NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product development lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.
Basis of Presentation. We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with generally accepted accounting principles in the U.S. ("GAAP"). Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Management is responsible for the fair presentation of the accompanying consolidated financial statements, prepared in accordance with GAAP, and has full responsibility for their integrity and accuracy. In the opinion of management, the accompanying consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our consolidated balance sheet and our consolidated statement of operations, statement of comprehensive income, statement of cash flows and statement of equity.
Principles of consolidation. The consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All significant inter-company transactions have been eliminated.
Use of Estimates. The preparation of financial statements in accordance with GAAP 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 knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and our markets. 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 of October 31, 2021. 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 may involve multiple performance obligations, and we allocate the transaction price between each performance obligation on the basis of relative standalone selling price. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services
Product revenues are generated predominantly from the sale of various types of design and test software and hardware. Products consist of standalone software and hardware generally installed with software applications that are licensed on a perpetual and term basis. Our hardware products generally do not have any substantive acceptance terms that would otherwise preclude the transfer of control. Performance obligations related to our software licenses, including the license portion of our software subscriptions, grant the customer the right to use our software via electronic delivery.
Service revenues consist of repair and calibration services, extended warranties, technical support for hardware and software, when-and-if available software updates and upgrades, and professional services, including installation and implementation, consulting, and training. Services include both hardware and software services. Repair and calibration services for hardware products are sold both as per-incident customer services and as customer agreements to provide such services over the contractual period. Extended warranties are optional to the customer and provide warranty on hardware products for additional years beyond the standard one-year warranty. Technical support for software and when-and-if available software updates and upgrades are sold either together with our software licenses and software subscriptions, or separately as part of our customer support programs. These are considered stand-ready performance obligations where customers benefit from the services evenly throughout the license or service period. These performance obligations provide the customer access evenly over the contract period. Our professional services may be sold on a time and material basis (e.g., consulting) or on a fixed-fee basis (e.g., non-recurring engineering).
We also generate revenues from a combination of products and services ("custom solutions"), including combinations of hardware, software, software subscriptions, installation, professional services, and other support services. Custom solutions provide the customer with a combination of hardware, software and professional services to meet customers' unique specifications and are accounted for as one performance obligation.
For our contracts with customers, we account for individual performance obligations separately if they are distinct. Our standard payment terms are net 30 to 90 days, and we generally do not offer extended payment terms beyond one year. Our contracts typically contain various forms of variable consideration, including trade discounts, trade-in credits, rebates, and rights of return. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices ("SSPs") for a majority of our products and services are estimated based on our established pricing practices and maximize the use of observable inputs. An observable input is the price of the good or service when it is sold as a separate item in a similar circumstance and to a similar customer as in the contract for which SSPs are being determined. We have elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by Keysight from a customer (e.g., sales, use, value added, and some excise taxes). We have also elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.
Our typical performance obligations include the following:
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Performance obligation
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When performance obligation is typically satisfied
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When payment is typically due
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How standalone selling price is typically determined
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Product Revenues
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Hardware
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When customer obtains control of the product, typically at delivery (point in time)
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Within 30-90 days of shipment
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Estimated based on established pricing practices or observable based on standalone sales for certain hardware products
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Software licenses
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Upon electronic delivery of the software, and the applicable license period has begun (point in time)
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Within 30-90 days of the beginning of license period
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Estimated based on established pricing practices or observable based on standalone sales for certain software products
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Threat intelligence solutions
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Ratably over the subscription period (over time)
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Within 30-90 days of the beginning of subscription period
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Estimated based on established pricing practices
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Service Revenues
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Calibration contracts
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Ratably over the service contract period (over time)
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Within 30-90 days of the beginning of service contract period
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Estimated based on established pricing practices
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Repair and calibration (per- incident)
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As services are performed (point in time)
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Within 30-90 days of invoicing for services rendered
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Estimated based on established pricing practices
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Extended hardware warranty
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Ratably over the warranty period (over time)
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Within 30-90 days of invoicing
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Estimated based on established pricing practices or observable based on standalone sales of certain hardware warranty contracts
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Technical support and when-and-if-available software updates
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Ratably over the license service contract period (over time)
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Within 30-90 days of the beginning of license or service contract period
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Estimated based on established pricing practices or observable based on standalone sales for certain support contracts
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Professional services
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As services are performed based on measures of progress (over time) or at a point in time
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Within 30-90 days of invoicing for services rendered
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Estimated based on established pricing practices
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Custom Solutions
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Custom solutions (milestone-based)
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As milestones are achieved based on transfer of control to customer (over time)
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Within 30-90 days of milestone achievement
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Transaction price, as pricing is custom and can vary significantly from contract to contract
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Custom solutions (point in time)
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When customer obtains control of the solution, typically at delivery or customer acceptance, as defined by the contract (point in time)
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Within 30-90 days of delivery of solution
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Transaction price, as pricing is custom and can vary significantly from contract to contract
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Significant Judgments
Judgment is required to determine the standalone selling price for each distinct performance obligation. As most of our products and services are not sold on a standalone basis, we typically estimate the standalone selling price. In doing so, we consider our internal price list for each product and service, which reflects our desired profitability, based on an expected level of sales, and adjust for factors such as competition, customer relationship, discount provided in the contract, geographic location, and the products and services purchased in the arrangement. We use a range based on actual historical sales to determine whether the calculated standalone selling price for a product or service is a fair representation of the standalone selling price.
For capitalized contract costs, we use judgment in determining the capitalized amount and amortization period.
Our products are generally sold with a right of return and we may provide other credits, discounts, or incentives, which are accounted for as variable consideration at the portfolio level and estimated based on historical information. Returns, credits, and discounts are estimated at contract inception and updated at the end of each reporting period as additional information becomes available to the extent that it is probable a significant reversal of the cumulative amount of revenue recognized will not occur once the variability is subsequently resolved.
Shipping and handling costs. Our shipping and handling costs charged to customers are included in revenue, and the associated expense is recorded in cost of products for all periods presented.
Deferred revenue. We recognize contract liabilities in our consolidated balance sheet as deferred revenue, which represents the amount of service and software revenue deferred and recognized over the contractual period or as services are rendered and accepted by the customer. In addition, it includes the amount allocated to undelivered performance obligations.
Accounts receivable, net. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging of such receivables, among other factors. The allowance for doubtful accounts was approximately $4 million and $3 million as of October 31, 2021 and 2020, respectively. We do not have any off-balance-sheet credit exposure related to our customers.
Share-based compensation. We account for share-based awards made to our employees and directors, including restricted stock units ("RSUs"), employee stock purchases made under Keysight's employee stock purchase plan under Section 423(b) of the Internal Revenue Code ("ESPP"), employee stock option awards, and performance share awards under Keysight Technologies, Inc. Long-Term Performance ("the LTP") Program, using the estimated grant date fair value method of accounting. We recorded compensation expense for all share-based awards of $104 million in 2021, $93 million in 2020 and $82 million in 2019.
Inventory. Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based on estimates about future demand and actual usage. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales unit forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory.
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. See Note 13, "Supplemental financial information".
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. We accrue for probable losses from contingencies, including legal settlement costs, on an undiscounted basis when such costs are considered probable of being incurred and are reasonably estimable. We periodically evaluate available information, both internal and external, relative to such contingencies and adjust this accrual as necessary.
Taxes on income. Income tax expense is based on income or loss before taxes. Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are r ecognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
We account for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate due to new information. We classify the liability for unrecognized tax benefits as current to the extent that the company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax
positions are recognized in the provision for income taxes. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
Goodwill and other intangible assets. Goodwill is assessed for impairment on a reporting unit basis at least annually in the fourth quarter, as of September 30, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The impairment test compares the fair value of a reporting unit with its carrying amount, with an impairment charge recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value up to a maximum amount of the goodwill balance for the reporting unit. We determine fair values for each of the reporting units 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 appropriately. Valuations using the market approach are derived from metrics of publicly traded comparable companies. The selections of comparable businesses are based on the markets in which our reporting units operate, giving consideration to risk profiles, size, geography and diversity of products and services. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business.
As defined in the authoritative guidance, a reporting unit is an operating segment or one level below an operating segment. During the fourth quarter of 2021, we performed our annual impairment test for all our reporting units. Based on the results of our testing, the fair value of each of our reporting units exceeded the carrying value. There were no impairments of goodwill during the years ended October 31, 2021, 2020 and 2019. See Note 2, “Acquisitions,” and Note 7, “Goodwill and Other Intangible Assets,” for additional information about our goodwill and other intangible assets.
Other intangible assets consist primarily of developed technologies, proprietary know-how, trademarks, customer relationships, non-compete agreements, and acquired 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. No impairments of purchased intangible assets were recorded during the years ended October 31, 2021, 2020 and 2019.
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 2021, 2020 and 2019 we assessed impairment by performing a qualitative test and concluded that no material impairment of indefinite-lived intangible assets was required.
Advertising. Advertising costs are expensed as incurred and were $21 million in 2021, $24 million in 2020 and $22 million in 2019.
Research and development. Costs related to the research, design and development of our products are charged to research and development expense as they are incurred.
Investments. Investments with readily determinable fair values and trading securities are reported at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments. Gains or losses resulting from changes in fair value are recognized currently in earnings. The company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. There was no impairment recognized in 2021, 2020 and 2019.
Net income per share. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period excluding the dilutive effect of stock options and other employee stock plans. Diluted net income per share gives effect to all potentially dilutive common stock equivalents outstanding during the period. The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense, and the dilutive effect of in-the-money options and non-vested RSUs. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be used to repurchase hypothetical shares.
Cash, cash equivalents and short-term investments. We classify investments as cash equivalents if their original maturity or remaining maturity at the time of purchase is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.
As of October 31, 2021, approximately $1.6 billion of our cash, cash equivalents and restricted cash was held outside of the U.S. in our foreign subsidiaries. Our cash and cash equivalents mainly consist of investments in institutional money market funds, short-term deposits held at major global financial institutions, and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions in which 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.
We classify investments as short-term investments if their original maturities are greater than three months and their remaining maturities are one year or less.
Fair value of financial instruments. The carrying values of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the equity method or measurement alternative, the carrying value approximates estimated fair value. The fair value of our long-term debt, calculated from quoted prices that are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeded the carrying value less debt issuance costs by approximately $178 million and $236 million as of October 31, 2021 and 2020, respectively. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies, are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 8, "Fair Value Measurements," for additional information on the fair value of financial instruments.
Concentration of credit risk. Financial instruments that potentially subject us to significant concentration of credit risk include money market fund investments, time deposits and demand deposit balances. These investments are categorized as cash and cash equivalents and long-term investments. In addition, we have credit risk from derivative financial instruments used in hedging activities and accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis.
Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount.
Credit risk is mitigated through collateral, such as letters of credit, bank guarantees or payment terms like cash in advance. No single customer accounted for more than 10 percent of accounts receivable as of October 31, 2021 or 2020.
Derivative instruments. We are exposed to global foreign currency exchange rate risk in the normal course of business. We enter into foreign exchange hedging contracts, primarily forward contracts to manage financial exposures resulting from changes in foreign currency exchange rates. Foreign currency exposures include committed and anticipated revenue and expense transactions (cash flow exposure) and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary (balance sheet exposure). For cash flow hedges, contracts are designed at inception as hedges of the related foreign currency exposures. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking various hedge transactions at the inception of the hedge. This process includes linking all derivatives that are designated as cash flow hedges to specific forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting changes in cash flows of hedged items. Our foreign exchange hedging contracts have maturities based on a rolling period of up to twelve months. We do not use derivative financial instruments for speculative trading purposes.
All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and qualify as a cash flow hedge, changes in the value of the effective portion of the derivative instrument is recognized in accumulated comprehensive income, a component of stockholders' equity. Amounts associated with cash flow hedges are reclassified and recognized in income when either the forecast transaction occurs or it becomes probable the forecast transaction will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at fair value, and changes in fair value are recorded in earnings in the current period. Derivative instruments are subject to master netting arrangements and
qualify for net presentation in the balance sheet. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities.
Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from our general ledger, and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated over the lesser of their useful lives or the remaining term of the lease and machinery and equipment, which is generally over three years to ten years. We use the straight-line method to depreciate assets.
Leases. We adopted Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), on November 1, 2019 using the modified retrospective transition approach provided by Accounting Standards Update ("ASU") 2018-11, Leases: Targeted Improvements, with the cumulative effect of initially applying the standard recognized at the date of adoption.
We determine whether an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities (current and non-current) on our consolidated balance sheet. Finance leases are included in property, plant and equipment, other accrued liabilities, and other long-term liabilities in our consolidated balance sheet. Our finance lease and lessor arrangements are immaterial.
ROU assets and lease obligations are recognized based on their present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the lease term and economic environment to discount lease obligations. ROU assets also include any lease payments made and exclude lease incentives and initial direct costs incurred. We initially measure payments based on an index by using the applicable rate at lease commencement. Variable payments that do not depend on an index are not included in the lease liability and are recognized as they are incurred. See Note 10, "Leases," for additional information.
Impairment of long-lived assets. We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Restructuring costs. The main component of our existing restructuring plans 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.
Employee compensation and benefits. Amounts owed to employees, such as accrued salary, bonuses and vacation benefits are reported within employee compensation and benefits in the consolidated balance sheet. The total amount of accrued vacation benefit was $114 million and $107 million as of October 31, 2021 and 2020, respectively.
Foreign currency translation. We translate and remeasure balance sheet and statement of operations items into U.S. dollars. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates that approximate average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity.
For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are re-measured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts, which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates that approximate average exchange rates in effect during each period. Gains or losses from foreign currency re-measurement are included in net income. Net gains or losses resulting from foreign currency transactions are reported in other income (expense) and were a $3 million gain in 2021, a $3 million gain in 2020 and a $2 million gain in 2019.
Retirement plans and post-retirement benefit plan assumptions. Defined benefit plan obligations are remeasured at least annually as of October 31, based on the present value of future benefit payments to reflect 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. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include 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."
New Accounting Pronouncements.
ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued guidance that requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We will early adopt this guidance effective November 1, 2021. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Other amendments to GAAP that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
2. ACQUISITIONS
2021 Acquisitions
Acquisition of Sanjole
During the first quarter of fiscal 2021, we acquired Sanjole Inc. ("Sanjole") for $102 million, net of $11 million cash acquired, and recognized additions to goodwill and other intangible assets of $48 million and $51 million, respectively, based on the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. We expect the goodwill recognized on the Sanjole acquisition or any potential impairment charges in the future to be deductible for income tax purposes. The identified intangible assets primarily consist of developed technology of $24 million, customer relationships of $17 million and in-process R&D of $7 million. The estimated useful lives of developed technology and customer relationships are 7 years and 9 years, respectively. Sanjole is a leader in wireless test and measurement solutions for protocol decoding and interoperability.
Additionally, we acquired two other businesses for $76 million, net of cash acquired, and recognized goodwill and other intangible assets of $52 million and $32 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed.
Goodwill for the acquisitions was assigned to the Communications Solutions Group.
2020 Acquisitions
Acquisition of Eggplant
During the third quarter of fiscal 2020, we acquired Eggplant Topco Limited ("Eggplant") for $319 million, net of $11 million cash acquired, and recognized additions to goodwill and other intangible assets of $280 million and $88 million, respectively, based on the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. The identified intangible assets primarily consist of developed technology of $38 million and customer relationships of $46 million with estimated useful lives of 3 years and 6 years, respectively. Eggplant is a software test automation platform provider that uses artificial intelligence and analytics to automate test creation and test execution. All goodwill was assigned to the Electronic Industrial Solutions Group. We do not expect the goodwill recognized or any potential impairment charges in the future to be deductible for income tax purposes.
Additionally, we acquired two other businesses for $38 million, net of cash acquired, and recognized goodwill of $34 million based on the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. Goodwill for the acquisitions was assigned to the Communications Solutions Group.
Supplemental Pro Forma Information (Unaudited)
Pro forma results of operations for 2021 and 2020 acquisitions have not been presented because the effects of the acquisitions were not material to the company’s financial results.
3. REVENUE
Disaggregation of Revenue
We disaggregate our revenue from contracts with customers by geographic region, end market, and timing of revenue recognition, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregated revenue is presented for each of our reportable segments, Communications Solutions Group ("CSG") and Electronics Industrial Solutions Group ("EISG").
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Year Ended October 31,
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2021
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2020
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2019
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CSG
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EISG
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Total
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CSG
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EISG
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Total
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CSG
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EISG
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Total
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(in millions)
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Region
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Americas
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$
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1,697
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$
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299
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$
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1,996
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|
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$
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1,424
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$
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217
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$
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1,641
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$
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1,474
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$
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250
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$
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1,724
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Europe
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500
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295
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795
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421
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255
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676
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456
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|
257
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713
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Asia Pacific
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1,326
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824
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2,150
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1,287
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617
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1,904
|
|
|
1,238
|
|
|
628
|
|
|
1,866
|
|
Total revenue
|
$
|
3,523
|
|
|
$
|
1,418
|
|
|
$
|
4,941
|
|
|
$
|
3,132
|
|
|
$
|
1,089
|
|
|
$
|
4,221
|
|
|
$
|
3,168
|
|
|
$
|
1,135
|
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace, Defense & Government
|
$
|
1,142
|
|
|
$
|
—
|
|
|
$
|
1,142
|
|
|
$
|
928
|
|
|
$
|
—
|
|
|
$
|
928
|
|
|
$
|
975
|
|
|
$
|
—
|
|
|
$
|
975
|
|
Commercial Communications
|
2,381
|
|
|
—
|
|
|
2,381
|
|
|
2,204
|
|
|
—
|
|
|
2,204
|
|
|
2,193
|
|
|
—
|
|
|
2,193
|
|
Electronic Industrial
|
—
|
|
|
1,418
|
|
|
1,418
|
|
|
—
|
|
|
1,089
|
|
|
1,089
|
|
|
—
|
|
|
1,135
|
|
|
1,135
|
|
Total revenue
|
$
|
3,523
|
|
|
$
|
1,418
|
|
|
$
|
4,941
|
|
|
$
|
3,132
|
|
|
$
|
1,089
|
|
|
$
|
4,221
|
|
|
$
|
3,168
|
|
|
$
|
1,135
|
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue recognized at a point in time
|
$
|
2,936
|
|
|
$
|
1,233
|
|
|
$
|
4,169
|
|
|
$
|
2,598
|
|
|
$
|
946
|
|
|
$
|
3,544
|
|
|
$
|
2,748
|
|
|
$
|
1,037
|
|
|
$
|
3,785
|
|
Revenue recognized over time
|
587
|
|
|
185
|
|
|
772
|
|
|
534
|
|
|
143
|
|
|
677
|
|
|
420
|
|
|
98
|
|
|
518
|
|
Total revenue
|
$
|
3,523
|
|
|
$
|
1,418
|
|
|
$
|
4,941
|
|
|
$
|
3,132
|
|
|
$
|
1,089
|
|
|
$
|
4,221
|
|
|
$
|
3,168
|
|
|
$
|
1,135
|
|
|
$
|
4,303
|
|
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 up front 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 balances were $84 million and $61 million as of October 31, 2021 and October 31, 2020, respectively, and are included in "accounts receivables, net" and "other assets" in our consolidated balance sheet.
Contract costs
We capitalize direct and incremental costs incurred to acquire contracts for which the associated revenue is expected to be recognized in future periods. We have determined that certain employee and third-party representative commission programs meet the requirements to be capitalized. These costs are initially deferred and typically amortized over the term of the customer contract which corresponds to the period of benefit. Capitalized contract costs were $39 million and $31 million as of October 31, 2021 and October 31, 2020, respectively, and are included in “other current assets” and “other assets” in the consolidated balance sheet. The amortization expense associated with these costs was $77 million, $83 million and $64 million for the years ended October 31, 2021, 2020 and 2019, respectively.
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 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.
|
|
|
|
|
|
|
Year Ended October 31, 2021
|
Balance at October 31, 2020
|
$
|
566
|
|
|
|
|
|
Deferral of revenue billed in current period, net of recognition
|
487
|
|
Deferred revenue arising out of acquisitions
|
3
|
|
Revenue recognized that was deferred as of the beginning of the period
|
(391)
|
|
Foreign currency translation impact
|
—
|
|
Balance at October 31, 2021
|
$
|
665
|
|
Remaining Performance Obligations
Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, was approximately $382 million as of October 31, 2021, and represents the company’s obligation to deliver products and services and obtain customer acceptance on delivered products. Since we typically invoice customers at contract inception, this amount is included in our current and long-term deferred revenue balances. As of October 31, 2021, we expect to recognize approximately 51 percent of the revenue related to these unsatisfied performance obligations during 2022, 29 percent in 2023 and 20 percent thereafter.
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 RSUs, ESPP, employee stock option awards, and performance share awards granted to selected members of our senior management under the LTP Program, based on estimated fair values.
Description of Keysight’s Share-Based Plans
Incentive compensation plans. The 2014 Equity and Incentive Compensation Plan (the "2014 Stock Plan") was originally adopted by our board of directors on July 16, 2014, subsequently amended and restated by our board of directors on September 29, 2014 and on January 22, 2015 and became effective as of November 1, 2014. Our board of directors initially reserved 25 million shares of company common stock that may be issued under the 2014 Stock Plan, plus any shares forfeited or cancelled under the 2014 Stock Plan and subsequently reduced the number to 17 million shares. The 2014 Stock Plan was further amended and restated by our board of directors on November 16, 2017 to increase the maximum aggregate number of shares that may be issued under the 2014 Stock Plan to 21.8 million shares. The 2014 Stock Plan provides for the grant of awards in the form of stock options, SARs, restricted stock, RSUs, performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2014 Stock Plan has a term of ten years. As of October 31, 2021, approximately 6 million shares were available for future awards under the 2014 Stock Plan.
Stock options granted under the 2014 Stock Plan may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code, or non-statutory. Options were granted prior to November 1, 2015 and generally vest at a rate of 25 percent per year over a period of four years from the date of grant with a maximum contractual term of ten years. The exercise price for stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted.
Effective November 1, 2014, the Compensation and Human Capital Committee of our board of directors approved the performance awards, part of the LTP Program administered under the 2014 Stock Plan, for the company's executive officers and other key employees. Participants in this program are entitled to receive unrestricted shares of the company's stock after the end of the contractual period if specified performance targets are met. The maximum contractual period for awards under the performance awards program is three years. These awards can be based on a variety of targets, such as total shareholder return ("TSR") or financial metrics, such as operating margin, cost synergies and others. The final award may vary from zero to 200 percent of the target award based on the actual performance. For TSR-based performance awards, the peer group comparisons are set at the beginning of the performance period. The performance targets for operating margin-based performance grants are set each year in the first quarter for that respective year. We consider the dilutive impact of this program in our diluted net income per share calculation only to the extent that the performance conditions are met.
RSUs under our share-based plans are granted to directors, executives and employees. The estimated fair value of the restricted stock unit awards granted under the 2014 Stock Plan is determined based on the market price of Keysight common stock on the date of grant. RSUs generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.
Effective November 1, 2014, the company adopted the ESPP. The ESPP allows eligible employees to contribute up to 10 percent of their base compensation to purchase shares of Keysight common stock at 85 percent of the closing market price at the purchase date. Shares authorized for issuance in connection with the ESPP are subject to an automatic annual increase of the lesser of one percent of the outstanding shares of Keysight common stock on November 1 or an amount determined by the Compensation and Human Capital Committee of our board of directors. Under the terms of the ESPP, in no event shall the number of shares issued under the ESPP exceed 75 million shares.
