 million, net of $11 million cash acquired, for the acquisition of Sanjole Inc. and an additional $34 million, net, for other acquisition activity. For the six months ended April 30, 2022 and 2021, investments in property, plant and equipment were $95 million and $61 million, respectively. For the six months ended April 30, 2022, we used $30 million for purchase of an equity investment.

Financing Activities

Net cash changes in financing activities primarily relate to proceeds from issuance of common stock under employee stock plans, tax payments related to net share settlement of equity awards and treasury stock repurchases.

Net cash used in financing activities increased $263 million during the six months ended April 30, 2022 compared to the same period last year, primarily due to higher treasury stock repurchases and payment of taxes related to net share settlement of equity awards.

Treasury Stock Repurchases

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. 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. See "Issuer Purchases of Equity Securities" under Part II Item 2 for additional information.

Debt

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 April 30, 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 and senior notes during the six months ended April 30, 2022. See note 9, "Debt" for additional information.

Cash and cash requirements

Cash

Our cash and cash equivalents mainly consist of investments in institutional money market funds, short-term deposits held at major global financial institutions and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and money market fund asset managers with whom we invest our funds. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. Most significant international locations have access to internal funding through an offshore cash pool for working capital needs. In addition, a few locations that are unable to access internal funding have access to temporary local overdraft and short-term working capital lines of credit.

Cash requirements

We have cash requirements to support working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. We generally intend to use available cash and funds generated from our operations to meet these cash requirements, but in the event that additional liquidity is required, we may also borrow under our revolving credit facility.

Our non-cancellable commitments to contract manufacturers and suppliers increased to $518 million as of April 30, 2022 from $444 million as of October 31, 2021, driven by higher revenue, advance purchase orders to secure capacity for critical parts due to global supply shortages and higher material costs. There were no other material changes to the cash requirements from our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

There were no material changes in our liabilities toward uncertain tax positions from our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. We are unable to accurately predict when these will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next 12 months due to either the expiration of a statute of limitations or a tax audit settlement.

For the remainder of fiscal 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 $5 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. See note 10, "Retirement plans and post-retirement benefit plans."

Additionally, we expect capital spending to be between approximately $240 million and $260 million in fiscal 2022, with increasing capacity and technology investments.

As of April 30, 2022, we believe our cash and cash equivalents, cash generated from operations, and our ability to access capital markets and credit lines will satisfy our cash needs for the foreseeable future both globally and domestically.

Quantitative and qualitative disclosures about market risk appear in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. There were no material changes during the six months ended April 30, 2022 to this information reported in the company’s 2021 Annual Report on Form 10-K.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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 April 30, 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. In October 2019, Keysight entered into a license agreement with Centripetal Networks in conjunction with the resolution of a patent infringement lawsuit brought by Centripetal against Keysight. Royalties owed under the license, which expired on December 31, 2021, are the primary subject of pending arbitration. On January 1, 2022, Centripetal filed a lawsuit in Federal District Court in Virginia, alleging that additional Keysight products infringe certain of Centripetal’s patents. In addition, in February 2022, Centripetal filed complaints in Germany alleging infringement of certain of Centripetal’s German patents, and in April 2022, Centripetal filed a complaint with

the International Trade Commission (“ITC”) requesting that they investigate whether Keysight should be enjoined from importing certain products that are manufactured outside of the U.S. and are alleged to infringe Centripetal patents. We deny the allegations and intend to aggressively defend each case. Although we do not currently believe that these or other matters are 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. Management’s expectations, if proved to be incorrect, could impact our results in a financial period.

Risks, Uncertainties and Other Factors That May Affect Future Results

Risks Related to Our Business

Global health crises, such as the COVID-19 pandemic, have had an impact on our supply chain and could have a material impact on our global operations, our customers and vendors, which could adversely impact our business results and financial condition.

In March 2020, the World Health Organization declared COVID-19 a global pandemic. In response to the rapid global spread of the virus, national, state, and local governments issued orders and recommendations to attempt to reduce spread of the disease. Fluctuation in infection rates have continued, and the appearance of new and more easily transmitted variants of COVID-19 have resulted in periodic changes in restrictions that vary from region to region and require vigilant attention and rapid response.

The uncertain duration and severity of the pandemic caused by COVID-19 and its variants, as well as periodic spikes in infection rates, local outbreaks of the virus and its variants or potential outbreaks on our sites or supplier, customer or vendor sites, in spite of safety measures or vaccinations, where available, could cause disruptions to our operations or those of our suppliers, customers or vendors. Outbreaks causing new or renewed government orders could impact the availability of our employees or other workers or could lead to attrition of key employees, which could further impact our ability to manufacture, ship or deliver products and solutions to customers. As new variants of the virus appear, especially variants that are more easily spread, cause more serious outcomes, or are resistant to existing vaccines, new health orders and safety protocols could further impact our on-site operations and our ability to collaborate globally with customers, suppliers, and internal colleagues.

