KEYSIGHT TECHNOLOGIES, INC. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, earnings from our foreign subsidiaries, remediation activities, new solution and service introductions, the ability of our solutions to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our completed acquisitions and other transactions, our transition to lower-cost regions, the existence of political or economic instability, impacts of geopolitical tension and conflict in regions outside of theU.S. , including the war betweenRussia andUkraine and the risk of increased tensions betweenChina andTaiwan , the impacts of increased trade tension and tightening of export control regulations, the impact of compliance with theAugust 3, 2021 Consent Agreement with theDirectorate of Defense Trade Controls ,Bureau of Political-Military Affairs ,Department of State , the impact of new and ongoing litigation, inflationary pressures, continued impacts to the supply chain, impacts related to endemic and pandemic conditions, impacts related to net zero emissions commitments, the impact of volatile weather caused by environmental conditions such as climate change, increases in attrition and our ability to retain key personnel, and our estimated or anticipated future results of operations, which involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including but not limited to those risks and uncertainties discussed in Part II Item 1A and elsewhere in this Annual Report on Form 10-K.
Overview and Executive Summary
Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated inDelaware onDecember 6, 2013 , is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product development lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.
Our fiscal year end is
Inflation, supply chain disruptions and the challenging geopolitical and macro-economic environment
Our global operations have been affected by many headwinds, including inflationary pressures, ongoing global supply chain disruptions, increased geopolitical tensions, including the war betweenRussia andUkraine , increased trade restrictions, financial market volatility, currency movements, and the pandemic. These headwinds, specifically the supply chain disruptions, have adversely impacted our ability to procure certain components, which in some cases has impacted our ability to manufacture products, causing delays in delivery of our solutions to our customers and higher material procurement costs. We used a number of strategies to effectively navigate supply chain challenges, including product redesign, alternate sourcing, and increased supplier and customer engagement. These, along with the strength of our broad portfolio and global application of the Keysight Leadership Model, enables us to deliver consistent value to our customers.
For discussion of risks related to potential impacts of supply chain, geopolitical and macro-economic challenges on our operations, business results and financial condition, see "Item 1A. Risk Factors."
InFebruary 2022 , theU.S. imposed economic sanctions and other restrictions onRussia following its invasion ofUkraine . As a result, after an initial suspension of operations inRussia , we permanently discontinued our Russian operations and are exitingRussia . Our business inRussia accounted for approximately 1 percent of total revenue for 2021. In 2022, we recorded pre-tax expenses of$13 million , including asset impairment charges of$7 million and other liquidation-related expenses, including employee severance related to our exit ofRussia . 37 -------------------------------------------------------------------------------- Table of Contents Years endedOctober 31, 2022 , 2021 and 2020 Orders of$5,984 million for 2022 increased 12 percent when compared to 2021. Foreign currency movements had an unfavorable impact of 3 percentage points on order growth for 2022 as compared to 2021. Orders grew across all regions, including double-digit growth inAsia Pacific . Total orders for 2021 were$5,356 million , an increase of 18 percent when compared to 2020. Foreign currency movements and acquisitions each contributed 1 percentage point to the order growth for 2021 when compared to 2020. Orders grew double-digits across all regions. Revenue of$5,420 million for 2022 increased 10 percent when compared to 2021. Foreign currency movements had an unfavorable impact of 2 percentage points on revenue growth for 2022 as compared to 2021. Revenue for both theCommunications Solutions Group and theElectronic Industrial Solutions Group grew as compared to 2021, driven by growth across all regions and markets. Revenue from theCommunications Solutions Group and theElectronic Industrial Solutions Group represented approximately 70 percent and 30 percent, respectively, of total revenue for 2022. Revenue of$4,941 million for 2021 increased 17 percent when compared to 2020. Foreign currency movements and acquisitions each contributed 1 percentage point to the revenue growth for 2021 as compared to 2020. Revenue for both theCommunications Solutions Group and theElectronic Industrial Solutions Group grew as compared to 2020, driven by strong demand across all the regions and markets. Revenue from theCommunications Solutions Group and theElectronic Industrial Solutions Group represented approximately 71 percent and 29 percent, respectively, of total revenue for 2021. Net income was$1,124 million in 2022 compared to net income of$894 million and$627 million in 2021 and 2020, respectively. The increase in net income for 2022 when compared to 2021 was primarily driven by higher revenue volume, lower amortization of acquisition-related balances and lower variable people-related costs, partially offset by higher material costs and higher selling, general and administrative, R&D and income tax expenses. The increase in net income for 2021 when compared to 2020 was primarily driven by higher revenue volume, lower amortization of acquisition-related balances and lower income tax expense, partially offset by an increase in variable people-related costs, higher R&D investments, lower operating income due to a one-time prior-period gain related to an insurance settlement, a loss on a partial settlement of ourNetherlands defined benefit plan and the incremental costs of acquired businesses. In 2022, 2021 and 2020, we generated operating cash flows of$1,144 million ,$1,322 million and$1,016 million , respectively.
Outlook
Our first-to-market solutions strategy enables customers to develop new
technologies and accelerate innovation and provides a platform for long-term
growth. Our customers are expected to continue to make R&D investments in
certain next-generation technologies, such as 5G/6G, new mobility technologies,
industrial internet of things ("IoT") and defense modernization. In the midst of
an uncertain economic environment, we continue to closely monitor the macro
indicators related to inflation, trade, tariffs, monetary and fiscal policies,
endemic and pandemic conditions, and the related global supply chain challenges,
increased trade restrictions and increasing geopolitical tension in regions
outside of the U.S. , including the risk of increased tensions between China and
Taiwan . We remain confident in our long-term secular market growth trends and
the strength of our operating model.