Under our ESPP, employees purchased 541,241 shares for $56 million in 2021, 628,449 shares for $53 million in 2020 and 810,172 shares for $48 million in 2019. As of October 31, 2021, common stock authorized and available for issuance under our ESPP was 19,322,516 shares, which includes shares issued in November 2021 to participants in consideration of the aggregate contribution of $30 million as of October 31, 2021.
Impact of Share-based Compensation Awards
Share-based compensation expense has been recognized using a straight-line amortization method. The impact of share-based compensation expense on our consolidated statement of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Cost of products and services
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
14
|
|
Research and development
|
21
|
|
|
19
|
|
|
16
|
|
Selling, general and administrative
|
64
|
|
|
58
|
|
|
52
|
|
Total share-based compensation expense
|
$
|
104
|
|
|
$
|
93
|
|
|
$
|
82
|
|
Income tax benefit realized from exercised stock options and similar awards
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
9
|
|
The expense for 2021, 2020 and 2019 includes mark-to-market adjustments for financial metrics-based performance awards of $5 million, $2 million and $8 million, respectively. At October 31, 2021 and 2020, there was no share-based compensation expense capitalized within inventory.
Valuation Assumptions
The following assumptions were used to estimate the fair value of TSR-based performance awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
Volatility of Keysight shares
|
36%
|
|
28%
|
|
25%
|
Volatility of index
|
23%
|
|
13%
|
|
12%
|
Price-wise correlation with selected peers
|
67%
|
|
61%
|
|
57%
|
The TSR-based performance awards were valued using a Monte Carlo simulation model, which requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. The estimated fair value of restricted stock awards and the financial metrics-based performance awards is determined based on the market price of Keysight’s
common stock on the grant date. 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.
Share-based Payment Award Activity
Employee Stock Options
We have not granted any stock options post fiscal year 2015. As of October 31, 2021 and 2020, the options outstanding were approximately 0.3 million and 0.4 million, respectively, having a weighted average exercise price of $29 and $28, respectively. During the year, 0.1 million options, with an intrinsic value of $14 million were exercised at the weighted average exercise price of $26. The intrinsic value of the options exercised during 2020 and 2019 was $14 million and $39 million, respectively, at the weighted average exercise price of $27. The options outstanding as of October 31, 2021 have a weighted average contractual remaining life of 2.4 years and an intrinsic value of $39 million, based on Keysight's closing stock price of $180.02 at October 31, 2021.
Non-vested Awards
The following table summarizes non-vested award activity in 2021 for our LTP Program and restricted stock unit awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
|
(in thousands)
|
|
|
Non-vested at October 31, 2020
|
2,634
|
|
|
$
|
67
|
|
Granted
|
743
|
|
|
124
|
|
Vested
|
(1,377)
|
|
|
54
|
|
Forfeited
|
(47)
|
|
|
87
|
|
LTP Program incremental
|
228
|
|
|
52
|
|
Non-vested at October 31, 2021
|
2,181
|
|
|
$
|
93
|
|
As of October 31, 2021, the unrecognized share-based compensation cost for non-vested stock awards was approximately $62 million, which is expected to be amortized over a weighted average period of 2.4 years. Unrecognized share-based compensation cost does not include expense for operating margin based performance awards for which the target have not yet been set. The total fair value of stock awards vested was $165 million for 2021, $167 million for 2020 and $89 million for 2019. See Note 5, "Income Taxes," for the tax impact on share-based award exercises and vesting.
5. INCOME TAXES
The domestic and foreign components of income before taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
U.S. operations
|
$
|
89
|
|
|
$
|
68
|
|
|
$
|
20
|
|
Non-U.S. operations
|
921
|
|
|
693
|
|
|
695
|
|
Total income before taxes
|
$
|
1,010
|
|
|
$
|
761
|
|
|
$
|
715
|
|
The provision for income taxes was comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
U.S. federal taxes:
|
|
|
|
|
|
Current
|
$
|
71
|
|
|
$
|
16
|
|
|
$
|
10
|
|
Deferred
|
(10)
|
|
|
1
|
|
|
(8)
|
|
Non-U.S. taxes:
|
|
|
|
|
|
Current
|
90
|
|
|
77
|
|
|
91
|
|
Deferred
|
(30)
|
|
|
36
|
|
|
14
|
|
State taxes, net of federal benefit:
|
|
|
|
|
|
Current
|
8
|
|
|
—
|
|
|
(5)
|
|
Deferred
|
(13)
|
|
|
4
|
|
|
(8)
|
|
Total provision for income taxes
|
$
|
116
|
|
|
$
|
134
|
|
|
$
|
94
|
|
The following table presents the components of the deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Deferred Tax Assets
|
|
|
|
|
Inventory
|
$
|
18
|
|
|
|
$
|
10
|
|
Intangibles
|
559
|
|
|
|
597
|
|
Property, plant and equipment
|
31
|
|
|
|
21
|
|
Warranty reserves
|
8
|
|
|
|
8
|
|
|
|
|
|
|
Pension benefits
|
34
|
|
|
|
90
|
|
|
|
|
|
|
Employee benefits, other than retirement
|
39
|
|
|
|
28
|
|
Net operating loss, capital loss, and credit carryforwards
|
315
|
|
|
|
286
|
|
|
|
|
|
|
Share-based compensation
|
17
|
|
|
|
16
|
|
Deferred revenue
|
35
|
|
|
|
32
|
|
Lease obligations
|
53
|
|
|
|
38
|
|
Others
|
7
|
|
|
|
8
|
|
Total deferred tax assets
|
1,116
|
|
|
|
1,134
|
|
Tax valuation allowance
|
(231)
|
|
|
|
(238)
|
|
Total deferred tax assets less valuation allowance
|
885
|
|
|
|
896
|
|
Deferred Tax Liabilities
|
|
|
|
|
Intangibles
|
(41)
|
|
|
|
(38)
|
|
Property, plant and equipment
|
(26)
|
|
|
|
(31)
|
|
Warranty reserves
|
—
|
|
|
|
(1)
|
|
Pension benefits
|
(84)
|
|
|
|
(84)
|
|
Employee benefits, other than retirement
|
(1)
|
|
|
|
(1)
|
|
Unremitted earnings of foreign subsidiaries
|
(21)
|
|
|
|
(37)
|
|
Deferred revenue
|
(4)
|
|
|
|
(3)
|
|
ROU lease assets
|
(51)
|
|
|
|
(36)
|
|
Others
|
(14)
|
|
|
|
(11)
|
|
Total deferred tax liabilities
|
(242)
|
|
|
|
(242)
|
|
Total deferred tax assets, net of deferred tax liabilities
|
$
|
643
|
|
|
|
$
|
654
|
|
The decrease in deferred tax assets in 2021 as compared to 2020 primarily relates to a decrease in net pension liabilities in the U.S. and Germany and a decrease in intangible assets in Singapore due to amortization, partially offset by an increase in the value of the net operating loss carryforwards in the U.K. due to a tax rate change.
As of October 31, 2021, there was a deferred tax liability of $21 million for the tax liability expected to be imposed upon the repatriation of unremitted foreign earnings that are not considered indefinitely reinvested. As of October 31, 2021, the cumulative amount of undistributed earnings considered indefinitely reinvested was $105 million. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to indefinitely reinvest those earnings in the company’s foreign operations. The amount of the unrecognized deferred tax liability on the indefinitely reinvested earnings was $4 million.
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis.
The $231 million and $238 million valuation allowances as of October 31, 2021 and 2020, respectively, are mainly related to net operating losses in Luxembourg and the U.K., capital losses in the U.K., and California research credits. The decrease in valuation allowance from October 31, 2020 to October 31, 2021 is primarily due to a release of valuation allowance on Netherlands net operating losses, partially offset by an increase in valuation allowance on U.K. capital and net operating losses. The release of the Netherlands valuation allowance was due to a tax law change allowing net operating losses to be carried forward indefinitely. The increase in the valuation allowance on U.K. capital and net operating losses is primarily due to a tax rate change that increased the after-tax value of the losses subject to valuation allowance. We will maintain a valuation allowance until sufficient positive evidence exists to support a reversal.
At October 31, 2021, we had U.S. federal net operating loss carryforwards of approximately $6 million and U.S. state net operating loss carryforwards, primarily from acquired entities, of approximately $51 million. The U.S. federal net operating losses will expire in years beginning 2027 through 2029 if not utilized. Of the total U.S. state net operating loss carryforwards, $48 million are subject to change of ownership limitations under various state tax provisions and are subject to valuation allowance. The U.S. state net operating loss carryforwards will begin to expire in 2029, if not utilized. At October 31, 2021, we had U.S. state research credit carryforwards of approximately $23 million. Of the total U.S. state research credit carryforwards, $21 million are California research credits that can be carried forward indefinitely. Due to change of ownership limitations, however, $17 million of California research credits are subject to valuation allowance.
At October 31, 2021, we also had foreign net operating loss carryforwards of approximately $945 million. Of the total foreign loss, $8 million will expire in years beginning 2024 through 2027. The remaining loss is comprised of $670 million that will expire in years beginning 2035 through 2038 if not utilized and $267 million that has an indefinite life. Of the $945 million of foreign net operating loss carryforward, $690 million is subject to a valuation allowance. At October 31, 2021, we had foreign capital loss carryforwards of approximately $150 million with an indefinite life and $5 million of tax credits in foreign jurisdictions with an indefinite life. The foreign capital loss carryforwards are subject to valuation allowance as we do not expect to generate income of the type required in order to utilize these losses.
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Profit before tax times statutory rate
|
$
|
212
|
|
|
$
|
160
|
|
|
$
|
150
|
|
State income taxes, net of federal benefit
|
(6)
|
|
|
4
|
|
|
(6)
|
|
Current U.S. tax on foreign earnings
|
58
|
|
|
39
|
|
|
48
|
|
Deferred taxes on foreign earnings not considered indefinitely reinvested
|
1
|
|
|
8
|
|
|
2
|
|
U.S. benefit on foreign sales
|
(16)
|
|
|
(8)
|
|
|
(13)
|
|
U.S. research credits
|
(15)
|
|
|
(14)
|
|
|
(12)
|
|
Non-U.S. income taxed at different rates
|
(105)
|
|
|
(64)
|
|
|
(70)
|
|
Change in unrecognized tax benefits
|
17
|
|
|
8
|
|
|
(12)
|
|
Share-based compensation
|
(6)
|
|
|
(7)
|
|
|
(5)
|
|
Officers’ compensation
|
6
|
|
|
5
|
|
|
4
|
|
Acquired entity integration
|
(15)
|
|
|
—
|
|
|
—
|
|
Release of non-US valuation allowance
|
(17)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Other, net
|
2
|
|
|
3
|
|
|
8
|
|
Provision for income taxes
|
$
|
116
|
|
|
$
|
134
|
|
|
$
|
94
|
|
Effective tax rate
|
11
|
%
|
|
18
|
%
|
|
13
|
%
|
The effective tax rate was 11 percent, 18 percent, and 13 percent for 2021, 2020 and 2019, respectively. The tax rate in each of these years was lower than the U.S. statutory rate primarily due to the proportion of worldwide earnings that are taxed at lower statutory tax rates in non-U.S. jurisdictions. The decrease in the effective tax rate from 2020 to 2021 is due to a change in the jurisdictional mix of non-U.S. earnings offset by an increase in U.S. taxes on non-U.S. earnings, a decrease due to the release of valuation allowance on Netherlands net operating losses in 2021, and a decrease 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 increase in the effective tax rate from 2019 to 2020 is primarily due to the 2019 benefit from a release of tax reserves.
Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore and Malaysia, that have granted us tax incentives that 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 or specific types of income in those jurisdictions. The Singapore tax incentive is due for renewal in 2024, and the Malaysia incentive is due for renewal in 2025. The impact of the tax incentives decreased income taxes by $70 million, $53 million and $47 million in 2021, 2020 and 2019, respectively. The benefit of the tax incentives on net income per share (diluted) was approximately $0.38, $0.28 and $0.25 in 2021, 2020 and 2019, respectively. The increase in the tax benefit from 2020 to 2021 is primarily due to change in the jurisdictional mix of non-U.S. earnings, which increased the earnings taxed at incentive tax rates in 2021.
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows for the years 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Current income tax assets (included within other current assets)
|
$
|
30
|
|
|
$
|
53
|
|
Current income tax liabilities (included within income and other taxes payable)
|
(44)
|
|
|
(40)
|
|
|
|
|
|
Long-term income tax liabilities (included within other long-term liabilities)
|
(219)
|
|
|
(212)
|
|
Total
|
$
|
(233)
|
|
|
$
|
(199)
|
|
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 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. 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.
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. If the resolution of any tax issues that arise in any future or currently ongoing examinations are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period in which such resolution occurs.
The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Gross Balance, beginning of year
|
$
|
237
|
|
|
$
|
226
|
|
|
$
|
234
|
|
|
|
|
|
|
|
Additions due to acquisition
|
—
|
|
|
—
|
|
|
9
|
|
Additions for tax positions related to the current year
|
19
|
|
|
13
|
|
|
18
|
|
Additions for tax positions from prior years
|
—
|
|
|
2
|
|
|
—
|
|
Reductions for tax positions from prior years
|
(3)
|
|
|
(1)
|
|
|
(32)
|
|
|
|
|
|
|
|
Statute of limitations expirations
|
(4)
|
|
|
(3)
|
|
|
(3)
|
|
|
|
|
|
|
|
Gross Balance, end of year
|
$
|
249
|
|
|
$
|
237
|
|
|
$
|
226
|
|
As of October 31, 2021, the total amount of gross unrecognized tax benefits, excluding interest and penalties, was $249 million, of which, if recognized, $229 million would impact our effective tax rate. However, approximately $3 million of the unrecognized tax benefits were related to acquisitions, which if recognized within certain agreed upon time periods, would result in the recognition of an offsetting indemnification asset. As of October 31, 2020, the total amount of gross unrecognized tax benefits, excluding interest and penalties, was $237 million, of which, if recognized, $221 million would impact our effective tax rate. As of October 31, 2019, the total amount of gross unrecognized tax benefits was $226 million, of which, if recognized, $216 million would impact our effective tax rate.
Cumulatively, interest and penalties accrued as of the end of October 31, 2021, 2020 and 2019 were $37 million, $33 million and $28 million, respectively. We recognized tax expense of $4 million, $5 million, and $2 million for interest and penalties related to unrecognized tax benefits in 2021, 2020 and 2019, respectively. We recorded an additional $4 million of interest and penalties related to unrecognized tax benefits in 2019 through purchase accounting related to acquisitions.
The open tax years for the U.S. federal income tax return and most state income tax returns are from November 1, 2017 through the current tax year. For the majority of our foreign entities, the open tax years are from November 1, 2015 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
Keysight’s fiscal year 2018 U.S. federal income tax return is currently under examination by the Internal Revenue Service. The Tax Cuts and Jobs Act was enacted in December 2017 and imposed a one-time U.S. tax on foreign earnings not previously repatriated to the U.S., known as the Transition Tax, which was reported in Keysight’s 2018 U.S. federal income tax return.
The company is being audited in Malaysia for the 2008 tax year. 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. Our appeals to both the Special Commissioners of Income Tax and the High Court in Malaysia have been unsuccessful. We have filed a Notice of Appeal with the Court of Appeal. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed, and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company.
6. NET INCOME PER SHARE
The following table presents the calculation of basic and diluted net income per share (in millions, except per-share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Net income
|
$
|
894
|
|
|
$
|
627
|
|
|
$
|
621
|
|
Basic weighted-average shares
|
185
|
|
|
187
|
|
|
188
|
|
Potential common shares — stock options and other employee stock plans
|
2
|
|
|
2
|
|
|
3
|
|
Diluted weighted-average shares
|
187
|
|
|
189
|
|
|
191
|
|
Net income per share - basic
|
$
|
4.84
|
|
|
$
|
3.35
|
|
|
$
|
3.31
|
|
Net income per share - diluted
|
$
|
4.78
|
|
|
$
|
3.31
|
|
|
$
|
3.25
|
|
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested RSUs. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are collectively assumed to be used to repurchase hypothetical shares.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the years ended 2021, 2020 and 2019, we excluded zero shares from the calculation of diluted earnings per share. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTP Program and restricted stock awards, whose combined exercise price and
unamortized fair value collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. The number of shares excluded was immaterial in 2021, 2020 and 2019.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balances as of October 31, 2021, 2020 and 2019 and the movements in 2021 and 2020 for each of our reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSG
|
|
EISG
|
|
Total
|
|
(in millions)
|
Goodwill at October 31, 2019
|
$
|
942
|
|
|
$
|
267
|
|
|
$
|
1,209
|
|
Foreign currency translation impact
|
8
|
|
|
6
|
|
|
14
|
|
Goodwill arising from acquisitions
|
34
|
|
|
280
|
|
|
314
|
|
Goodwill at October 31, 2020
|
984
|
|
|
553
|
|
|
1,537
|
|
Foreign currency translation impact
|
(15)
|
|
|
6
|
|
|
(9)
|
|
Goodwill arising from acquisitions
|
100
|
|
|
—
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill at October 31, 2021
|
$
|
1,069
|
|
|
$
|
559
|
|
|
$
|
1,628
|
|
There were no impairments of goodwill during the years ended October 31, 2021, 2020 and 2019. As of October 31, 2021, 2020 and 2019, accumulated impairment losses on goodwill were $709 million.
Other intangible assets as of October 31, 2021 and 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
October 31, 2020
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
(in millions)
|
Developed technology
|
$
|
969
|
|
|
$
|
866
|
|
|
$
|
103
|
|
|
$
|
915
|
|
|
$
|
749
|
|
|
$
|
166
|
|
Backlog
|
17
|
|
|
17
|
|
|
—
|
|
|
17
|
|
|
14
|
|
|
3
|
|
Trademark/Tradename
|
36
|
|
|
28
|
|
|
8
|
|
|
35
|
|
|
25
|
|
|
10
|
|
Customer relationships
|
389
|
|
|
235
|
|
|
154
|
|
|
364
|
|
|
184
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets
|
1,411
|
|
|
1,146
|
|
|
265
|
|
|
1,331
|
|
|
972
|
|
|
359
|
|
In-Process R&D
|
7
|
|
|
—
|
|
|
7
|
|
|
2
|
|
|
—
|
|
2
|
|
Total
|
$
|
1,418
|
|
|
$
|
1,146
|
|
|
$
|
272
|
|
|
$
|
1,333
|
|
|
$
|
972
|
|
|
$
|
361
|
|
In 2021, we recorded additions to goodwill and other intangible assets of $100 million and $83 million, respectively, due to the acquisition of Sanjole and two other acquisitions. In 2020, we recorded additions to goodwill and other intangible assets of $314 million and $88 million, respectively, due to the acquisition of Eggplant and two other acquisitions. For additional information on the acquisitions, see Note 2, "Acquisitions."
The impact of foreign exchange translation on other intangible assets in 2021 and 2020 was $3 million and $2 million, respectively.
Amortization of other intangible assets was $174 million in 2021, $220 million in 2020 and $210 million in 2019. Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
|
|
|
|
|
|
|
Amortization expense
|
|
(in millions)
|
2022
|
$
|
100
|
|
2023
|
$
|
77
|
|
2024
|
$
|
38
|
|
2025
|
$
|
21
|
|
2026
|
$
|
13
|
|
Thereafter
|
$
|
16
|
|
Goodwill is assessed for impairment on a reporting unit basis at least annually in the fourth quarter, as of September 30, after the annual update to our long-term financial forecasts during our strategic planning cycle, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The impairment test compares the fair value of a reporting unit with its carrying amount, with an impairment charge recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value up to a maximum amount of the goodwill balance for the reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment or one level below an operating segment.
We determine fair values for each of the reporting units 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 appropriately. Valuations using the market approach are derived from metrics of publicly traded comparable companies. The selections of comparable businesses are based on the markets in which our reporting units operate, giving consideration to risk profiles, size, geography, and diversity of products and services. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business.
During the fourth quarter of 2021, we performed our annual impairment test of goodwill for all our reporting units using a qualitative approach, except for our Eggplant reporting unit, which is included in our EISG reportable segment, for which the test was performed using a quantitative approach. The income and market approaches were used to determine the fair value of the Eggplant reporting unit. With respect to the income approach, the discounted cash flow method was used, which included a forecasted cash flow projection and an estimated terminal value. The market approach used revenue, gross margin and EBITDA multiples to develop an estimate of fair value. A weighting of 75 percent and 25 percent was applied to the income and market approaches, respectively, to determine the fair value of the Eggplant reporting unit. The income approach was given a larger weighting based on the underlying detailed financial projections prepared during the strategic planning cycle that reflect the financial and operational facts and circumstances specific to Eggplant as of the valuation date. Based on the results of our annual impairment tests, the fair value of each of our reporting units exceeded the carrying value.
As of October 31, 2021, we determined that no goodwill impairment exists and that the remaining goodwill is recoverable for all of our reporting units; however, there can be no assurance that goodwill will not be impaired in future periods. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. It is possible that the judgments and estimates described above could change in future periods.
In 2020, we performed our annual impairment test of goodwill for all our reporting units using a qualitative approach. Based on the results of our annual impairment tests, the fair value of each of our reporting units exceeded the carrying value.
In 2019, we performed our annual impairment test of goodwill for all our reporting units using a qualitative approach, except for our previous Ixia Solutions Group ("ISG") reporting unit, which was the only reporting unit in our previous ISG reportable segment, for which the test was performed using a quantitative approach. The income and market approaches were used to determine the fair value of the ISG reporting unit. With respect to the income approach, the discounted cash flow method was used, which included an eight-year future cash flow projection and an estimated terminal value. The market approach used revenue and EBITDA multiples to develop an estimate of fair value. A weighting of 60 percent and 40 percent was applied to the income and market approaches, respectively, to determine the fair value of the ISG reporting unit. The income approach was given a larger weighting based on the underlying detailed financial projections prepared during the strategic planning cycle that reflect the financial and operational facts and circumstances specific to ISG as of the valuation date. Based on the results of our annual impairment tests, the fair value of each of our reporting units exceeded the carrying value.
We review long-lived 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 and ISG's long-lived assets in 2021 and 2019, respectively, which preceded the quantitative test of goodwill in accordance with the guidance, and concluded that no impairment charge was required.
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.
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 October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of October 31,
|
|
2021
|
|
2020
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,296
|
|
|
$
|
1,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,047
|
|
|
$
|
1,047
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (foreign exchange contracts)
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (interest rate swaps)
|
48
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
Equity investments
|
60
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity investments - other
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Total assets measured at fair value
|
$
|
1,420
|
|
|
$
|
1,356
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
1,134
|
|
|
$
|
1,099
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (foreign exchange contracts)
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
24
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our money market funds and equity investments with readily determinable fair values are measured at fair value using quoted market prices and, therefore, are classified within Level 1 of the fair value hierarchy. Equity investments without readily determinable fair values that are measured at cost adjusted for observable changes in price or impairments are not categorized in the fair value hierarchy and are presented as "Equity investments - other" in the tables above. Our deferred compensation liability is classified as Level 2 because the inputs used in the calculations are observable, although the values are not directly based on quoted market prices. Our derivative financial instruments are classified within Level 2 as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.
Equity investments, including securities that are earmarked to pay the deferred compensation liability, and the deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss).
All of our investments are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of the investment. There was no impairment recognized in 2021, 2020 and 2019. Realized gains and losses from the sale of investments are recorded in earnings.
