Keysight Technologies 10-Q 2023-07-31

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 JULY 31, 2023

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 August 25, 2023 was 177,574,662.

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)

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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 which include but are not limited to predictions, future guidance, projections, beliefs, and expectations about the company’s 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 government regulations on our ability to 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, and our transition to lower-cost regions. The forward-looking statements involve risks and uncertainties that could cause Keysight’s results to differ materially from management’s current expectations. Such risks and uncertainties include, but are not limited to, the impact of global economic conditions such as inflation or potential recession, slowing demand for products or services, volatility in financial markets, reduced access to credit, increased interest rates, supply chain constraints, the existence of political or economic instability, impacts of geopolitical tension and conflict in regions outside of the U.S., the impacts 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, impacts related to endemic and pandemic conditions, impacts related to net zero emissions commitments, and the impact of volatile weather caused by environmental conditions such as climate change. 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 customers' 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 the development of new software and hardware products, as well as improvements to existing products, and customer solutions aligned to the industries that 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.

Macro-economic headwinds and challenging geopolitical environment

Our global operations continue to be affected by many external headwinds, including inflationary pressures, rising interest rates, currency movements, geopolitical tensions and trade restrictions. These headwinds are also negatively impacting our customers' operations and financial performance. As a result, demand has declined year-over-year as our customers are exercising caution in spending to manage financial results and adapt to post-pandemic industry dynamics. We believe that Keysight’s technology leadership, differentiated first-to-market solutions portfolio, durable and resilient business model driven by the strength of the Keysight Leadership Model, continued customer engagement in new technology innovation spanning diverse applications across global markets and our culture position us well to weather these macro and industry dynamics and deliver consistent long-term value to our customers.

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

Three and nine months ended July 31, 2023 and 2022

Total orders for the three and nine months ended July 31, 2023 were $1,244 million and $3,863 million, respectively, a decrease of 15 percent and 12 percent compared to the same periods last year. Foreign currency movements for the three and nine months ended July 31, 2023 had an unfavorable impact of 1 percentage point and 2 percentage points, respectively, on the year-over-year order change. Acquisitions had an immaterial impact on the year-over-year order change for both the three and nine months ended July 31, 2023. For the three months ended July 31, 2023, orders declined in Asia Pacific and Europe, including a double-digit decline in Asia Pacific, partially offset by an increase in the Americas. For the nine months ended July 31, 2023, orders declined in Asia Pacific and the Americas, including a double-digit decline in Asia Pacific, partially offset by an increase in Europe.

Revenue for the three and nine months ended July 31, 2023 of $1,382 million and $4,153 million, respectively, was flat and an increase of 4 percent compared to the same periods last year. Foreign currency movements for the three and nine months ended July 31, 2023 had an unfavorable impact of 1 percentage point and 2 percentage points, respectively, on the year-over-year revenue change. Revenue associated with acquisitions had an immaterial impact on the year-over-year revenue change for the three and nine months ended July 31, 2023. For the three and nine months ended July 31, 2023, the year-over-year revenue change was driven by an increase in the Electronic Industrial Solutions Group, partially offset by a decline in the Communications Solutions Group. Revenue from the Communications Solutions Group and the Electronic Industrial Solutions Group represented 66 percent and 34 percent, respectively, of total revenue for the three months ended July 31, 2023. Revenue from the Communications Solutions Group and the Electronic Industrial Solutions Group represented 67 percent and 33 percent, respectively, of total revenue for the nine months ended July 31, 2023.

Net income for the three and nine months ended July 31, 2023 was $288 million and $831 million, respectively, compared to $338 million and $825 million for the same periods last year. The decrease in net income for the three months ended July 31, 2023 was primarily driven by higher income tax and R&D expenses, partially offset by higher interest income, favorable mix, lower variable people-related costs and higher revenue. The increase in net income for the nine months ended July 31, 2023 was primarily driven by higher revenue, interest income and favorable mix, partially offset by higher income tax expense, R&D expense, selling, general and administrative expense and material costs.

