filings.toolsItem 1. Condensed Consolidated Financial Statements (Unaudited)
103K characters. Original on sec.gov · Markdown
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | $ | 1,099 | $ | 1,116 | $ | 3,321 | $ | 3,218 | |||||||||||||||
| Services and other | 283 | 260 | 832 | 759 | |||||||||||||||||||
| Total revenue | 1,382 | 1,376 | 4,153 | 3,977 | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products | 391 | 408 | 1,180 | 1,168 | |||||||||||||||||||
| Cost of services and other | 95 | 91 | 285 | 269 | |||||||||||||||||||
| Total costs | 486 | 499 | 1,465 | 1,437 | |||||||||||||||||||
| Research and development | 215 | 206 | 664 | 626 | |||||||||||||||||||
| Selling, general and administrative | 319 | 317 | 994 | 962 | |||||||||||||||||||
| Other operating expense (income), net | (3) | (3) | (11) | (3) | |||||||||||||||||||
| Total costs and expenses | 1,017 | 1,019 | 3,112 | 3,022 | |||||||||||||||||||
| Income from operations | 365 | 357 | 1,041 | 955 | |||||||||||||||||||
| Interest income | 29 | 4 | 70 | 6 | |||||||||||||||||||
| Interest expense | (19) | (20) | (58) | (59) | |||||||||||||||||||
| Other income (expense), net | 14 | 5 | 28 | 15 | |||||||||||||||||||
| Income before taxes | 389 | 346 | 1,081 | 917 | |||||||||||||||||||
| Provision for income taxes | 101 | 8 | 250 | 92 | |||||||||||||||||||
| Net income | $ | 288 | $ | 338 | $ | 831 | $ | 825 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 1.62 | $ | 1.89 | $ | 4.66 | $ | 4.56 | |||||||||||||||
| Diluted | $ | 1.61 | $ | 1.87 | $ | 4.63 | $ | 4.52 | |||||||||||||||
| Weighted average shares used in computing net income per share: | |||||||||||||||||||||||
| Basic | 178 | 179 | 178 | 181 | |||||||||||||||||||
| Diluted | 179 | 181 | 179 | 182 |
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 288 | $ | 338 | $ | 831 | $ | 825 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Gain (loss) on derivative instruments, net of tax benefit (expense) of $(1), $3, $5 and $(7) | 2 | (11) | (18) | 29 | |||||||||||||||||||
| Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of $1, zero, $1 and zero | — | (1) | (3) | (3) | |||||||||||||||||||
| Foreign currency translation, net of tax benefit (expense) of zero | (9) | (20) | 61 | (106) | |||||||||||||||||||
| Net defined benefit pension cost and post retirement plan costs: | |||||||||||||||||||||||
| Change in net actuarial loss, net of tax expense of $1, $3, $3 and $7 | 4 | 6 | 12 | 22 | |||||||||||||||||||
| Other comprehensive income (loss) | (3) | (26) | 52 | (58) | |||||||||||||||||||
| Total comprehensive income | $ | 285 | $ | 312 | $ | 883 | $ | 767 |
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, 2023 | October 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,572 | $ | 2,042 | |||||||
| Accounts receivable, net | 893 | 905 | |||||||||
| Inventory | 975 | 858 | |||||||||
| Other current assets | 462 | 429 | |||||||||
| Total current assets | 4,902 | 4,234 | |||||||||
| Property, plant and equipment, net | 754 | 690 | |||||||||
| Operating lease right-of-use assets | 222 | 220 | |||||||||
| Goodwill | 1,655 | 1,582 | |||||||||
| Other intangible assets, net | 175 | 189 | |||||||||
| Long-term investments | 96 | 62 | |||||||||
| Long-term deferred tax assets | 656 | 667 | |||||||||
| Other assets | 366 | 454 | |||||||||
| Total assets | $ | 8,826 | $ | 8,098 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 289 | $ | 348 | |||||||
| Employee compensation and benefits | 264 | 333 | |||||||||
| Deferred revenue | 518 | 495 | |||||||||
| Income and other taxes payable | 81 | 96 | |||||||||
| Operating lease liabilities | 42 | 39 | |||||||||
| Other accrued liabilities | 144 | 96 | |||||||||
| Total current liabilities | 1,338 | 1,407 | |||||||||
| Long-term debt | 1,794 | 1,793 | |||||||||
| Retirement and post-retirement benefits | 62 | 58 | |||||||||
| Long-term deferred revenue | 229 | 197 | |||||||||
| Long-term operating lease liabilities | 186 | 186 | |||||||||
| Other long-term liabilities | 320 | 296 | |||||||||
| Total liabilities | 3,929 | 3,937 | |||||||||
| 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; 200 million shares at July 31, 2023 and 199 million shares at October 31, 2022 issued | 2 | 2 | |||||||||
| Treasury stock at cost; 22.2 million shares at July 31, 2023 and 20.5 million shares at October 31, 2022 | (2,550) | (2,274) | |||||||||
| Additional paid-in-capital | 2,462 | 2,333 | |||||||||
| Retained earnings | 5,385 | 4,554 | |||||||||
