filings.toolsItem 1. Condensed Consolidated Financial Statements (Unaudited)
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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 | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | $ | 1,140 | $ | 1,021 | $ | 3,282 | $ | 2,987 | |||||||||||||||
| Services and other | 236 | 225 | 695 | 660 | |||||||||||||||||||
| Total revenue | 1,376 | 1,246 | 3,977 | 3,647 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products | 410 | 370 | 1,175 | 1,151 | |||||||||||||||||||
| Cost of services and other | 89 | 88 | 262 | 264 | |||||||||||||||||||
| Total costs | 499 | 458 | 1,437 | 1,415 | |||||||||||||||||||
| Research and development | 206 | 207 | 626 | 615 | |||||||||||||||||||
| Selling, general and administrative | 317 | 302 | 962 | 900 | |||||||||||||||||||
| Other operating expense (income), net | (3) | (5) | (3) | (14) | |||||||||||||||||||
| Total costs and expenses | 1,019 | 962 | 3,022 | 2,916 | |||||||||||||||||||
| Income from operations | 357 | 284 | 955 | 731 | |||||||||||||||||||
| Interest income | 4 | 1 | 6 | 2 | |||||||||||||||||||
| Interest expense | (20) | (20) | (59) | (59) | |||||||||||||||||||
| Other income (expense), net | 5 | 5 | 15 | (1) | |||||||||||||||||||
| Income before taxes | 346 | 270 | 917 | 673 | |||||||||||||||||||
| Provision for income taxes | 8 | 16 | 92 | 61 | |||||||||||||||||||
| Net income | $ | 338 | $ | 254 | $ | 825 | $ | 612 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 1.89 | $ | 1.38 | $ | 4.56 | $ | 3.31 | |||||||||||||||
| Diluted | $ | 1.87 | $ | 1.36 | $ | 4.52 | $ | 3.27 | |||||||||||||||
| Weighted average shares used in computing net income per share: | |||||||||||||||||||||||
| Basic | 179 | 184 | 181 | 185 | |||||||||||||||||||
| Diluted | 181 | 186 | 182 | 187 |
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 | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | 338 | $ | 254 | $ | 825 | $ | 612 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $3, $7, $(7) and $(4) | (11) | (22) | 29 | 18 | |||||||||||||||||||
| Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of zero | (1) | (1) | (3) | (1) | |||||||||||||||||||
| Foreign currency translation, net of tax benefit (expense) of zero | (20) | (7) | (106) | 10 | |||||||||||||||||||
| Net defined benefit pension cost and post retirement plan costs: | |||||||||||||||||||||||
| Change in net actuarial loss, net of tax expense of $3, $6, $7 and $16 | 6 | 13 | 22 | 44 | |||||||||||||||||||
| Other comprehensive income (loss) | (26) | (17) | (58) | 71 | |||||||||||||||||||
| Total comprehensive income | $ | 312 | $ | 237 | $ | 767 | $ | 683 |
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)
| July 31, 2022 | October 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,847 | $ | 2,052 | |||||||
| Accounts receivable, net | 882 | 735 | |||||||||
| Inventory | 837 | 777 | |||||||||
| Other current assets | 395 | 270 | |||||||||
| Total current assets | 3,961 | 3,834 | |||||||||
| Property, plant and equipment, net | 668 | 650 | |||||||||
| Operating lease right-of-use assets | 225 | 227 | |||||||||
| Goodwill | 1,606 | 1,628 | |||||||||
| Other intangible assets, net | 216 | 272 | |||||||||
| Long-term investments | 73 | 70 | |||||||||
| Long-term deferred tax assets | 661 | 711 | |||||||||
| Other assets | 442 | 389 | |||||||||
| Total assets | $ | 7,852 | $ | 7,781 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 328 | $ | 287 | |||||||
| Employee compensation and benefits | 275 | 355 | |||||||||
| Deferred revenue | 496 | 478 | |||||||||
| Income and other taxes payable | 63 | 74 | |||||||||
| Operating lease liabilities | 40 | 41 | |||||||||
| Other accrued liabilities | 110 | 74 | |||||||||
| Total current liabilities | 1,312 | 1,309 | |||||||||
| Long-term debt | 1,792 | 1,791 | |||||||||
| Retirement and post-retirement benefits | 131 | 167 | |||||||||
| Long-term deferred revenue | 200 | 187 | |||||||||
| Long-term operating lease liabilities | 192 | 191 | |||||||||
| Other long-term liabilities | 305 | 352 | |||||||||
| Total liabilities | 3,932 | 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; 199 million shares at July 31, 2022 and 197 million shares at October 31, 2021 issued | 2 | 2 | |||||||||
| Treasury stock at cost; 19.7 million shares at July 31, 2022 and 15.1 million shares at October 31, 2021 | (2,148) | (1,425) | |||||||||
| Additional paid-in-capital | 2,311 | 2,219 | |||||||||
| Retained earnings | 4,255 | 3,430 | |||||||||
| Accumulated other comprehensive loss | (500) | (442) | |||||||||
| Total stockholders' equity | 3,920 | 3,784 | |||||||||
| Total liabilities and equity | $ | 7,852 | $ | 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)
| Nine Months Ended | |||||||||||
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 825 | $ | 612 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 88 | 87 | |||||||||
| Amortization | 80 | 149 | |||||||||
| Share-based compensation | 102 | 83 | |||||||||
| Deferred tax expense (benefit) | 19 | (49) | |||||||||
| Excess and obsolete inventory-related charges | 18 | 20 | |||||||||
| Loss on settlement of pension plan | — | 16 | |||||||||
| Other non-cash expense (income), net | 30 | 7 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (166) | (64) | |||||||||
| Inventory | (88) | (30) | |||||||||
| Accounts payable | 41 | 10 | |||||||||
| Employee compensation and benefits | (81) | (12) | |||||||||
| Deferred revenue | 69 | 86 | |||||||||
| Income taxes payable | (59) | 8 | |||||||||
| Retirement and post-retirement benefits | (21) | 5 | |||||||||
| Other assets and liabilities | (111) | 26 | |||||||||
| Net cash provided by operating activities | 746 | 954 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Investments in property, plant and equipment | (127) | (101) | |||||||||
| Acquisition of businesses and intangible assets, net of cash acquired | (33) | (136) | |||||||||
| Purchase of investments | (30) | — | |||||||||
| Other investing activities | — | (1) | |||||||||
| Net cash used in investing activities | (190) | (238) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock under employee stock plans | 63 | 59 | |||||||||
| Payment of taxes related to net share settlement of equity awards | (74) | (53) | |||||||||
| Treasury stock repurchases | (723) | (320) | |||||||||
| Payment of acquisition-related contingent consideration | — | (2) | |||||||||
| Other financing activities | — | (1) | |||||||||
| Net cash used in financing activities | (734) | (317) | |||||||||
| Effect of exchange rate movements | (27) | 4 | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (205) | 403 | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 2,068 | 1,767 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 1,863 | $ | 2,170 | |||||||
| Supplemental cash flow information: | |||||||||||
| Interest payments | $ | 37 | $ | 37 | |||||||
| Income tax paid, net | $ | 157 | $ | 100 | |||||||
| Investments in property, plant and equipment included in accounts payable | $ | 23 | $ | 27 |
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 April 30, 2022 | 198,229 | $ | 2 | $ | 2,254 | (18,101) | $ | (1,920) | $ | 3,917 | $ | (474) | $ | 3,779 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 338 | — | 338 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (26) | (26) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 287 | — | 32 | — | — | — | — | 32 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 25 | — | — | — | — | 25 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (1,639) | (228) | — | — | (228) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | 198,516 | $ | 2 | $ | 2,311 | (19,740) | $ | (2,148) | $ | 4,255 | $ | (500) | $ | 3,920 | |||||||||||||||||||||||||||||||||
| Balance as of October 31, 2021 | 197,248 | $ | 2 | $ | 2,219 | (15,094) | $ | (1,425) | $ | 3,430 | $ | (442) | $ | 3,784 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 825 | — | 825 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (58) | (58) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1,268 | — | 63 | — | — | — | — | 63 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | (73) | — | — | — | — | (73) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 102 | — | — | — | — | 102 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (4,646) | (723) | — | — | (723) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | 198,516 | $ | 2 | $ | 2,311 | (19,740) | $ | (2,148) | $ | 4,255 | $ | (500) | $ | 3,920 | |||||||||||||||||||||||||||||||||
| Balance as of April 30, 2021 | 196,901 | $ | 2 | $ | 2,152 | (12,461) | $ | (992) | $ | 2,894 | $ | (511) | $ | 3,545 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 254 | — | 254 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (17) | (17) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 318 | — | 30 | — | — | — | — | 30 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | (1) | — | — | — | — | (1) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 19 | — | — | — | — | 19 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (569) | (80) | — | — | (80) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2021 | 197,219 | $ | 2 | $ | 2,200 | (13,030) | $ | (1,072) | $ | 3,148 | $ | (528) | $ | 3,750 | |||||||||||||||||||||||||||||||||
| Balance as of October 31, 2020 | 195,661 | $ | 2 | $ | 2,110 | (10,732) | $ | (752) | $ | 2,536 | $ | (599) | $ | 3,297 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 612 | — | 612 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 71 | 71 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1,558 | — | 59 | — | — | — | — | 59 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | (52) | — | — | — | — | (52) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 83 | — | — | — | — | 83 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (2,298) | (320) | — | — | (320) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2021 | 197,219 | $ | 2 | $ | 2,200 | (13,030) | $ | (1,072) | $ | 3,148 | $ | (528) | $ | 3,750 |
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 July 31, 2022 and October 31, 2021, results of operations for the three and nine months ended July 31, 2022 and 2021, and cash flows for the nine months ended July 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 | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | 468 | $ | 94 | $ | 562 | $ | 418 | $ | 81 | $ | 499 | |||||||||||||||||||||||
| Europe | 121 | 86 | 207 | 122 | 79 | 201 | |||||||||||||||||||||||||||||
| Asia Pacific | 381 | 226 | 607 | 335 | 211 | 546 | |||||||||||||||||||||||||||||
| Total revenue | $ | 970 | $ | 406 | $ | 1,376 | $ | 875 | $ | 371 | $ | 1,246 | |||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | 275 | $ | — | $ | 275 | $ | 280 | $ | — | $ | 280 | |||||||||||||||||||||||
| Commercial Communications | 695 | — | 695 | 595 | — | 595 | |||||||||||||||||||||||||||||
| Electronic Industrial | — | 406 | 406 | — | 371 | 371 | |||||||||||||||||||||||||||||
| Total revenue | $ | 970 | $ | 406 | $ | 1,376 | $ | 875 | $ | 371 | $ | 1,246 | |||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 807 | $ | 349 | $ | 1,156 | $ | 729 | $ | 322 | $ | 1,051 | |||||||||||||||||||||||
| Revenue recognized over time | 163 | 57 | 220 | 146 | 49 | 195 | |||||||||||||||||||||||||||||
| Total revenue | $ | 970 | $ | 406 | $ | 1,376 | $ | 875 | $ | 371 | $ | 1,246 |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | 1,340 | $ | 268 | $ | 1,608 | $ | 1,228 | $ | 223 | $ | 1,451 | |||||||||||||||||||||||
| Europe | 395 | 256 | 651 | 380 | 222 | 602 | |||||||||||||||||||||||||||||
| Asia Pacific | 1,076 | 642 | 1,718 | 996 | 598 | 1,594 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,811 | $ | 1,166 | $ | 3,977 | $ | 2,604 | $ | 1,043 | $ | 3,647 | |||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | 860 | $ | — | $ | 860 | $ | 845 | $ | — | $ | 845 | |||||||||||||||||||||||
| Commercial Communications | 1,951 | — | 1,951 | 1,759 | — | 1,759 | |||||||||||||||||||||||||||||
| Electronic Industrial | — | 1,166 | 1,166 | — | 1,043 | 1,043 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,811 | $ | 1,166 | $ | 3,977 | $ | 2,604 | $ | 1,043 | $ | 3,647 | |||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 2,342 | $ | 1,006 | $ | 3,348 | $ | 2,172 | $ | 907 | $ | 3,079 | |||||||||||||||||||||||
| Revenue recognized over time | 469 | 160 | 629 | 432 | 136 | 568 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,811 | $ | 1,166 | $ | 3,977 | $ | 2,604 | $ | 1,043 | $ | 3,647 |
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 balance was $59 million and $84 million as of July 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 $37 million and $39 million as of July 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 $19 million and $64 million for the three and nine months ended July 31, 2022, respectively, and $20 million and $58 million for the corresponding periods last year.