Outlook

Our first-to-market solutions strategy enables customers to develop new technologies and accelerate innovation and provides a platform for Keysight's long-term growth. Our customers are expected to continue to make R&D investments in certain next-generation technologies, including 5G, early 6G, high-speed data center, satellite networks and Artificial Intelligence-Machine Learning ("AI-ML") network modeling, new automotive mobility technologies, industrial internet of things ("IoT") and defense modernization. We continue to engage actively with our customers, and closely monitor the current macro-economic environment, including trade, tariffs, monetary and fiscal policies, geopolitical tensions, and supply chain challenges. Despite the near-term challenges, we remain confident in the long-term secular growth trends of our markets and our ability to outperform in a variety of market conditions.

Critical Accounting Policies and Estimates

There were no material changes during the three and nine months ended July 31, 2023 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, 2022.

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 nine months ended July 31, 2023 and 2022

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 nine months ended July 31, 2023 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 months ended July 31, 2023 increased 1 percentage point as compared to the same period last year, primarily driven by price increases and favorable mix, partially offset by higher warranty costs. Gross margin for the nine months ended July 31, 2023 increased 1 percentage point as compared to the same period last year, primarily driven by price increases and favorable mix, partially offset by higher material costs.

R&D expense for the three and nine months ended July 31, 2023 increased 4 percent and 6 percent compared to the same periods last year, primarily driven by continued investments in key growth opportunities in our end markets and leading-edge technologies, partially offset by lower variable people-related costs. As a percentage of revenue, R&D expense was 16 percent for both the three and nine months ended July 31, 2023.

Selling, general and administrative expense for the three months ended July 31, 2023 was flat compared to the same period last year, primarily driven by higher infrastructure-related costs offset by lower variable people-related and selling costs. Selling, general and administrative expense for the nine months ended July 31, 2023 increased 3 percent compared to the same period last year, primarily driven by higher infrastructure-related costs, travel and people-related costs, partially offset by lower selling and marketing costs.

Other operating expense (income), net for the three and nine months ended July 31, 2023 was income of $3 million and $11 million, respectively, compared to income of $3 million for the same periods last year. Other operating expense (income), net for the nine months ended July 31, 2022 includes asset impairment charges of $7 million related to the discontinuance of our Russia operations.

Operating margin for both the three and nine months ended July 31, 2023 increased 1 percentage point compared to the same periods last year, primarily driven by gross margin gains.

Interest income for the three and nine months ended July 31, 2023 was $29 million and $70 million, respectively, as compared to $4 million and $6 million, respectively, for the same periods last year and primarily relates to interest earned on our cash balances. The increase in interest income for the three and nine months ended July 31, 2023 is primarily driven by an increase in interest rates and higher year-over-year cash balances. Interest expense for the three and nine months ended July 31, 2023 was $19 million and $58 million, respectively, as compared to $20 million and $59 million for the same periods last year and primarily relates to interest on our senior notes.

Other income (expense), net for the three and nine months ended July 31, 2023 was income of $14 million and $28 million, respectively, compared to income of $5 million and $15 million for the same periods last year and primarily includes income related to our defined benefit and post-retirement benefit plans, the change in fair value of our equity and other investments and currency impacts. The increase in net other income for the three and nine months ended July 31, 2023 compared to the same periods last year was primarily driven by a net gain on our equity investments, partially offset by higher amortization of net actuarial losses.

As of July 31, 2023, our headcount was approximately 14,800 compared to approximately 14,700 at July 31, 2022.

Income Taxes

The following table provides income tax details:

The tax expense for the three and nine months ended July 31, 2023 was higher compared to the same periods last year primarily due to the impacts of U.S. tax capitalization of research and experimental expenditures, an increase in income before taxes and an increase in discrete tax expense. A provision enacted in the Tax Cuts and Jobs Act of 2017 (the "TCJA") became effective for Keysight on November 1, 2022 requiring that for U.S. tax purposes research and experimental expenditures be capitalized and amortized over five years for research activities conducted in the U.S. and over fifteen years for research activities conducted outside the U.S. The capitalization of research and experimental expenditures for U.S. tax purposes increases the provision for global intangible low-taxed income (“GILTI”) and is partially offset by an increase in the Foreign-Derived Intangible Income tax deduction.