| Accumulated other comprehensive loss | (402) | (454) | |||||||||
| Total stockholders' equity | 4,897 | 4,161 | |||||||||
| Total liabilities and equity | $ | 8,826 | $ | 8,098 |
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, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 831 | $ | 825 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 90 | 88 | |||||||||
| Amortization | 72 | 80 | |||||||||
| Share-based compensation | 110 | 102 | |||||||||
| Deferred tax expense (benefit) | 10 | 19 | |||||||||
| Excess and obsolete inventory-related charges | 19 | 18 | |||||||||
| Unrealized loss (gain) on equity and other investments | (16) | 21 | |||||||||
| Other non-cash expense (income), net | 3 | 9 | |||||||||
| Changes in assets and liabilities, net of effects of businesses acquired: | |||||||||||
| Accounts receivable | 32 | (166) | |||||||||
| Inventory | (126) | (88) | |||||||||
| Accounts payable | (54) | 41 | |||||||||
| Employee compensation and benefits | (87) | (81) | |||||||||
| Deferred revenue | 41 | 69 | |||||||||
| Income taxes payable | (28) | (59) | |||||||||
| Retirement and post-retirement benefits | (7) | (21) | |||||||||
| Interest rate swap agreement termination proceeds | 107 | — | |||||||||
| Prepaid assets | (33) | (97) | |||||||||
| Other assets and liabilities | 66 | (14) | |||||||||
| Net cash provided by operating activities | 1,030 | 746 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Investments in property, plant and equipment | (158) | (127) | |||||||||
| Acquisition of businesses and intangible assets, net of cash acquired | (85) | (33) | |||||||||
| Purchase of investments | (7) | (30) | |||||||||
| Net cash used in investing activities | (250) | (190) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock under employee stock plans | 67 | 63 | |||||||||
| Payment of taxes related to net share settlement of equity awards | (49) | (74) | |||||||||
| Treasury stock repurchases | (276) | (723) | |||||||||
| Other financing activities | (1) | — | |||||||||
| Net cash used in financing activities | (259) | (734) | |||||||||
| Effect of exchange rate movements | 10 | (27) | |||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 531 | (205) | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 2,057 | 2,068 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 2,588 | $ | 1,863 | |||||||
| Supplemental cash flow information: | |||||||||||
| Interest payments | $ | 37 | $ | 37 | |||||||
| Income tax paid, net | $ | 268 | $ | 157 | |||||||
| Investments in property, plant and equipment included in accounts payable | $ | 23 | $ | 23 |
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, 2023 | 199,398 | $ | 2 | $ | 2,404 | (21,247) | $ | (2,399) | $ | 5,097 | $ | (399) | $ | 4,705 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 288 | — | 288 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | (3) | (3) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 350 | — | 34 | — | — | — | — | 34 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | (2) | — | — | — | — | (2) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 26 | — | — | — | — | 26 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (929) | (151) | — | — | (151) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | 199,748 | $ | 2 | $ | 2,462 | (22,176) | $ | (2,550) | $ | 5,385 | $ | (402) | $ | 4,897 | |||||||||||||||||||||||||||||||||
| Balance as of October 31, 2022 | 198,569 | $ | 2 | $ | 2,333 | (20,536) | $ | (2,274) | $ | 4,554 | $ | (454) | $ | 4,161 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 831 | — | 831 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 52 | 52 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1,179 | — | 67 | — | — | — | — | 67 | |||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | (49) | — | — | — | — | (49) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 111 | — | — | — | — | 111 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (1,640) | (276) | — | — | (276) | |||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | 199,748 | $ | 2 | $ | 2,462 | (22,176) | $ | (2,550) | $ | 5,385 | $ | (402) | $ | 4,897 | |||||||||||||||||||||||||||||||||
| 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 |
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 customers' 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, 2023 and October 31, 2022, results of operations for the three and nine months ended July 31, 2023 and 2022, and cash flows for the nine months ended July 31, 2023 and 2022.
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. 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, 2022.
Reclassifications. Beginning in fiscal year 2023, to align the presentation of revenue with the manner in which management reviews such information, the presentation of "products" and "services and other" revenue and "costs and expenses" in the condensed consolidated statement of operations were reclassified to move revenue and costs and expenses primarily related to bundled licenses and technical support services from "products" to "services and other." This resulted in reclassification of $24 million and $64 million, respectively, from "products" revenue to "services and other" revenue for the three and nine months ended July 31, 2022, and $2 million and $7 million, respectively, from "cost of products" to "cost of services and other" for the three and nine months ended July 31, 2022 to conform to the current presentation. This change had no impact on reported total revenue, income from operations and net income in our condensed consolidated statement of operations.
New Accounting Pronouncements. 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 Electronic Industrial Solutions Group ("EISG").
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | 446 | $ | 110 | $ | 556 | $ | 468 | $ | 94 | $ | 562 | |||||||||||||||||||||||
| Europe | 139 | 104 | 243 | 121 | 86 | 207 | |||||||||||||||||||||||||||||
| Asia Pacific | 333 | 250 | 583 | 381 | 226 | 607 | |||||||||||||||||||||||||||||
| Total revenue | $ | 918 | $ | 464 | $ | 1,382 | $ | 970 | $ | 406 | $ | 1,376 | |||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | 307 | $ | — | $ | 307 | $ | 275 | $ | — | $ | 275 | |||||||||||||||||||||||
| Commercial Communications | 611 | — | 611 | 695 | — | 695 | |||||||||||||||||||||||||||||
| Electronic Industrial | — | 464 | 464 | — | 406 | 406 | |||||||||||||||||||||||||||||
| Total revenue | $ | 918 | $ | 464 | $ | 1,382 | $ | 970 | $ | 406 | $ | 1,376 | |||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 749 | $ | 395 | $ | 1,144 | $ | 807 | $ | 349 | $ | 1,156 | |||||||||||||||||||||||
| Revenue recognized over time | 169 | 69 | 238 | 163 | 57 | 220 | |||||||||||||||||||||||||||||
| Total revenue | $ | 918 | $ | 464 | $ | 1,382 | $ | 970 | $ | 406 | $ | 1,376 |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | 1,322 | $ | 312 | $ | 1,634 | $ | 1,340 | $ | 268 | $ | 1,608 | |||||||||||||||||||||||
| Europe | 414 | 315 | 729 | 395 | 256 | 651 | |||||||||||||||||||||||||||||
| Asia Pacific | 1,058 | 732 | 1,790 | 1,076 | 642 | 1,718 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,794 | $ | 1,359 | $ | 4,153 | $ | 2,811 | $ | 1,166 | $ | 3,977 | |||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | 927 | $ | — | $ | 927 | $ | 860 | $ | — | $ | 860 | |||||||||||||||||||||||
| Commercial Communications | 1,867 | — | 1,867 | 1,951 | — | 1,951 | |||||||||||||||||||||||||||||
| Electronic Industrial | — | 1,359 | 1,359 | — | 1,166 | 1,166 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,794 | $ | 1,359 | $ | 4,153 | $ | 2,811 | $ | 1,166 | $ | 3,977 | |||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | 2,301 | $ | 1,165 | $ | 3,466 | $ | 2,342 | $ | 1,006 | $ | 3,348 | |||||||||||||||||||||||
| Revenue recognized over time | 493 | 194 | 687 | 469 | 160 | 629 | |||||||||||||||||||||||||||||
| Total revenue | $ | 2,794 | $ | 1,359 | $ | 4,153 | $ | 2,811 | $ | 1,166 | $ | 3,977 |
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 upfront 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 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 $68 million and $88 million as of July 31, 2023 and October 31, 2022, 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 $31 million and $38 million as of July 31, 2023 and October 31, 2022, 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 $13 million and $50 million for the three and nine months ended July 31, 2023, respectively, and $19 million and $64 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 products are shipped or 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, | |||||
| 2023 | |||||
| (in millions) | |||||
| Balance at October 31, 2022 | $ | 692 | |||
| Deferral of revenue billed in current period, net of recognition | 467 | ||||
| Deferred revenue arising out of acquisitions | 4 | ||||
| Revenue recognized that was deferred as of the beginning of the period | (427) | ||||
| Foreign currency translation impact | 11 | ||||
| Balance at July 31, 2023 | $ | 747 |
Of the $427 million of revenue recognized in the nine months ended July 31, 2023 that was deferred as of the beginning of the period, approximately $94 million was recognized in the three months ended July 31, 2023.
Remaining Performance Obligations
Our remaining performance obligations, excluding contracts that have an original expected duration of one year or less, was approximately $576 million as of July 31, 2023, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. As of July 31, 2023, we expect to fulfill 15 percent of these remaining performance obligations during the remainder of 2023, 45 percent during 2024, and 40 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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cost of products and services | $ | 4 | $ | 5 | $ | 20 | $ | 19 | |||||||||||||||
| Research and development | 8 | 6 | 31 | 22 | |||||||||||||||||||
| Selling, general and administrative | 15 | 15 | 60 | 62 | |||||||||||||||||||
| Total share-based compensation expense | $ | 27 | $ | 26 | $ | 111 | $ | 103 |
Share-based compensation capitalized within inventory was $2 million and zero at July 31, 2023 and July 31, 2022, respectively.
4. INCOME TAXES
The following table provides income tax details:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| in millions, except percentages | |||||||||||||||||||||||
| Income before taxes | $ | 389 | $ | 346 | $ | 1,081 | $ | 917 | |||||||||||||||
| Provision for income taxes | $ | 101 | $ | 8 | $ | 250 | $ | 92 | |||||||||||||||
| Effective tax rate | 25.8 | % | 2.3 | % | 23.1 | % | 10.0 | % |
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 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. The impact of the tax incentives decreased the income tax provision by $73 million and $63 million for the nine months ended July 31, 2023 and 2022, 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.
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| in millions, except per-share amounts | |||||||||||||||||||||||
| Net income | $ | 288 | $ | 338 | $ | 831 | $ | 825 | |||||||||||||||
| Basic weighted-average shares | 178 | 179 | 178 | 181 | |||||||||||||||||||
| Potential common shares | 1 | 2 | 1 | 1 | |||||||||||||||||||
| Diluted weighted-average shares | 179 | 181 | 179 | 182 | |||||||||||||||||||
| Net income per share - basic | $ | 1.62 | $ | 1.89 | $ | 4.66 | $ | 4.56 | |||||||||||||||
| Net income per share - diluted | $ | 1.61 | $ | 1.87 | $ | 4.63 | $ | 4.52 | |||||||||||||||
Diluted shares outstanding primarily include the dilutive effect of non-vested RSUs and in-the-money options. 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. Anti-dilutive shares excluded from the calculation of diluted earnings per share were not material for the three and nine months ended July 31, 2023 and 2022.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balance as of July 31, 2023 and October 31, 2022 and the activity for the nine months ended July 31, 2023 for each of our reportable operating segments were as follows:
| CSG | EISG | Total | |||||||||||||||
| (in millions) | |||||||||||||||||
| Goodwill at October 31, 2022 | $ | 1,022 | $ | 560 | $ | 1,582 | |||||||||||
| Foreign currency translation impact | 10 | 6 | 16 | ||||||||||||||
| Goodwill arising from acquisitions | 36 | 21 | 57 | ||||||||||||||
| Goodwill at July 31, 2023 | $ | 1,068 | $ | 587 | $ | 1,655 |
There were no impairments for the three and nine months ended July 31, 2023 and 2022. As of July 31, 2023 and October 31, 2022, accumulated impairment losses on goodwill was $709 million.