Net recognized gains on equity investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Net realized gains on investments sold
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Net unrealized gains on investments still held
|
$
|
4
|
|
|
$
|
11
|
|
|
$
|
6
|
|
Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis consisted of goodwill and intangible assets. See Note 7, "Goodwill and Other Intangible Assets" for more information.
Goodwill
Fair value assessments of the reporting unit and the reporting unit's net assets, which are performed for goodwill impairments tests, are considered Level 3 measurements due to the significance of unobservable inputs developed using company-specific information. We considered a market approach as well as an income approach using the discounted cash flow model to determine the fair value of the reporting unit.
Intangible Assets
We utilized an income approach for estimating the fair value of intangible assets. The future cash flows used in the analysis are based on internal cash flow projections based on our long-range plans and include significant assumptions by management. Accordingly, the fair value assessment of the long-lived assets is considered a Level 3 fair value measurement.
9. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities based on a rolling period of up to twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in the value of the derivative instrument included in the assessment of effectiveness are recognized in accumulated other comprehensive income and reclassified into earnings when the forecasted transaction occurs in the same financial statement line item in the consolidated statement of operations where the earnings effect of the hedged item is presented. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified into earnings in the current period. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness are amortized to earnings on a straight-line basis over the tenor of the hedge and are presented in the same financial statement line of the consolidated statement of operations where the earnings effect of the hedged item is presented. For hedges executed prior to February 1, 2020, these gains and losses were recognized immediately in earnings.
In fiscal 2020, we entered into forward starting interest rate swaps with an aggregate notional amount of $600 million associated with future interest payments on anticipated debt issuances through fiscal year 2024. The contract term allows us to lock-in a treasury rate on anticipated debt issuances. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in fair value of these derivative instruments have been recognized in accumulated other comprehensive income (loss). For the year ended October 31, 2021, a gain of $26 million was recognized in accumulated other comprehensive income (loss). Amounts associated with these cash flow hedges will be reclassified to interest expense in the consolidated statement of operations when future interest payments on the anticipated debt occur.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense), net, in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions, which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
The number of open foreign exchange forward contracts designated as "cash flow hedges" and "not designated as hedging instruments" was 219 and 68, respectively, as of October 31, 2021. The aggregated notional amounts by currency and designation as of October 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in
Cash Flow
Hedging Relationships
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
Forward
Contracts
|
|
Forward
Contracts
|
Currency
|
|
Buy/(Sell)
|
|
Buy/(Sell)
|
|
|
(in millions)
|
Euro
|
|
$
|
35
|
|
|
$
|
13
|
|
British Pound
|
|
19
|
|
|
(87)
|
|
Singapore Dollar
|
|
25
|
|
|
28
|
|
Malaysian Ringgit
|
|
98
|
|
|
10
|
|
Japanese Yen
|
|
(101)
|
|
|
(42)
|
|
Other currencies
|
|
13
|
|
|
(44)
|
|
Total
|
|
$
|
89
|
|
|
$
|
(122)
|
|
Derivative instruments are subject to master netting arrangements and are disclosed gross in the consolidated balance sheet. The gross fair values and balance sheet presentation of derivative instruments held as of October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
Assets Derivatives
|
|
Liabilities Derivatives
|
|
|
Fair Value
|
|
|
|
Fair Value
|
Balance Sheet Location
|
|
October 31,
2021
|
|
October 31,
2020
|
|
Balance Sheet Location
|
|
October 31,
2021
|
|
October 31,
2020
|
(in millions)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
5
|
|
|
$
|
2
|
|
|
Other accrued liabilities
|
|
$
|
1
|
|
|
$
|
3
|
|
Interest rate swap contracts:
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
48
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
1
|
|
|
1
|
|
|
Other accrued liabilities
|
|
3
|
|
|
1
|
|
Total derivatives
|
|
$
|
54
|
|
|
$
|
26
|
|
|
|
|
$
|
4
|
|
|
$
|
4
|
|
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Interest rate swap contracts:
|
|
|
|
|
|
Gain (loss) recognized in accumulated other comprehensive income (loss)
|
$
|
26
|
|
|
$
|
23
|
|
|
$
|
—
|
|
Foreign exchange contracts:
|
|
|
|
|
|
Gain (loss) recognized in accumulated other comprehensive income (loss)
|
6
|
|
|
(3)
|
|
|
(5)
|
|
Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings:
|
|
|
|
|
|
Cost of products
|
—
|
|
|
(3)
|
|
|
(1)
|
|
Selling, general and administrative
|
2
|
|
|
(1)
|
|
|
(2)
|
|
Gain (loss) excluded from effectiveness testing recognized in earnings based on changes in fair value:
|
|
|
|
|
|
Cost of products
|
—
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
|
Gain (loss) excluded from effectiveness testing recognized in earnings based on amortization approach:
|
|
|
|
|
|
Cost of products
|
1
|
|
|
1
|
|
|
—
|
|
Selling, general and administrative
|
1
|
|
|
—
|
|
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Gain (loss) recognized in other income (expense), net
|
$
|
(3)
|
|
|
$
|
4
|
|
|
$
|
(5)
|
|
The estimated amount at October 31, 2021 expected to be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months is a gain of $3 million.
10. LEASES
We have operating leases for items including office space, order fulfillment, sales and service centers, R&D and certain equipment, primarily automobiles. Our leases have remaining terms of up to 13 years, some of which may include options to extend the leases, primarily for 3 to 5 years. We consider options to renew in our lease terms and measurement of ROU assets and lease liabilities if we determine they are reasonably certain to be exercised.
The weighted average lease term of our operating leases was 8.2 years and 7.3 years as of October 31, 2021 and 2020, respectively. The weighted average discount rate of our operating leases was 3 percent as of both October 31, 2021 and 2020.
The following table summarizes the components of our lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Operating lease cost
|
$
|
51
|
|
|
$
|
49
|
|
Variable lease cost
|
$
|
14
|
|
|
$
|
16
|
|
Short-term lease costs, sublease income and finance lease costs were immaterial for the year ended October 31, 2021 and 2020.
Supplemental cash flow information related to our operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Cash payments for operating leases
|
$
|
53
|
|
|
$
|
48
|
|
ROU assets obtained in exchange for operating lease obligations
|
$
|
78
|
|
|
$
|
67
|
|
The maturities of our operating leases as of October 31, 2021 with initial terms exceeding one year were as follows:
|
|
|
|
|
|
|
Operating Leases
|
|
(in millions)
|
2022
|
$
|
45
|
|
2023
|
38
|
|
2024
|
30
|
|
2025
|
24
|
|
Thereafter
|
123
|
|
Total undiscounted lease liability
|
260
|
|
Imputed interest
|
28
|
|
Total discounted lease liability
|
$
|
232
|
|
As of October 31, 2021, we did not have material leases that had not yet commenced.
Rental income from leasing out excess facilities was $11 million for both the year ended October 31, 2021 and 2020 and is included in other operating expense (income), net. Other lessor arrangements were immaterial.
11. DEBT
The following table summarizes the components of our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
2024 Senior Notes at 4.55% ($600 face amount less unamortized costs of $1 and $2)
|
$
|
599
|
|
|
$
|
598
|
|
2027 Senior Notes at 4.60% ($700 face amount less unamortized costs of $4 and $5)
|
696
|
|
|
695
|
|
2029 Senior Notes at 3.00% ($500 face amount less unamortized costs of $4 and $4)
|
496
|
|
|
496
|
|
|
$
|
1,791
|
|
|
$
|
1,789
|
|
Short-Term Debt
Revolving Credit Facility
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, 2021 and October 31,2020, 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, 2021.
Other
During the year ended October 31, 2020, we repaid $7 million of debt assumed with the acquisition of Eggplant.
Long-Term Debt
The below senior notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness. We were in compliance with the covenants of our senior notes during the year ended October 31, 2021.
2024 Senior Notes
In October 2014, the company issued an aggregate principal amount of $600 million in unsecured senior notes ("2024 Senior Notes"). The 2024 Senior Notes were issued at 99.966 percent of their principal amount. The notes will mature on October 30, 2024, and bear interest at a fixed rate of 4.55 percent per annum. The interest is payable semi-annually on April 30 and October 30 of each year. We incurred issuance costs of $5 million in connection with the 2024 Senior Notes that are being amortized to interest expense over the term of the senior notes.
2027 Senior Notes
In April 2017, the company issued an aggregate principal amount of $700 million in unsecured senior notes ("2027 Senior Notes"). The 2027 Senior Notes were issued at 99.873 percent of their principal amount. The notes will mature on April 6, 2027 and bear interest at a fixed rate of 4.60 percent per annum. The interest is payable semi-annually on April 6 and October 6 of each year, commencing on October 6, 2017. We incurred issuance costs of $6 million in connection with the 2027 Senior Notes that, along with the debt discount, are being amortized to interest expense over the term of the senior notes.
2029 Senior Notes
In October 2019, the company issued an aggregate principal amount of $500 million in unsecured senior notes ("2029 Senior Notes"). The 2029 Senior Notes were issued at 99.914 percent of their principal amount. The notes will mature on October 30, 2029 and bear interest at a fixed rate of 3.00 percent per annum. The interest is payable semi-annually on April 30 and October 30 of each year, commencing on April 30, 2020. We incurred issuance costs of $4 million in connection with the 2029 Senior Notes that, along with the debt discount are being amortized to interest expense over the term of the senior notes.
Letter of Credit
As of both October 31, 2021 and 2020, we had $40 million of outstanding letters of credit and surety bonds unrelated to the credit facility that were issued by various lenders.
12. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
General. The majority of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees. We provide U.S. employees who meet eligibility criteria under the Keysight Technologies, Inc. Retirement Plan ("RP") defined benefits that are based on an employee's base or target pay during the years of employment and on length of service. For eligible employees' service through October 31, 1993, the benefit payable under the RP is reduced by any amounts due to the eligible employees' service under our defined contribution Deferred Profit-Sharing Plan ("DPSP"), which was closed to new participants as of November 1993. The obligations under the DPSP equal the fair value of the DPSP assets, which was $267 million as of October 31, 2021. Employees hired on or after August 1, 2015 are not eligible to participate in the RP or the Keysight Technologies, Inc. Health Plan for Retirees ("U.S. Post-Retirement Benefit Plan").
In addition, in the U.S. we maintain the Supplemental Benefits Retirement Plan ("SBRP"), a supplemental unfunded non-qualified defined benefit plan to provide benefits that would be provided under the RP but for limitations imposed by the Internal Revenue Code. The RP and the SBRP comprise the "U.S. Plans."
Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans ("Non-U.S. Plans") based on factors such as years of service and/or employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements. Certain of our immaterial non-U.S. defined benefit plans are not included in these disclosures.
401(k) defined contribution plan. Eligible U.S. employees may participate in the Keysight Technologies, Inc. 401(k) Plan (the "401(k) Plan"). Enrollment in the 401(k) Plan is automatic for employees who meet eligibility requirements unless they decline participation. We provide matching contributions of up to 4 percent of annual eligible compensation for employees hired prior to August 1, 2015 and up to 6 percent for employees hired thereafter. The 401(k) Plan employer expense included in income from operations was $28 million in 2021, $27 million in 2020 and $25 million in 2019.
Post-retirement medical benefit plans. In addition to receiving retirement benefits, U.S. employees who meet eligibility requirements as of their termination date may participate in the U.S. Post-Retirement Benefit Plans.
Components of net periodic benefit cost. The company uses alternate methods of amortization, as allowed by the authoritative guidance, which amortizes the actuarial gains and losses on a consistent basis for the years presented. For the U.S. Plans, gains and losses are amortized over the average future working lifetime. For most Non-U.S. Plans and the U.S. Post-Retirement Benefit Plan, gains and losses are amortized using a separate layer for each year's gains and losses.
In March 2021, we substantially transferred all the assets and obligations of our Netherlands defined benefit plan to an insurance company. The partial settlement resulted in a loss of $16 million, which is included in "other income (expense), net" in the consolidated statement of operations during the year ended October 31, 2021. We received a net refund of $3 million due to the partial settlement of the Netherlands defined benefit plan. During the year ended October 31, 2020, the lump sum payments in our U.K. defined benefit plan were more than the sum of the service cost and interest cost components of net
periodic benefit cost (“the threshold amount”), resulting in recognition of a settlement loss of $5 million. We also recognized a curtailment gain of $1 million in our Netherlands defined benefit plan for the year 2020. These are included in other income (expense) in the consolidated statement of operations.
For the years ended October 31, 2021, 2020 and 2019, components of net periodic benefit cost (benefit) and other amounts recognized in other comprehensive income were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
U.S. Post-Retirement Benefit Plan
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
|
2019
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Net periodic benefit cost (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost — benefits earned during the period
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
20
|
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost on benefit obligation
|
22
|
|
|
24
|
|
|
28
|
|
|
15
|
|
|
16
|
|
|
23
|
|
|
4
|
|
|
6
|
|
|
8
|
|
Expected return on plan assets
|
(52)
|
|
|
(44)
|
|
|
(41)
|
|
|
(77)
|
|
|
(84)
|
|
|
(77)
|
|
|
(12)
|
|
|
(13)
|
|
|
(13)
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
24
|
|
|
18
|
|
|
10
|
|
|
41
|
|
|
34
|
|
|
27
|
|
|
11
|
|
|
10
|
|
|
9
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
(11)
|
|
|
(14)
|
|
Net periodic benefit cost (benefit)
|
18
|
|
|
21
|
|
|
13
|
|
|
(6)
|
|
|
(19)
|
|
|
(14)
|
|
|
3
|
|
|
(7)
|
|
|
(9)
|
|
Curtailments and settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
4
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total periodic benefit cost (benefit)
|
$
|
18
|
|
|
$
|
21
|
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
(15)
|
|
|
$
|
(12)
|
|
|
$
|
3
|
|
|
$
|
(7)
|
|
|
$
|
(9)
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
(100)
|
|
|
$
|
64
|
|
|
$
|
77
|
|
|
$
|
26
|
|
|
$
|
81
|
|
|
$
|
78
|
|
|
$
|
(38)
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
(24)
|
|
|
(18)
|
|
|
(10)
|
|
|
(41)
|
|
|
(34)
|
|
|
(27)
|
|
|
(11)
|
|
|
(10)
|
|
|
(9)
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
11
|
|
|
14
|
|
Curtailments and settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
(4)
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive (income) loss
|
$
|
(124)
|
|
|
$
|
46
|
|
|
$
|
71
|
|
|
$
|
(30)
|
|
|
$
|
44
|
|
|
$
|
49
|
|
|
$
|
(48)
|
|
|
$
|
10
|
|
|
$
|
16
|
|
Total recognized in the periodic benefit cost (benefit) and other comprehensive (income) loss
|
$
|
(106)
|
|
|
$
|
67
|
|
|
$
|
84
|
|
|
$
|
(20)
|
|
|
$
|
29
|
|
|
$
|
37
|
|
|
$
|
(45)
|
|
|
$
|
3
|
|
|
$
|
7
|
|
We record the service cost component of net periodic benefit cost (benefit) in the same line item as other employee compensation costs. We record the non-service components of net periodic benefit cost (benefit), such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, within other income (expense) in the consolidated statement of operations.
Funded status. As of October 31, 2021 and 2020, the funded status of the defined benefit and post-retirement benefit plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined
Benefit Plans
|
|
Non-U.S. Defined
Benefit Plans
|
|
U.S.
Post-Retirement
Benefit Plan
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
(in millions)
|
Change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value — beginning of year
|
$
|
722
|
|
|
$
|
615
|
|
|
$
|
1,545
|
|
|
$
|
1,538
|
|
|
$
|
175
|
|
|
$
|
176
|
|
Actual return on plan assets
|
189
|
|
|
41
|
|
|
134
|
|
|
21
|
|
|
45
|
|
|
12
|
|
Employer contributions
|
—
|
|
|
100
|
|
|
8
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
(41)
|
|
|
(14)
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(49)
|
|
|
(34)
|
|
|
(50)
|
|
|
(36)
|
|
|
(13)
|
|
|
(13)
|
|
Other
|
—
|
|
|
—
|
|
|
(15)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency impact
|
—
|
|
|
—
|
|
|
27
|
|
|
26
|
|
|
—
|
|
|
—
|
|
Fair value — end of year
|
$
|
862
|
|
|
$
|
722
|
|
|
$
|
1,608
|
|
|
$
|
1,545
|
|
|
$
|
207
|
|
|
$
|
175
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
848
|
|
|
$
|
774
|
|
|
$
|
1,421
|
|
|
$
|
1,393
|
|
|
$
|
203
|
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
24
|
|
|
23
|
|
|
15
|
|
|
15
|
|
|
1
|
|
|
1
|
|
Interest cost
|
22
|
|
|
24
|
|
|
15
|
|
|
16
|
|
|
4
|
|
|
6
|
|
Settlements
|
—
|
|
|
—
|
|
|
(41)
|
|
|
(14)
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
37
|
|
|
62
|
|
|
90
|
|
|
18
|
|
|
(5)
|
|
|
7
|
|
Benefits paid
|
(50)
|
|
|
(35)
|
|
|
(50)
|
|
|
(36)
|
|
|
(13)
|
|
|
(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
(18)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency impact
|
—
|
|
|
—
|
|
|
33
|
|
|
30
|
|
|
—
|
|
|
—
|
|
Benefit obligation — end of year
|
$
|
881
|
|
|
$
|
848
|
|
|
$
|
1,465
|
|
|
$
|
1,421
|
|
|
$
|
190
|
|
|
$
|
203
|
|
Overfunded (Underfunded) status of PBO
|
$
|
(19)
|
|
|
$
|
(126)
|
|
|
$
|
143
|
|
|
$
|
124
|
|
|
$
|
17
|
|
|
$
|
(28)
|
|
Amounts recognized in the consolidated balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
264
|
|
|
$
|
311
|
|
|
$
|
17
|
|
|
$
|
—
|
|
Employee compensation and benefits
|
(1)
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Retirement and post-retirement benefits
|
(18)
|
|
|
(125)
|
|
|
(121)
|
|
|
(187)
|
|
|
—
|
|
|
(28)
|
|
Net asset (liability)
|
$
|
(19)
|
|
|
$
|
(126)
|
|
|
$
|
143
|
|
|
$
|
124
|
|
|
$
|
17
|
|
|
$
|
(28)
|
|
Amounts recognized in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses
|
$
|
101
|
|
|
$
|
225
|
|
|
$
|
457
|
|
|
$
|
487
|
|
|
$
|
(21)
|
|
|
$
|
28
|
|
Prior service credits
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
(1)
|
|
|
(2)
|
|
Total
|
$
|
101
|
|
|
$
|
225
|
|
|
$
|
458
|
|
|
$
|
488
|
|
|
$
|
(22)
|
|
|
$
|
26
|
|
The change in the benefit obligations for the U.S. defined benefit plans was primarily driven by the changes in actuarial assumptions, including the lump sum conversion rate and demographic experience. The changes in the non-U.S. plans were primarily driven by an insurance buy-in contract we executed for a portion of benefit obligations under the U.K. defined benefit plan and partial settlement of benefit obligations under the Netherlands DB plan. The change in the benefit obligations for the U.S. post-retirement benefit plan was primarily driven by changes in the discount rate.
Investment policies and strategies as of October 31, 2021. In the U.S., our RP and U.S. Post-Retirement Benefit Plan target asset allocations are approximately 70 percent to equities and approximately 30 percent to fixed income investments. Our DPSP target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income investments. The general investment objective for all our plan assets is to obtain the optimum rate of investment return on the total investment portfolio consistent with the assumed level of risk. Specific investment objectives for the plans' portfolios are to: maintain and enhance the purchasing power of the plans' assets; achieve investment returns consistent with the level of risk being taken; and earn performance rates of return in accordance with the benchmarks adopted for each asset class. Outside of the U.S., our target asset allocation is from 5 to 60 percent to equities, from 40 to 64 percent to fixed income investments, and from zero to 50 percent to insurance contracts and cash. All plans' assets are broadly diversified. Due to fluctuations in capital markets, our actual allocations of plan assets as of October 31, 2021, differ from the target allocation. Our policy is to periodically bring the actual allocation in line with the target allocation.
Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified industries. Fixed income securities include a portfolio of corporate bonds of companies from diversified industries, government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Portions of the cash and cash equivalent, equity, and fixed income investments are held in commingled funds. Investments in commingled funds are valued using the net asset value (“NAV”) method as a practical expedient. Investments valued using the NAV method are allocated across a broad array of funds and diversify the portfolio. The value of the plan assets directly affects the funded status of our pension and post-retirement benefit plans recorded in the financial statements. In March 2021, we entered into an insurance buy-in contract for a portion of benefit obligations under the U.K. defined benefit plan and classified it as “Other Investment.” The insurance buy-in contract is similar to an annuity contract, which matches cash flows with future benefit payments for a specific group of pensioners with the obligation remaining with the plan. This contract is issued by a third-party insurance company with no affiliation to us. The insurance contract is valued on an insurer pricing basis, which reflects the purchase price adjusted for changes in discount rates and other actuarial assumptions, which approximates fair value.
Fair Value. The measurement of the fair value of pension and post-retirement plan assets uses the valuation methodologies and the inputs as described in Note 8, "Fair Value Measurements."
Cash and Cash Equivalents - Cash and cash equivalents consist of short-term investment funds that are invested in short-term domestic fixed income securities and other securities with debt-like characteristics, emphasizing short-term maturities and quality. Cash and cash equivalents are generally classified as Level 2 investments except when the cash and cash equivalents are held in commingled funds, which have a daily NAV derived from quoted prices for the underlying securities in active markets; these are classified as assets measured at NAV.
Equity - Some equity securities consisting of common and preferred stock are held in commingled funds, which have daily NAVs derived from quoted prices for the underlying securities in active markets; these are classified as assets measured at NAV. Commingled funds that have quoted prices in active markets are classified as Level 1 investments.
Fixed Income - Some of the fixed income securities are held in commingled funds that have daily NAVs derived from the underlying securities; these are classified as assets measured at NAV. Commingled funds that have quoted prices in active markets are classified as Level 1 investments.
Other Investment - Other investment includes a U.K. insurance buy-in contract executed during the year and classified as a Level 3 investment. Insurance contracts are generally classified as Level 3 investments.
The following tables present the fair value of U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
as of October 31, 2021 Using
|
|
October 31,
2021
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
605
|
|
|
187
|
|
|
1
|
|
|
—
|
|
|
417
|
|
Fixed income
|
239
|
|
|
27
|
|
|
103
|
|
|
—
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
862
|
|
|
$
|
214
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
526
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
as of October 31, 2020 Using
|
|
October 31,
2020
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
443
|
|
|
124
|
|
|
1
|
|
|
—
|
|
|
318
|
|
Fixed income
|
169
|
|
|
9
|
|
|
100
|
|
|
—
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
722
|
|
|
$
|
133
|
|
|
$
|
211
|
|
|
$
|
—
|
|
|
$
|
378
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
For U.S. Defined Benefit Plans, there was no activity relating to assets measured at fair value using significant unobservable inputs (Level 3) during 2021 and 2020.
The following tables present the fair value of U.S. Post-Retirement Benefit Plan assets classified under the appropriate level of the fair value hierarchy as of October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of
October 31, 2021 Using
|
|
October 31,
2021
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
144
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
99
|
|
Fixed income
|
58
|
|
|
6
|
|
|
25
|
|
|
—
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
207
|
|
|
$
|
51
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
126
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of
October 31, 2020 Using
|
|
October 31,
2020
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
123
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
89
|
|
Fixed income
|
48
|
|
|
3
|
|
|
28
|
|
|
—
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
175
|
|
|
$
|
37
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
106
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
For the U.S. Post-Retirement Benefit Plan, there was no activity relating to assets measured at fair value using significant unobservable inputs (Level 3) during 2021 and 2020.
The following tables present the fair value of Non-U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of
October 31, 2021 Using
|
|
October 31,
2021
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Equity
|
$
|
526
|
|
|
$
|
189
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
335
|
|
Fixed income
|
718
|
|
|
—
|
|
|
235
|
|
|
—
|
|
|
483
|
|
Other investment
|
364
|
|
|
—
|
|
|
—
|
|
|
364
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
1,608
|
|
|
$
|
189
|
|
|
$
|
237
|
|
|
$
|
364
|
|
|
$
|
818
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of
October 31, 2020 Using
|
|
October 31,
2020
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets Measured at NAV(a)
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
Equity
|
$
|
452
|
|
|
$
|
150
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
302
|
|
Fixed income
|
1,093
|
|
|
—
|
|
|
221
|
|
|
—
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
$
|
1,545
|
|
|
$
|
150
|
|
|
$
|
221
|
|
|
$
|
—
|
|
|
$
|
1,174
|
|
(a) Certain instruments that are measured at fair value using the NAV per share practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the total value of plan assets.
For Non-U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (Level 3), the following table summarizes the change in balances during 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Balance, beginning of year
|
$
|
—
|
|
|
$
|
—
|
|
Unrealized gains/(losses)
|
17
|
|
|
—
|
|
Purchases, sales, issuances, and settlements
|
(7)
|
|
|
—
|
|
Transfers in (out)
|
354
|
|
|
—
|
|
Balance, end of year
|
$
|
364
|
|
|
$
|
—
|
|
.The table below presents the combined projected benefit obligation ("PBO"), accumulated benefit obligation ("ABO") and fair value of plan assets, grouping plans using comparisons of the PBO and ABO relative to the plan assets as of October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Benefit
Obligation
|
|
Fair Value of Plan Assets
|
|
Benefit
Obligation
|
|
Fair Value of Plan Assets
|
|
|
|
PBO
|
|
|
PBO
|
|
|
(in millions)
|
|
(in millions)
|
U.S. defined benefit plans where PBO exceeds the fair value of plan assets
|
$
|
881
|
|
|
$
|
862
|
|
|
$
|
848
|
|
|
$
|
722
|
|
U.S. defined benefit plans where fair value of plan assets exceeds PBO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
881
|
|
|
$
|
862
|
|
|
$
|
848
|
|
|
$
|
722
|
|
Non-U.S. defined benefit plans where PBO exceeds the fair value of plan assets
|
$
|
383
|
|
|
$
|
262
|
|
|
$
|
433
|
|
|
$
|
246
|
|
Non-U.S. defined benefit plans where fair value of plan assets exceeds PBO
|
1,082
|
|
|
1,346
|
|
|
988
|
|
|
1,299
|
|
Total
|
$
|
1,465
|
|
|
$
|
1,608
|
|
|
$
|
1,421
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
ABO
|
|
|
|
ABO
|
|
|
U.S. defined benefit plans where ABO exceeds the fair value of plan assets
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
784
|
|
|
$
|
722
|
|
U.S. defined benefit plans where the fair value of plan assets exceeds ABO
|
791
|
|
|
862
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
796
|
|
|
$
|
862
|
|
|
$
|
784
|
|
|
$
|
722
|
|
Non-U.S. defined benefit plans where ABO exceeds the fair value of plan assets
|
$
|
372
|
|
|
$
|
262
|
|
|
$
|
421
|
|
|
$
|
246
|
|
Non-U.S. defined benefit plans where fair value of plan assets exceeds ABO
|
1,079
|
|
|
1,346
|
|
|
984
|
|
|
1,299
|
|
Total
|
$
|
1,451
|
|
|
$
|
1,608
|
|
|
$
|
1,405
|
|
|
$
|
1,545
|
|
Contributions and estimated future benefit payments. For 2022, we do not expect to contribute to our U.S. Defined Benefit Plan or U.S. Post-Retirement Benefit Plan, and we expect to contribute $12 million to our Non-U.S. Defined Benefit Plans. The following table presents expected future benefit payments for the next 10 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined
Benefit Plans
|
|
Non-U.S. Defined
Benefit Plans
|
|
U.S. Post-Retirement
Benefit Plan
|
|
(in millions)
|
2022
|
$
|
49
|
|
|
$
|
39
|
|
|
$
|
14
|
|
2023
|
$
|
53
|
|
|
$
|
42
|
|
|
$
|
15
|
|
2024
|
$
|
53
|
|
|
$
|
44
|
|
|
$
|
15
|
|
2025
|
$
|
63
|
|
|
$
|
44
|
|
|
$
|
16
|
|
2026
|
$
|
64
|
|
|
$
|
45
|
|
|
$
|
16
|
|
2027 - 2031
|
$
|
310
|
|
|
$
|
244
|
|
|
$
|
74
|
|
Assumptions. The assumptions used to determine the benefit obligations and net periodic benefit cost for our defined benefit and post-retirement benefit plans are presented in the tables below. The expected long-term return on assets below represents an estimate of long-term returns on investment portfolios, consisting of a mixture of equities, fixed income and other investments, in proportion to the asset allocations of each of our plans. We consider long-term rates of return, which are weighted based on the asset classes (both historical and forecasted) in which we expect our pension and post-retirement funds to be invested. Discount rates reflect the current rate at which pension and post-retirement obligations could be settled based on the measurement dates of the plans, which is October 31. The U.S. discount rates as of October 31, 2021 and 2020 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, 2021 and 2020 were determined based on a granular approach, which discounts the expected plan benefit payments with rates from a high quality corporate bond yield curve. In addition, we used this method to calculate two components of the periodic benefit cost: service cost and interest cost. The range of assumptions that were used for the Non-U.S. Defined Benefit Plans reflects the different economic environments within various countries.
Assumptions used to calculate the net periodic benefit cost (benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
U.S. Defined Benefit Plans:
|
|
|
|
Discount rate
|
2.75%
|
|
3.25%
|
Average increase in compensation levels
|
3.00%
|
|
3.00%
|
Expected long-term return on assets
|
7.50%
|
|
7.50%
|
Non-U.S. Defined Benefit Plans:
|
|
|
|
Discount rate
|
0.81-1.66%
|
|
0.79-1.89%
|
Average increase in compensation levels
|
2.50-2.75%
|
|
2.50-3.00%
|
Expected long-term return on assets
|
4.00-6.50%
|
|
3.50-6.50%
|
U.S. Post-Retirement Benefits Plan:
|
|
|
|
Discount rate
|
2.25%
|
|
3.00%
|
Expected long-term return on assets
|
7.50%
|
|
7.50%
|
Current medical cost trend rate
|
6.25%
|
|
6.25%
|
Ultimate medical cost trend rate
|
4.50%
|
|
4.50%
|
Medical cost trend rate decreases to ultimate rate in year
|
2028
|
|
2027
|
Assumptions used to calculate the benefit obligation as of October 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
2021
|
|
2020
|
U.S. Defined Benefit Plans:
|
|
|
|
Discount rate
|
2.75%
|
|
2.75%
|
Average increase in compensation levels
|
3.50%
|
|
3.00%
|
Non-U.S. Defined Benefit Plans:
|
|
|
|
Discount rate
|
0.70-1.86%
|
|
0.81-1.66%
|
Average increase in compensation levels
|
2.50-2.75%
|
|
2.50-2.75%
|
U.S. Post-Retirement Benefits Plan:
|
|
|
|
Discount rate
|
2.75%
|
|
2.25%
|
Current medical cost trend rate
|
6.00%
|
|
6.25%
|
Ultimate medical cost trend rate
|
4.50%
|
|
4.50%
|
Medical cost trend rate decreases to ultimate rate in year
|
2028
|
|
2028
|
Health care trend rates did not have a significant effect on the total service and interest cost components or on the post-retirement benefit obligation amounts reported for the U.S. Post-Retirement Benefit Plan for the years ended October 31, 2021 and 2020.
13. SUPPLEMENTAL FINANCIAL INFORMATION
The following tables provide details of selected balance sheet items:
Cash, cash equivalents, and restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
2,052
|
|
|
$
|
1,756
|
|
Restricted cash included in other current assets
|
—
|
|
|
9
|
|
Restricted cash included in other assets
|
16
|
|
|
2
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
$
|
2,068
|
|
|
$
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash primarily relates to deficit reduction contributions to an escrow account for one of our non-U.S. defined benefit pension plans and deposits held as collateral against bank guarantees.
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Finished goods
|
$
|
329
|
|
|
$
|
342
|
|
Purchased parts and fabricated assemblies
|
448
|
|
|
415
|
|
Total inventory
|
$
|
777
|
|
|
$
|
757
|
|
Gross inventory-related excess and obsolescence charges recorded in total cost of products were $27 million in 2021, $29 million in 2020 and $27 million in 2019. We record excess and obsolete inventory charges for inventory at our sites and at our contract manufacturers and suppliers, where we have non-cancellable purchase commitments.
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Land
|
$
|
61
|
|
|
$
|
67
|
|
Buildings and leasehold improvements
|
785
|
|
|
743
|
|
Machinery and equipment
|
1,328
|
|
|
1,224
|
|
Total property, plant and equipment
|
2,174
|
|
|
2,034
|
|
Accumulated depreciation of property, plant and equipment
|
(1,524)
|
|
|
(1,439)
|
|
Property, plant and equipment, net
|
$
|
650
|
|
|
$
|
595
|
|
The increase in property, plant and equipment, net, for the year ended October 31, 2021, is primarily driven by capital investments to increase the resiliency of our supply chains. Asset impairments were zero in 2021, 2020 and 2019. Depreciation expense was $117 million in 2021, $104 million in 2020 and $96 million in 2019.
Standard warranty
Activity related to the standard warranty accrual, which is included in other accrued and other long-term liabilities in our consolidated balance sheet, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Beginning balance
|
$
|
33
|
|
|
$
|
38
|
|
Accruals for warranties
|
29
|
|
|
24
|
|
Settlements made during the period
|
(28)
|
|
|
(29)
|
|
Ending balance
|
$
|
34
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals for warranties due within one year
|
$
|
21
|
|
|
$
|
20
|
|
Accruals for warranties due after one year
|
13
|
|
|
13
|
|
Ending balance
|
$
|
34
|
|
|
$
|
33
|
|
14. COMMITMENTS AND CONTINGENCIES
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. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. The reported open purchase orders represent a commitment to our suppliers. Our agreements with suppliers for common materials provide us the option to cancel, reschedule, and adjust our requirements based on business needs. We expect to fulfill most of our purchase commitments for inventory within one year or based on mutually agreed terms.
As of October 31, 2021 and 2020, our non-cancellable purchase commitments were approximately $444 million and $291 million, respectively, of which the majority is for less than one year. The increase in the non-cancellable purchase commitments for the year ended October 31, 2021 was driven by higher revenue and advance purchase orders to secure capacity for critical parts due to global supply disruptions.
Other purchase commitments. Other purchase commitments relate to contracts with professional services suppliers. We can typically cancel these contracts within 90 days without penalties. For those contracts that are not cancellable within 90 days without penalties, we disclose the amounts we are obligated to pay to a supplier under each contract in that period before such contract can be canceled. As of October 31, 2021, our contractual obligations with these suppliers were approximately $60 million within the next fiscal year, as compared to approximately $52 million as of October 31, 2020.