Currency Exchange Rate Exposure
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our consolidated statement of operations. We experience some fluctuations within individual lines of the consolidated balance sheet and consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our cash flow hedging program is designed to hedge short-term currency movements based on a rolling period of up to twelve months. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact theU.S. dollar cost of the transaction. 38 -------------------------------------------------------------------------------- Table of Contents Results from Operations - Years endedOctober 31, 2022 , 2021 and 2020
A summary of our results is as follows:
Year Ended October 31, 2022 over 2021 2021 over 2020
2022 2021 2020 % Change % Change
in millions, except margin data
Revenue$ 5,420 $ 4,941 $ 4,221 10% 17% Products$ 4,474 $ 4,050 $ 3,432 10% 18% Percentage of revenue 83 % 82 % 81 % 1 ppt 1 ppt Services and other$ 946 $ 891 $ 789 6% 13% Percentage of revenue 17 % 18 % 19 % (1) ppt (1) ppt Gross margin 63.7 % 62.1 % 60.0 % 2 ppts 2 ppts Products 63.9 % 62.4 % 60.0 % 2 ppts 2 ppts Services and other 62.7 % 60.7 % 60.0 % 2 ppts 1 ppt Research and development$ 841 $ 811 $ 715 4% 13% Percentage of revenue 16 % 16 % 17 % (1) ppt (1) ppt Selling, general and administrative$ 1,283 $ 1,195 $ 1,097 7% 9% Percentage of revenue 24 % 24 % 26 % - (2) ppts
Other operating expense (income), net
$ (44) (53)% (61)% Income from operations$ 1,334 $ 1,080 $ 765 24% 41% Operating margin 24.6 % 21.9 % 18.1 % 3 ppts 4 ppts Interest income$ 16 $ 3 $ 11 676% (81)% Interest expense$ (79) $ (79) $ (78) -% 1% Other income (expense), net$ 14 $ 6 $ 63 105% (90)% Income before taxes$ 1,285 $ 1,010 $ 761 27% 33% Provision for income taxes$ 161 $ 116 $ 134 39% (14)% Net income$ 1,124 $ 894 $ 627 26% 43% Revenue Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Returns are recorded in the period received from the customer and historically have not been material. The following table provides the percent change in revenue for 2022 and 2021 by geographic region and the impact of foreign currency movements as compared to the respective prior year. Year over Year % Change 2022 over 2021 2021 over 2020 Currency Impact Currency Impact Favorable Favorable Geographic Region actual (Unfavorable) actual (Unfavorable) Americas 10% - 22% - Europe 11% (5) ppts 18% 4 ppts Asia Pacific 9% (4) ppts 13% 1 ppt Total revenue 10% (2) ppts 17% 1 ppt
Gross Margin, Operating Margin and Income Before Taxes
Gross margin increased 2 percentage points in 2022 compared to 2021, primarily driven by lower amortization of acquisition-related balances, price increases, higher revenue volume and lower variable people-related costs, partially offset by higher material costs. Gross margin increased 2 percentage points in 2021 compared to 2020, primarily driven by lower amortization of acquisition-related balances and higher revenue volume, partially offset by higher variable people-related costs.
Excess and obsolete inventory charges were
Research and development expense increased 4 percent in 2022 compared to 2021,
primarily driven by investments in key growth opportunities in our end markets
and leading-edge technologies, as well as incremental costs of acquired
businesses,
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Table of Contents
partially offset by lower variable people-related costs. Research and
development expense increased 13 percent in 2021 compared to 2020, primarily
driven by greater investments in key growth opportunities in our end markets and
leading-edge technologies, an increase in variable people-related costs and
incremental costs of acquired businesses.
Selling, general and administrative expenses increased 7 percent in 2022
compared to 2021, primarily driven by increased investment in sales resources,
higher infrastructure-related, travel and marketing-related costs, as well as
incremental costs of acquired businesses, partially offset by lower variable
people-related costs. Selling, general and administrative expenses increased 9
percent in 2021 compared to 2020, primarily driven by increases in variable and
other people-related costs, infrastructure-related costs, and incremental costs
of acquired businesses, partially offset by reductions in travel and
marketing-related costs due to COVID-19 related disruptions.
Other operating expense (income), net was income of $8 million , $17 million and
$44 million for 2022, 2021 and 2020, respectively. The decrease in net other
operating income in 2022 was primarily driven by asset impairment charges
related to the discontinuance of our Russia operations. Other operating expense
(income), net for 2020 includes a one-time gain of $32 million on an insurance
settlement.
Operating margin increased 3 percentage points in 2022 when compared to 2021,
primarily driven by gross margin gains and lower operating expenses as a
percentage of sales. Operating margin increased 4 percentage points in 2021 when
compared to 2020, primarily driven by gross margin gains and lower operating
expenses as a percentage of sales.
Our headcount was approximately 15,000 at
Interest Income and Expense
Interest income for 2022, 2021 and 2020 was$16 million ,$3 million and$11 million , respectively, and primarily relates to interest earned on our cash balances. Interest expense for 2022, 2021 and 2020 was$79 million ,$79 million and$78 million , respectively, and primarily relates to interest on our senior notes. Other income (expense), net Other income (expense), net for 2022, 2021 and 2020 was income of$14 million ,$6 million and$63 million , respectively, and primarily includes net income related to our defined benefit and post-retirement benefit plans (interest cost, expected return on assets, amortization of net actuarial loss and prior service credits, and gains (losses) on settlements and curtailments) and the change in fair value of our equity investments. The increase in net other income for 2022 when compared to 2021 was primarily driven by$38 million lower amortization of net actuarial losses and a 2021 loss on a partial settlement of a non-U.S. pension plan, partially offset by a$31 million loss on our equity investments. The decrease in net other income for 2021 when compared to 2020 was driven by a$16 million loss on the partial settlement of ourNetherlands defined benefit plan and higher amortization of net actuarial losses. We also recognized gains from insurance proceeds of$9 million for the year endedOctober 31, 2020 . Income Taxes Year Ended October 31, 2022 2021 2020 (in millions) Provision for income taxes$ 161 $ 116 $ 134 Effective tax rate 13 % 11 % 18 % The effective tax rate was 13 percent, 11 percent, and 18 percent for 2022, 2021 and 2020, respectively. The tax rate in each of these years was lower than theU.S. statutory rate primarily due to the proportion of worldwide earnings that are taxed at lower statutory tax rates in non-U.S. jurisdictions, partially offset byU.S. tax imposed on earnings in non-U.S. jurisdictions. The increase in the effective tax rate from 2021 to 2022 was due to nonrecurring tax benefits recorded in 2021, partially offset by a decrease in 2022 taxes from changes in tax reserves primarily due to audit settlement and from a relative decrease inU.S. tax due on non-U.S. earnings. The 2022 tax expense also includes a decrease in tax expense resulting from an out-of-period adjustment to tax reserves for fiscal years 2019 through 2021 related to the potentialU.S. benefit associated with the future resolution of non-U.S. tax reserves. The 2022 decrease in tax expense was partially offset by an increase to tax expense resulting from an out-of-period adjustment related to corrections to the tax rate applied to non-US pension deferred tax balances. Neither of these out-of-period adjustments were material individually or in the aggregate. The 2021 significant nonrecurring tax benefits include the release