Other intangible assets as of July 31, 2023 and October 31, 2022 consisted of the following:
| July 31, 2023 | October 31, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Developed technology | $ | 1,033 | $ | 943 | $ | 90 | $ | 992 | $ | 914 | $ | 78 | |||||||||||||||||||||||
| Backlog | 19 | 17 | 2 | 17 | 17 | — | |||||||||||||||||||||||||||||
| Trademark/Tradename | 36 | 32 | 4 | 36 | 31 | 5 | |||||||||||||||||||||||||||||
| Customer relationships | 407 | 328 | 79 | 393 | 287 | 106 | |||||||||||||||||||||||||||||
| Total | $ | 1,495 | $ | 1,320 | $ | 175 | $ | 1,438 | $ | 1,249 | $ | 189 | |||||||||||||||||||||||
During the nine months ended July 31, 2023, we acquired Cliosoft, Inc. ("Cliosoft") for approximately $85 million, net of $15 million cash acquired. Cliosoft's data and intellectual property management tools enhance our portfolio of electronic design automation solutions. Based on a preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed, we recognized additions to goodwill and other intangible assets of $57 million and $56 million, respectively. The identified intangible assets primarily consist of developed technology of $41 million, customer relationships of $13 million and backlog of $2 million. The estimated useful lives of developed technology range between 6 to 7 years, customer relationships is 6 years, and backlog is 3 years. Goodwill for the acquisition was assigned to the CSG and EISG operating segments using the relative fair value allocation approach. We don't expect the goodwill recognized or any potential impairment charges in the future to be deductible for income tax purposes.
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, 2023.
During the nine months ended July 31, 2023, other intangible assets increased $1 million due to the impact of foreign exchange translation. Amortization of other intangible assets was $23 million and $71 million, respectively, for the three and nine months ended July 31, 2023. Amortization of other intangible assets was $26 million and $78 million, respectively, for the three and nine months ended July 31, 2022.
Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
| Amortization expense | |||||
| (in millions) | |||||
| 2023 (remainder) | $ | 19 | |||
| 2024 | $ | 53 | |||
| 2025 | $ | 35 | |||
| 2026 | $ | 25 | |||
| 2027 | $ | 17 | |||
| Thereafter | $ | 26 |
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, 2023 and October 31, 2022 were as follows:
| Fair Value Measurements at | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 1,968 | $ | 1,968 | $ | — | $ | — | $ | — | $ | 1,338 | $ | 1,338 | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Derivative instruments (foreign exchange contracts) | 15 | — | 15 | — | — | 21 | — | 21 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative instruments (interest rate swap contracts) | — | — | — | — | — | 133 | — | 133 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity investments | 69 | 69 | — | — | — | 50 | 50 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other investments | 27 | — | — | — | 27 | 12 | — | — | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 2,079 | $ | 2,037 | $ | 15 | $ | — | $ | 27 | $ | 1,554 | $ | 1,388 | $ | 154 | $ | — | $ | 12 | |||||||||||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative instruments (foreign exchange contracts) | $ | 9 | $ | — | $ | 9 | $ | — | $ | — | $ | 12 | $ | — | $ | 12 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Long-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred compensation liability | 28 | — | 28 | — | — | 22 | — | 22 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | 37 | $ | — | $ | 37 | $ | — | $ | — | $ | 34 | $ | — | $ | 34 | $ | — | $ | — |
During the nine months ended July 31, 2023, we terminated forward-starting interest rate swap agreements, resulting in a deferred gain of $107 million recognized in accumulated other comprehensive income (loss) that will be amortized to interest expense over the term of the anticipated debt. See Note 8, "Derivatives," for additional information.
During the nine months ended July 31, 2023, we made a cost-method investment of $7 million classified as "other investments" in the table above. Net realized gain (loss) on sale of our equity and other investments was zero for both the three and nine months ended July 31, 2023 and 2022. Net unrealized gains on our equity and other investments were $13 million and $20 million for the three and nine months ended July 31, 2023, respectively. Net unrealized losses on our equity and other investments were $8 million and $24 million for the three and nine months ended July 31, 2022, respectively.
Our money market funds and equity investments with readily determinable fair values are measured at fair value using quoted market prices and, therefore, are classified within Level 1 of the fair value hierarchy. Equity or fixed income investments without readily determinable fair values that are measured at cost adjusted for observable changes in price or impairments and convertible notes are not categorized in the fair value hierarchy and are presented as "Other Investments" in the table above. Our deferred compensation liability is classified as Level 2 because the inputs used in the calculations are observable, although the values are not directly based on quoted market prices. Our derivative financial instruments are classified within Level 2 as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.