The income tax expense for the three and nine months ended July 31, 2023 included a net discrete expense of $19 million and $21 million, respectively. The discrete expense for the three and nine months ended July 31, 2023 includes tax expense adjustments from the filing of prior year U.S. and non-U.S. tax returns and a reversal of the expected foreign tax credit benefit for U.S. branch 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 discrete tax benefit for the three and nine months ended July 31, 2022 includes changes in tax reserves from audit settlements as well as a prior year adjustment to tax reserves related to the potential U.S. benefit associated with the future resolution of non-U.S. tax reserves.

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, 2023 and 2022 the impact of the tax incentives decreased the income tax provision by $73 million and $63 million, respectively. The increase in tax benefit for the nine months ended July 31, 2023 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 2023.

The open tax years for the U.S. federal income tax return and most state income tax returns are from November 1, 2019 through the current tax year. For the majority of our non-U.S. entities, the open tax years are from November 1, 2017 through the current tax year. For certain non-U.S. entities, the tax years remain open, at most, back to the year 2008.

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 strong technical 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 available recourses 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. There were hearings with the Court of Appeal in April and July 2023, and a subsequent hearing is scheduled for September 2023. There are limited further legal options available after the conclusion is returned from the Court of Appeal.

At this time, management does not believe that the outcome of any future or currently ongoing examination will have a material impact on our consolidated financial statements. We believe that we have an adequate provision for any adjustments that may result from tax examinations. However, the outcome of 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 that 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.

We are subject to income taxes in the U.S. and various other countries globally. Changes in tax law, tax rates, or in the composition of earnings in countries with differing tax rates may affect deferred tax assets and liabilities recorded and our future effective tax rate. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 that included changes to the U.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which is effective for Keysight beginning November 1, 2023. In addition, the Organization for Economic Cooperation and Development (“OECD”) reached agreement among various countries to implement a minimum fifteen percent tax rate on certain multinational enterprises, commonly referred to as Pillar Two. Many countries continue to announce changes in their tax laws and regulations based on the Pillar Two proposals. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new guidance becomes available. Some of these legislative changes could result in double taxation of our non-U.S. earnings, a reduction in the tax benefit received from our tax incentives, or other impacts to our effective tax rate and tax liabilities. Given the numerous proposed tax law changes and the uncertainty regarding such proposed legislative changes, the impact of Pillar Two cannot be determined at this time.

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, instrumentation, systems, and related services. These solutions are used in the simulation, design, validation, manufacturing, installation, and optimization of communication systems in wireless, wireline, enterprise, and aerospace and defense end markets. In addition the group provides automated software test solutions that include AI-ML to automatically identify, build and execute tests critical to digital business success and a strong customer experience.

Revenue

The Communications Solutions Group revenue for the three and nine months ended July 31, 2023 decreased 5 percent and 1 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and nine months ended July 31, 2023 had an unfavorable impact of 1 percentage point and 2 percentage points, respectively, on the year-over-year revenue change. Revenues associated with acquisitions had an immaterial impact on the year-over-year revenue change for the three and nine months ended July 31, 2023. For the three and nine months ended July 31, 2023, a revenue decline in the commercial communications end market was partially offset by growth in the aerospace, defense and government end market. For both the three and nine months ended July 31, 2023, revenue declines in Asia Pacific and the Americas were partially offset by an increase in Europe. The Communications Solutions Group revenue for the three and nine months ended July 31, 2023 declined due to cautious customer spending across the communications ecosystem as they work through post-pandemic inventory dynamics and macro-economic uncertainty. At the same time, customer engagements remain strong with R&D investments in key technologies to support 5G, including investments in Open Radio Access Networks ("Open RAN"), non-terrestrial networks and 5G RedCap release 17 capabilities. Investment is also continued in AI-ML driven high speed data center networking, early 6G research, electromagnetic spectrum operations, cybersecurity, space and satellite solutions; and support major defense and government programs worldwide.

The commercial communications end market revenue for the three and nine months ended July 31, 2023, decreased 12 percent and 4 percent, respectively, year-over-year and represented 67 percent of total Communications Solutions Group revenue. For the three and nine months ended July 31, 2023, revenue declines in the Americas and Asia Pacific were partially offset by an increase in Europe. We continue to see investments in wireless 5G, Open RAN, components and operators, and high-speed data solutions to support data centers and the cloud.