of valuation allowance onNetherlands net operating losses in 2021 and a decrease 40 -------------------------------------------------------------------------------- Table of Contents due to the 2021 actual tax impact of acquired entity integration as compared to the estimate at acquisition based on the finalization of the integration plan. The decrease in the effective tax rate from 2020 to 2021 was due to a change in the jurisdictional mix of non-U.S. earnings, partially offset by an increase inU.S. taxes on non-U.S. earnings and the 2021 nonrecurring tax benefits described above. Keysight benefits from tax incentives in several jurisdictions, most significantly inSingapore andMalaysia , 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. TheSingapore tax incentive is due for renewal in 2024, and theMalaysia 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 income taxes by$81 million ,$70 million and$53 million in 2022, 2021 and 2020, respectively. The increase in tax benefit from 2021 to 2022 is primarily due to a change in the jurisdictional mix of non-U.S. earnings, which increased the earnings taxed at incentive tax rates in 2022. The calculation of our tax liabilities involves uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for allU.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the consolidated statements of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet. The open tax years for theU.S. federal income tax return and most state income tax returns are fromNovember 1, 2017 through the current tax year. For the majority of our foreign entities, the open tax years are fromNovember 1, 2017 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. Keysight's fiscal year 2018 U.S. federal income tax return was under examination by the Internal Revenue Service. The Tax Cuts and Jobs Act ("TCJA") was enacted inDecember 2017 and imposed a one-timeU.S. tax on foreign earnings not previously repatriated to theU.S. , known as the Transition Tax, which was reported in Keysight's fiscal year 2018 U.S. federal income tax return. As ofJune 2022 , the fiscal year 2018 U.S. federal income tax audit was effectively settled with no material assessments and no additional cash taxes paid. The company is being audited inMalaysia for fiscal year 2008. This tax year predates 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, includingMalaysia , any historical tax liability is the responsibility of Keysight. In the fourth quarter of fiscal year 2017, Keysight paid income taxes and penalties of$68 million on gains related to intellectual property rights. The company believes there are numerous defenses to the current assessment; the statute of limitations for the fiscal year 2008 inMalaysia was closed, and the income in question is exempt from tax inMalaysia . The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company. Our appeals to both the Special Commissioners of Income Tax and theHigh Court inMalaysia have been unsuccessful. We have filed a Notice of Appeal with theCourt of Appeal , and a hearing is currently scheduled for 2023. 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. A provision enacted in the TCJA requiringU.S. tax research and experimental expenditures to be capitalized and amortized over five years for research activities conducted in theU.S. and fifteen years for research activities conducted outside of theU.S. will be effective for Keysight beginningNovember 1, 2022 . If this provision is not deferred, the capitalization is expected to increaseU.S. taxable income and increase theU.S. federal Foreign-Derived Intangible Income tax deduction. As Keysight has elected to treat global intangible low-taxed income ("GILTI") as a period cost, the capitalization will also increase the provision for income taxes. OnAugust 16, 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 that includes changes to theU.S. corporate income tax system, including a fifteen percent minimum tax based on "adjusted financial statement income," which is effective for Keysight beginningNovember 1, 2023 and a one percent excise tax on repurchases of stock afterDecember 31, 2022 . We are continuing to evaluate the impact of these changes inU.S. tax law, as well as its application to our business. 41 -------------------------------------------------------------------------------- Table of Contents Segment Overview We have two reportable operating segments, theCommunications Solutions Group and theElectronic Industrial Solutions Group . The profitability of each of the segments is measured after excluding share-based compensation expense, amortization of acquisition-related balances, acquisition and integration costs, a 2020 gain on an insurance settlement related to northernCalifornia wildfires, restructuring costs, interest income, interest expense and other items.
Communications Solutions Group
The Communications Solutions Group serves customers spanning the worldwide commercial communications and aerospace, defense, and government end markets. The group's solutions consist of electronic design and test software, electronic measurement instruments, systems and related services. These solutions are used in the simulation, design, validation, manufacturing, installation, and optimization of electronic equipment and networks. Revenue Year Ended October 31, 2022 over 2021 2021 over 2020 2022 2021 2020 % Change % Change (in millions) Total revenue$ 3,803 $ 3,523 $ 3,132 8% 12%Communications Solutions Group revenue for 2022 increased 8 percent when compared to 2021. Foreign currency movements had an unfavorable impact of 2 percentage points on year-over-year revenue growth for 2022 as compared to 2021. Revenue grew across all regions and in both the commercial communications and the aerospace, defense and government markets. Investment continues to be strong to support new communications technologies like 5G, Open Radio Access Networks ("O-RAN"), 400G, 800G, 1.6Terabit networks, high-speed digital applications, spectrum operations, cybersecurity, space and satellite solutions; however, on-going supply chain constraints limited shipments and moderated revenue growth in 2022. Communications Solutions Group revenue for 2021 increased 12 percent when compared to 2020. Foreign currency movements and acquisitions each contributed 1 percentage point to revenue growth for 2021 when compared to 2020. Revenue grew in both the aerospace, defense and government and the commercial communications markets. Revenue grew across all regions driven by strength in theAmericas andEurope . Revenue from the commercial communications market represented approximately 69 percent of totalCommunications Solutions Group revenue in 2022 and increased 11 percent as compared to 2021. Revenue grew across all regions, driven by strong market demand across the communications ecosystem. Wireless 5G development and manufacturing of chipsets, components and devices, O-RAN, and high-speed data solutions to support data centers and the cloud drove growth. Revenue from the commercial communications market represented approximately 68 percent of totalCommunications Solutions Group revenue in 2021 and increased 8 percent as compared to 2020, with growth in theAmericas andEurope , partially offset by a decline inAsia Pacific . The 2021 revenue growth was driven by improved economic conditions across the communications ecosystem, partially offset by the impact ofChina trade restrictions. Revenue from the aerospace, defense and government market represented approximately 31 percent of totalCommunications Solutions Group revenue in 2022 and increased 3 percent as compared to 2021. The growth inAsia Pacific andEurope was partially offset by a decline in theAmericas . We continue to see investments in spectrum operations, cybersecurity, and satellites and space, as well as new commercial technologies like 5G and early 6G research applications. Revenue from the aerospace, defense and government market represented approximately 32 percent of totalCommunications Solutions Group revenue in 2021 and increased 23 percent as compared to 2020, with revenue growing across all regions. The strong revenue growth was driven by increased customer demand and continued investment in space, satellite, spectrum operations, and new commercial technologies like 5G and early 6G research applications. 42 -------------------------------------------------------------------------------- Table of Contents Gross Margin and Operating Margin
The following table provides
Year Ended October 31, 2022 over 2021 2021 over 2020
2022 2021 2020 % Change % Change
Total gross margin 66.5 % 65.3 % 65.2 % 1 ppt -
Operating margin 28.5 % 26.5 % 24.7 % 2 ppts 2 ppts
(in millions)
Research and development $ 606 $ 589 $ 530 3% 11%
Selling, general and administrative $ 848 $ 791 $ 749 7% 6%
Other operating expense (income), net $ (11) $ (12) $ (9) (15)% 34%
Income from operations $ 1,085 $ 932 $ 773 16% 20%
Gross margin for the Communications Solutions Group in 2022 increased 1
percentage point as compared to 2021, primarily driven by price increases,
higher revenue volume and lower variable people-related costs, partially offset
by higher material costs. Gross margin for the Communications Solutions Group in
2021 was flat as compared to 2020, as gains driven by higher revenue volume were
offset by higher variable people-related costs.
Research and development expense in 2022 increased 3 percent when compared to
2021, primarily driven by investments in key growth opportunities in our end
markets and leading-edge technologies, as well as incremental costs of acquired
businesses, partially offset by lower variable people-related costs. Research
and development expense in 2021 increased 11 percent when compared to 2020,
driven by greater investments in key growth opportunities in our end markets and
leading-edge technologies, higher variable people-related costs,
infrastructure-related costs and incremental costs of acquired businesses.
Selling, general and administrative expense in 2022 increased 7 percent when
compared to 2021, primarily driven by increased investment in sales resources,
higher infrastructure-related, marketing and travel-related costs, as well as
incremental costs of acquired businesses, partially offset by lower variable
people-related costs. Selling, general and administrative expense in 2021
increased 6 percent when compared to 2020, primarily driven by higher
infrastructure-related, selling and variable people-related costs.
Other operating expense (income), net, primarily includes property rental income
and was income of $11 million in 2022, $12 million in 2021 and $9 million in
2020.
Income from Operations
Income from operations for 2022 increased
Operating margin in 2022 increased 2 percentage points when compared to 2021, driven by gross margin gains and lower operating expenses as a percentage of sales. Operating margin in 2021 increased 2 percentage points when compared to 2020, driven by gross margin gains from higher revenue volume and lower operating expenses as a percentage of sales.
The Electronic Industrial Solutions Group provides test and measurement solutions and related services across a broad set of electronic industrial end markets, focusing on high-value applications in the automotive and energy industries and measurement solutions for consumer electronics, education, general electronics design and manufacturing, and semiconductor design and manufacturing. The group provides electronic measurement instruments, design and test software and systems, and related services used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment, as well as automated test software that uses artificial intelligence and machine learning to automate test creation and test execution. 43 -------------------------------------------------------------------------------- Table of Contents Revenue Year Ended October 31, 2022 over 2021 2021 over 2020 2022 2021 2020 % Change % Change (in millions) Total revenue$ 1,617 $ 1,418 $ 1,089 14% 30%Electronic Industrial Solutions Group revenue for 2022 increased 14 percent when compared to 2021. Foreign currency movements had an unfavorable impact of 3 percentage points on year-over-year revenue growth for 2022 as compared to 2021. The revenue increase was driven by continued investments in next-generation automotive and energy technologies, semiconductor measurement solutions, and industrial IoT. Revenue grew across all regions for 2022 as compared to 2021.Electronic Industrial Solutions Group revenue for 2021 increased 30 percent when compared to 2020. Foreign currency movements had a favorable impact of 1 percentage point on revenue. Revenue associated with acquisitions contributed 2 percentage points to revenue growth for 2021 when compared to 2020. The revenue increase was driven by growth in semiconductor measurement solutions, general electronics measurement and automotive and energy, led by ongoing investments in advanced semiconductor technology nodes, EV and AV technologies and capacity expansions to address demand. Revenue grew across all regions for 2021 as compared to 2020.
Gross Margin and Operating Margin
The following table providesElectronic Industrial Solutions Group margins, expenses and income from operations for 2022 versus 2021, and 2021 versus 2020. Year Ended October 31, 2022 over 2021 2021 over 2020 2022 2021 2020 % Change % Change Total gross margin 61.5 % 64.2 % 62.7 % (3) ppts 2 ppts Operating margin 31.0 % 31.3 % 27.1 % - 4 ppts (in millions) Research and development$ 207 $ 199 $ 167 4% 20% Selling, general and administrative$ 290 $ 272 $ 224 6% 21% Other operating expense (income), net$ (4) $ (5) $ (4) (17)% 20% Income from operations$ 501 $ 444 $ 296 13% 50% Gross margin in 2022 decreased 3 percentage points as compared to 2021, primarily driven by higher material costs, partially offset by higher revenue volume and price increases. Gross margin in 2021 increased 2 percentage points as compared to 2020, primarily driven by higher revenue volume and favorable mix. Research and development expense in 2022 increased 4 percent when compared to 2021, primarily driven by greater investments in key growth opportunities in our end markets and leading-edge technologies, partially offset by lower variable people-related costs. Research and development expense in 2021 increased 20 percent when compared to 2020, primarily driven by greater investments in key growth opportunities in our end markets and leading-edge technologies, incremental costs of an acquired business, and higher variable people-related costs. Selling, general and administrative expense in 2022 increased 6 percent when compared to 2021, primarily driven by higher infrastructure-related, marketing and travel-related costs, partially offset by lower variable people-related costs. Selling, general and administrative expense in 2021 increased 21 percent when compared to 2020, primarily due to incremental costs of an acquired business, higher selling costs, higher infrastructure-related costs and variable people-related costs. Other operating expense (income), net primarily includes property rental income and was income of$4 million ,$5 million and$4 million in 2022, 2021 and 2020, respectively. Income from Operations Income from operations for 2022 increased$57 million on a corresponding revenue increase of$199 million . Income from operations for 2021 increased$148 million on a corresponding revenue increase of$329 million . 44 -------------------------------------------------------------------------------- Table of Contents Operating margin in 2022 was flat when compared to 2021, primarily driven by lower operating expenses as a percentage of sales, partially offset by gross margin declines. Operating margin increased 4 percentage points in 2021 compared to 2020, primarily driven by gross margin gains from higher revenue volume and favorable mix and lower operating expenses as a percentage of sales.