Equity investments, including securities that are earmarked to pay the deferred compensation liability, and the deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss).
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 2020, we entered into forward-starting interest rate swap agreements with an aggregate notional amount of $600 million associated with future interest payments on anticipated debt issuances through fiscal year 2024. We designated these derivative instruments as a cash flow hedge. During the nine months ended July 31, 2023, we terminated the interest rate swap agreements, resulting in a deferred gain of $107 million recognized in accumulated other comprehensive income (loss) to be amortized to interest expense over the term of the anticipated debt.
Non-designated Hedges
Additionally, we periodically enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. During the three and nine months ended July 31, 2023, we entered into foreign exchange forward contracts with an aggregate notional amount of 930 million euros to mitigate the currency exchange risk associated with our intended acquisition of ESI Group SA ("ESI Group"). 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 aggregate number of open foreign exchange forward contracts designated as "cash flow hedges" and "not designated as hedging instruments" was 180 and 69, respectively, as of July 31, 2023. The aggregated notional amounts by currency and designation as of July 31, 2023 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 | $ | — | $ | 1,052 | ||||||||||||||||||||||
| British Pound | 7 | (34) | ||||||||||||||||||||||||
| Singapore Dollar | 34 | 10 | ||||||||||||||||||||||||
| Malaysian Ringgit | 119 | 15 | ||||||||||||||||||||||||
| Japanese Yen | (163) | (33) | ||||||||||||||||||||||||
| Other currencies | (34) | (38) | ||||||||||||||||||||||||
| Total | $ | (37) | $ | 972 |
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, 2023 and October 31, 2022 were as follows:
| Fair Values of Derivative Instruments | ||||||||||||||||||||||||||||||||
| Assets Derivatives | Liabilities Derivatives | |||||||||||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||||||||||
| Balance Sheet Location | July 31, 2023 | October 31, 2022 | Balance Sheet Location | July 31, 2023 | October 31, 2022 | |||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||||||||||
| Other current assets | $ | 12 | $ | 18 | Other accrued liabilities | $ | 4 | $ | 10 | |||||||||||||||||||||||
| Interest rate swap contracts: | ||||||||||||||||||||||||||||||||
| Other assets | — | 133 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||||||||||
| Other current assets | 3 | 3 | Other accrued liabilities | 5 | 2 | |||||||||||||||||||||||||||
| Total derivatives | $ | 15 | $ | 154 | $ | 9 | $ | 12 |
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||
| Cash Flow Hedges | |||||||||||||||||||||||
| Interest rate swap contracts: | |||||||||||||||||||||||
| Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | — | $ | (11) | $ | (26) | $ | 37 | |||||||||||||||
| Foreign exchange contracts: | |||||||||||||||||||||||
| Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | 3 | $ | (3) | $ | 3 | $ | (1) | |||||||||||||||
| Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings: | |||||||||||||||||||||||
| Cost of products | $ | 1 | $ | 5 | $ | 5 | $ | 9 | |||||||||||||||
| Selling, general and administrative | $ | — | $ | (4) | $ | (1) | $ | (6) | |||||||||||||||
| Gain (loss) excluded from effectiveness testing recognized in earnings based on amortization approach: | |||||||||||||||||||||||
| Cost of products | $ | 2 | $ | — | $ | 4 | $ | — | |||||||||||||||
| Selling, general and administrative | $ | — | $ | — | $ | — | $ | 1 | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
| Gain (loss) recognized in: | |||||||||||||||||||||||
| Other income (expense), net | $ | (2) | $ | — | $ | (2) | $ | 13 |
The estimated amount at July 31, 2023 expected to be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months is a gain of $7 million.
9. DEBT
The following table summarizes the components of our long-term debt:
| July 31, 2023 | October 31, 2022 | ||||||||||
| (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 $2 and $3) | 698 | 697 | |||||||||
| 2029 Senior Notes at 3.00% ($500 face amount less unamortized costs of $3 and $3) | 497 | 497 | |||||||||
| Total debt | $ | 1,794 | $ | 1,793 |
Short-Term Debt
Revolving Credit Facility
On July 30, 2021, we entered into an amended and restated credit agreement (the “Revolving Credit Facility”) which provides 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 during the nine months ended July 31, 2023
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, 2023 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. We were in compliance with the covenants of our senior notes during the nine months ended July 31, 2023.
