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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(MARK ONE) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2021
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE TRANSITION PERIOD FROM              TO        
 COMMISSION FILE NUMBER: 001-36334
 KEYSIGHT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware46-4254555
(State or other jurisdiction of(IRS employer
incorporation or organization)Identification no.)
1400 Fountaingrove Parkway 
Santa RosaCalifornia95403
(Address of principal executive offices)(Zip Code)
 
Registrant’s telephone number, including area code: (800) 829-4444  
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareKEYSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the exchange act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a)of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No  
The number of shares of common stock outstanding at February 26, 2021 was 185,994,432.


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PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share data)
(Unaudited)
 
Three Months Ended
 January 31,
 20212020
Revenue:
Products$970 $902 
Services and other210 193 
Total revenue1,180 1,095 
Costs and expenses:
Cost of products392 359 
Cost of services and other81 81 
Total costs473 440 
Research and development199 187 
Selling, general and administrative301 300 
Other operating expense (income), net(5)(35)
Total costs and expenses968 892 
Income from operations212 203 
Interest income1 6 
Interest expense(20)(19)
Other income (expense), net2 12 
Income before taxes195 202 
Provision for income taxes23 39 
Net income $172 $163 
Net income per share:
Basic$0.93 $0.87 
Diluted$0.92 $0.86 
Weighted average shares used in computing net income per share:
Basic186 188 
Diluted188 191 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
Three Months Ended
 January 31,
 20212020
Net income$172 $163 
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $(5) and $(1)
18 1 
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of zero
 1 
Foreign currency translation, net of tax benefit (expense) of zero
31  
Net defined benefit pension cost and post retirement plan costs:
Change in net actuarial loss, net of tax expense of $5 and zero
14 17 
Change in net prior service credit, net of tax benefit of zero and $1
 (2)
Other comprehensive income63 17 
Total comprehensive income$235 $180 

The accompanying notes are an integral part of these condensed consolidated financial statements.
    
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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share data)
(Unaudited)

 January 31, 2021October 31, 2020
ASSETS  
Current assets:  
Cash and cash equivalents$1,887 $1,756 
Accounts receivable, net654 606 
Inventory760 757 
Other current assets265 255 
Total current assets3,566 3,374 
Property, plant and equipment, net597 595 
Operating lease right-of-use assets215 182 
Goodwill1,588 1,537 
Other intangible assets, net356 361 
Long-term investments62 61 
Long-term deferred tax assets700 740 
Other assets410 368 
Total assets$7,494 $7,218 
LIABILITIES AND EQUITY
Current liabilities:  
Accounts payable$228 $224 
Employee compensation and benefits253 289 
Deferred revenue456 391 
Income and other taxes payable56 64 
Operating lease liabilities42 43 
Other accrued liabilities89 70 
Total current liabilities1,124 1,081 
Long-term debt1,790 1,789 
Retirement and post-retirement benefits362 362 
Long-term deferred revenue166 175 
Long-term operating lease liabilities184 149 
Other long-term liabilities332 365 
Total liabilities3,958 3,921 
Commitments and contingencies (Note 14)
Stockholders’ equity:  
Preferred stock; $0.01 par value; 100 million shares authorized; none issued and outstanding
  
Common stock; $0.01 par value; 1 billion shares authorized; 197 million shares at January 31, 2021 and 196 million shares at October 31, 2020 issued
2 2 
Treasury stock at cost; 10.9 million shares at January 31, 2021 and 10.7 million shares at October 31, 2020
(772)(752)
Additional paid-in-capital2,134 2,110 
Retained earnings2,708 2,536 
Accumulated other comprehensive loss(536)(599)
Total stockholders' equity3,536 3,297 
Total liabilities and equity$7,494 $7,218 
    
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
Three Months Ended
 January 31,
 20212020
Cash flows from operating activities:  
Net income$172 $163 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation 28 24 
Amortization59 56 
Share-based compensation43 39 
Deferred tax expense1 18 
Excess and obsolete inventory-related charges7 7 
Gain on insurance proceeds received for damage to property, plant and equipment (32)
Other non-cash expense (income), net7 1 
Changes in assets and liabilities:  
Accounts receivable(38)(3)
Inventory (36)
Accounts payable4 (26)
Employee compensation and benefits(54)(63)
Deferred revenue50 29 
Income taxes payable(1)10 
Retirement and post-retirement benefits(1)(3)
Other assets and liabilities18 13 
Net cash provided by operating activities295 197 
Cash flows from investing activities:  
Investments in property, plant and equipment(28)(32)
Acquisition of businesses and intangible assets, net of cash acquired(96)(5)
Insurance proceeds received for damage to property, plant and equipment 32 
Net cash used in investing activities(124)(5)
Cash flows from financing activities:  
Proceeds from issuance of common stock under employee stock plans28 26 
Payment of taxes related to net share settlement of equity awards(49)(49)
Treasury stock repurchases(20)(76)
Payment of acquisition-related contingent consideration(2) 
Net cash used in financing activities(43)(99)
Effect of exchange rate movements8  
Net increase in cash, cash equivalents, and restricted cash136 93 
Cash, cash equivalents, and restricted cash at beginning of period1,767 1,600 
Cash, cash equivalents, and restricted cash at end of period$1,903 $1,693 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions, except number of shares in thousands)
(Unaudited)
 Common StockTreasury Stock  
 Number of SharesPar ValueAdditional Paid-in CapitalNumber of SharesTreasury Stock at CostRetained EarningsAccumulated Other Comprehensive LossTotal Stockholders' Equity
Balance as of October 31, 2020195,661 $2 $2,110 (10,732)$(752)$2,536 $(599)$3,297 
Net income— — — — — 172 — 172 
Other comprehensive income, net of tax— — — — — — 63 63 
Issuance of common stock1,193 — 28 — — — — 28 
Taxes related to net share settlement of equity awards— — (49)— — — — (49)
Share-based compensation— — 45 — — — — 45 
Repurchase of common stock— — — (137)(20)— — (20)
Balance as of January 31, 2021196,854 $2 $2,134 (10,869)$(772)$2,708 $(536)$3,536 
Balance as of October 31, 2019193,769 $2 $2,013 (6,458)$(342)$1,909 $(578)$3,004 
Net income— — — — — 163 — 163 
Other comprehensive income, net of tax— — — — — — 17 17 
Issuance of common stock1,270 — 26 — — — — 26 
Taxes related to net share settlement of equity awards— — (49)— — — — (49)
Share-based compensation— — 41 — — — — 41 
Repurchase of common stock— — — (732)(75)— — (75)
Balance as of January 31, 2020195,039 $2 $2,031 (7,190)$(417)$2,072 $(561)$3,127 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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KEYSIGHT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.
Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarters.
Basis of Presentation. We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The accompanying financial statements and information should be read in conjunction with our Annual Report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our financial position as of January 31, 2021 and October 31, 2020, our results of operations for the three months ended January 31, 2021 and 2020 and cash flows for the three months ended January 31, 2021 and 2020.
Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. 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.
Update to Significant Accounting Policies. There have been no material changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
New Accounting Pronouncements. Accounting standard updates in the first quarter of fiscal 2021 that have been issued by the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies are not material to our condensed 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 condensed consolidated financial statements upon adoption.
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2.    REVENUE
Disaggregation of Revenue
We disaggregate our revenue from contracts with customers by geographic region, end market, and timing of revenue recognition, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregated revenue is presented for each of our reportable segments.
Three Months Ended
January 31,
20212020
Communications Solutions GroupElectronic Industrial Solutions GroupTotalCommunications Solutions GroupElectronic Industrial Solutions GroupTotal
 (in millions)
Region
Americas$401 $67 $468 $386 $61 $447 
Europe132 70 202 115 71 186 
Asia Pacific319 191 510 317 145 462 
Total revenue$852 $328 $1,180 $818 $277 $1,095 
End Market
Aerospace, Defense & Government$294 $ $294 $245 $ $245 
Commercial Communications558  558 573  573 
Electronic Industrial 328 328  277 277 
Total revenue$852 $328 $1,180 $818 $277 $1,095 
Timing of Revenue Recognition
Revenue recognized at a point in
time
$712 $284 $996 $701 $250 $951 
Revenue recognized over time140 44 184 117 27 144 
Total revenue$852 $328 $1,180 $818 $277 $1,095 
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 as 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
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue (contract liabilities) on our condensed consolidated balance sheet. In addition, we defer and capitalize certain costs incurred to obtain a contract (contract costs).
Contract assets. Contract assets represent unbilled amounts from arrangements for which we have performed by transferring goods or services to the customer in advance of invoicing for such goods and services. Contract assets arise primarily from service agreements and products delivered pending a formal customer acceptance, which generally occurs within 30 days. The contract assets balance was $51 million and $61 million at January 31, 2021 and October 31, 2020, respectively, and is included in "accounts receivables, net" in our condensed consolidated balance sheet.
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Contract costs. We recognize an asset for the incremental costs of obtaining a contract with a customer. We have determined that certain employee and third-party representative commissions programs meet the requirements to be capitalized. Employee commissions are based on the achievement of order volume compared to a sales target. Third-party representative commission costs relate directly to a customer contract as the commission is tied to orders contracted through and contracts arranged by our third-party representatives. Without obtaining the contracts, the commissions would not be paid and, as such, are determined to be an incremental cost to obtaining a contract. We only defer these costs when we have determined the commissions are, in fact, incremental and would not have been incurred absent the customer contract.
Capitalized incremental costs are allocated to the individual performance obligations in proportion to the transaction price allocated to each performance obligation and amortized based on the pattern of performance for the underlying performance obligation. Contract costs related to initial contracts and renewals are amortized over the same period because the commissions paid on both the initial contract and renewals are commensurate with one another.
The following table provides a roll-forward of our capitalized contract costs, current and non-current:
Three Months Ended
January 31,
20212020
(in millions)
Beginning balance$31 $28 
Costs capitalized during the period21 16 
Costs amortized during the period(18)(16)
Ending balance$34 $28 
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. Contract liabilities are recognized as revenue when services are provided to the customer.
The following table provides a roll-forward of our contract liabilities, current and non-current:
Three Months Ended
January 31,
20212020
(in millions)
Balance at October 31$566 $510 
Deferral of revenue billed in current period, net of recognition214 161 
Deferred revenue arising out of acquisitions2  
Revenue recognized that was deferred as of the beginning of the period(164)(132)
Foreign currency translation impact4  
Balance at January 31$622 $539 
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 $353 million as of January 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 January 31, 2021, we expect to recognize 39% of the revenue related to these unsatisfied performance obligations during the remainder of 2021, 36% during 2022, and 25% thereafter.