Financial Condition
Liquidity and Capital Resources
Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Under certain circumstances, local government regulations may limit our ability to move cash balances to meet cash needs. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization.
Overview of Cash Flows
Our key cash flow activities were as follows:
Year Ended October 31,
2022 2021 2020
(in millions)
Net cash provided by operating activities $ 1,144 $ 1,322 $ 1,016
Net cash used in investing activities $ (251) $ (353) $ (442)
Net cash used in financing activities $ (861) $ (671) $ (413)
Operating Activities
Cash flows from operating activities can fluctuate significantly from period to period as working capital needs, the timing of payments for income taxes, variable pay, pension funding, and other items impact reported cash flows.
Net cash provided by operating activities decreased by
• Net income in 2022 increased$230 million as compared to 2021. Non-cash adjustments to net income were higher by$32 million , primarily due to a$60 million decrease in deferred tax benefits, a$31 million unrealized loss on investment in equity securities, a$22 million increase in share-based compensation expense and a$7 million impairment of assets, partially offset by a$70 million decrease in amortization, a$16 million lower pension settlement loss and a$2 million decrease from other miscellaneous non-cash activities. Net income in 2021 increased$267 million as compared to 2020. Non-cash adjustments to net income were lower by$54 million , primarily due to a$94 million increase in deferred tax benefits and a$46 million decrease in amortization, partially offset by a one-time prior-period gain of$32 million related to an insurance recovery of property, plant and equipment reflected as cash from investing activity, a$16 million loss on a partial settlement of ourNetherlands defined benefit plan, a$13 million increase in depreciation, a$11 million increase in share-based compensation expense, and a$14 million increase from other miscellaneous non-cash activities. • The aggregate of accounts receivable, inventory and accounts payable used net cash of$273 million during 2022, compared to net cash used of$112 million in 2021 and$31 million in 2020. The increase in aggregate net cash used in 2022 is primarily driven by higher revenue volume, net of collections, and an increase in inventory due to higher material procurement costs and incremental stock build-up to secure supply. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends on the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period. •Net cash used for retirement and post-retirement benefits was$19 million in 2022, compared to net cash provided of$7 million in 2021 and net cash used of$108 million in 2020. The company's contributions to ourU.S. Defined Benefit Plan were zero, zero and$100 million in 2022, 2021 and 2020, respectively. The company's contributions to our non-U.S. defined benefit plans were$7 million ,$8 million and$10 million in 2022, 2021 and 2020, respectively. We did not contribute to theKeysight Technologies, Inc. Health Plan for Retirees ("U.S. Post-Retirement Benefit Plan") in 2022, 2021 and 2020. 45 -------------------------------------------------------------------------------- Table of Contents •The aggregate other movements in assets and liabilities used net cash of$112 million during 2022, compared to net cash provided of$141 million in 2021 and$82 million in 2020. The difference between 2022 and 2021 cash flows is primarily due to higher prepaid inventory deposits driven by supply chain constraints, higher income tax payments, net of accruals, higher variable compensation and other payroll-related payments, net of accruals, higher prepaid expenses, and changes in deferred revenue. The difference between 2021 and 2020 cash flows is primarily due to higher variable compensation accruals, net of payments, and higher cash inflow from deferred revenue, partially offset by an increase in prepaid current assets as compared to the same period last year.
Investing Activities
Net cash changes in investing activities primarily relates to investments in property, plant and equipment and acquisitions of businesses to support our growth.
Net cash used in investing activities decreased by$102 million in 2022 as compared to 2021 and decreased by$89 million in 2021 as compared to 2020. Investments in property, plant and equipment increased$11 million as compared to 2021 and increased$57 million in 2021 as compared to 2020. The increase in capital spending in 2022 was driven by capital investments to increase the resiliency of our supply chains. In 2022, we used$251 million for investing activities, including$185 million for purchases of property, plant and equipment;$33 million , net of cash acquired, for acquisition activities; and$33 million for investments, including$30 million for purchase of an equity investment. In 2021, we used$353 million for investing activities, including$174 million for purchases of property, plant and equipment;$102 million , net of$11 million of cash acquired, for the acquisition ofSanjole Inc. ; and$76 million , net of cash acquired, for other acquisition activities. In 2020, we used$442 million for investing activities, including$117 million for purchases of property, plant and equipment;$319 million , net of$11 million of cash acquired, for the acquisition ofEggplant Topco Limited ("Eggplant") and$38 million , net of cash acquired, for other acquisition activities; partially offset by receipt of insurance proceeds of$32 million for property, plant and equipment damaged in the 2017 northernCalifornia wildfires.
Financing Activities
Net cash changes in financing activities primarily relate to proceeds from issuance of common stock under employee stock plans, tax payments related to net share settlement of equity awards and treasury stock repurchases.
Net cash used in financing activities increased by
In 2022, we used$861 million for financing activities, including$849 million of treasury stock repurchases and$74 million of tax payments related to net share settlement of equity awards, partially offset by$63 million of proceeds from issuance of common stock under employee stock plans. In 2021, we used$671 million for financing activities, including$673 million of treasury stock repurchases and$53 million of tax payments related to net share settlement of equity awards, partially offset by$59 million of proceeds from issuance of common stock under employee stock plans. In 2020, we used$413 million for financing activities, including$411 million of treasury stock repurchases and$53 million of tax payments related to net share settlement of equity awards and$7 million of payments on short-term debt, partially offset by$58 million of proceeds from issuance of common stock under employee stock plans.Treasury stock repurchases OnNovember 18, 2021 , our board of directors approved a stock repurchase program authorizing the purchase of up to$1,200 million of the company's common stock, replacing the previously approvedNovember 2020 program, under which$77 million remained. The stock repurchase program may be commenced, suspended or discontinued at any time at the company's discretion and does not have an expiration date. See "Issuer Purchases ofEquity Securities " under Part II Item 2 for additional information. 46 --------------------------------------------------------------------------------
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Debt
October 31,
2022 2021
(in millions)
Total debt (par value) $ 1,800 $ 1,800
Revolving credit facility $ 750 $ 750
On July 30, 2021 , we entered into a new credit agreement that amended and
restated our existing credit agreement dated February 15, 2017 in its entirety,
and provides for a $750 million five-year unsecured revolving credit facility
(the "Revolving Credit Facility") that will expire on July 30, 2026 and bears
interest at an annual rate of LIBOR + 1 percent along with a facility fee of
0.125 percent per annum. In addition, the new credit agreement permits the
company, subject to certain customary conditions, on one or more occasions to
request to increase the total commitments under the Revolving Credit Facility by
up to $250 million in the aggregate. We may use amounts borrowed under the
facility for general corporate purposes. As of October 31, 2022 and October 31,
2021 , we had no borrowings outstanding under the Revolving Credit Facility. We
were in compliance with the covenants of the Revolving Credit Facility during
the year ended October 31, 2022 . See note 11, "Debt" for additional information.
Cash and cash requirements
Cash
October 31,
2022 2021
(in millions)
Cash, cash equivalents and restricted cash
$ 371 $ 427 Non-U.S.$ 1,686 $ 1,641 Our cash and cash equivalents mainly consist of investments in institutional money market funds, short-term deposits held at major global financial institutions and similar short duration instruments with original maturities of three months or less. We continuously monitor the creditworthiness of the financial institutions and money market fund asset managers with whom we invest our funds. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. Most significant international locations have access to internal funding through an offshore cash pool for working capital needs. In addition, a few locations that are unable to access internal funding have access to temporary local overdraft and short-term working capital lines of credit.
Cash requirements
We have cash requirements to support working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. We generally intend to use available cash and funds generated from our operations to meet these cash requirements, but in the event that additional liquidity is required, we may also borrow under our revolving credit facility. The following table summarizes our short and long-term cash requirements as ofOctober 31, 2022 : Due within one Due later than one Total year year (in millions) Senior notes obligations$ 1,800 $ - $ 1,800 Interest payments on senior notes 304 75 229 Operating lease commitments 251 45 206 Commitments to contract manufacturers and suppliers 631 593 38 Other purchase commitments 55 55 - Other liabilities reflected on our consolidated balance sheet 1,547 996 551 Total$ 4,588 $ 1,764 $ 2,824
Senior notes obligations and interest payments on senior notes. We have contractual obligations for principal and interest payments on our senior notes. See note 11, "Debt" for additional information.
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Table of Contents Operating lease commitments. Commitments under operating leases primarily relates to leasehold properties. See Note 10, "Leases" for additional information.
Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. See note 14, "Commitments and contingencies." As ofOctober 31, 2022 , we had non-cancellable purchase commitments that aggregated to approximately$553 million , of which the majority is for less than one year.
Other purchase commitments. Other purchase commitments relate to contracts with professional services suppliers. See note 14, "Commitments and Contingencies."
Other liabilities. Other liabilities primarily includes contract liabilities, net pensions and post-retirement benefit obligations, employee compensation and benefits, net tax liabilities, standard warranties and other accrued liabilities. The timing of cash flows associated with these obligations is based upon management's estimates over the terms of these arrangements and is largely based upon historical experience. Of the tax liabilities included in the above table,$59 million relates to aU.S. transition tax liability and$136 million for uncertain tax positions. The remainingU.S. transition tax liability, which Keysight originally elected to pay over 8 years, is payable over the next 4 years and relates to a one-timeU.S. tax on those earnings that had not been previously repatriated to theU.S. With regard to the$136 million of long-term liabilities for uncertain tax positions, we are unable to accurately predict when these amounts will be realized or released. 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. See note 5 "Income taxes" for additional information.
In addition to the obligations noted above, as of
For the next twelve months, we do not expect to contribute to ourU.S. defined benefit plan andU.S. post-retirement benefit plan, and we expect to contribute$11 million to our non-U.S. defined benefit plans. The ultimate amounts we will contribute depend upon, among other things, legal requirements, underlying asset returns, the plan's funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors. See note 12, "Retirements plans and post-retirements benefits."
Additionally, we expect capital spending to be approximately
As ofOctober 31, 2022 , we believe our cash and cash equivalents, cash generated from operations, and our ability to access capital markets and credit lines will satisfy our cash needs for the foreseeable future both globally and domestically.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts reported in our 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 best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as ofOctober 31, 2022 . An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and other intangible assets, warranty, loss contingencies, restructuring and accounting for income taxes.
Revenue recognition. Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We primarily generate revenue from the sale of products (hardware and/or software), services, or a combination thereof. We enter into contracts that
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may involve multiple performance obligations, and we allocate the transaction
price between each performance obligation on the basis of relative standalone
selling price ("SSP"). We recognize revenue following the five-step model.
1.Identify the contract with a customer: Generally, we consider customer
purchase orders, which in some cases are governed by master sales or other
purchase agreements, to be the customer contract. All of the following criteria
must be met before we consider an agreement to qualify as a contract with a
customer under the revenue standard: (i) it must be approved by all parties;
(ii) each party's rights regarding the goods and services to be transferred can
be identified; (iii) the payment terms for the goods and services can be
identified; (iv) the agreement has commercial substance; and, (v) the customer
has the ability and intent to pay and collection of substantially all of the
consideration is probable. We exercise reasonable judgment to determine the
customer's ability and intent to pay, which is based upon various factors
including the customer's historical payment experience or credit and financial
information and credit risk management measures that we implement.