As of July 31, 2023 and October 31, 2022, we had $41 million and $38 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 $1,722 million and $1,679 million as of July 31, 2023 and October 31, 2022, respectively.
10. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
For the three and nine months ended July 31, 2023 and 2022, 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, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Service cost—benefits earned during the period | $ | 4 | $ | 7 | $ | 2 | $ | 3 | $ | — | $ | 1 | |||||||||||||||||||||||
| Interest cost on benefit obligation | 10 | 6 | 8 | 4 | 2 | 1 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (13) | (16) | (13) | (15) | (3) | (4) | |||||||||||||||||||||||||||||
| Amortization of net actuarial loss | 2 | 3 | 3 | 6 | — | — | |||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | 3 | $ | — | $ | — | $ | (2) | $ | (1) | $ | (2) |
| Pensions | |||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plan | |||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Service cost—benefits earned during the period | $ | 12 | 19 | $ | 7 | $ | 10 | $ | — | $ | 1 | ||||||||||||||||||||||||
| Interest cost on benefit obligation | 28 | 18 | 23 | 12 | 6 | 3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (37) | (46) | (39) | (45) | (9) | (11) | |||||||||||||||||||||||||||||
| Amortization of net actuarial loss | 6 | 8 | 7 | 18 | 1 | 1 | |||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | 9 | $ | (1) | $ | (2) | $ | (5) | $ | (2) | $ | (6) |
We record the service cost component of net periodic benefit cost (benefit) in the same line item as other employee compensation costs. The non-service components of net periodic benefit cost (benefit), such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are recorded within "other income (expense), net" in the condensed consolidated statement of operations.
We did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan during the three and nine months ended July 31, 2023 and 2022. We contributed $2 million and $7 million to our non-U.S. defined benefit plans during the three and nine months ended July 31, 2023, respectively. 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, respectively.
For the remainder of 2023, 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, employee retirements, 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, 2023 | October 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 2,572 | $ | 2,042 | |||||||
| Restricted cash included in other assets | 16 | 15 | |||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 2,588 | $ | 2,057 | |||||||
Restricted cash relates primarily 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, 2023 | October 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Finished goods | $ | 379 | $ | 322 | |||||||
| Purchased parts and fabricated assemblies | 596 | 536 | |||||||||
| Total inventory | $ | 975 | $ | 858 |
The increase in inventory for the nine months ended July 31, 2023 was primarily due to incremental stock to assure supply and demo.
Leases
The following table summarizes the components of our lease cost:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| July 31, | July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | (in millions) | ||||||||||||||||||||||
| Operating lease cost | $ | 14 | $ | 13 | $ | 40 | $ | 38 | |||||||||||||||
| Variable lease cost | $ | 5 | $ | 4 | $ | 15 | $ | 12 |
Supplemental information related to our operating leases was as follows:
| Nine Months Ended | |||||||||||
| July 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash payment for operating leases | $ | 40 | $ | 36 | |||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 32 | $ | 40 |
As of July 31, 2023, we have additional operating leases, primarily for real estate, that have not yet commenced of $17 million. These operating leases will commence in the remainder of 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, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Beginning balance | $ | 32 | $ | 34 | |||||||
| Accruals for warranties, including change in estimates | 23 | 16 | |||||||||
| Settlements made during the period | (21) | (18) | |||||||||
| Ending balance | $ | 34 | $ | 32 | |||||||
| Accruals for warranties due within one year | $ | 20 | $ | 19 | |||||||
| Accruals for warranties due after one year | 14 | 13 | |||||||||
| Ending balance | $ | 34 | $ | 32 |
Other current assets
| July 31, 2023 | October 31, 2022 | ||||||||||
| (in millions) | |||||||||||
| Prepaid assets | $ | 325 | $ | 280 | |||||||
| Other current assets | 137 | 149 | |||||||||
| Total other current assets | $ | 462 | $ | 429 |
Prepaid assets include deposits paid in advance to contract manufacturers of $232 million and $199 million as of July 31, 2023 and October 31, 2022, respectively.