The aerospace, defense and government end market revenue for the three and nine months ended July 31, 2023 increased 11 percent and 8 percent, respectively, year-over-year and represented 33 percent of total Communications Solutions Group revenue. For the three and nine months ended July 31, 2023, revenue grew across all regions. We continue to see investments in

electromagnetic spectrum operations, cybersecurity, and space and satellite solutions, as well as next-generation commercial technologies like 5G and early 6G research applications.

Gross Margin and Operating Margin

Gross margin for the three months ended July 31, 2023 increased 1 percentage point as compared to the same period last year, primarily driven by price increases and favorable mix, partially offset by higher warranty costs. Gross margin for the nine months ended July 31, 2023 increased 1 percentage point as compared to the same period last year, primarily driven by price increases and favorable mix, partially offset by higher material costs.

R&D expense for the three and nine months ended July 31, 2023 increased 1 percent and 3 percent compared to the same periods last year, primarily driven by continued investments in key growth opportunities in our end markets and leading-edge technologies, partially offset by lower variable people-related costs.

Selling, general and administrative expense for the three months ended July 31, 2023 decreased 6 percent compared to the same period last year, primarily driven by lower selling and variable people-related costs. Selling, general and administrative expense for the nine months ended July 31, 2023 decreased 1 percent compared to the same period last year, primarily driven by lower selling costs, partially offset by higher travel, infrastructure-related and people-related costs.

Other operating expense (income), net for the three and nine months ended July 31, 2023 was income of $2 million and $8 million, respectively, compared to income of $2 million and $7 million, respectively, for the same periods last year.

Operating margin for the three months ended July 31, 2023 was flat compared to the same period last year, primarily driven by gross margin gains offset by higher R&D expenses as a percentage of sales. Operating margin for the nine months ended July 31, 2023 increased 1 percentage point compared to the same period last year, primarily driven by higher 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 design and test software, instrumentation, systems, and related services. These solutions are used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment. In addition the group provides automated software test solutions that include AI-ML 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 the three and nine months ended July 31, 2023 increased 14 percent and 17 percent, respectively, compared to the same periods last year. Foreign currency movements for the three and nine months ended July 31, 2023 had an unfavorable impact of 1 percentage point and 3 percentage points, respectively, on the year-over-year revenue change. Revenues associated with acquisitions had an immaterial impact on the year-over-year revenue change for the three and nine months ended July 31, 2023. For the three and nine months ended July 31, 2023, revenue grew double-digit across all regions and markets. We saw moderation of demand in the quarter, particularly in semiconductor and manufacturing applications. Despite delays in their near-term spending, customer engagement remains high as they continue to invest in key long-term strategic initiatives, such as next-generation electric (EV) and autonomous (AV) vehicle mobility, digital health, industrial IoT, and advanced semiconductor technologies.

Gross Margin and Operating Margin

Gross margin for the three months ended July 31, 2023 increased 1 percentage point compared to the same period last year, primarily driven by higher revenue volume and favorable mix, partially offset by higher warranty costs. Gross margin for the nine months ended July 31, 2023 was flat compared to the same period last year, primarily driven by higher revenue volume and favorable mix offset by higher material costs.

R&D expense for the three and nine months ended July 31, 2023 increased 11 percent and 10 percent compared to the same periods last year, primarily driven by continued investments in key growth opportunities in our markets and leading-edge technologies, partially offset by lower variable people-related costs.

Selling, general and administrative expense for the three months ended July 31, 2023 increased 8 percent compared to the same period last year, primarily driven by higher selling costs, partially offset by lower variable people-related costs. Selling, general and administrative expense for the nine months ended July 31, 2023 increased 6 percent compared to the same period last year, primarily driven by higher selling, travel, people-related and infrastructure-related costs.

Other operating expense (income), net for the three and nine months ended July 31, 2023 and 2022 was income of $1 million and $3 million, respectively.

Operating margin for the three months ended July 31, 2023 increased 3 percentage points compared to the same period last year, primarily driven by lower operating expenses as a percentage of sales and gross margin gains. Operating margin for the nine months ended July 31, 2023 increased 3 percentage points compared to the same period last year, primarily driven by lower operating expenses as a percentage of sales.

Financial Condition

Liquidity and Capital Resources

Our liquidity is affected by many factors, including normal ongoing operations of our business and fluctuations due 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 due to working capital needs, the timing of payments for income taxes, variable pay, and pension funding and other items that impact reported cash flows.

Net cash provided by operating activities increased $284 million during the nine months ended July 31, 2023 compared to the same period last year.

• Net income for the nine months ended July 31, 2023 increased $6 million compared to the same period last year. Non-cash adjustments to net income were lower by $49 million primarily due to a $37 million increase in unrealized gains on equity and other investments, a $9 million decrease in deferred tax expense, an $8 million decrease in amortization, and a $3 million decrease in other non-cash adjustments, which was primarily driven by prior year one-time asset impairment charges related to the discontinuance of our Russia operations, partially offset by an $8 million increase in share-based compensation.

• The aggregate of accounts receivable, inventory and accounts payable used net cash of $148 million during the first nine months of fiscal 2023 compared to net cash used of $213 million in the same period last year, primarily due to higher collections, net of payments, partially offset by an increase in inventory for incremental stock to assure supply and demo. 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.

• For the nine months ended July 31, 2023, we terminated forward-starting interest rate swap agreements resulting in proceeds of $107 million. See Note 8, "Derivatives," for additional information.

• Other movements in assets and liabilities used net cash of $48 million during the first nine months of fiscal 2023 compared to net cash used of $203 million in the same period last year, primarily due to lower prepaid assets, higher income and other tax accruals, net of payments, and changes in other assets and liabilities.

Investing Activities

Our investing activities primarily include investments in property, plant and equipment and acquisitions of businesses to support our strategy and growth.

Net cash used in investing activities increased $60 million during the nine months ended July 31, 2023 compared to the same period last year. Investments in property, plant and equipment were $158 million and $127 million for the nine months ended July 31, 2023 and 2022, respectively. For the nine months ended July 31, 2023, we used $85 million, net of cash acquired, to acquire Cliosoft, Inc. ("Cliosoft"). Cliosoft's data and intellectual property management tools enhance our portfolio of electronic design automation solutions. For the nine months ended July 31, 2022, we used $33 million, net of cash acquired, for acquisition activity. Additionally, for the nine months ended July 31, 2023, we used $7 million for purchase of a cost-method investment as compared to $30 million for an equity investment in the same period last year.

Financing Activities

Our financing activities primarily include 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 decreased $475 million during the nine months ended July 31, 2023 compared to the same period last year, primarily due to lower treasury stock repurchases and lower payment of taxes related to net share settlement of equity awards.

Treasury Stock Repurchases

On March 7, 2023, our board of directors approved a new stock repurchase program authorizing the purchase of up to $1,500 million of the company’s common stock, replacing the previously approved November 2021 program authorizing the purchase of up to $1,200 million of the company’s common stock, of which $225 million remained. 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 an amended and restated credit agreement (the “Revolving Credit Facility”), which provided a $750 million five-year unsecured revolving credit facility that expires on July 30, 2026 with an annual interest rate of LIBOR + 1 percent along with a facility fee of 0.125 percent per annum. On February 17, 2023, we entered into the first amendment to the Revolving Credit Facility to change the annual interest rate from LIBOR + 1 percent to SOFR + 1.1 percent. In addition, the Revolving Credit Facility 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 Revolving Credit Facility for general corporate purposes. As of July 31, 2023 and October 31, 2022, 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 three months ended July 31, 2023. 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. In the event that additional liquidity is required, we may also borrow under our revolving credit facility.

On June 28, 2023, we announced our intention to acquire the entire share capital of ESI Group SA (“ESI Group”) at a price per share of 155 euros, which reflects a valuation of 913 million euros on a fully diluted basis. The acquisition is expected to be funded with existing cash. Completion of the acquisition of the controlling block of ESI Group shares is expected before the end of calendar year 2023.

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, 2022.

Cash requirements related to tax liabilities include uncertain tax positions, which increased by $28 million from our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 due to current year increases in reserves. Additionally, with regard to the U.S. transition tax liability, $13 million moved from amounts due later than one year to amounts due within one year. We believe that we have an adequate provision for any adjustments that may result from tax examinations. However, the outcome of 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.

For the remainder of fiscal 2023, we do not expect to contribute to our U.S. defined benefit plan and U.S. post-retirement benefit plan. We do 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. See Note 10, "Retirement plans and post-retirement benefit plans."