3.    SHARE-BASED COMPENSATION
Keysight accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including restricted stock units ("RSUs"), employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”), employee stock option awards, and performance share awards granted to selected members of our senior management under the Long-Term Performance (“LTP”) Program, based on estimated fair values. 
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Three Months Ended
January 31,
 20212020
 (in millions)
Cost of products and services$7 $5 
Research and development9 8 
Selling, general and administrative27 26 
Total share-based compensation expense$43 $39 
Share-based compensation capitalized within inventory was $2 million at both January 31, 2021 and January 31, 2020.
Performance awards based on total shareholder return ("TSR") are 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 valuation is done once every year in the first quarter at the time of annual grants. The following assumptions were used to estimate the fair value of TSR based performance awards:
Three Months Ended
January 31,
 20212020
Volatility of Keysight shares36 %28 %
Volatility of index23 %13 %
Price-wise correlation with selected peers67 %61 %
The estimated fair value of RSUs 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 reflects the cost of awards that are probable to vest at the end of the performance period. We did not grant option awards in the three months ended January 31, 2021 and 2020.
4.    INCOME TAXES
The company’s effective tax rate was 11.6 percent and 19.1 percent for the three months ended January 31, 2021 and 2020, respectively. The income tax expense was $23 million and $39 million for the three months ended January 31, 2021 and 2020, respectively. The income tax expense for the three months ended January 31, 2021 included a net discrete benefit of $11 million. The income tax expense for the three months ended January 31, 2020 included a net discrete expense of $3 million. The decrease in tax expense for the three months ended January 31, 2021 is primarily due to the increased benefit of U.S. state R&D credits and a reduction in U.S. states taxes on foreign earnings.
Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore, 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 impact of the tax incentives decreased the income tax provision by $10 million and $15 million for the three months ended January 31, 2021 and 2020, respectively, resulting in a benefit to net income per share (diluted) of approximately $0.05 and $0.08 for the three months ended January 31, 2021 and 2020, respectively. The Singapore tax incentive is due for renewal in 2024. The incentive in Malaysia is due for renewal in 2025.
The open tax years for the IRS and most states are from November 1, 2016 through the current tax year. Keysight’s 2018 U.S. federal income tax return is currently under examination by the IRS. This is the year in which the Tax Cuts and Jobs Act was enacted and the one-time U.S. tax on earnings not previously repatriated to the U.S., known as the Transition Tax, was reported. 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. At this time, management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If resolution of any tax issues addressed in our current open examinations are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs.
Keysight’s 2008 Malaysian income tax return was examined by the Malaysian Tax Authority. This tax year pre-dates our separation from Agilent. However, pursuant to the tax matters agreement between Agilent and Keysight that was 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 to the Malaysian Tax Authority of $68 million on gains related to intellectual property rights. Our appeal to the Special Commissioners of Income Tax in Malaysia was unsuccessful. An appeal has now been lodged with the High Court. The company believes there are numerous defenses to the
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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 pursuing all avenues to resolve this issue favorably for the company.
5.    NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:
Three Months Ended
January 31,
 20212020
 (in millions)
Numerator:
Net income$172 $163 
Denominator:
Basic weighted-average shares186 188 
Potential common shares— stock options and other employee stock plans2 3 
Diluted weighted-average shares188 191 
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 both the three months ended January 31, 2021 and 2020, we excluded zero options 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 awards and RSUs, 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. We excluded approximately 251,000 shares for the three months ended January 31, 2021. The impact was immaterial for the three months ended January 31, 2020.
6.    SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes was $22 million and $9 million for the three months ended January 31, 2021 and 2020, respectively. Cash paid for interest was zero for both the three months ended January 31, 2021 and 2020.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet to the amount shown in the condensed consolidated statement of cash flows:
January 31, 2021October 31, 2020
(in millions)
Cash and cash equivalents$1,887 $1,756 
Restricted cash included in other current assets14 9 
Restricted cash included in other assets2 2 
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows$1,903 $1,767 
Restricted cash included in other current assets primarily relates to short-term deficit reduction contribution to an escrow account for one of our non-U.S. defined benefit pension plans, and restricted cash included in other assets is primarily deposits held as collateral against bank guarantees.
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7.    INVENTORY
 January 31, 2021October 31, 2020
 (in millions)
Finished goods$335 $342 
Purchased parts and fabricated assemblies425 415 
Total inventory$760 $757 
Inventory-related excess and obsolescence charges recorded in total cost of products was $7 million for both the three months ended January 31, 2021 and 2020. We record excess and obsolete inventory charges for inventory at our sites as well as inventory at our contract manufacturers and suppliers, where we have non-cancellable purchase commitments.
8.    GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balance as of January 31, 2021 and October 31, 2020 and the activity for the three months ended January 31, 2021 for each of our reportable operating segments were as follows:
 Communications Solutions GroupElectronic Industrial Solutions GroupTotal
 (in millions)
Goodwill at October 31, 2020$984 $553 $1,537 
Foreign currency translation impact2 8 10 
Goodwill arising from acquisitions41  41 
Goodwill at January 31, 2021$1,027 $561 $1,588 
Components of goodwill:
Goodwill$1,693 $553 $2,246 
Accumulated impairment losses(709) (709)
Goodwill at October 31, 2020$984 $553 $1,537 
Goodwill$1,736 $561 $2,297 
Accumulated impairment losses(709) (709)
Goodwill at January 31, 2021$1,027 $561 $1,588 
Other intangible assets as of January 31, 2021 and October 31, 2020 consisted of the following:
 January 31, 2021October 31, 2020
 Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
 (in millions)
Developed technology$942 $793 $149 $915 $749 $166 
Backlog17 15 2 17 14 3 
Trademark/Tradename36 26 10 35 25 10 
Customer relationships380 195 185 363 183 180 
Non-compete agreements3 1 2 1 1  
Total amortizable intangible assets1,378 1,030 348 1,331 972 359 
In-Process R&D8 — 8 2 — 2 
Total$1,386 $1,030 $356 $1,333 $972 $361 
During the three months ended January 31, 2021, we acquired Sanjole Inc. ("Sanjole") for $96 million, net of $11 million cash acquired, and recognized additions to goodwill and other intangible assets of $41 million and $51 million, respectively, based on the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. All goodwill was assigned to the Communications Solutions Group. We expect the goodwill recognized 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 is 7 years and 9 years, respectively. Sanjole is a leader in wireless test and measurement solutions for protocol decoding and interoperability.
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Goodwill is assessed for impairment on a reporting unit basis at least annually in the fourth quarter of each year, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The company has not identified any triggering events that indicate an impairment of goodwill for the three months ended January 31, 2021.
During the three months ended January 31, 2021, other intangible assets increased $3 million due to the impact of foreign exchange translation. Amortization of other intangible assets was $58 million and $55 million for the three months ended January 31, 2021 and 2020, respectively. During the three months ended January 31, 2021, we transferred $1 million from in-process R&D to developed technology as projects were successfully completed.
Estimated intangible assets amortization expense for each of the five succeeding fiscal years is as follows:
Amortization expense
(in millions)
2021 (remainder)$114 
2022$95 
2023$72 
2024$32 
2025$16 
Thereafter$19 
9.    FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. 
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2021 and October 31, 2020 were as follows:
Fair Value Measurements at
 January 31, 2021October 31, 2020
 TotalLevel 1Level 2Level 3OtherTotalLevel 1Level 2Level 3Other
 (in millions)
Assets:        
Short-term        
Cash equivalents
Money market funds$1,121 $1,121 $ $ $— $1,047 $1,047 $ $ $— 
Derivative instruments (foreign exchange contracts)6  6  — 3  3  — 
Long-term
Derivative instruments (interest rate swaps)43  43  — 23  23  — 
Equity investments52 52   — 52 52   — 
Equity investments - other10    10 9    9 
Total assets measured at fair value$1,232 $1,173 $49 $ $10 $1,134 $1,099 $26 $ $
Liabilities:        
Short-term
Derivative instruments (foreign exchange contracts)$4 $ $4 $ $— $4 $ $4 $ $— 
Long-term
Deferred compensation liability20  20  — 18  18  — 
Total liabilities measured at fair value$24 $ $24 $ $— $22 $ $22 $ $— 
Net realized gains (losses) on sale of our equity investments were zero for both the three months ended January 31, 2021 and 2020. Net unrealized losses on our equity investments still held were $2 million and zero for the three months ended January 31, 2021 and 2020, respectively.
Our money market funds and equity investments with readily determinable fair values are measured at fair value using quoted market prices and, therefore, are classified within Level 1 of the fair value hierarchy. Equity 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 table above. Our deferred compensation liability is classified as Level 2 because the inputs used in the calculations are observable, although the values are not directly based on quoted market prices. Our derivative financial instruments are classified within Level 2 as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.
Equity investments, including securities that are earmarked to pay the deferred compensation liability, and the deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss).
10.    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.
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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 terms allow 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.
Non-designated 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.
The number of open foreign exchange forward contracts designated as "cash flow hedges" and "not designated as hedging instruments" was 190 and 98, respectively, as of January 31, 2021. The aggregated notional amounts by currency and designation as of January 31, 2021 were as follows:
 Derivatives in Cash Flow
Hedging Relationships
Derivatives Not Designated as Hedging Instruments
 Forward
Contracts
Forward
Contracts
CurrencyBuy/(Sell)Buy/(Sell)
 (in millions)
Euro$21 $33 
British Pound (122)
Singapore Dollar17 13 
Malaysian Ringgit82 13 
Japanese Yen(76)(84)
Other currencies9 (7)
Total$53 $(154)
Derivative instruments are subject to master netting arrangements and are disclosed gross in the condensed consolidated balance sheet. The gross fair values and balance sheet presentation of derivative instruments held as of January 31, 2021 and October 31, 2020 were as follows:
Fair Values of Derivative Instruments
Assets DerivativesLiabilities Derivatives
Fair Value Fair Value
Balance Sheet LocationJanuary 31, 2021October 31, 2020Balance Sheet LocationJanuary 31, 2021October 31, 2020
(in millions)
Derivatives designated as hedging instruments:     
Cash flow hedges
Foreign exchange contracts     
Other current assets$5 $2 Other accrued liabilities$2 $3 
Interest rate swap contracts:
Other assets43 23 Other long-term liabilities  
Derivatives not designated as hedging instruments:     
Foreign exchange contracts     
Other current assets1 1 Other accrued liabilities2 1 
Total derivatives$49 $26  $4 $4 
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and for those not designated as hedging instruments in our condensed consolidated statement of operations was as follows:
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Three Months Ended
January 31,
20212020
 (in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Interest rate swap contracts:
Gain (loss) recognized in accumulated other comprehensive income (loss)$21 $ 
Foreign exchange contracts:
Gain (loss) recognized in accumulated other comprehensive income (loss)$2 $2 
Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings:
Cost of products$(1)$(1)
Selling, general and administrative$1 $ 
Gain (loss) excluded from effectiveness testing recognized in earnings based on changes in fair value:
Cost of products$ $1 
Derivatives not designated as hedging instruments:
Gain (loss) recognized in:
Cost of products$1 $ 
Other income (expense), net$(4)$ 
The estimated amount at January 31, 2021 expected to be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months is a gain of $1 million.
11. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
For the three months ended January 31, 2021 and 2020, our net pension and post-retirement benefit cost (benefit) was comprised of the following:
 Pensions 
 U.S. Defined Benefit PlansNon-U.S. Defined Benefit
Plans
U.S. Post-Retirement
Benefit Plan
 Three Months Ended
January 31,
 202120202021202020212020
(in millions)
Service cost—benefits earned during the period$6 $6 $4 $4 $ $ 
Interest cost on benefit obligation5 6 4 4 1 1 
Expected return on plan assets(13)(11)(20)(21)(3)(3)
Amortization:
Net actuarial loss6 4 10 8 3 3 
Prior service credit     (3)
Net periodic benefit cost (benefit)$4 $5 $(2)$(5)$1 $(2)
We record the service cost component of net periodic benefit cost (benefit) in the same line item as other employee compensation costs. The non-service components of net periodic benefit cost (benefit), such as interest cost, expected return on assets, amortization of prior service cost, and actuarial gains or losses, are recorded within other income (expense), in the condensed consolidated statement of operations.
We did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan during the three months ended January 31, 2021 and 2020. We contributed $3 million and $2 million to our non-U.S. defined benefit plans during the three months ended January 31, 2021 and 2020, respectively.
For the remainder of 2021, we are evaluating potential contributions to our U.S. Defined Benefit Plan or U.S. Post-Retirement Benefit Plan, although contributions are not required, and we expect to contribute $6 million to our non-U.S. defined benefit plans.
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12.    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 for 3 to 5 years. We consider options to renew in our lease terms and measurement of right-of-use ("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 6.3 years as of January 31, 2021 and 2020, respectively. The weighted average discount rate of our operating leases was 3% for both January 31, 2021 and 2020.
The following table summarizes the components of our lease cost:
Three Months Ended
January 31,
20212020
(in millions)
Operating lease cost$13 $11 
Variable lease cost$5 $4 
Costs associated with our short-term leases were immaterial for both the three months ended January 31, 2021 and 2020. Sublease income was immaterial for both the three months ended January 31, 2021 and 2020. Amounts related to finance lease activities for the three months ended January 31, 2021 and 2020 were not material.
Supplemental cash flow information related to our leases was as follows:
Three Months Ended
January 31,
20212020
(in millions)
Cash paid for amounts included in the measurement of lease liabilities — operating cash flows$13 $11 
ROU assets obtained in exchange for operating lease obligations$41 $12 
The increase in ROU assets was primarily driven by reassessment of a lease term triggered by significant leasehold improvements.
Maturity Analysis of Liabilities
The maturities of our operating leases as of January 31, 2021 with initial terms exceeding one year are as follows:
Operating Leases
(in millions)
2021 (remainder)$38 
202243 
202333 
202424 
202519 
Thereafter100 
Total undiscounted lease liability257 
Imputed interest31 
Total discounted lease liability$226 
Leases That Have Not Yet Commenced
As of January 31, 2021, we did not have material leases that had not yet commenced.
Lessor Disclosure
Rental income from leasing out excess facilities was $3 million for both the three months ended January 31, 2021, and 2020, and is included in other operating expense (income), net. Other lessor arrangements were immaterial.
13.    WARRANTIES, COMMITMENTS AND CONTINGENCIES
Standard warranty
Our warranties on products sold through direct sales channels are primarily for one year. Warranties for products sold through distribution channels are primarily for three years. We accrue for standard warranty costs based on historical trends in
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warranty charges. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.
Activity related to the standard warranty accrual, which is included in other accrued and other long-term liabilities in our condensed consolidated balance sheet, is as follows:
 Three Months Ended
January 31,
 20212020
 (in millions)
Beginning balance$33 $38 
Accruals for warranties, including change in estimates9 5 
Settlements made during the period(7)(8)
Ending balance$35 $35 
Accruals for warranties due within one year$21 $22 
Accruals for warranties due after one year14 13 
Ending balance $35 $35 
Commitments
During the three months ended January 31, 2021, there were no material changes to our contractual commitments reported in the company’s 2020 Annual Report on Form 10-K.
Contingencies
We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we currently believe probable and reasonably possible of having a material impact to our business, consolidated financial position, results of operations or cash flows.
14.    DEBT
The following table summarizes the components of our long-term debt:
January 31, 2021October 31, 2020
(in millions)
2024 Senior Notes at 4.55% ($600 face amount less unamortized costs of $2 and $2)
$598 $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 
Total debt$1,790 $1,789 
Short-Term Debt
Revolving Credit Facility
We maintain a credit facility (the “Revolving Credit Facility”) that provides for a $450 million, five-year unsecured revolving credit facility that will expire on February 15, 2022. In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to $150 million (to a total of $600 million) in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. As of January 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 three months ended January 31, 2021.
Long-Term Debt
There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the three months ended January 31, 2021 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
As of January 31, 2021 and October 31, 2020, we had $42 million and $40 million, respectively, of outstanding letters of credit and surety bonds unrelated to the credit facility that were issued by various lenders.
The fair value of our long-term debt, 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 $267 million and $236
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million as of January 31, 2021 and October 31, 2020, respectively. The increase in fair value is due to lower corporate credit spreads, partially offset by an increase in U.S. Treasury yields.
15.    STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 18, 2020, our board of directors approved a new stock repurchase program authorizing the purchase of up to $750 million of the company’s common stock. Our previously approved 2019 stock repurchase program authorizing the purchase of up to $500 million of the company’s common stock was nearly exhausted.
Under our stock repurchase program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date.
For the three months ended January 31, 2021, we repurchased 137,200 shares of common stock for $20 million. For the three months ended January 31, 2020, we repurchased 731,918 shares of common stock for $75 million.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component and related tax effects for the three months ended January 31, 2021 and 2020 were as follows:
Foreign currency translationNet defined benefit pension cost and post retirement plan costsUnrealized gains (losses) on derivativesTotal
Actuarial lossesPrior service credits
(in millions)
As of October 31, 2020$(10)$(600)$(5)$16 $(599)
Other comprehensive income (loss) before reclassifications31   23 54 
Amounts reclassified out of accumulated other comprehensive gain (loss) 19   19 
Tax benefit (expense) (5) (5)(10)
Other comprehensive income (loss)31 14  18 63 
As of January 31, 2021$21 $(586)$(5)$34 $(536)
As of October 31, 2019$(43)$(536)$4 $(3)$(578)
Other comprehensive income (loss) before reclassifications   2 2 
Amounts reclassified out of accumulated other comprehensive gain (loss) 17 (3)1 15 
Tax benefit (expense)  1 (1) 
Other comprehensive income (loss) 17 (2)2 17 
As of January 31, 2020$(43)$(519)$2 $(1)$(561)
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Reclassifications out of accumulated other comprehensive loss for the three months ended January 31, 2021 and 2020 were as follows:
Details about accumulated other comprehensive loss componentsAmounts reclassified from other comprehensive lossAffected line item in statement of operations
Three Months Ended
January 31,
20212020
(in millions)
Unrealized gain (loss) on derivatives$(1)$(1)Cost of products
1  Selling, general and administrative
  Benefit (provision) for income tax
 (1)Net of Income tax
Net defined benefit pension cost and post retirement plan costs:
Net actuarial loss(19)(17)
Prior service credits 3 
(19)(14)Total before income tax
5 (1)Benefit (provision) for income tax
(14)(15)Net of income tax
Total reclassifications for the period$(14)$(16)
An amount in parentheses indicates a reduction to income and an increase to the accumulated other comprehensive loss.
Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 11, "Retirement Plans and Post-Retirement Benefit Plans").
16.    SEGMENT INFORMATION
We report our results in two reportable segments consisting of Communications Solutions Group and Electronic Industrial Solutions Group.
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 industry and measurement solutions for consumer electronics, education, general electronics design and manufacturing, and semiconductor design and manufacturing. The group provides design and test software, electronic measurement instruments and systems and related services used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment. With the acquisition of Eggplant, a leading software test automation company, we now have the ability to provide automated software test capabilities that include artificial intelligence (AI) and machine learning to automatically identify, build and execute tests critical to digital business success and a strong customer experience.
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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.
Communications Solutions GroupElectronic Industrial Solutions GroupTotal Segments
 (in millions)
Three months ended January 31, 2021:
Revenue$852 $328 $1,180 
Segment income from operations$224 $96 $320 
Three months ended January 31, 2020:
  
Revenue$818 $277 $1,095 
Segment income from operations$201 $73 $274 
The following table reconciles total reportable operating segments’ income from operations to our income before taxes, as reported:
Three Months Ended
 January 31,
 20212020
 (in millions)
Total reportable operating segments' income from operations$320 $274 
Share-based compensation(43)(39)
Amortization of acquisition-related balances(58)(59)
Acquisition and integration costs(3)(2)
Gain on insurance settlement 32 
Restructuring and other(4)(3)
Income from operations, as reported212 203 
Interest income1 6 
Interest expense(20)(19)
Other income (expense), net2 12 
Income before taxes, as reported$195 $202 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new solution and service introductions, the ability of our solutions to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our completed acquisitions and other transactions, our transition to lower-cost regions, the existence of political or economic instability, increased trade tension and tightening of export control regulations, impact of pandemic conditions such as the novel coronavirus ("COVID-19"), the impact of volatile weather caused by environmental conditions such as climate change, and our and the combined group's estimated or anticipated future results of operations, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including but not limited to those risks and uncertainties discussed in Part II Item 1A and elsewhere in this Form 10-Q.
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Basis of Presentation
The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarter periods.
Overview and Executive Summary
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 lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.
We invest in research and development ("R&D") to align our business with available markets and position the company for growth. Our R&D efforts focus on improvements to existing software and hardware products and development to support new software and hardware product introductions and complete customer solutions aligned to the industries we serve. We anticipate that we will continue to have significant R&D expenditures in order to maintain our competitive position with a continuous flow of innovative, high-quality software, customer solutions, products and services. We remain committed to investment in R&D and have focused our development efforts on strategic opportunities to capture future growth.
COVID-19 pandemic
In March 2020, the World Health Organization declared COVID-19 as a global pandemic. In response to the rapid global spread of the virus, national, state, and local governments issued orders and recommendations to attempt to reduce the further spread of the disease. Such orders included movement control and shelter-in-place orders, travel restrictions, limitations on public gatherings, school closures, social distancing requirements and the closure of all but critical and essential services and infrastructure. Our employees, customers, suppliers and vendors have been subject to these restrictions and orders and have been similarly impacted. Working with local governments and health officials to implement health and safety measures at all of our locations, we have re-opened most sites worldwide and significantly ramped our production and services operations. All of our essential production facilities around the world were open during the first fiscal quarter, and as of the date of this Form 10-Q.
For discussion of risks related to COVID-19 on our operations, business results and financial condition, see “Item 1A. Risk Factors.”
Three months ended January 31, 2021 and 2020
Total orders for the three months ended January 31, 2021 were $1,223 million, an increase of 7 percent when compared to the same period last year. Orders associated with acquisitions and foreign currency movements each had a favorable impact of 1 percent on the year-over-year order growth. Orders increased across all regions, more significantly in Asia Pacific.
Revenue for the three months ended January 31, 2021 was $1,180 million, an increase of 8 percent when compared to the same period last year. Revenue associated with acquisitions and foreign currency movements each had a favorable impact of 1 percent on the year-over-year revenue growth. Revenue for both the Communications Solutions Group and Electronic Industrial Solutions Group increased year over year driven by strength in aerospace, defense and government, semiconductor measurement and general electronics measurement, partially offset by a decline in commercial communications. Revenue from the Communications Solutions Group and Electronic Industrial Solutions Group represented 72 percent and 28 percent, respectively, of total revenue for the current period.
Net income for the three months ended January 31, 2021 was $172 million compared to $163 million for the same period last year. The increase in net income was primarily driven by higher revenue volume and lower income tax expense, partially offset by unfavorable mix and lower operating income due to a one-time prior-period gain related to an insurance settlement.
Outlook
Our strategy of bringing first-to-market solutions that help customers develop new technologies and accelerate innovation provides a platform for long-term growth. We expect our customers to continue to make R&D investments in certain next-generation technologies. We are still in the early market stages for emerging technologies, such as 5G, next-generation automotive, internet of things ("IoT") and defense modernization and expect technology investments to continue. We continue to closely monitor the current macro environment related to trade, tariffs, monetary and fiscal policies, as well as pandemics or epidemics, such as the recent COVID-19 outbreak. We have complied and will continue to comply with recent U.S. Department of Commerce export control regulations. We remain confident in our long-term secular market growth trends and the strength of our operating model.
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Critical Accounting Policies and Estimates
There were no material changes during the three months ended January 31, 2021 to the critical accounting estimates described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Adoption of New Accounting Pronouncements
Accounting standard updates in the first quarter of fiscal 2021 that have been issued by the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies are not material to our condensed consolidated financial statements.
Currency Exchange Rate Exposure
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our condensed consolidated balance sheet and statement of operations. We experience some fluctuations within individual lines of the condensed consolidated balance sheet and condensed consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge short-term currency movements based on a rolling period of up to twelve months. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations - Three months ended January 31, 2021 and 2020
Revenue
Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Returns are recorded in the period received from the customer and historically have not been material.
 Three Months EndedYear over Year Change
 January 31,Three
 20212020Months
(in millions)
Revenue:
Products$970 $902 7%
Services and other210 193 9%
Total revenue$1,180 $1,095 8%
The following table provides the percent change in revenue for the three months ended January 31, 2021 by geographic region including and excluding the impact of foreign currency movements as compared to the same period last year.
Year over Year Change
 Three Months Ended
 January 31, 2021
Geographic RegionActualCurrency Adjusted
Americas%%
Europe%%
Asia Pacific10 %%
Total revenue%%
Revenue grew across all regions, including double-digit growth in Asia Pacific. Currency had a favorable impact on revenue of 3 percentage points in Europe and 1 percentage point in Asia Pacific for the three months ended January 31, 2021.
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Costs and Expenses
 Three Months EndedYear over Year Change
 January 31,Three
 20212020Months
Total gross margin59.9%59.8 %
Operating margin18.0%18.5 %(1) ppt
in millions
Research and development$199 $187 7%
Selling, general and administrative$301 $300 
Other operating expense (income), net$(5)$(35)(85)%
Gross margin for the three months ended January 31, 2021 was flat compared to the same period last year, as the favorable impact from higher revenue volume was offset by unfavorable mix and higher warranty costs.
R&D expense for the three months ended January 31, 2021 increased 7 percent compared to the same period last year, primarily driven by greater investment in key growth opportunities in our end markets, leading-edge technologies, incremental costs of an acquired business and higher infrastructure-related costs, partially offset by declines in discretionary spending due to COVID-19 related restrictions and people-related costs. As a percentage of revenue, R&D expense was 17 percent for both the three months ended January 31, 2021 and 2020.
Selling, general and administrative expense for the three months ended January 31, 2021 was flat compared to the same period last year, as incremental costs of an acquired business, higher people-related costs and higher infrastructure-related costs were offset by reductions in travel and marketing-related costs due to COVID-19 related restrictions.
Other operating expense (income), net for the three months ended January 31, 2021 was income of $5 million compared to income of $35 million for the three months ended January 31, 2020, which included a one-time gain of $32 million on an insurance settlement.
Operating margin decreased 1 percentage point for the three months ended January 31, 2021 compared to the same period last year, driven by unfavorable mix and lower operating income due to a one-time prior-period gain from an insurance settlement , partially offset by favorable impact from flat selling, general and administration expenses and higher revenue volume.
As of January 31, 2021, our headcount was approximately 14,000 compared to approximately 13,600 at January 31, 2020. The increase in headcount was primarily driven by acquisitions.
Interest Income and Expense
Interest income for the three months ended January 31, 2021 and 2020 was $1 million and $6 million, respectively, and primarily relates to interest earned on our cash balances. Interest expense for the three months ended January 31, 2021 and 2020 was $20 million and $19 million, respectively, and primarily relates to interest on our senior notes.
Other income (expense), net
Other income (expense), net for the three months ended January 31, 2021 and 2020 was income of $2 million and $12 million, respectively, and primarily includes net income related to our defined benefit and post-retirement benefit plans (interest cost, expected return on assets and amortization of net actuarial loss and prior service credits) and the change in fair value of our equity investments.
Income Taxes
The company’s effective tax rate was 11.6 percent and 19.1 percent for the three months ended January 31, 2021 and 2020, respectively. The income tax expense was $23 million and $39 million for the three months ended January 31, 2021 and 2020, respectively. The income tax expense for the three months ended January 31, 2021 included a net discrete benefit of $11 million. The income tax expense for the three months ended January 31, 2020 included a net discrete expense of $3 million. The decrease in tax expense for the three months ended January 31, 2021 is primarily due to the increased benefit of U.S. state R&D credits and a reduction in U.S. states taxes on foreign earnings.
Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore, 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 impact of the tax incentives decreased the income tax provision by $10 million and $15 million for the three months ended January 31, 2021 and 2020, respectively, resulting in a benefit to net income per share (diluted) of approximately $0.05 and
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$0.08 for the three months ended January 31, 2021 and 2020, respectively. The Singapore tax incentive is due for renewal in 2024. The incentive in Malaysia is due for renewal in 2025.
The open tax years for the IRS and most states are from November 1, 2016 through the current tax year. Keysight’s 2018 U.S. federal income tax return is currently under examination by the IRS. This is the year in which the Tax Cuts and Jobs Act was enacted and the one-time U.S. tax on earnings not previously repatriated to the U.S., known as the Transition Tax, was reported. 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. At this time, management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If resolution of any tax issues addressed in our current open examinations are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs.
Keysight’s 2008 Malaysian income tax return was examined by the Malaysian Tax Authority. In the fourth quarter of fiscal year 2017, Keysight paid income taxes and penalties to the Malaysian Tax Authority of $68 million on gains related to intellectual property rights. Our appeal to the Special Commissioners of Income Tax in Malaysia was unsuccessful. An appeal has now been lodged with the High Court. 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 pursuing all avenues to resolve this issue favorably for the company.
At January 31, 2021, our estimated annual effective tax rate for fiscal year 2021 is an expense of 16.9 percent excluding discrete items. We determine our interim tax provision using an estimated annual effective tax rate methodology except in jurisdictions where we anticipate a full year loss or we have a year-to-date ordinary loss for which no tax benefit can be recognized. In these jurisdictions, tax expense is computed separately. Our estimated annual effective tax rate was lower than the U.S. statutory rate primarily due to the beneficial impact of the mix of earnings in non-U.S. jurisdictions taxed at lower rates and the U.S. federal research and development tax credit, offset by the expense impact of the U.S. GILTI tax on earnings in non-U.S. jurisdictions net of U.S. foreign tax credits and other U.S. tax reform deductions and reserves for uncertain tax positions.
We do not recognize deferred taxes for temporary differences expected to impact the GILTI tax expense in future years. We recognize the tax expense related to GILTI in each year in which the tax is incurred.
Segment Overview
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, interest income, interest expense and other items.
Communications Solutions Group
The Communications Solutions Group serves customers spanning the worldwide commercial communications and aerospace, defense, and government end markets. The group’s solutions consist of electronic design and test software, electronic measurement instruments, systems and related services. These solutions are used in the simulation, design, validation, manufacturing, installation, and optimization of electronic equipment and networks.
Revenue
Three Months EndedYear over Year Change
January 31,Three
20212020Months
(in millions)
Total revenue$852 $818 4%
The Communications Solutions Group revenue for the three months ended January 31, 2021 increased 4 percent compared to the same period last year. Foreign currency movements had a 1 percent favorable impact on the year-over-year revenue growth. Revenue growth in the aerospace, defense and government market was partially offset by a decline in the commercial communications market. Revenue grew across all regions for the three months ended January 31, 2021.
Revenue from the commercial communications market represented 65 percent of the total Communications Solutions Group revenue for the current period and declined 3 percent year over year. For the three months ended January 31, 2021, revenue declines in Asia Pacific and the Americas were partially offset by an increase in Europe. The decline was largely driven by increased China trade restrictions. We continue to see strength driven by on-going global 5G deployments, the roll-out of new 5G devices, and continued investments in 400G and 800G ethernet for data centers.
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Revenue from the aerospace, defense and government market represented 35 percent of the total Communications Solutions Group revenue for the three months ended January 31, 2021, and increased 20 percent year over year. For the three months ended January 31, 2021, revenue increased across all regions. Revenue growth was mainly driven by continued investment in electromagnetic spectrum operations, space, and new commercial technologies like 5G and early 6G research. The aerospace, defense and government market remained strong in the U.S. with increased year-end spending on major defense and government programs, complemented by growth in China and Europe.
Gross Margin and Operating Margin
The following table provides the Communications Solutions Group margins, expenses and income from operations for the three months ended January 31, 2021 versus the three months ended January 31, 2020.
Three Months EndedYear over Year Change
January 31,Three
20212020Months
Total gross margin64.6 %65.7 %(1) ppt
Operating margin26.3 %24.6 %2 ppts
in millions
Research and development$143 $139 3%
Selling, general and administrative$188 $201 (6)%
Other operating expense (income), net$(4)$(3)36%
Income from operations$224 $201 11%
Gross margin for the three months ended January 31, 2021 decreased 1 percentage point compared to the same period last year, primarily driven by unfavorable mix and higher warranty costs, partially offset by higher revenue volume.
R&D expense for the three months ended January 31, 2021 increased 3 percent when compared to the same period last year, primarily driven by greater investments in key growth opportunities in our end markets, leading-edge technologies and higher infrastructure-related costs, partially offset by a decline in travel costs due to COVID-19 related restrictions.
Selling, general and administrative expense for the three months ended January 31, 2021 decreased 6 percent compared to the same period last year, primarily driven by lower selling, marketing and infrastructure-related costs, and travel costs due to COVID-19 related restrictions and lower discretionary expenses.
Other operating expense (income), net was income of $4 million for the three months ended January 31, 2021 compared to income of $3 million for the same period last year.
Income from Operations
Income from operations for the three months ended January 31, 2021 increased $23 million on a corresponding revenue increase of $34 million compared to the same period last year.
Operating margin increased 2 percentage points for the three months ended January 31, 2021 compared to the same period last year, driven by declines in operating expenses, partially offset by a decline in gross margin as noted above.
Electronic Industrial Solutions Group
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 industry 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. With the acquisition of Eggplant, a leading software test automation company, we now have the ability to provide automated software test capabilities that include artificial intelligence and machine learning to automatically identify, build and execute tests critical to digital business success and a strong customer experience.
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Revenue
Three Months EndedYear over Year Change
January 31,Three
20212020Months
(in millions)
Total revenue$328 $277 18%
The Electronic Industrial Solutions Group revenue for the three months ended January 31, 2021 increased 18 percent compared to the same period last year and increased 15 percent excluding the impact of acquisitions. Foreign currency movements had a favorable impact of 2 percent on the year-over-year revenue growth. The revenue increase was primarily driven by growth in semiconductor measurement solutions and general electronics measurement due to continued investments in next-generation semiconductor technologies and continued economic recovery in general electronics measurement, partially offset by declines in automotive and energy. Revenue growth in Asia Pacific and the Americas was partially offset by a slight decline in Europe.
Gross Margin and Operating Margin
The following table shows the Electronic Industrial Solutions Group margins, expenses and income from operations for the three months ended January 31, 2021 versus the three months ended January 31, 2020.
Three Months EndedYear over Year Change
January 31,Three
20212020Months
Total gross margin63.4 %61.1 %2 ppts
Operating margin29.4 %26.3 %3 ppts
in millions
Research and development$48 $41 18%
Selling, general and administrative$65 $57 15%
Other operating expense (income), net$(1)$(1)
Income from operations$96 $73 32%
Gross margin increased 2 percentage points for the three months ended January 31, 2021 compared to the same period last year, primarily driven by favorable mix and higher revenue volume, partially offset by increased warranty costs.
R&D expense for the three months ended January 31, 2021 increased 18 percent compared to the same period last year, primarily driven by greater investment in key growth opportunities in our end markets, leading-edge technologies and incremental costs of an acquired business.
Selling, general and administrative expense for the three months ended January 31, 2021 increased 15 percent compared to the same period last year, primarily due to incremental costs of an acquired business and higher selling, marketing and infrastructure-related costs.
Other operating expense (income) for each of the three months ended January 31, 2021 and 2020 was income of $1 million.
Income from Operations
Income from operations for the three months ended January 31, 2021 increased $23 million on a corresponding revenue increase of $51 million compared to the same period last year.
Operating margin for the three months ended January 31, 2021 increased 3 percentage points when compared to the same period last year, primarily driven by gross margin gains as noted above.
Financial Condition
Liquidity and Capital Resources
Our financial position as of January 31, 2021 consisted of cash, cash equivalents and restricted cash of $1,903 million as compared to $1,767 million as of October 31, 2020.
As of January 31, 2021, approximately $1,346 million of our cash, cash equivalents and restricted cash was held outside of the United States in our foreign subsidiaries. Our cash and cash equivalents mainly consist of investments in institutional
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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 believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. Cash generated from our operations provides our primary source of cash flows. Given the uncertain duration and severity of the COVID-19 pandemic, we can experience significant fluctuations in our future cash from operations from the ongoing impacts of the pandemic because of the adverse global macroeconomic environment and our customers ability to pay. For further discussion of risks related to the COVID-19 pandemic on our operations, business results and financial condition, see “Item 1A. Risk Factors.”
Net Cash Provided by Operating Activities
Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding, variable pay, and other items impact reported cash flows.
Net cash provided by operating activities was $295 million for the three months ended January 31, 2021 compared to $197 million for the same period last year.
Net income for the three months ended January 31, 2021 increased $9 million compared to the same period last year. Non-cash adjustments to net income were higher by $32 million due to a prior-period adjustment to reflect a $32 million gain from insurance recovery of property, plant and equipment as cash from investing activity, a $4 million increase in each of share-based compensation expense and depreciation, a $3 million increase in amortization and a $6 million increase from other miscellaneous non-cash activities, partially offset by a $17 million decrease in deferred tax expense.
The aggregate of accounts receivable, inventory and accounts payable used net cash of $34 million during the first three months of fiscal 2021 compared to net cash used of $65 million in the comparable period last year. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.
The aggregate of employee compensation and benefits, income taxes payable, deferred revenue and other assets and liabilities provided net operating cash of $13 million during the first three months of fiscal 2021 compared to net cash used of $11 million in the comparable period last year. The increase is primarily due to higher cash inflow from deferred revenue and lower variable compensation payments, partially offset by a decrease in cash from income taxes payable as compared to the same period last year.
We contributed $3 million to our non-U.S. defined benefit plans during the first three months of fiscal 2021 compared to $2 million in the same period last year. For the remainder of 2021, we expect to contribute $6 million to our non-U.S. defined benefit plans. For the three months ended January 31, 2021, we did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan. For the remainder of 2021, we are evaluating potential contributions to our U.S. Defined Benefit Plan or U.S. Post-Retirement Benefit Plan, although contributions are not required.
Net Cash Used in Investing Activities
Net cash used in investing activities was $124 million for the three months ended January 31, 2021 as compared to $5 million for the same period last year. For the three months ended January 31, 2021, we used $96 million, net of $11 million cash acquired, for an acquisition of Sanjole Inc., a leader in wireless test and measurement solutions for protocol decoding and interoperability. For the three months ended January 31, 2021 and 2020, investments in property, plant and equipment were $28 million and $32 million, respectively. For the three months ended January 31, 2020, we received $32 million of insurance proceeds for property, plant and equipment damaged in the 2017 northern California wildfires, and we used $5 million for an acquisition.
We anticipate total fiscal 2021 capital spending to be approximately $175 million.
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Net Cash Used in Financing Activities
For the three months ended January 31, 2021, we used $43 million for financing activities, which included $49 million for tax payments related to net share settlement of equity awards, $20 million for treasury stock repurchases, $2 million for payment of acquisition-related contingent consideration, partially offset by proceeds of $28 million from issuance of common stock under employee stock plans.
For the three months ended January 31, 2020, we used $99 million for financing activities, including $76 million for treasury stock repurchases and $49 million for tax payments related to net share settlement of equity awards, partially offset by proceeds of $26 million from issuance of common stock under employee stock plans.
On November 18, 2020, our board of directors approved a new stock repurchase program authorizing the purchase of up to $750 million of the company’s common stock. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date. See "Issuer Purchases of Equity Securities" under Part II Item 2 for additional information. Our previously approved 2019 stock repurchase program authorizing the purchase of up to $500 million of the company’s common stock was nearly exhausted.
Short-Term Debt
Revolving Credit Facility
We maintain a credit facility (the “Revolving Credit Facility”) that provides for a $450 million, five-year unsecured revolving credit facility that will expire on February 15, 2022. In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to $150 million (to a total of $600 million) in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. As of January 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 three months ended January 31, 2021.
Long-Term Debt
There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the three months ended January 31, 2021 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Other
There were no other material changes to the contractual commitments from our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
There were no material changes in our liabilities toward uncertain tax positions from our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. We are unable to accurately predict when these will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next 12 months due to either the expiration of a statute of limitations or a tax audit settlement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk appear in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. There were no material changes during the three months ended January 31, 2021 to this information reported in the company’s 2020 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. Although there are no matters pending that we currently believe are probable and reasonably possible of having a material impact to our business, consolidated financial position, 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.
Item 1A.  Risk Factors
Risks, Uncertainties and Other Factors That May Affect Future Results
Risks Related to Our Business
Global health crises, such as the COVID-19 pandemic, could have a material impact on our global operations and the operations of our supply chain, customers and vendors which could adversely impact our business results and financial condition.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. In response to the rapid global spread of the virus, national, state, and local governments issued orders and recommendations to attempt to reduce the further spread of the disease. Such orders included movement control and shelter-in-place orders, travel restrictions, limitations on public gatherings, school closures, social distancing requirements and the closure of all but critical and essential services and infrastructure. In response to these measures and to protect the health and safety of our employees, we temporarily closed our facilities globally and asked all employees who can work from home to do so for the foreseeable future, made substantial changes to employee travel policies, and canceled training and marketing events or moved them to a virtual format. As a supplier to some critical and essential businesses, we have restarted on-site operations using only employees who are not able to work effectively from home and where doing so is in compliance with local regulations and our COVID-19 safety procedures. Our customers, suppliers and vendors are all subject to these restrictions and orders and are similarly impacted. Fluctuation in infection rates in the regions in which we operate has resulted in periodic changes in restrictions that vary from region to region and require vigilant attention and rapid response to new or reinstated restrictions.
The uncertain duration and severity of the pandemic, as well as periodic spikes in infection rates, local outbreaks of the virus or potential outbreaks on our sites or supplier, customer or vendor sites, in spite of safety measures, could cause further shutdowns of our operations or those of our suppliers, customers or vendors. Any outbreaks causing renewed implementation or extension of existing government orders could also impact the availability of our employees or other workers. As more is understood about the virus and how it is spread, new health orders and safety protocols could further impact our on site operations. Adverse impact to our suppliers could adversely impact our ability to procure components and materials, causing an inability to manufacture products or solutions. Customers could reduce spending, causing reduced demand for products and solutions, delayed or canceled orders, and inability to pay for products and solutions. Lack of employee availability due to shutdowns caused by government orders, illness, or quarantine requirements could further impact our ability to manufacture, ship or deliver products and solutions to customers. Continued implementation of measures to reduce the spread of the virus may impact our ability to collaborate globally with customers, suppliers, and internal colleagues. Continued uncertainty and market volatility could result in a national or global recession, which could create additional market and global financial instability. These factors could materially and negatively impact our business results, operations, revenue, growth and overall financial condition.
Uncertainty in general economic conditions may adversely affect our operating results and financial condition.
Our business is sensitive to negative changes in general economic conditions, both inside and outside the United States. Global and regional economic uncertainty, recession, or depression may impact our business, resulting in:
reduced demand for our solutions, delays in the shipment of orders or increases in order cancellations;
increased risk of excess and obsolete inventory;
increased price pressure for our solutions and services; and
greater risk of impairment to the value, and a detriment to the liquidity, of our future investment portfolio.
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In addition, global and regional macroeconomic developments, such as increased unemployment, decreased income, uncertainty related to future economic activity, reduced access to credit, volatility in capital markets, decreased liquidity, uncertain or destabilizing national election results in the U.S., Europe, and Asia, and negative changes or volatility in general economic conditions in the U.S., Europe, and Asia could negatively affect our ability to conduct business in those territories. Financial difficulties experienced by our suppliers and customers, including distributors, due to economic volatility or negative changes could result in product delays, delays in payment or inability to pay us, and inventory issues. Economic risks related to accounts receivable could result in delays in collection and greater bad debt expense.
Our operating results and financial condition could be harmed if the markets into which we sell our solutions decline or do not grow as anticipated.
Visibility into our markets is limited. Our quarterly sales and operating results are highly dependent on the volume and timing of technology-related spending and orders received during the fiscal quarter, which are difficult to forecast and may be cancelled by our customers. In addition, our revenues and earnings forecasts for future fiscal quarters are often based on the expected seasonality or cyclicality of our markets. However, due to the uncertainties and negative economic environment created by the current global pandemic, the markets we serve may experience increased volatility and may not experience the seasonality or cyclicality that we expect. Any decline in our customers' markets would likely result in a reduction in demand for our solutions and services. The broader semiconductor market is one of the drivers for our business, and therefore, a decrease in the semiconductor market could harm our business. Also, if our customers' markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our financial position, results of operations, cash flows and stock price, and could limit our profitability. Also, in such an environment, pricing pressures could intensify. Since a significant portion of our operating expenses is relatively fixed in nature due to sales, R&D and manufacturing costs, if we were unable to respond quickly enough, these pricing pressures could further reduce our operating margins.
Economic and political policies favoring national interests could adversely affect our results of operations.
Nationalistic economic policies and political trends in the United States, the United Kingdom, the European Union, Singapore, Malaysia and China among other countries, such as opposition to globalization and free trade, sanctions or trade restrictions, withdrawal from or re-negotiation of global trade agreements, tax policies that favor domestic industries and interests, the exit of the United Kingdom from the European Union (known as Brexit), the distancing or potential exit of other countries from the European Union, and other similar actions may result in increased transaction costs, reduced ability to hire employees, reduced access to supplies and materials, reduced demand or access to customers in international markets, and inability to conduct our operations as they have been conducted historically. Each of these factors may adversely affect our business.
International trade disputes and increased tariffs between the United States and such jurisdictions could substantially change our expectations and ability to operate in such jurisdictions as we have done historically. Many of our suppliers, vendors, customers, partners, and other entities with whom we do business have strong ties to doing business in China. Their ability to supply materials to us, buy products or services from us, or otherwise work with us is affected by their ability to do business in China. The deterioration of the U.S.’s relationship with China could result in additional trade disputes, trade protection measures, retaliatory actions, tariffs and increased barriers, policies that favor domestic industries, or increased import or export licensing requirements or restrictions, then our deployment of resources in jurisdictions affected by such measures could be misaligned and our operations may be adversely affected due to such changes in the economic and political ecosystem in which our suppliers, vendors, customers, partners, and other entities with whom we do business operate.
A decreased demand for our customers’ products or trade restrictions could adversely affect our results of operations.
Our business depends on our customers’ ability to manufacture, design, and sell their products in the marketplace. International trade disputes affecting our customers could adversely affect our business. Tariffs on imports to or from China could increase the cost of our customers’ components and raw materials, which could make our customers’ products and services more expensive and could reduce demand for our customers’ products. Protectionist and retaliatory trade measures by either China or the United States could limit our customers’ ability to sell their products and services and could reduce demand of our customers’ products. Our customers and other entities in our customer chain could decide to take actions in response to international trade disputes that we could not foresee. A decrease in demand or significant change in operations from our customers due to international trade disputes could adversely affect our operating results and financial condition.
In addition to the above, our customers and suppliers could become subject to U.S. export restrictions and sanctions, such as, being added to the U.S. Department of Commerce’s “Lists of Parties of Concern” and having U.S. export privileges denied or suspended. In the event that a customer or supplier of ours becomes subject to such sanctions, we will suspend our business with such customer or supplier. Because of the increasingly tense political and economic relationship between the United States and China, new sanctions could be imposed with little notice, which could leave us without an adequate alternative solution to compensate for our inability to continue to do business with such customer or supplier. Some of our
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suppliers and customers in the supply chain are working on unique solutions and products in the market, and it may be difficult if not impossible to replace them, especially with short notice. We cannot predict what impact future sanctions could have on our customers or suppliers, and therefore, our business. Any export restrictions or sanctions and any tariffs or other trade restriction imposed on our customers or suppliers could adversely affect our financial condition and business.
Economic, political, and other risks associated with international sales and operations could adversely affect our results of operations.
Because we sell our solutions worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a majority of our total revenue. However, there can be no assurances that our international sales will continue at existing levels or grow in accordance with our effort to increase foreign market penetration. In addition, many of our employees, contract manufacturers, suppliers, job functions and manufacturing facilities are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including but not limited to:
negative impact of a country’s response to the global COVID-19 pandemic or an imposed reduction in economic activity and other economic and political measures taken to contain the spread of COVID-19;
changes in a specific country's or region's political, economic or other conditions, including but not limited to changes that favor national interests and economic volatility;
negative consequences from changes in tax laws;
difficulty in protecting intellectual property;
interruption to transportation flows for delivery of parts to us and finished goods to our customers;
changes in foreign currency exchange rates;
difficulty in staffing and managing foreign operations;
local competition;
differing labor regulations;
unexpected changes in regulatory requirements;
inadequate local infrastructure;
potential incidences of corruption and fraudulent business practices; and
volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism, and war.
We centralize most of our accounting processes at two locations: India and Malaysia. These processes include general accounting, inventory cost accounting, accounts payable and accounts receivables functions. If conditions change in those countries, it may adversely affect operations, including impairing our ability to pay our suppliers. Our results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial results.
Further, even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage similar risks.
Failure to introduce successful new solutions and services in a timely manner to address increased competition, rapid technological changes, and changing industry standards could result in our solutions and services becoming obsolete.
We generally sell our solutions in industries that are characterized by increased competition through frequent new solution and service introductions, rapid technological changes and changing industry standards. In addition, many of the markets in which we operate are seasonal and cyclical. Without the timely introduction of new solutions, services and enhancements, our solutions and services will become technologically obsolete over time, in which case our revenue and operating results would suffer. Our ability to offer new solutions and services and to deploy them in a timely manner depend on several factors, including but not limited to our ability to:
properly identify customer needs;
innovate and develop new technologies, services and applications;
successfully commercialize new technologies in a timely manner;
manufacture and deliver our solutions in sufficient volumes and on time;
differentiate our offerings from our competitors' offerings;
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price our solutions competitively;
anticipate our competitors' development of new solutions, services or technological innovations; and
control product quality in our manufacturing process.
The COVID-19 global pandemic could impact our ability to execute on these dependencies. It may be difficult to differentiate ourselves from our competitors due to limited travel and access to customers, which could make it difficult to properly assess customer needs, and interruptions in manufacturing and delivery of solutions.
Our future operating results may fluctuate significantly if our investments in innovative technologies are not as profitable as we anticipate.
On a regular basis, we review the existing technologies available in the market and identify strategic new technologies to develop and invest in. We are currently devoting significant resources to the 5G technology and other new technologies in the automotive, battery, Internet of Things, and mobile industries. We are investing in R&D, developing relationships with customers and suppliers, and re-directing our corporate and operational resources to grow within these innovative technologies. Our income could be harmed if we fail to gain sufficient market share, if demand for our solutions is lower than we expect, or if our income related to the innovative technologies is lower than we anticipate. For example, when the 5G standards are published, we may not be able to produce a satisfactory return on investment if our strategic vision and the resources that we are spending on developing our presence in the 5G technology industry turn out to be misaligned with such standards. We provide solutions for the design, development, and manufacturing stages of our customers’ workflow. Our customers who currently use our solutions in one stage of their workflow may not use our solutions in other aspects of their manufacturing process.
Failure to adjust our purchases due to changing market conditions or failure to estimate our customers' demand could adversely affect our income.
Our income could be harmed if we are unable to adjust our purchases to market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate. The sale of our solutions and services are dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile, making demand difficult to anticipate. Making such estimations in the current economic climate affected by the global pandemic is particularly difficult as increased volatility may impact seasonal trends making it more difficult to anticipate demand fluctuations. During a market upturn, we may not be able to purchase sufficient supplies or components to meet increasing product demand, which could materially affect our results. In the past, we have seen a shortage of parts for some of our products. In addition, some of the parts that require custom design are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work. Should a supplier cease manufacturing such a component, we would be forced to re-engineer our solution. In addition to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. The COVID-19 pandemic may further exacerbate these risks as suppliers are impacted by surging infection rates, possible shutdown orders or new safety restrictions. In order to secure components for the production of products, we may continue to enter into non-cancellable purchase commitments with vendors, or at times make advance payments to suppliers, which could impact our ability to adjust our inventory to declining market demands. Prior commitments of this type have resulted in an excess of parts when demand for electronic products has decreased. If demand for our solutions is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges
Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring solutions to market and damage our reputation. Dependence on outsourced information technology and other administrative functions may impair our ability to operate effectively.
As part of our efforts to streamline operations and to cut costs, we outsource aspects of our manufacturing processes and other functions and continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring solutions to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers' orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Additionally, changing or replacing our contract manufacturers or other outsourced vendors could cause disruptions or delays. In addition, we outsource significant portions of our information technology ("IT") and other administrative functions. Since IT is critical to our operations, any failure of our IT providers to perform could impair our ability to operate effectively. In addition to the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues and unrealized efficiencies and could impact our results of operations and stock price. Much of our outsourcing takes place in developing countries and, as a result, may be subject to geopolitical uncertainty.
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Our operating results may suffer if our manufacturing capacity does not match the demand for our solutions.
Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand does not meet our expectations, our manufacturing capacity will likely exceed our production requirements. During a general market upturn or an upturn in our business, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner, which could lead to order cancellations, contract breaches or indemnification obligations. This inability could materially and adversely limit our ability to improve our income, margin and operating results. By contrast, if, during an economic downturn, we had excess manufacturing capacity, then our fixed costs associated with excess manufacturing capacity would adversely affect our income, margins and operating results.
Key customers or large orders may expose us to additional business and legal risks that could have a material adverse impact on our operating results and financial condition.
As a global company, we have key customers all over the world. Although no one customer makes up more than 10 percent of our revenue, trade restrictions, sanctions and embargos could force reductions in sales to or prevent us from selling large orders to certain key customers, which could impact our income, operating results and financial condition.
Certain key customers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may demand contract terms that differ considerably from our standard terms and conditions. Large orders may also include severe contractual liabilities for us if we fail to provide the quantity and quality of product at the required delivery times. While we attempt to contractually limit our potential liability under such contracts, we may have to agree to some or all of these types of provisions to secure these orders and to continue to grow our business. Such actions expose us to significant additional risks, which could result in a material adverse impact on our operating results and financial condition.
Industry consolidation and consolidation among our customer base may lead to increased competition and may harm our operating results.
There is potential for industry consolidation in our markets. As companies attempt to strengthen or hold their market positions in an evolving industry, companies could be acquired or may be unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors and could lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the communications market, rapid consolidation would lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.
Additionally, if there is consolidation among our customer base, our customers may be able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are diminished, we could decide not to sell our solutions under such less favorable terms, which would decrease our revenue. Consolidation among our customer base may also lead to reduced demand for our solutions, replacement of our products by the combined entity with those of our competitors and cancellations of orders, each of which could harm our operating results.
Our acquisitions, strategic alliances, joint ventures, internal reorganizations and divestitures may result in financial results that are different than expected.
In the normal course of business, we may engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. Additionally, we occasionally make changes to our internal structure to align business products, services and solutions with market demands and to obtain cost synergies and operational efficiencies. As a result of such transactions, our financial results may differ from our own or the investment community's expectations in a given fiscal quarter, or over the long term. If market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions or reorganizations. Further, such third-party transactions often have post-closing arrangements, including, but not limited to, post-closing adjustments, transition services, escrows or indemnifications, the financial results of which can be difficult to predict. In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team, employees and business infrastructure into our existing operations without impacting the business operations of the newly acquired company. We may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances performance and expands the markets of the newly acquired company. The acquired company may not enhance the performance of our businesses or product lines such that we do not realize the value from expected synergies. Depending on the size and complexity of an acquisition, the successful integration of the entity depends on a variety of factors, including but not limited to:
the achievement of anticipated cost savings, synergies, business opportunities and growth prospects from combining the acquired company;
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the scalability of production, manufacturing and marketing of products of a newly acquired company to broader adjacent markets;
the ability to cohesively integrate operations, product definitions, price lists, delivery, and technical support for products and solutions of a newly acquired company into our existing operations;
the compatibility of our infrastructure, operations, policies and organizations with those of the acquired company;
the retention of key employees and/or customers;
the management of facilities and employees in different geographic areas; and
the management of relationships with our strategic partners, suppliers, and customer base.
If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted. Additionally, we may record significant goodwill and other assets as a result of acquisitions or investments, and we may be required to incur impairment charges, which could adversely affect our consolidated financial position and results of operations.
Any inability to complete acquisitions on acceptable terms could negatively impact our growth rate and financial performance.
Our ability to grow revenues, earnings and cash flow depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies and business performance. Appropriate targets for acquisition are difficult to identify and complete for a variety of reasons, including but not limited to, limited due diligence, high valuations, business and intellectual property evaluations, other interested parties, negotiations of the definitive documentation, satisfaction of closing conditions, the need to obtain antitrust or other regulatory approvals on acceptable terms, and availability of funding. The inability to close appropriate acquisitions on acceptable terms could adversely impact our growth rate, revenue, and financial performance.
We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions, and such financing may not be available on terms favorable to us, if at all, and may be dilutive to existing shareholders.
We may need to seek additional financing for our general corporate purposes. For example, we may need to increase our investment in R&D activities or need funds to make acquisitions. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance solutions or respond to competitive pressures, any of which could negatively affect our business. If we finance acquisitions by issuing additional convertible debt or equity securities, our existing stockholders may experience share dilution, which could affect the market price of our stock. If we raise additional funds through the issuance of equity securities, our shareholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to further limitations on our operations and ability to pay dividends due to restrictive covenants.
We have outstanding debt and may incur other debt in the future, which could adversely affect our financial condition, liquidity and results of operations.
We currently have outstanding debt as well as availability to borrow under a revolving credit facility. We may borrow additional amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business or repurchases of our outstanding shares of common stock.
Our incurrence of this debt, and increases in our aggregate levels of debt, may adversely affect our operating results and financial condition by, among other things:
requiring a portion of our cash flow from operations to make interest payments on this debt;
increasing our vulnerability to general adverse economic and industry conditions;
reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; and
limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
Our current revolving credit facility and term loan imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of our subsidiaries to incur indebtedness, and requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, the indenture governing our senior notes contains covenants that may adversely affect our ability to incur certain liens or engage in
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certain types of sale and leaseback transactions. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.
If currency exchange rates fluctuate substantially in the future, our financial results could be adversely affected.
 A substantial amount of our solutions are priced and paid for in U.S. Dollars, although many of our solutions are priced in local currencies and a significant amount of certain types of expenses, such as payroll, utilities, tax and marketing expenses, are paid in local currencies. Our hedging programs are designed to reduce, but not entirely eliminate, within any given 12-month period, the impact of currency exchange rate movements, including those caused by currency controls, which could impact our business, operating results and financial condition by resulting in lower revenue or increased expenses. However, for expenses beyond a 12-month period, our hedging strategy will not mitigate our exchange rate risk. In addition, our currency hedging programs involve third-party financial institutions as counterparties. The weakening or failure of these counterparties may adversely affect our hedging programs and our financial condition through, among other things, a reduction in the number of available counterparties, increasingly unfavorable terms or the failure of counterparties to perform under hedging contracts.
Volatile changes in weather conditions and effects of climate change could damage or destroy strategic facilities, including our headquarters, which could have a significant negative impact on our operations.
We and our customers and suppliers are vulnerable to the increasing impact of climate change. Volatile changes in weather conditions, including extreme heat or cold, could increase the risk of wildfires, floods, blizzards, hurricanes and other weather-related disasters. Disasters created by extreme conditions could cause significant damage to or destruction of our facilities resulting in temporary or long-term closures of our facilities and operations and significant expense for repair or replacement of damaged or destroyed facilities. This could also result in loss or damage to employee homes, employees relocating to other parts of the country or being unwilling to relocate to the strategic locations, housing shortages and loss of or inability to recruit key employees, This could result in adverse impact to the available workforce, damage to or destruction of inventory, inability to manufacture and deliver solutions, cancellation of orders, and breaches of customer contracts leading to reduced revenue.
If we suffer a loss to our employees, factories, facilities or distribution system due to a catastrophic event, our operations could be significantly harmed.
Our factories, facilities and distribution system are vulnerable to catastrophic loss due to natural or man-made disasters. Several of our facilities could be subject to a catastrophic loss caused by earthquake or other natural disasters due to their locations. For example, our production facilities, headquarters and laboratories in California and our production facilities in Japan are all located in areas with above-average seismic activity. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. In addition, since we have consolidated our manufacturing facilities, we are more likely to experience an interruption to our operations in the event of a catastrophe in any one location. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism. Also, our third-party insurance coverage will vary from time to time in both type and amount depending on availability, cost and our decisions with respect to risk retention. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third-party insurance. If our third-party insurance coverage is adversely affected, or to the extent we have elected to self-insure, we may be at a greater risk that our operations will be harmed by a catastrophic loss.
Third parties may claim that we are infringing their intellectual property rights, and we could suffer significant litigation or licensing expenses or be prevented from selling solutions or services.
Third parties may claim that one or more of our solutions or services infringe their intellectual property rights. We analyze and take action in response to such claims on a case-by-case basis. Any dispute or litigation regarding patents or other intellectual property could be costly and time-consuming due to the complexity of our technology and the uncertainty of intellectual property litigation and could divert our management and key personnel from business operations. A claim of intellectual property infringement could cause us to enter into a costly or restrictive license agreement (which may not be available under acceptable terms, or at all), require us to redesign certain of our solutions (which would be costly and time-consuming) and/or subject us to significant damages or an injunction against the development and sale of certain solutions or services. In certain of our businesses, we rely on third-party intellectual property licenses, and we cannot ensure that these licenses will be available to us in the future on terms favorable to us or at all.
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Third parties may infringe our intellectual property rights, and we may suffer competitive injury or expend significant resources enforcing our intellectual property rights.
Our success depends in part on our proprietary technology, including technology we obtained through acquisitions. We rely on various intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as confidentiality provisions and licensing arrangements, to establish our proprietary rights. If we do not enforce our intellectual property rights successfully, our competitive position may suffer, which could harm our operating results.
Our pending patent, copyright and trademark registration applications may not be allowed or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights, trademarks and other intellectual property rights may not provide us with a significant competitive advantage. In preparation for the separation and distribution, we have applied for trademarks related to our new global brand name in various jurisdictions worldwide. Any successful opposition to our applications in material jurisdictions could impose material costs on us or make it more difficult to protect our brand. Different jurisdictions vary widely in the level of protection and priority they give to trademark and other intellectual property rights.
We may be required to spend significant resources monitoring our intellectual property rights, and we may or may not be able to detect infringement of such rights by third parties. Our competitive position may be harmed if we cannot detect infringement and enforce our intellectual property rights in a timely manner, or at all. In some circumstances, we may choose to not pursue enforcement due to a variety of reasons. In addition, competitors may avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Intellectual property rights and our ability to enforce them may be unavailable or limited in some countries, which could make it easier for competitors to capture market share and could result in lost revenues to the company. Furthermore, some of our intellectual property is licensed to others, which allows them to compete with us using that intellectual property.