12. COMMITMENTS AND CONTINGENCIES
Commitments
During the nine months ended July 31, 2023, there were no material changes to the purchase commitments as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
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 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 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 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. 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, 2023, we repurchased 1,640,236 shares of common stock for $276 million. For the nine months ended July 31, 2022, we repurchased 4,646,427 shares of common stock for $723 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, 2023 and 2022 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, 2023 | $ | (115) | $ | (365) | $ | (6) | $ | 87 | $ | (399) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (9) | — | — | 3 | (6) | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 5 | — | (1) | 4 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (1) | — | — | (1) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | (9) | 4 | — | 2 | (3) | |||||||||||||||||||||||||||
| As of July 31, 2023 | $ | (124) | $ | (361) | $ | (6) | $ | 89 | $ | (402) | ||||||||||||||||||||||
| As of October 31, 2022 | $ | (185) | $ | (373) | $ | (6) | $ | 110 | $ | (454) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 61 | — | — | (23) | 38 | |||||||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive gain (loss) | — | 15 | — | (4) | 11 | |||||||||||||||||||||||||||
| Tax benefit (expense) | — | (3) | — | 6 | 3 | |||||||||||||||||||||||||||
| Other comprehensive income (loss) | 61 | 12 | — | (21) | 52 | |||||||||||||||||||||||||||
| As of July 31, 2023 | $ | (124) | $ | (361) | $ | (6) | $ | 89 | $ | (402) | ||||||||||||||||||||||
| 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) |
Reclassifications out of accumulated other comprehensive loss into earnings for the three and nine months ended July 31, 2023 and 2022 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, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivatives | $ | 1 | $ | 5 | $ | 5 | $ | 9 | Cost of products | |||||||||||||||||||||||
| — | (4) | (1) | (6) | Selling, general and administrative | ||||||||||||||||||||||||||||
| (1) | — | (1) | — | Benefit (provision) for income tax | ||||||||||||||||||||||||||||
| — | 1 | 3 | 3 | Net of income tax | ||||||||||||||||||||||||||||
| Net defined benefit pension cost and post-retirement plan costs: | ||||||||||||||||||||||||||||||||
| Net actuarial loss | (5) | (9) | (15) | (29) | Other income (expense), net | |||||||||||||||||||||||||||
| 1 | 3 | 3 | 7 | Benefit (provision) for income tax | ||||||||||||||||||||||||||||
| (4) | (6) | (12) | (22) | Net of income tax | ||||||||||||||||||||||||||||
| Total reclassifications for the period | $ | (4) | $ | (5) | $ | (9) | $ | (19) |
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, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 918 | $ | 464 | $ | 1,382 | $ | 970 | $ | 406 | $ | 1,376 | |||||||||||||||||||||||
| Segment income from operations | $ | 276 | $ | 157 | $ | 433 | $ | 288 | $ | 127 | $ | 415 |
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| July 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Revenue | $ | 2,794 | $ | 1,359 | $ | 4,153 | $ | 2,811 | $ | 1,166 | $ | 3,977 | |||||||||||||||||||||||
| Segment income from operations | $ | 811 | $ | 454 | $ | 1,265 | $ | 796 | $ | 359 | $ | 1,155 |
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, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Total reportable operating segments' income from operations | $ | 433 | $ | 415 | $ | 1,265 | $ | 1,155 | |||||||||||||||
| Share-based compensation | (27) | (26) | (111) | (103) | |||||||||||||||||||
| Amortization of acquisition-related balances | (23) | (26) | (71) | (78) | |||||||||||||||||||
| Acquisition and integration costs | (6) | (2) | (11) | (7) | |||||||||||||||||||
| Restructuring and others | (12) | (4) | (31) | (12) | |||||||||||||||||||
| Income from operations, as reported | 365 | 357 | 1,041 | 955 | |||||||||||||||||||
| Interest income | 29 | 4 | 70 | 6 | |||||||||||||||||||
| Interest expense | (19) | (20) | (58) | (59) | |||||||||||||||||||
| Other income (expense), net | 14 | 5 | 28 | 15 | |||||||||||||||||||
| Income before taxes, as reported | $ | 389 | $ | 346 | $ | 1,081 | $ | 917 |
Previous: Cover and table of contents · Next: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)