Additionally, we expect capital spending to be approximately $215 million in 2023, primarily for investments in capacity expansion and technology investments.

As of July 31, 2023, 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, 2022. There were no material changes during the nine months ended July 31, 2023 to this information reported in our 2022 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 third quarter of fiscal 2023 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 was suspended and designated for remediation activities over three years, including employment of a special compliance officer. To date, we have paid $3.1 million of the penalty. The suspended portion of the penalty has been satisfied by amounts we have spent on qualifying compliance activities to date.

On January 1, 2022, Centripetal Networks filed a lawsuit in Federal District Court in Virginia, alleging that certain 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 which are alleged to infringe Centripetal patents. We deny the allegations and are aggressively defending each case.

Although there are no matters pending that we currently believe are probable and reasonably possible of having a material impact to our business, consolidated financial position, or results of operations or cash flows, the outcome of litigation is inherently uncertain and is difficult to predict. An adverse outcome in any outstanding lawsuit or proceeding could result in

significant monetary damages or injunctive relief. If adverse results are above management’s expectations or are unforeseen, management may not have accrued for the liability, which could impact our results in a financial period.

We are also involved in lawsuits, claims, investigations and other proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business.

Risks, Uncertainties and Other Factors That May Affect Future Results

Risks Related to Our Business

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, inflation, potential recession or depression has and may continue to impact our business, resulting in:

• increased cost to manufacture products or deliver solutions;

• reduced customer purchasing power;

• reduced demand for our solutions and services, reduced or delayed orders;

• 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, volatility in financial markets, 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.

Economic, political, and other risks associated with international sales and operations could adversely affect our results of operations.

Because we operate our businesses and sell our solutions worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a majority of our total revenue. However, there can be no assurances that our international sales will continue at existing levels or grow in accordance with our effort to increase foreign market penetration. In addition, many of our employees, contract manufacturers, suppliers and manufacturing facilities are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including but not limited to:

• inability to conduct business in certain countries or regions or with certain customers due to U.S. sanctions or trade restrictions;

• inability to sell certain products, technologies, or services to countries, regions, facilities, or customers due to U.S. sanctions or trade restrictions;

• changes in a specific country's or region's political, economic or other conditions, including but not limited to changes that favor national interests and economic volatility;

• negative impact of economic and political measures taken by a country to contain the spread of global pandemic conditions;

• negative consequences from changes in tax laws;

• difficulty in protecting intellectual property;

• injunctions or exclusion orders related to intellectual property disputes;

• interruptions to transportation flows for delivery of parts to us and finished goods to our customers;

• changes in foreign currency exchange rates;

• difficulty in staffing and managing foreign operations;

• local competition;

• differing labor regulations;

• unexpected changes in regulatory requirements;

• inadequate local infrastructure;

• potential incidences of corruption and fraudulent business practices; and

• volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism, and war.

We centralize most of our accounting processes at two locations: India and Malaysia. If conditions change in those countries, it may adversely affect operations, including impairing our ability to pay our suppliers. Our results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial results.

Further, even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage similar risks.

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

Nationalistic economic policies and political trends such as opposition to globalization and free trade, sanctions or trade restrictions, including those on advanced computing and semiconductor manufacturing, withdrawal from or re-negotiation of global trade agreements, tax policies that favor domestic industries and interests, the distancing or potential exit of 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, 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 the United Kingdom, the European Union, Singapore, Malaysia and China, among other countries 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.

Volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism and war could result in market instability, which could negatively impact our business results.

We are a global company with international operations, and we sell our products and solutions in countries throughout the world. Escalation in regional conflicts, including the Russian invasion of Ukraine, which resulted in economic sanctions, and the risk of increased tensions between China and Taiwan, could limit or prohibit our ability to transfer certain technologies, to sell our products and solutions, and could result in closure of facilities in sanctioned countries, such as our decision to discontinue operations in Russia. In addition, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions; inflation, which has resulted in increases in the cost of manufacturing products and solutions, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders; increased risk of cybersecurity attacks; and market instability, which could adversely impact our financial results.

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

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Rule 10b5-1 Trading plans

During the three months ended July 31, 2023, the following directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(c) of Regulation S-K:

During the three months ended July 31, 2023, there were no terminations of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement.”

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.