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:
| Nine Months Ended | |||||
| July 31, | |||||
| 2022 | |||||
| (in millions) | |||||
| Balance at October 31 | $ | 665 | |||
| Deferral of revenue billed in current period, net of recognition | 479 | ||||
| Revenue recognized that was deferred as of the beginning of the period | (425) | ||||
| Foreign currency translation impact | (23) | ||||
| Balance at July 31 | $ | 696 |
Of the $425 million of revenue recognized in the nine months ended July 31, 2022 that was deferred as of the beginning of the period, approximately $88 million was recognized in the three months ended July 31, 2022.
Remaining Performance Obligations
Our remaining performance obligations, excluding contracts that have an original expected duration of one year or less, was approximately $399 million as of July 31, 2022, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. As of July 31, 2022, we expect to fulfill 16 percent of these unsatisfied performance obligations during the remainder of 2022, 43 percent during 2023, and 41 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 | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cost of products and services | $ | 5 | $ | 3 | $ | 19 | $ | 16 | |||||||||||||||
| Research and development | 6 | 4 | 22 | 17 | |||||||||||||||||||
| Selling, general and administrative | 15 | 12 | 62 | 51 | |||||||||||||||||||
| Total share-based compensation expense | $ | 26 | $ | 19 | $ | 103 | $ | 84 |
4. INCOME TAXES
The following table provides details of income taxes:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| in millions, except percentages | |||||||||||||||||||||||
| Income before taxes | $ | 346 | $ | 270 | $ | 917 | $ | 673 | |||||||||||||||
| Provision for income taxes | $ | 8 | $ | 16 | $ | 92 | $ | 61 | |||||||||||||||
| Effective tax rate | 2.3 | % | 5.9 | % | 10.0 | % | 9.0 | % |
The tax expense for the three months ended July 31, 2022 was lower compared to the same period last year, primarily due to a decrease in tax expense due to discrete tax differences, partially offset by an increase in income before taxes. The income tax expense for the nine months ended July 31, 2022 was higher compared to the same period last year, primarily due to an increase in income before taxes.
The income tax expense for the three and nine months ended July 31, 2022 included a net discrete benefit of $38 million and $47 million, respectively. The income tax expense for the three and nine months ended July 31, 2021 included a net discrete benefit of $26 million and $46 million, respectively. The discrete tax benefit for the three and nine months ended July 31, 2022 includes changes in tax reserves from audit settlements as well as an out-of-period adjustment to tax reserves for fiscal years 2019 through 2021 related to the potential U.S. benefit associated with the future resolution of non-U.S. tax reserves. The adjustment was immaterial to current and prior-period financial statements. The discrete tax benefit for the three and nine months ended July 31, 2021 includes the release of valuation allowance on Netherlands tax assets. The discrete tax benefit for the nine months ended July 31, 2021 also includes the impact of integration activities for acquired entities resulting in a decrease in U.S. taxes expected to be imposed upon the repatriation of unremitted foreign earnings.
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. We are continuing to evaluate renewal options and the impact of potential outcomes on our effective tax rate. For the nine months ended July 31, 2022 and 2021, respectively, the impact of the tax incentives decreased the income tax provision by $63 million and $41 million. The increase in tax benefit for the nine months ended July 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.
Keysight’s fiscal year 2018 U.S. federal income tax return has been 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 fiscal year 2018 U.S. federal income tax
return. As of June 2022, the fiscal year 2018 U.S. federal income tax audit was effectively settled with no material assessments and no additional cash taxes paid.
The company is being audited in Malaysia for fiscal year 2008. 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 fiscal year 2008 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, and a hearing is currently scheduled for February 2023.
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.
5. NET INCOME PER SHARE
The following table presents the calculation of basic and diluted net income per share:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| in millions, except per-share amounts | |||||||||||||||||||||||
| Net income | $ | 338 | $ | 254 | $ | 825 | $ | 612 | |||||||||||||||
| Basic weighted-average shares | 179 | 184 | 181 | 185 | |||||||||||||||||||
| Potential common shares— stock options and other employee stock plans | 2 | 2 | 1 | 2 | |||||||||||||||||||
| Diluted weighted-average shares | 181 | 186 | 182 | 187 | |||||||||||||||||||
| Net income per share - basic | $ | 1.89 | $ | 1.38 | $ | 4.56 | $ | 3.31 | |||||||||||||||
| Net income per share - diluted | $ | 1.87 | $ | 1.36 | $ | 4.52 | $ | 3.27 | |||||||||||||||
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 July 31, 2022 and October 31, 2021 and the activity for the nine months ended July 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 | (35) | (7) | (42) | ||||||||||||||
| Goodwill arising from acquisitions | 9 | 11 | 20 | ||||||||||||||
| Goodwill at July 31, 2022 | $ | 1,043 | $ | 563 | $ | 1,606 |
As of July 31, 2022 and October 31, 2021, accumulated impairment losses on goodwill was $709 million.
