Keysight Technologies, Inc. [KEYS] Filings

10-Q 1 keys-20230731.htm 10-Q keys-20230731

Table of Contents

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

☐ 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)


Delaware		46-4254555
(State or other jurisdiction of		(IRS employer
incorporation or organization)		Identification no.)

1400 Fountaingrove Parkway
Santa Rosa	California	95403
(Address of principal executive offices)		(Zip Code)

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

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	KEYS	New York Stock Exchange

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.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

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

TABLE OF CONTENTS


			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
		Condensed Consolidated Statement of Operations	3
		Condensed Consolidated Statement of Comprehensive Income	4
		Condensed Consolidated Balance Sheet	5
		Condensed Consolidated Statement of Cash Flows	6
		Condensed Consolidated Statement of Equity	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
	Item 4.	Controls and Procedures	33
Part II.	Other Information		33
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 5 .	Other I nformation	48
	Item 6.	Exhibits	49
Signatures			50

Table of Contents

PART I. FINANCIAL INFORMATION

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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").

Table of Contents


	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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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

Table of Contents

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).

Table of Contents

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

Table of Contents

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

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

Other accrued liabilities

Interest rate swap contracts: