Form 10-Q Keysight Technologies, For: Apr 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2024
OR
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-36334
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| (State or other jurisdiction of | (IRS employer | |||||||
| incorporation or organization) | Identification no.) | |||||||
| (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 | ||||||
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.
| ☒ | 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 May 28, 2024 was 174,539,238 .
TABLE OF CONTENTS
| Page Number | |||||||||||
2
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 | Six Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | $ | $ | $ | $ | |||||||||||||||||||
| Services and other | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of products | |||||||||||||||||||||||
| Cost of services and other | |||||||||||||||||||||||
| Total costs | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Other operating expense (income), net | ( | ( | ( | ( | |||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net | |||||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares used in computing net income per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
Gain (loss) on derivative instruments, net of tax benefit (expense) of $( | ( | ||||||||||||||||||||||
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of $ | ( | ( | ( | ( | |||||||||||||||||||
Foreign currency translation, net of tax benefit (expense) of | ( | ( | ( | ||||||||||||||||||||
| Net defined benefit pension cost and post-retirement plan costs: | |||||||||||||||||||||||
Change in net actuarial loss, net of tax expense of $ | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share data)
(Unaudited)
| April 30, 2024 | October 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Long-term investments | |||||||||||
| Long-term deferred tax assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Employee compensation and benefits | |||||||||||
| Deferred revenue | |||||||||||
| Income and other taxes payable | |||||||||||
| Operating lease liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Retirement and post-retirement benefits | |||||||||||
| Long-term deferred revenue | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock; $ | |||||||||||
Common stock; $ | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Additional paid-in-capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
| Six Months Ended | |||||||||||
| April 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Share-based compensation | |||||||||||
| Deferred tax expense (benefit) | ( | ( | |||||||||
| Excess and obsolete inventory-related charges | |||||||||||
| Other non-cash expense (income), net | ( | ( | |||||||||
| Changes in assets and liabilities, net of effects of businesses acquired: | |||||||||||
| Accounts receivable | |||||||||||
| Inventory | ( | ( | |||||||||
| Accounts payable | ( | ( | |||||||||
| Employee compensation and benefits | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Income taxes payable | ( | ( | |||||||||
| Interest rate swap agreement termination proceeds | |||||||||||
| Prepaid assets | ( | ( | |||||||||
| Other assets and liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Investments in property, plant and equipment | ( | ( | |||||||||
| Acquisition of businesses and intangible assets, net of cash acquired | ( | ( | |||||||||
| Other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock under employee stock plans | |||||||||||
| Payment of taxes related to net share settlement of equity awards | ( | ( | |||||||||
| Acquisition of non-controlling interests | ( | ||||||||||
| Treasury stock repurchases | ( | ( | |||||||||
| Repayment of debt | ( | ||||||||||
| Other financing activities | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate movements | |||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
| Supplemental cash flow information: | |||||||||||
| Interest payments | $ | $ | |||||||||
| Income tax paid, net | $ | $ | |||||||||
| Investments in property, plant and equipment included in accounts payable | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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 | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2024 | $ | $ | ( | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2024 | $ | $ | ( | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| ESI Group acquisition | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of non-controlling interests | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2024 | $ | $ | ( | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of January 31, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ( | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Taxes related to net share settlement of equity awards | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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 global innovator in the computing, communications and electronics market, committed to advancing our customers’ business success by helping them solve critical challenges in the development and commercialization of their products and services. Our mission, "accelerating innovation to connect and secure the world," speaks to the value we provide our customers in a world of ever-increasing technological complexity. We deliver this value through a broad range of design and test solutions that address the critical challenges our customers face in bringing their innovations to market faster.
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 April 30, 2024 and October 31, 2023, results of operations for the three and six months ended April 30, 2024 and 2023, and cash flows for the six months ended April 30, 2024 and 2023.
Principles of consolidation. The condensed consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All significant inter-company transactions have been eliminated. The condensed consolidated financial statements also reflect the impact of non-controlling interests. Non-controlling interests do not have a significant impact on the condensed consolidated results of operations; therefore, net income attributable to non-controlling interests for the six months ended April 30, 2024 of $4 million is not presented separately and is included in "other income (expense), net" in the condensed consolidated statements of operations.
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.
Acquisition of ESI Group SA. In the first quarter of fiscal 2024, we acquired all of the outstanding common stock of ESI Group SA ("ESI Group") for $935 million, net of cash acquired, using existing cash. See Note 2, "Acquisitions," for further information of the acquisition of ESI Group.
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, 2023.
New Accounting Pronouncements. Amendments to GAAP that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption.
2. ACQUISITIONS
Acquisition of ESI Group SA
On November 3, 2023 , we acquired 50.6 % of the share capital of ESI Group SA ("ESI Group") for $512 million, using existing cash. During January 2024, we completed the acquisition of the remaining share capital of ESI Group for $458 million, using existing cash. The company entered into put/call agreements valued at $7 million for certain ESI Group equity awards, subject to a holding period that may extend beyond the explicit vesting period, for the right to receive a cash payment equal to the public tender offer consideration of 155 euros per share. On January 26, 2024, ESI Group was delisted from Euronext Paris. For the three and six months ended April 30, 2024, ESI Group's net revenue was $26 million and $94 million, respectively. For the three and six months ended April 30, 2024, ESI Group's net loss attributable to Keysight shareholders was $22 million and $20 million, respectively.
8
The ESI Group acquisition was accounted for in accordance with the authoritative accounting guidance. The acquired assets and assumed liabilities were recorded by Keysight at their estimated fair values. Keysight determined the estimated fair values with the assistance of valuations performed by third party specialists, discounted cash flow analysis, and estimates made by management. The acquisition of ESI Group expands our application layer portfolio with simulation capabilities that are critical to accelerate innovation in multiple end markets. These factors, among others, contributed to a purchase price in excess of the estimated fair value of ESI Group's net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.
Goodwill was assigned to the Communications Solutions Group ("CSG") and the Electronic Industrial Solutions Group ("EISG") reportable segments, based on the expected benefits and synergies that are likely to be realized from the ESI Group acquisition. We do not expect the goodwill recognized or any potential impairment charges in the future to be deductible for income tax purposes.
A portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, a deferred tax liability of approximately $98 million was established primarily for the future amortization of these intangibles and is included in "other long-term liabilities" in the table below.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date:
| November 3, 2023 | |||||
| (in millions) | |||||
| Cash and cash equivalents | $ | ||||
| Short-term investments | |||||
| Accounts receivable | |||||
| Other current assets | |||||
| Property, plant and equipment | |||||
| Operating lease right-of-use assets | |||||
| Goodwill | |||||
| Other intangible assets | |||||
| Other assets | |||||
| Total assets acquired | |||||
| Accounts payable | ( | ||||
| Employee compensation and benefits | ( | ||||
| Deferred revenue | ( | ||||
| Income and other taxes payable | ( | ||||
| Operating lease liabilities | ( | ||||
| Other accrued liabilities | ( | ||||
| Debt | ( | ||||
| Retirement and post-retirement benefits | ( | ||||
| Long-term operating lease liabilities | ( | ||||
| Other long-term liabilities | ( | ||||
| Net assets acquired | $ | ||||
The fair values of cash and cash equivalents, short-term investments, accounts receivable, other current assets, accounts payable, employee compensation and benefits, and deferred revenue were generally determined using historical carrying values given the short-term nature of these assets and liabilities. The fair value for intangible assets was determined with the input from third-party valuation specialists. The fair values of property, plant and equipment and certain other liabilities were determined internally using historical carrying values and estimates made by management. In connection with the acquisition and determination of the fair values of acquired assets and assumed liabilities, the company is in the process of obtaining additional information to refine its initial fair value estimates related to income taxes and intangible assets. During the second quarter of fiscal year 2024, the company decreased the deferred tax liability and goodwill by $8 million primarily for a timing difference in the recognition of research and development expenses. We expect to finalize this allocation in the third quarter of fiscal year 2024. As additional information becomes available, we may revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material.
9
Valuation of Intangible Assets Acquired
The components of intangible assets acquired in connection with the ESI Group acquisition were as follows:
| Estimated Fair Value | Estimated useful life | ||||||||||
| (in millions) | (in years) | ||||||||||
| Developed technology | $ | ||||||||||
| Customer relationships | |||||||||||
| Backlog | |||||||||||
| Trademarks/Tradename | |||||||||||
| Total amortizable intangible assets | |||||||||||
| In-process research and development | |||||||||||
| Total intangible assets | $ | ||||||||||
As noted above, the intangible assets were valued with input from valuation specialists using the income approach, which includes the discounted cash flow, with and without, and relief from royalty methods. The in-process research and development was valued using the multi-period excess earnings method under the income approach by discounting forecasted cash flows directly related to the products expecting to result from the projects, net of returns on contributory assets. A discount rate of 12 % was used to value the research and development projects to reflect the additional risks inherent in the acquired projects. The primary in-process projects acquired relate to next generation products which will be released in the near future. Total costs to complete for all ESI Group in-process research and development were estimated at approximately $7 million as of the close date.
Acquisition and integration costs directly related to the ESI Group acquisition are recorded in selling, general and administrative expenses and other income (expense), net, and were $7 million and $21 million for the three and six months ended April 30, 2024, respectively. For the three and six months ended April 30, 2024, we incurred $1 million and $6 million, respectively, of acquisition-related compensation expense to redeem certain of ESI Group's outstanding unvested stock awards as of the date of the acquisition that were determined to relate to post-merger service periods.
The following represents pro forma operating results as if ESI Group had been included in the company's condensed consolidated statements of operations as of the beginning of fiscal 2023:
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| April 30, | April 30, | |||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||
| in millions, except per-share amounts | ||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||
| Net income per share - Basic | $ | $ | $ | $ | ||||||||||||||||
| Net income per share - Diluted | $ | $ | $ | $ | ||||||||||||||||
The unaudited pro forma financial information for the three and six months ended April 30, 2024 and 2023 combines the historical results of Keysight and ESI Group for the three and six months ended April 30, 2024 and 2023, assuming that the companies were combined as of November 1, 2022 and includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets and tax-related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2023.
Acquisition of Riscure Holding B.V.
On February 21, 2024 , we acquired all the outstanding share capital of Riscure Holding B.V. ("Riscure") for $78 million, net of cash acquired, expanding our automated security assessment capabilities and solutions for semiconductors, embedded systems, and connected devices. We recognized goodwill and other intangible assets of $52 million and $35 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed.
10
3. 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, CSG and EISG.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| April 30, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial Communications | |||||||||||||||||||||||||||||||||||
| Electronic Industrial | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| April 30, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| CSG | EISG | Total | CSG | EISG | Total | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Region | |||||||||||||||||||||||||||||||||||
| Americas | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| End Market | |||||||||||||||||||||||||||||||||||
| Aerospace, Defense & Government | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial Communications | |||||||||||||||||||||||||||||||||||
| Electronic Industrial | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Timing of Revenue Recognition | |||||||||||||||||||||||||||||||||||
| Revenue recognized at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Revenue recognized over time | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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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 the repair and calibration contracts, extended warranties, technical support for hardware and software, certain software subscription and Software as a Service ("SaaS") product offerings, and professional services. Technical support for software and when-and-if available software updates and upgrades are sold either together with our software licenses and software subscriptions, including SaaS, or separately as part of our customer support programs.
Additionally, we provide custom solutions that include combinations of hardware, software, software subscriptions, installation, professional services, and other support services, and revenue may be recognized either up front on delivery or over time depending upon the terms of the contract.
Contract Balances
Contract assets
Contract assets consist of unbilled receivables and are recorded when revenue is recognized in advance of scheduled billings to our customers. These amounts are primarily related to solutions and support arrangements when transfer of control has occurred but we have not yet invoiced. The contract assets balance was $75 58
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 $38 million and $43 million as of April 30, 2024 and October 31, 2023, respectively, and are included in “other current assets” and “other assets” in the condensed consolidated balance sheet. The amortization expense associated with these capitalized costs was $14 million and $30 million for the three and six months ended April 30, 2024, respectively, and $18 million and $37 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:
| Six Months Ended | |||||
| April 30, 2024 | |||||
| (in millions) | |||||
| Balance at October 31, 2023 | $ | ||||
| Deferral of revenue billed in current period, net of recognition | |||||
| Deferred revenue arising out of acquisitions | |||||
| Revenue recognized that was deferred as of the beginning of the period | ( | ||||
| Foreign currency translation impact | |||||
| Balance at April 30, 2024 | $ | ||||
Of the $370 million of revenue recognized in the six months ended April 30, 2024 that was deferred as of the beginning of the period, approximately $146 million was recognized in the three months ended April 30, 2024.
Remaining Performance Obligations
Our remaining performance obligations, excluding contracts that have an original expected duration of one year or less, was approximately $580 million as of April 30, 2024, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. As of April 30, 2024, we expect to fulfill 30 percent of these remaining performance obligations during the remainder of 2024 , 44 percent during 2025 , and 26 percent thereafter.
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4. 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 the condensed consolidated statement of operations was as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Cost of products and services | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
For the three and six months ended April 30, 2024, the total share-based compensation expense includes $1 million and $6 million, respectively, of ESI Group acquisition-related compensation to redeem certain outstanding unvested stock awards as of the date of the acquisition that were determined to relate to post-merger service periods. Share-based compensation capitalized within inventory was $2
5. INCOME TAXES
The following table provides income tax details:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| in millions, except percentages | |||||||||||||||||||||||
| Income before taxes | $ | $ | $ | $ | |||||||||||||||||||
| Provision for income taxes | $ | $ | $ | $ | |||||||||||||||||||
| Effective tax rate | % | % | % | % | |||||||||||||||||||
The tax expense for the three and six months ended April 30, 2024 was lower compared to the same periods last year primarily due to a decrease in income before taxes. The decrease in income before taxes in jurisdictions with tax rates lower than the U.S. statutory rate, without a proportional decline in the U.S. taxes on non-U.S. earnings, resulted in an increase in the overall effective tax rate for the three and six months ended April 30, 2024 as compared to the same periods last year.
The income tax expense for the three and six months ended April 30, 2024 included a net discrete benefit of $1 million and net discrete expense of $1 million, respectively. The income tax expense for the three and six months ended April 30, 2023 included a net discrete expense of $3 million and $2 million, respectively.
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, 2018 through the current tax year. For certain non-U.S. entities, the tax years remain open, at most, back to the year 2008.
The company was audited in Malaysia 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, 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
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company disputed this assessment and filed an appeal with the Court of Appeal in Malaysia. The Court of Appeal’s decision was rendered in Keysight’s favor on May 24, 2024.
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.
6. NET INCOME PER SHARE
The following table presents the calculation of basic and diluted net income per share:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| April 30, | April 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| in millions, except per-share amounts | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted-average shares | |||||||||||||||||||||||
| Potential common shares | |||||||||||||||||||||||
| Diluted weighted-average shares | |||||||||||||||||||||||
| Net income per share - basic | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share - diluted | $ | $ | $ | $ | |||||||||||||||||||
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balance as of April 30, 2024 and October 31, 2023 and the activity for the six months ended April 30, 2024 for each of our reportable operating segments were as follows:
| CSG | EISG | Total | |||||||||||||||
| (in millions) | |||||||||||||||||
| Goodwill at October 31, 2023 | $ | $ | $ | ||||||||||||||
| Foreign currency translation impact | ( | ( | ( | ||||||||||||||
| Goodwill arising from acquisitions | |||||||||||||||||
| Goodwill at April 30, 2024 | $ | $ | $ | ||||||||||||||
There were no 709
Other intangible assets as of April 30, 2024 and October 31, 2023 consisted of the following:
| April 30, 2024 | October 31, 2023 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Developed technology | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Backlog | |||||||||||||||||||||||||||||||||||
| Trademark/Tradename | |||||||||||||||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||||||||||||||
| Total amortizable intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| In-Process R&D | — | — | |||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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During the six months ended April 30, 2024, we recognized additions to goodwill and other intangible assets of $648 million and $529 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed from the acquisition of ESI Group and other acquisition activity. See Note 2, "Acquisitions," for additional information. During the six months ended April 30, 2024, we transferred $7 million from in-process R&D to developed technology as projects were successfully completed.
Goodwill is assessed for impairment on a reporting unit basis at least annually in the fourth quarter of each year, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The company has not identified any triggering events that indicate an impairment of goodwill for the six months ended April 30, 2024.
During the six months ended April 30, 2024, foreign exchange translation had an immaterial impact on other intangible assets. Amortization of other intangible assets was $37 million and $75 million, respectively for the three and six months ended April 30, 2024. Amortization of other intangible assets was $25 million and $48 million, respectively, for the three and six months ended April 30, 2023.
Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
| Amortization expense | |||||
| (in millions) | |||||
| 2024 (remainder) | $ | ||||
| 2025 | $ | ||||
| 2026 | $ | ||||
| 2027 | $ | ||||
| 2028 | $ | ||||
| 2029 | $ | ||||
| Thereafter | $ | ||||
8. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
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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 April 30, 2024 and October 31, 2023 were as follows:
| Fair Value Measurements at | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| April 30, 2024 | October 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Other | Total | Level 1 | Level 2 | Level 3 | Other | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||