Other intangible assets as of July 31, 2022 and October 31, 2021 consisted of the following:
| July 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 | $ | 993 | $ | 903 | $ | 90 | $ | 969 | $ | 866 | $ | 103 | |||||||||||||||||||||||
| Backlog | 17 | 17 | — | 17 | 17 | — | |||||||||||||||||||||||||||||
| Trademark/Tradename | 36 | 30 | 6 | 36 | 28 | 8 | |||||||||||||||||||||||||||||
| Customer relationships | 394 | 274 | 120 | 389 | 235 | 154 | |||||||||||||||||||||||||||||
| Total amortizable intangible assets | 1,440 | 1,224 | 216 | 1,411 | 1,146 | 265 | |||||||||||||||||||||||||||||
| In-Process R&D | — | — | — | 7 | — | 7 | |||||||||||||||||||||||||||||
| Total | $ | 1,440 | $ | 1,224 | $ | 216 | $ | 1,418 | $ | 1,146 | $ | 272 |
During the nine months ended July 31, 2022, we used $33 million, net of cash acquired, for acquisition activity and recognized goodwill and other intangible assets of $20 million and $23 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. During the nine months ended July 31, 2022, we transferred $7 million from in-process R&D to developed technology as projects were successfully completed.
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 nine months ended July 31, 2022.
During the nine months ended July 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 $78 million for the three and nine months ended July 31, 2022, respectively. Amortization of other intangible assets was $33 million and $147 million for the three and nine months ended July 31, 2021, respectively.
Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
| Amortization expense | |||||
| (in millions) | |||||
| 2022 (remainder) | $ | 25 | |||
| 2023 | $ | 83 | |||
| 2024 | $ | 43 | |||
| 2025 | $ | 26 | |||
| 2026 | $ | 16 | |||
| Thereafter | $ | 23 |
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 July 31, 2022 and October 31, 2021 were as follows:
| Fair Value Measurements at | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 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 | $ | 1,151 | $ | 1,151 | $ | — | $ | — | $ | — | $ | 1,296 | $ | 1,296 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Derivative instruments (foreign exchange contracts) | 12 | — | 12 | — | — | 6 | — | 6 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative instruments (interest rate swaps) | 85 | — | 85 | — | — | 48 | — | 48 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity investments | 63 | 63 | — | — | — | 60 | 60 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity investments - other | 9 | — | — | — | 9 | 10 | — | — | — | 10 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 1,320 | $ | 1,214 | $ | 97 | $ | — | $ | 9 | $ | 1,420 | $ | 1,356 | $ | 54 | $ | — | $ | 10 | |||||||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative instruments (foreign exchange contracts) | $ | 13 | $ | — | $ | 13 | $ | — | $ | — | $ | 4 | $ | — | $ | 4 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Long-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation liability | 23 | — | 23 | — | — | 24 | — | 24 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | 36 | $ | — | $ | 36 | $ | — | $ | — | $ | 28 | $ | — | $ | 28 | $ | — | $ | — |
During the nine months ended July 31, 2022, we made an equity investment of $30 million. The changes in fair value of the equity investment are recorded within "other income (expense), net" in the condensed consolidated statement of operations.
Net realized gains (losses) on sale of our equity investments were zero for both the three and nine months ended July 31, 2022 and 2021. Net unrealized losses on our equity investments were $8 million and $24 million for the three and nine months ended July 31, 2022, respectively. Net unrealized gains on our equity investments were $1 million and $2 million for the three and nine months ended July 31, 2021, respectively.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
For the nine months ended July 31, 2022, our held and used long-lived assets in Russia with a carrying amount of $3 million were written down to a fair value of zero, resulting in an impairment on assets that are expected to generate zero cash flows in the future of $3 million, which was recorded within “other operating expense (income), net” in the condensed consolidated statement of operations.