2.Identify the performance obligations in the contract: We assess whether each
promised good or service is distinct for the purpose of identifying the various
performance obligations in each contract. Promised goods and services are
considered distinct provided that: (i) the customer can benefit from the good or
service either on its own or together with other resources that are readily
available to the customer; and, (ii) our promise to transfer the good or service
to the customer is separately identifiable or distinct from other promises in
the contract.
3.Determine the transaction price: Transaction price reflects the amount of
consideration to which we expect to be entitled in exchange for transferring
goods or services. Our contracts may include terms that could cause variability
in the transaction price including rebates, rights of return, trade-in credits,
and discounts. Variable consideration is generally accounted for at the
portfolio level and estimated based on historical information.
4.Allocate the transaction price to performance obligations in the contract: If
the contract contains a single performance obligation, the entire transaction
price is allocated to that performance obligation. Many of our contracts include
multiple performance obligations with a combination of distinct products and
services, maintenance and support, professional services and/or training. For
contracts with multiple performance obligations, we allocate the total
transaction value to each distinct performance obligation based on relative SSP.
Judgment is required to determine the SSP for each distinct performance
obligation. The best evidence of SSP is the observable price of a good or
service when we sell that good or service separately under similar circumstances
to similar customers. Since most contracts contain multiple performance
obligations, we use information that may include market conditions and other
observable inputs to estimate SSP when we don't have standalone transactions.
5.Recognize revenue when (or as) performance obligations are satisfied: Revenue
is recognized at the point in time control is transferred to the customer. For
hardware sales, transfer of control to the customer typically occurs at the
point the product is shipped or delivered to the customer's designated location.
For software license sales transfer of control to the customer typically occurs
upon shipment, electronic delivery, or when the software is available for
download by the customer. For sales of implementation service and custom
solutions or in instances where products are sold along with essential
installation services, transfer of control occurs and revenue is typically
recognized upon customer acceptance. For fixed-price support and extended
warranty contracts, or certain software arrangements that provide customers with
a right to access over a discrete period, control is deemed to transfer over
time and revenue is recognized on a straight-line basis over the contract term
due to the stand-ready nature of the performance obligation. Revenue from
hardware repairs and calibration services outside of an extended warranty or
support contract is recognized at the time of completion of the related service.
For other professional services or time-based labor contracts, revenue is
recognized as we perform the services and the customers receive and/or consume
the benefits.
Inventory valuation. We assess the valuation of our inventory on a periodic
basis and make adjustments to the value for estimated excess and obsolete
inventory based upon estimates about future demand and actual usage. Such
estimates are difficult to make under most economic conditions. The excess
balance determined by this analysis becomes the basis for our excess inventory
charge. Our excess inventory review process includes analysis of sales
forecasts, managing product rollovers and working with manufacturing and sales
to maximize recovery of excess inventory. If actual market conditions are less
favorable than those projected by management, additional write-downs may be
required. If actual market conditions are more favorable than anticipated,
inventory previously written down may be sold to customers, resulting in lower
cost of sales and higher income from operations than expected in that period.
Share-based compensation. We account 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. Awards granted under the Keysight
Technologies, Inc. Long-Term Performance ("LTP") Program are based on a variety
of targets, such as total shareholder return ("TSR") or financial metrics such
as
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operating margin. The awards based on TSR were valued using a Monte Carlo
simulation model and those based on financial metrics were valued based on the
market price of Keysight's common stock on the date of grant. The compensation
cost for financial metrics-based performance awards reflect the cost of awards
that are probable to vest at the end of the performance period. The Monte Carlo
simulation fair value model requires the use of highly subjective and complex
assumptions, including the price volatility of the underlying stock. For
additional information on valuation assumptions, see Note 4, "Share-Based
Compensation." The estimated fair value of restricted stock awards is determined
based on the market price of Keysight's common stock on the date of grant. We
did not grant any option awards in 2022, 2021 and 2020.
Retirement and post-retirement benefit plan assumptions. Retirement and
post-retirement benefit plan costs are a significant cost of doing business.
They represent obligations that will ultimately be settled sometime in the
future and therefore are subject to estimation. Defined benefit plan obligations
are remeasured at least annually as of October 31 , based on the present value of
future benefit payments to reflect the future benefit costs over the employees'
average expected future service to Keysight based on the terms of the plans. To
estimate the present value of these future payments, we are required to make
assumptions using actuarial concepts within the framework of GAAP. The discount
rate is a critical assumption. Other important assumptions include expected
long-term return on plan assets, expected future salary increases, expected
future increases to benefit payments, expected retirement dates, employee
turnover, retiree mortality rates and investment portfolio composition. We
evaluate these assumptions at least annually. See Note 12, "Retirement Plans and
Post-Retirement Benefit Plans."
The discount rate is used to determine the present value of future benefit
payments at the measurement date, which is October 31 for both U.S. and non-U.S.
plans. The U.S. discount rates as of October 31, 2022 and 2021 were determined
based on the results of matching expected plan benefit payments with cash flows
from a hypothetically constructed bond portfolio. The non-U.S. discount rates as
of October 31, 2022 and 2021 were determined using spot rates along the yield
curve to calculate disaggregated discount rates. In addition, we used this
method to calculate two components of the periodic benefit cost: service cost
and interest cost. If we changed our discount rate by 1 percent, the impact
would be $7 million on U.S. net periodic benefit cost and $8 million on non-U.S.
net periodic benefit cost. Lower discount rates increase the present value of
the liability and subsequent year pension expense; higher discount rates
decrease the present value of the liability and subsequent year pension expense.
The company uses alternate methods of amortization, as allowed by the
authoritative guidance, that amortizes the actuarial gains and losses on a
consistent basis for the years presented. For U.S. plans, gains and losses are
amortized over the average future working lifetime. For most non-U.S. plans and
U.S. post-retirement benefit plans, gains and losses are amortized using a
separate layer for each year's gains and losses. The expected long-term return
on plan assets is estimated using current and expected asset allocations as well
as historical and expected returns. Plan assets are valued at fair value. If we
changed our estimated return on assets by 1 percent, the impact would be $10
million on U.S. net periodic benefit cost and $11 million on non-U.S. net
periodic benefit cost.