The pandemic has led to global supply chain challenges, which have adversely impacted our ability to procure certain components and could impact our ability to manufacture products and cause delays in delivery of our solutions to our customers. Global shifts in customer demand and raw material supply could result in delayed or canceled orders and our customers’ reduced spending, reduced demand for products and solutions, and their inability to pay for products and solutions.

These factors could materially and negatively impact our business results, operations, revenue, growth and overall financial condition.

Uncertainty in general economic conditions may adversely affect our operating results and financial condition.

Our business is sensitive to negative changes in general economic conditions, both inside and outside the United States. Global and regional economic uncertainty, recession, depression or inflation may impact our business, resulting in:

• increased cost to manufacture products or deliver solutions;

• reduced customer purchasing power;

• reduced demand for our solutions, delays in the shipment of orders or increases in order cancellations;

• increased risk of excess and obsolete inventory;

• increased price pressure for our solutions and services; and

• greater risk of impairment to the value, and a detriment to the liquidity, of our future investment portfolio.

In addition, global and regional macroeconomic developments, such as increased unemployment, decreased income, uncertainty related to future economic activity, reduced access to credit, increased interest rates, volatility in capital markets, decreased liquidity, uncertain or destabilizing national election results in the U.S., Europe, and Asia, and negative changes or volatility in general economic conditions in the U.S., Europe, and Asia could negatively affect our ability to conduct business in those territories. Financial difficulties experienced by our suppliers and customers, including distributors, due to economic volatility or negative changes could result in product delays, reduced purchasing power, delays in payment or inability to pay us, and inventory issues. Economic risks related to accounts receivable could result in delays in collection and greater bad debt expense.

Our operating results and financial condition could be harmed if the markets into which we sell our solutions decline or do not grow as anticipated.

Visibility into our markets is limited. Our quarterly sales and operating results are highly dependent on the volume and timing of technology-related spending and orders received during the fiscal quarter, which are difficult to forecast and may be cancelled by our customers. In addition, our revenues and earnings forecasts for future fiscal quarters are often based on the expected seasonality or cyclicality of our markets. However, due to the uncertainties and volatile economic environment created by increased geopolitical tensions, including the conflict between Russia and Ukraine, the impact of inflation and the continuing impact of the global pandemic, the markets we serve may experience increased volatility and may not experience the seasonality or cyclicality that we expect. Any decline in our customers' markets would likely result in a reduction in demand for our solutions and services. The current global supply chain constraints could impact our markets and harm our business. Also, if our customers' markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our financial position, results of operations, cash flows and stock price, and could limit our profitability. Also, in such an environment, pricing pressures could intensify. Since a significant portion of our operating expenses is relatively fixed in nature due to sales, R&D and manufacturing costs, if we were unable to respond quickly enough, these pricing pressures could further reduce our operating margins.

Economic and political policies favoring national interests could adversely affect our results of operations.

Nationalistic economic policies and political trends in the United States, the United Kingdom, the European Union, Singapore, Malaysia and China among other countries, such as opposition to globalization and free trade, sanctions or trade restrictions, withdrawal from or re-negotiation of global trade agreements, tax policies that favor domestic industries and interests, the distancing or potential exit of other countries from the European Union, and other similar actions may result in increased transaction costs, reduced ability to hire employees, reduced access to supplies and materials, reduced demand or access to customers in international markets, and inability to conduct our operations as they have been conducted historically. Each of these factors may adversely affect our business.

International trade disputes and increased tariffs between the United States and such jurisdictions could substantially change our expectations and ability to operate in such jurisdictions as we have done historically. Many of our suppliers, vendors, customers, partners, and other entities with whom we do business have strong ties to doing business in China. Their ability to supply materials to us, buy products or services from us, or otherwise work with us is affected by their ability to do business in China. If the U.S.’s relationship with China results in additional trade disputes, trade protection measures, retaliatory actions, tariffs and increased barriers, policies that favor domestic industries, or increased import or export licensing requirements or restrictions, then our deployment of resources in jurisdictions affected by such measures could be misaligned and our operations may be adversely affected due to such changes in the economic and political ecosystem in which our suppliers, vendors, customers, partners, and other entities with whom we do business operate.

**A decreased demand for our customers’ products or trade restrictions could adversely affect our resu

Showing the first 8K of 77K characters. Open the full section

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KEYSIGHT TECHNOLOGIES, INC.