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 213 and 69, respectively, as of July 31, 2022. The aggregated notional amounts by currency and designation as of July 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 | $ | 21 | $ | 38 | ||||||||||||||||||||||
| British Pound | 24 | (78) | ||||||||||||||||||||||||
| Singapore Dollar | 32 | 34 | ||||||||||||||||||||||||
| Malaysian Ringgit | 106 | 10 | ||||||||||||||||||||||||
| Japanese Yen | (161) | (12) | ||||||||||||||||||||||||
| Other currencies | 13 | (20) | ||||||||||||||||||||||||
| Total | $ | 35 | $ | (28) |
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 July 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 | July 31, 2022 | October 31, 2021 | Balance Sheet Location | July 31, 2022 | October 31, 2021 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||||||||||
| Other current assets | $ | 11 | $ | 5 | Other accrued liabilities | $ | 10 | $ | 1 | |||||||||||||||||||||||
| Interest rate swap contracts: | ||||||||||||||||||||||||||||||||
| Other assets | 85 | 48 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||||||||||
| Other current assets | 1 | 1 | Other accrued liabilities | 3 | 3 | |||||||||||||||||||||||||||
| Total derivatives | $ | 97 | $ | 54 | $ | 13 | $ | 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 | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 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) | $ | (11) | $ | (29) | $ | 37 | $ | 19 | |||||||||||||||
| Foreign exchange contracts: | |||||||||||||||||||||||
| Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | (3) | $ | — | $ | (1) | $ | 3 | |||||||||||||||
| Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings: | |||||||||||||||||||||||
| Cost of products | $ | 5 | $ | 1 | $ | 9 | $ | (1) | |||||||||||||||
| Selling, general and administrative | $ | (4) | $ | — | $ | (6) | $ | 2 | |||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on amortization approach: | |||||||||||||||||||||||
| Selling, general and administrative | $ | — | $ | 1 | $ | 1 | $ | 1 | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Gain (loss) recognized in: | |||||||||||||||||||||||
| Cost of products | $ | — | $ | — | $ | — | $ | 1 | |||||||||||||||
| Other income (expense), net | $ | — | $ | (2) | $ | 13 | $ | (5) |
The estimated amount at July 31, 2022 expected to be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months is a loss of $1 million.
9. DEBT
The following table summarizes the components of our long-term debt:
| July 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 $3 and $4) | 697 | 696 | |||||||||
| 2029 Senior Notes at 3.00% ($500 face amount less unamortized costs of $4 and $4) | 496 | 496 | |||||||||
| Total debt | $ | 1,792 | $ | 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 July 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 nine months ended July 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 nine months ended July 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 nine months ended July 31, 2022.
As of July 31, 2022 and October 31, 2021, we had $39 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 is approximately $1,784 million and $1,977 million as of July 31, 2022 and October 31, 2021, respectively.
10. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
For the three and nine months ended July 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 | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Service cost—benefits earned during the period | $ | 7 | $ | 6 | $ | 3 | $ | 4 | $ | 1 | $ | 1 | |||||||||||||||||||||||
| Interest cost on benefit obligation | 6 | 6 | 4 | 3 | 1 | 1 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (16) | (13) | (15) | (19) | (4) | (3) | |||||||||||||||||||||||||||||
| Amortization of net actuarial loss | 3 | 6 | 6 | 10 | — | 3 | |||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | — | $ | 5 | $ | (2) | $ | (2) | $ | (2) | $ | 2 |
| Pensions | |||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plan | |||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Service cost—benefits earned during the period | $ | 19 | $ | 18 | $ | 10 | $ | 11 | $ | 1 | $ | 1 | |||||||||||||||||||||||
| Interest cost on benefit obligation | 18 | 17 | 12 | 11 | 3 | 3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (46) | (39) | (45) | (58) | (11) | (9) | |||||||||||||||||||||||||||||
| Amortization of net actuarial loss | 8 | 18 | 18 | 31 | 1 | 8 | |||||||||||||||||||||||||||||
| Settlement loss | — | — | — | 16 | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | (1) | $ | 14 | $ | (5) | $ | 11 | $ | (6) | $ | 3 |
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.
In March 2021, we substantially transferred the assets and obligations of our Netherlands defined benefit plan (“The Netherlands DB plan”) to an insurance company. The partial settlement resulted in a loss of $16 million which is included in "other income (expense), net" in the condensed consolidated statement of operations. We received a net refund of $3 million due to the partial settlement of the Netherlands DB plan.
We did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan during the three and nine months ended July 31, 2022 and 2021. We contributed $2 million and $6 million to our non-U.S. defined benefit plans during the three and nine months ended July 31, 2022. We contributed $1 million and $6 million to our non-U.S. defined benefit plans during the three and nine months ended July 31, 2021, respectively.
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 $2 million to our non-U.S. defined benefit plans. The amounts we 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
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 1,847 | $ | 2,052 | |||||||
| Restricted cash included in other assets | 16 | 16 | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 1,863 | $ | 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
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Finished goods | $ | 303 | $ | 329 | |||||||
| Purchased parts and fabricated assemblies | 534 | 448 | |||||||||
| Total inventory | $ | 837 | $ | 777 |
The increase in inventory for the nine months ended July 31, 2022, was primarily driven by higher material costs and incremental stock build-up to secure supply in the current supply-constrained environment.
Property, plant and equipment
| July 31, 2022 | October 31, 2021 | ||||||||||
| (in millions) | |||||||||||
| Land | $ | 53 | $ | 61 | |||||||
| Buildings and leasehold improvements | 798 | 785 | |||||||||
| Machinery and equipment | 1,372 | 1,328 | |||||||||
| Total property, plant and equipment | 2,223 | 2,174 | |||||||||
| Accumulated depreciation of property, plant and equipment | (1,555) | (1,524) | |||||||||
| Property, plant and equipment, net | $ | 668 | $ | 650 |
The increase in property, plant and equipment, net, for the nine months ended July 31, 2022, was primarily driven by increased capital spending for capacity and technology investments. Depreciation expense was $88 million and $87 million for the nine months ended July 31, 2022 and 2021, respectively.
Leases
The following table summarizes the components of our lease cost:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Operating lease cost | $ | 13 | $ | 13 | $ | 38 | $ | 39 | |||||||||||||||
| Variable lease cost | $ | 4 | $ | 4 | $ | 12 | $ | 11 |
Supplemental cash flow information related to our operating leases was as follows:
| Nine Months Ended | |||||||||||
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Cash payment for operating leases | $ | 36 | $ | 40 | |||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 40 | $ | 78 |
The decrease in right-of-use assets obtained in exchange for operating lease obligations was primarily driven by reassessment of a lease term in the prior year triggered by significant leasehold improvements.
As of July 31, 2022, we have additional operating leases, primarily for real estate, that have not yet commenced of $16 million. These operating leases will commence in the remainder of fiscal year 2022 and fiscal year 2023 with lease terms of up to 15 years.
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:
| Nine Months Ended | |||||||||||
| July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (in millions) | |||||||||||
| Beginning balance | $ | 34 | $ | 33 | |||||||
| Accruals for warranties, including change in estimates | 16 | 23 | |||||||||
| Settlements made during the period | (18) | (21) | |||||||||
| Ending balance | $ | 32 | $ | 35 | |||||||
| Accruals for warranties due within one year | $ | 19 | $ | 21 | |||||||
| Accruals for warranties due after one year | 13 | 14 | |||||||||
| Ending balance | $ | 32 | $ | 35 |
12. COMMITMENTS AND CONTINGENCIES
Commitments
Our non-cancellable commitments to contract manufacturers and suppliers increased to $536 million as of July 31, 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. During the nine months ended July 31, 2022, there were no other 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 July 31, 2022.
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 and the scope of the license, which expired on December 31, 2021, were the primary subjects of arbitration, which was fully resolved in Keysight’s favor. 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. We are also involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, employment, commercial and environmental matters, which arise in the ordinary course of business.