Goodwill and other intangible assets. We review goodwill for impairment annually
during our fourth fiscal quarter and whenever events or changes in circumstances
indicate the carrying value may not be recoverable. As defined in the
authoritative guidance, a reporting unit is an operating segment, or one level
below an operating segment. At the time of an acquisition, we assign goodwill to
the reporting unit that is expected to benefit from the synergies of the
combination.
Companies have the option to perform a qualitative assessment to determine
whether performing a quantitative test is necessary. If an entity believes, as a
result of its qualitative assessment, that it is more-likely-than-not that the
fair value of a reporting unit is less than its carrying amount, the
quantitative impairment test will be required. Otherwise, no further testing
will be required.
The quantitative impairment test involves a comparison of the estimated fair
value of a reporting unit to its carrying amount, including goodwill. We
determine the fair value of a reporting unit using the results derived using the
market approach, when available and appropriate, or the income approach, or a
combination of both. If multiple valuation methodologies are used, the results
are weighted accordingly. The income approach is estimated through the
discounted cash flow ("DCF") analysis. Determining fair value requires the
exercise of significant judgment, including judgments about appropriate discount
rates, revenue growth rates, and the amount and timing of expected future cash
flows. Discount rates are based on a weighted average cost of capital ("WACC"),
which represents the average rate a business must pay its providers of debt and
equity, plus a risk premium. The WACC used to test goodwill is derived from a
group of comparable companies. The cash flows employed in the DCF analysis are
derived from internal forecasts and external market forecasts. The market
approach estimates the fair value of the reporting unit by utilizing the market
comparable method, which is based on revenue and earnings multiples from
comparable companies. If the estimated fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not impaired. If the
carrying amount of a reporting unit exceeds its estimated fair value, then an
impairment charge is
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During the fourth quarter of 2022, we performed our annual impairment test of goodwill for all our reporting units using a qualitative approach. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of each reporting unit is greater than its respective carrying value. Other intangible assets consist primarily of developed technologies, proprietary know-how, trademarks, customer relationships, non-compete agreements, and backlog and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 12 years. We review other intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. We performed an impairment test of Eggplant's long-lived assets in 2021, which preceded the quantitative test of goodwill in accordance with the guidance, and concluded that no impairment charge was required. No impairments of purchased intangible assets were recorded during the years endedOctober 31, 2022 , 2021 and 2020. We review indefinite-lived intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. The authoritative accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the impairment testing guidance for goodwill. It allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The qualitative factors assist in determining whether it is more-likely-than-not that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. Our indefinite-lived intangible assets are in-process research and development ("IPR&D") intangible assets. In 2022, 2021 and 2020, we assessed impairment by performing a qualitative test. No material impairments of indefinite-lived intangible assets were recorded in 2022, 2021 and 2020. Warranty. Keysight 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.
We also sell extended warranties that provide warranty coverage beyond the standard warranty term. Revenue associated with extended warranties is deferred and recognized over the extended coverage period.
Loss Contingencies. As discussed in Note 13 and 14 to the consolidated financial
statements, we are, from time to time, subject to a variety of litigation and
similar contingent liabilities incidental to our business (or the business
operations of previously owned entities). We recognize a liability for any
contingency that is known or probable of occurrence and reasonably estimable.
These assessments require judgments concerning matters such as litigation
developments and outcomes, the anticipated outcome of negotiations, the number
of future claims and the cost of both pending and future claims. In addition,
because most contingencies are resolved over long periods of time, liabilities
may change in the future due to various factors. Changes in these factors could
materially impact our financial position or our results of operation.
Restructuring. The main component of our restructuring plan is related to
workforce reductions and site restructuring. Workforce reduction charges are
accrued when payment of benefits becomes probable and the amounts can be
estimated. If the amounts and timing of cash flows from restructuring activities
are significantly different from what we have estimated, the actual amount of
restructuring and other related charges could be materially different, either
higher or lower, than those we have recorded.
Accounting for income taxes. We must make certain estimates and judgments in
determining income tax expense for financial statement purposes. These estimates
and judgments occur in the calculation of tax benefits, credits and deductions,
and in the calculation of certain tax assets and liabilities that arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. Significant changes to these estimates may result
in an increase or decrease to our tax provision in a subsequent period.
Significant management judgment is also required in determining whether deferred
tax assets will be realized in full or in part. When it is more-likely-than-not
that all or some portion of specific deferred tax assets such as net operating
losses or foreign tax credit carryforwards will not be realized, a valuation
allowance must be established for the amount of the deferred tax assets that
cannot be realized. We consider all available positive and negative evidence on
a jurisdiction-by-jurisdiction
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basis when assessing whether it is more likely than not that deferred tax assets
are recoverable. We consider evidence such as our past operating results, the
existence of losses in recent years and our forecast of future taxable income.
At October 31, 2022 , the company maintains a valuation allowance mainly related
to net operating losses in Luxembourg and the U.K. , capital losses in the U.K. ,
and California research credits. We intend to maintain a valuation allowance in
these jurisdictions until sufficient positive evidence exists to support their
reversal.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax law and regulations in a multitude of
jurisdictions. Although the guidance on the accounting for uncertainty in income
taxes prescribes the use of a recognition and measurement model, the
determination of whether an uncertain tax position has met those thresholds will
continue to require significant judgment by management. In accordance with the
guidance on the accounting for uncertainty in income taxes, for all U.S. and
other tax jurisdictions, we recognize potential liabilities for anticipated tax
audit issues based on our estimate of whether, and the extent to which,
additional taxes and interest will be due. The ultimate resolution of tax
uncertainties may differ from what is currently estimated, which could result in
a material impact on income tax expense. If our estimate of income tax
liabilities proves to be less than the ultimate assessment, a further charge to
expense would be required. If events occur and the payment of these amounts
ultimately proves to be unnecessary, the reversal of the liabilities would
result in tax benefits being recognized in the period when we determine the
liabilities are no longer necessary. We include interest and penalties related
to unrecognized tax benefits within the provision for income taxes in the
consolidated statements of operations.
New Accounting Standards
See Note 1, "Overview and summary of significant accounting policies," to the consolidated financial statements for a description of new accounting pronouncements.
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