Litigation and Contingencies. On August 3, 2021, we entered into a Consent Agreement with the Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, Department of State to resolve alleged violations of the Arms Export Control Act and the International Traffic in Arms Regulations ("ITAR"). Pursuant the Consent Agreement, we will pay a penalty of $6.6 million, $2.5 million of which is suspended, over three years and will employ a special compliance officer for three years. We are also involved in lawsuits, claims, investigations and proceedings, including but not limited to patent, commercial and environmental matters that arise in the ordinary course of business. Although there are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows, the outcome of litigation is inherently uncertain and the outcome is difficult to predict. An adverse outcome in any outstanding lawsuit or proceeding could result in significant monetary damages or injunctive relief. If adverse results are above management’s expectations or are unforeseen, management may not have accrued for the liability, which could impact our results in a financial period.
Indemnification Obligations Related to Transactions
In connection with acquisitions, divestitures, mergers, spin-offs and other transactions, we have agreed to indemnify certain parties for damages, losses, expenses and liabilities arising in the future but that were incurred prior to or are related to such transactions. The liabilities covered by these indemnifications include but are not limited to tax, employment, benefits, intellectual property, environmental, and other liabilities. We do not believe that our indemnification obligations related to such liabilities were material as of October 31, 2021.
Indemnifications to Officers and Directors
Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Keysight and such other entities, including service with respect to employee benefit plans. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Keysight that provide for indemnification under similar and additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements, which are available on our website. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and do not believe that our indemnification obligations related to such claims were material as of October 31, 2021.
Other Indemnifications
As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events
related to the sale and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and do not believe that our indemnification obligations related to such claims were material as of October 31, 2021.
15. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 18, 2020, our board of directors approved a stock repurchase program authorizing the purchase of up to $750 million of the company’s common stock. On November 18, 2021, our board of directors approved a new stock repurchase program authorizing the purchase of up to $1,200 million of the company’s common stock, replacing the previously approved November 2020 program, under which $77 million remained.
Under our stock repurchase program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date.
In 2021 we repurchased 4,361,542 shares of common stock for $673 million. In 2020 we repurchased 4,274,366 shares of common stock for $410 million. In 2019 we repurchased 2,093,570 shares of common stock for $160 million. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method.
Accumulated other comprehensive loss
The following table summarizes the components of accumulated other comprehensive loss, net of tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Foreign currency translation, net of tax (expense) of $(63) and $(63)
|
$
|
(20)
|
|
|
$
|
(10)
|
|
Unrealized losses on defined benefit plans, net of tax benefit of $84 and $139
|
(462)
|
|
|
(605)
|
|
Unrealized gains (losses) on derivative instruments, net of tax (expense) of $(11) and $(5)
|
40
|
|
|
16
|
|
Total accumulated other comprehensive loss
|
$
|
(442)
|
|
|
$
|
(599)
|
|
Changes in accumulated other comprehensive loss by component and related tax effects were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension cost and post retirement plan costs:
|
|
|
|
|
|
Foreign currency translation
|
|
Actuarial losses
|
|
Prior service credits
|
|
Unrealized gains (losses) on derivatives
|
|
Total
|
|
(in millions)
|
At October 31, 2019
|
$
|
(43)
|
|
|
$
|
(536)
|
|
|
$
|
4
|
|
|
$
|
(3)
|
|
|
$
|
(578)
|
|
Other comprehensive income (loss) before reclassifications
|
33
|
|
|
(155)
|
|
|
—
|
|
|
20
|
|
|
(102)
|
|
Amounts reclassified out of accumulated other comprehensive gain (loss)
|
—
|
|
|
68
|
|
|
(12)
|
|
|
4
|
|
|
60
|
|
Tax benefit (expense)
|
—
|
|
|
23
|
|
|
3
|
|
|
(5)
|
|
|
21
|
|
Other comprehensive income (loss)
|
33
|
|
|
(64)
|
|
|
(9)
|
|
|
19
|
|
|
(21)
|
|
At October 31, 2020
|
(10)
|
|
|
(600)
|
|
|
(5)
|
|
|
16
|
|
|
(599)
|
|
Other comprehensive income (loss) before reclassifications
|
(10)
|
|
|
106
|
|
|
—
|
|
|
32
|
|
|
128
|
|
Amounts reclassified out of accumulated other comprehensive gain (loss)
|
—
|
|
|
93
|
|
|
(1)
|
|
|
(2)
|
|
|
90
|
|
Tax benefit (expense)
|
—
|
|
|
(55)
|
|
|
—
|
|
|
(6)
|
|
|
(61)
|
|
Other comprehensive income (loss)
|
(10)
|
|
|
144
|
|
|
(1)
|
|
|
24
|
|
|
157
|
|
At October 31, 2021
|
$
|
(20)
|
|
|
$
|
(456)
|
|
|
$
|
(6)
|
|
|
$
|
40
|
|
|
$
|
(442)
|
|
Reclassifications out of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about accumulated other comprehensive loss components
|
|
Amounts reclassified from other comprehensive loss
|
|
Affected line item in statement of operations
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
Unrealized gain (loss) on derivatives
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
Cost of products
|
|
|
|
|
2
|
|
|
(1)
|
|
|
Selling, general and administrative
|
|
|
|
|
—
|
|
|
1
|
|
|
Benefit (provision) for income taxes
|
|
|
|
|
2
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension cost and post retirement plan costs:
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
(93)
|
|
|
(68)
|
|
|
Other income (expense), net
|
|
|
Prior service credits
|
|
1
|
|
|
12
|
|
|
Other income (expense), net
|
|
|
|
|
(92)
|
|
|
(56)
|
|
|
|
|
|
|
|
24
|
|
|
10
|
|
|
Provision (benefit) for income taxes
|
|
|
|
|
(68)
|
|
|
(46)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(66)
|
|
|
$
|
(49)
|
|
|
|
|
|
An amount in parentheses indicates a reduction to income and an increase to the accumulated other comprehensive loss.
Reclassifications of prior service credits and net actuarial losses in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost. See Note 12, "Retirement Plans and Post Retirement Pension Plans."
16. SEGMENT INFORMATION
Our operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Segment operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to each segment and to assess performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
Descriptions of our two reportable segments are as follows:
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.
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, and automated test software that uses artificial intelligence and machine learning to automate test creation and test execution.
A significant portion of the segments' expenses arise from allocated corporate charges as well as expenses related to our centralized sales force, and service, marketing and technology functions that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. Corporate charges include legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Segment allocations are determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. Newly acquired businesses are not allocated these charges until integrated into our shared services and infrastructure.
The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with GAAP. The performance of each segment is measured based on several metrics, including income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding share-based compensation expense, amortization of acquisition-related balances, acquisition and integration costs, a gain on an insurance settlement related to northern California wildfires, restructuring costs, interest income, interest expense and other items as noted in the reconciliations below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSG
|
|
EISG
|
|
Total
|
|
(in millions)
|
Year ended October 31, 2021:
|
|
|
|
|
|
Total and segment revenue
|
$
|
3,523
|
|
|
$
|
1,418
|
|
|
$
|
4,941
|
|
Segment income from operations
|
$
|
932
|
|
|
$
|
444
|
|
|
$
|
1,376
|
|
Depreciation expense
|
$
|
91
|
|
|
$
|
26
|
|
|
$
|
117
|
|
Year ended October 31, 2020:
|
|
|
|
|
|
Total and segment revenue
|
$
|
3,132
|
|
|
$
|
1,089
|
|
|
$
|
4,221
|
|
Segment income from operations
|
$
|
773
|
|
|
$
|
296
|
|
|
$
|
1,069
|
|
Depreciation expense
|
$
|
81
|
|
|
$
|
23
|
|
|
$
|
104
|
|
Year ended October 31, 2019:
|
|
|
|
|
|
Total revenue
|
$
|
3,168
|
|
|
$
|
1,135
|
|
|
$
|
4,303
|
|
Amortization of acquisition-related balances
|
9
|
|
|
—
|
|
|
9
|
|
Total segment revenue
|
$
|
3,177
|
|
|
$
|
1,135
|
|
|
$
|
4,312
|
|
Segment income from operations
|
$
|
743
|
|
|
$
|
294
|
|
|
$
|
1,037
|
|
Depreciation expense
|
$
|
74
|
|
|
$
|
22
|
|
|
$
|
96
|
|
The following table reconciles reportable segments' income from operations to our total enterprise income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
2019
|
|
(in millions)
|
Total reportable segments' income from operations
|
$
|
1,376
|
|
|
$
|
1,069
|
|
|
$
|
1,037
|
|
Share-based compensation
|
(104)
|
|
|
(93)
|
|
|
(82)
|
|
Amortization of acquisition-related balances
|
(174)
|
|
|
(224)
|
|
|
(224)
|
|
Acquisition and integration costs
|
(9)
|
|
|
(13)
|
|
|
(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on insurance settlement
|
—
|
|
|
32
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other
|
(9)
|
|
|
(6)
|
|
|
(11)
|
|
Income from operations, as reported
|
1,080
|
|
|
765
|
|
|
711
|
|
Interest income
|
3
|
|
|
11
|
|
|
23
|
|
Interest expense
|
(79)
|
|
|
(78)
|
|
|
(80)
|
|
Other income (expense), net
|
6
|
|
|
63
|
|
|
61
|
|
Income before taxes, as reported
|
$
|
1,010
|
|
|
$
|
761
|
|
|
$
|
715
|
|
Major customers. No customer represented 10 percent or more of our total revenue in 2021, 2020 or 2019.
The following table presents segment assets and capital expenditures directly managed by each segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
2021
|
|
2020
|
|
|
CSG
|
|
EISG
|
|
Total
|
|
CSG
|
|
EISG
|
|
Total
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
$
|
4,122
|
|
|
$
|
1,523
|
|
|
$
|
5,645
|
|
|
$
|
3,832
|
|
|
$
|
1,334
|
|
|
$
|
5,166
|
|
Capital expenditures
|
$
|
130
|
|
|
$
|
44
|
|
|
$
|
174
|
|
|
$
|
90
|
|
|
$
|
27
|
|
|
$
|
117
|
|
The following table reconciles segment assets to our total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2021
|
|
2020
|
|
(in millions)
|
Total reportable segments' assets
|
$
|
5,645
|
|
|
$
|
5,166
|
|
Cash and cash equivalents
|
2,052
|
|
|
1,756
|
|
|
|
|
|
Long-term investments
|
70
|
|
|
61
|
|
Long-term deferred tax assets
|
711
|
|
|
740
|
|
Accumulated amortization of other intangibles
|
(1,146)
|
|
|
(972)
|
|
Pension and other assets
|
449
|
|
|
467
|
|
Total assets
|
$
|
7,781
|
|
|
$
|
7,218
|
|
The following tables present summarized information for revenue and long-lived assets by geographic region. Revenues from external customers are generally attributed to countries based upon the customer's location. Long-lived assets consist of property, plant, and equipment, operating lease right-of-use assets and other long-term assets excluding intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
China
|
|
Rest of the
World
|
|
Total
|
|
(in millions)
|
Revenue:
|
|
|
|
|
|
|
|
Year ended October 31, 2021
|
$
|
1,803
|
|
|
$
|
927
|
|
|
$
|
2,211
|
|
|
$
|
4,941
|
|
Year ended October 31, 2020
|
$
|
1,523
|
|
|
$
|
863
|
|
|
$
|
1,835
|
|
|
$
|
4,221
|
|
Year ended October 31, 2019
|
$
|
1,584
|
|
|
$
|
822
|
|
|
$
|
1,897
|
|
|
$
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Japan
|
|
|
|
U.K.
|
Rest of the
World
|
|
Total
|
|
(in millions)
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
$
|
533
|
|
|
$
|
294
|
|
|
|
|
$
|
116
|
|
$
|
306
|
|
|
$
|
1,249
|
|
October 31, 2020
|
$
|
387
|
|
|
$
|
272
|
|
|
|
|
$
|
179
|
|
$
|
332
|
|
|
$
|
1,170
|
|