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 nine months ended July 31, 2022, we repurchased 4,646,427 shares of common stock for $723 million. For the nine months ended July 31, 2021, we repurchased 2,297,600 shares of common stock for $320 million.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component and related tax effects for the three and nine months ended July 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 April 30, 2022 | $ | (106) | $ | (440) | $ | (6) | $ | 78 | $ | (474) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (20) | — | — | (14) | (34) | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 9 | — | (1) | 8 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (3) | — | 3 | — | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | (20) | 6 | — | (12) | (26) | |||||||||||||||||||||||||||
| As of July 31, 2022 | $ | (126) | $ | (434) | $ | (6) | $ | 66 | $ | (500) | ||||||||||||||||||||||
| As of October 31, 2021 | $ | (20) | $ | (456) | $ | (6) | $ | 40 | $ | (442) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (106) | — | — | 36 | (70) | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 29 | — | (3) | 26 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (7) | — | (7) | (14) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | (106) | 22 | — | 26 | (58) | |||||||||||||||||||||||||||
| As of July 31, 2022 | $ | (126) | $ | (434) | $ | (6) | $ | 66 | $ | (500) | ||||||||||||||||||||||
| As of April 30, 2021 | $ | 7 | $ | (569) | $ | (5) | $ | 56 | $ | (511) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (7) | — | — | (29) | (36) | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 19 | — | (1) | 18 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (6) | — | 7 | 1 | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | (7) | 13 | — | (23) | (17) | |||||||||||||||||||||||||||
| As of July 31, 2021 | $ | — | $ | (556) | $ | (5) | $ | 33 | $ | (528) | ||||||||||||||||||||||
| As of October 31, 2020 | $ | (10) | $ | (600) | $ | (5) | $ | 16 | $ | (599) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 10 | (14) | — | 22 | 18 | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 74 | — | (1) | 73 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (16) | — | (4) | (20) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | 10 | 44 | — | 17 | 71 | |||||||||||||||||||||||||||
| As of July 31, 2021 | $ | — | $ | (556) | $ | (5) | $ | 33 | $ | (528) |
Reclassifications out of accumulated other comprehensive loss for the three and nine months ended July 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 | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||
| July 31, | July 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivatives | $ | 5 | $ | 1 | $ | 9 | $ | (1) | Cost of products | |||||||||||||||||||||||||||||||||||
| (4) | — | (6) | 2 | Selling, general and administrative | ||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | Benefit (provision) for income tax | ||||||||||||||||||||||||||||||||||||||||
| 1 | 1 | 3 | 1 | Net of income tax | ||||||||||||||||||||||||||||||||||||||||
| Net defined benefit pension cost and post retirement plan costs: | ||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial loss | (9) | (19) | (29) | (74) | ||||||||||||||||||||||||||||||||||||||||
| 3 | 5 | 7 | 19 | Benefit (provision) for income tax | ||||||||||||||||||||||||||||||||||||||||
| (6) | (14) | (22) | (55) | Net of income tax | ||||||||||||||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | (5) | $ | (13) | $ | (19) | $ | (54) |
An amount in parentheses indicates a reduction to income and an increase to accumulated other comprehensive loss.
Reclassifications of prior service benefit and actuarial net loss related to 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 | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 970 | $ | 406 | $ | 1,376 | $ | 875 | $ | 371 | $ | 1,246 | |||||||||||||||||||||||
| Segment income from operations | $ | 288 | $ | 127 | $ | 415 | $ | 224 | $ | 115 | $ | 339 |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,811 | $ | 1,166 | $ | 3,977 | $ | 2,604 | $ | 1,043 | $ | 3,647 | |||||||||||||||||||||||
| Segment income from operations | $ | 796 | $ | 359 | $ | 1,155 | $ | 670 | $ | 309 | $ | 979 |
The following table reconciles total reportable operating segments’ income from operations to our income before taxes, as reported:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Total reportable operating segments' income from operations | $ | 415 | $ | 339 | $ | 1,155 | $ | 979 | |||||||||||||||
| Share-based compensation | (26) | (19) | (103) | (84) | |||||||||||||||||||
| Amortization of acquisition-related balances | (26) | (33) | (78) | (147) | |||||||||||||||||||
| Acquisition and integration costs | (2) | (2) | (7) | (8) | |||||||||||||||||||
| Restructuring and others | (4) | (1) | (12) | (9) | |||||||||||||||||||
| Income from operations, as reported | 357 | 284 | 955 | 731 | |||||||||||||||||||
| Interest income | 4 | 1 | 6 | 2 | |||||||||||||||||||
| Interest expense | (20) | (20) | (59) | (59) | |||||||||||||||||||
| Other income (expense), net | 5 | 5 | 15 | (1) | |||||||||||||||||||
| Income before taxes, as reported | $ | 346 | $ | 270 | $ | 917 | $ | 673 |
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