If we experience a significant cybersecurity attack or disruption in our IT systems, our business, reputation, and operating results could be adversely affected.
We rely on several centralized IT systems to provide solutions and services, maintain financial records, retain sensitive data such as intellectual property, proprietary business information, and data related to customers, suppliers, and business partners, process orders, manage inventory, process shipments to customers and operate other critical functions. The ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
Despite our implementation of network security measures, our network may be vulnerable to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Our network security measures include, but are not limited to, the implementation of firewalls, antivirus protection, patches, log monitors, routine backups, offsite storage, network audits, and routine updates and modifications. Despite our efforts to create these security barriers, we may not be able to keep pace as new threats emerge and it is virtually impossible for us to entirely eliminate this risk. Cybersecurity attacks are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, reputation, operating results and financial condition, and no assurance can be given that our efforts to reduce the risk of such attacks will be successful.
In addition, our IT systems may be susceptible to damage, disruptions, instability, or shutdowns due to power outages, hardware failures, telecommunication failures, user errors, implementation of new operational systems or software or upgrades to existing systems and software, catastrophes, overburdening of systems resulting from an increase of work from home employees due to COVID-19, or other unforeseen events. Such events could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. Further, such events could result in loss of revenue, loss of or reduction in purchase orders, inability to report financial information, litigation, regulatory fines and penalties, and other damage that could have a material impact on our business operations. To the extent that such disruptions occur, our customers and partners may lose confidence in our solutions and we may lose business or brand reputation, resulting in a material and adverse effect on our business operating results and financial condition.
We are or will be subject to ongoing tax examinations of our tax returns by the IRS and other tax authorities. An adverse outcome of any such audit or examination by the IRS or other tax authority could have a material adverse effect on our results of operations, financial condition and liquidity.
We are or will be subject to ongoing tax examinations of our tax returns by the IRS and other tax authorities in various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from ongoing tax examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable estimates and judgments. Intercompany transactions associated with the sale of inventory, services, intellectual property and cost sharing arrangements
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are complex and affect our tax liabilities. The calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. The outcomes of these tax examinations could have an adverse effect on our operating results and financial condition. Due to the complexity of tax contingencies, the ultimate resolution of any tax matters related to operations may result in payments greater or less than amounts accrued.
Our operations may be adversely impacted by changes in our business mix or changes in the tax legislative landscape.
Our effective tax rate may be adversely impacted by, among other things, changes in the mix of our earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, and changes in tax laws. We cannot give any assurance as to what our effective tax rate will be in the future because, among other things, there is uncertainty regarding the tax policies of the jurisdictions where we operate. Changes in tax laws, such as tax reform in the United States or changes in tax laws resulting from the Organization for Economic Co-operation and Development’s (“OECD”) multi-jurisdictional plan of action to address “base erosion and profit shifting” and the taxation of the “Digital Economy” could impact our effective tax rate.
If tax laws or incentives change or cease to be in effect, our income taxes could increase significantly.
We are subject to federal, state, and local taxes in the United States and numerous foreign jurisdictions. We devote significant resources to evaluating our tax positions and our worldwide provision for taxes. Our financial results and tax treatment are susceptible to changes in tax, accounting, and other laws, regulations, principles, and interpretations in the United States and in other jurisdictions where we do business. With the rise of economic and political policies that favor domestic interests, it is possible that more countries will enact tax laws that either increase the tax rates, or reduce or change the tax incentives available to multinational companies like ours. Upon a change in tax laws in any territory where we do significant business, we may not be able to maintain our current tax rate or qualify for or maintain the benefits of any tax incentives offered, to the extent such incentives are offered.
We currently benefit from tax incentives extended to certain of our foreign subsidiaries to encourage investment or employment, the most significant of which being Singapore. The Singapore tax incentives require that specific conditions be satisfied, which include achieving thresholds of employment, ownership of certain assets, as well as specific types of investment activities within Singapore. Based on the current tax environment, we believe that we will satisfy such conditions in the future as needed, but cannot guarantee that the tax environment will not change or that such conditions will be satisfied.
Our Singapore tax incentives are due for renewal in fiscal 2024, but we cannot guarantee that Singapore will not revoke the tax incentives earlier. Our taxes could increase if the existing Singapore incentives are not renewed upon revocation or expiration. We cannot guarantee that we will qualify for any new incentive regime that may exist in fiscal 2024, or that such conditions will be satisfied. If we cannot or do not wish to satisfy all or portions of the tax incentives conditions, we may lose the related tax incentives and could be required to refund the benefits that the tax incentives previously provided. As a result, our effective tax rate could be higher than it would have been had we maintained the benefits of the tax incentives and could harm our operating results.
Our business will suffer if we are not able to retain and hire key personnel.
Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel, including personnel joining our company through acquisitions. The markets in which we operate are dynamic, and we may need to respond with reorganizations, workforce reductions and site closures from time to time. We believe our pay levels are competitive within the regions that we operate. However, there is also intense competition for certain highly technical specialties in geographic areas in which we operate, and it may become more difficult to retain key employees. If we fail to retain and hire a sufficient number of these personnel, we may not be able to meet key objectives, such as launching effective product innovations and meeting financial goals, and maintain or expand our business.
If we fail to maintain satisfactory compliance with certain regulations, we may be subject to substantial negative financial consequences and civil or criminal penalties.
We and our customers are subject to various significant international, federal, state and local regulations, including, but not limited to, health and safety including regulations related to COVID-19, packaging, data privacy, product content, environmental, labor and import/export regulations. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, high financial penalties, product recalls or impositions of fines, and restrictions on our ability to carry on or expand our operations. If demand for our solutions is adversely affected or our costs increase, our business would suffer.
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Our R&D, manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements. We apply strict standards for protection of the environment and occupational health and safety inside and outside the United States, even where not subject to regulation imposed by foreign governments. We believe that our properties and operations at our facilities comply in all material respects with applicable environmental and occupational health and safety laws. In spite of these efforts, no assurance can be given that we will be compliant with all applicable environmental and workplace health and safety laws and regulations and violations could result in civil or criminal sanctions, fines and penalties.
We have developed internal data handling policies and practices to comply with the General Data Protection Regulation (“GDPR”) in the European Union and data privacy regulations similar to GDPR in other jurisdictions. Our existing business strategy does not rely on aggregating or selling personally identifiable information, and as a general matter Keysight does not process personally identifiable information on behalf of our customers. We devote resources to keep up with the changing regulatory environment on data privacy in the jurisdictions where we do business. Despite our efforts, no assurance can be given that we will be compliant with data privacy regulations. New laws, amendments, or interpretations of regulations, industry standards, and contractual obligations relating to data privacy may require us to incur additional costs and restrict our business operations. If we fail to comply with GDPR or other data privacy regulation, we may be subject to significant financial fines and civil or criminal penalties, and may suffer damage to our reputation or brand, which could adversely affect our business and financial results.
In addition, our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies such as the U.S. Federal Communications Commission. We also must comply with work safety rules. If we fail to adequately address any of these regulations, our businesses could be harmed.
Failure to comply with anti-corruption laws could adversely affect our business and result in financial penalties.
Because we have extensive international operations, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations. Although we actively maintain policies and procedures designed to ensure ongoing compliance with these laws and regulations, there can be no assurance that our employees, contractors or agents will not violate these policies and procedures. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our solutions in one or more countries, and could also materially affect our brand, ability to attract and retain employees, international operations, business and operating results.
Our business and financial results may be adversely affected by various legal and regulatory proceedings.
We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. The outcome of existing proceedings, lawsuits and claims may differ from our expectations because the outcomes of litigation are often difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable, or permit us to make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could adversely affect our business, operating results or financial condition.
Our internal controls may be determined to be ineffective, which may adversely affect investor confidence in our company, the value of our stock, and our access to capital.
The Sarbanes-Oxley Act of 2002 requires us to furnish a report by management on the effectiveness of our internal control over financial reporting, among other things. We are devoting significant resources and time to comply with such internal control over financial reporting requirements. However, we cannot be certain that these measures will ensure that we design, implement and maintain adequate control over our financial processes and reporting in the future, especially in the context of acquisitions of other businesses. Any difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock or on our access to capital, or cause us to be subject to investigation or sanctions by the SEC.
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Adverse conditions in the global banking industry and credit markets may adversely impact the value of our cash investments or impair our liquidity.
Our cash and cash equivalents are invested or held in a mix of money market funds, time deposit accounts and bank demand deposit accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our results and financial condition.
Future investment returns on pension assets may be lower than expected or interest rates may decline, requiring us to make significant additional cash contributions to our future plans.
We sponsor several defined benefit pension plans that cover many of our salaried and hourly employees. The Federal Pension Protection Act of 2006 requires that certain capitalization levels be maintained in each of the U.S. plans, and there may be similar funding requirements in the plans outside the United States. Because it is unknown what the investment return on and the fair value of our pension assets will be in future years or what interest rates and discount rates may be at any point in time, no assurances can be given that applicable law will not require us to make future material plan contributions. Any such contributions could adversely affect our financial condition.
Environmental contamination from past operations could subject us to unreimbursed costs and could harm on-site operations and the future use and value of the properties involved, and environmental contamination caused by ongoing operations could subject us to substantial liabilities in the future.
Some of our properties are undergoing remediation by HP Inc. ("HP") for subsurface contaminations that were known at the time of Agilent's separation from HP in 1999. In connection with Agilent's separation from HP, HP and Agilent entered into an agreement pursuant to which HP agreed to retain the liability for this subsurface contamination, perform the required remediation and indemnify Agilent with respect to claims arising out of that contamination. Agilent has assigned its rights and obligations under this agreement to Keysight in respect of facilities transferred to us in the separation. As a result, HP will have access to a limited number of our properties to perform remediation. Although HP agreed to minimize interference with on-site operations at such properties, remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the properties. In connection with the separation, Agilent will indemnify us directly for any liabilities related thereto. We cannot be sure that HP will continue to fulfill its remediation obligations or that Agilent will continue to fulfill its indemnification obligations.
In connection with the separation from Agilent, Agilent also agreed to indemnify us for any liability associated with contamination from past operations at all properties transferred from Agilent to Keysight. We cannot be sure that Agilent will fulfill its indemnification obligations.
Our current manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment. As a result, we may become subject to liabilities for environmental contamination, and these liabilities may be substantial. Although our policy is to apply strict standards for environmental protection at our sites inside and outside the United States, even if the sites outside the United States are not subject to regulations imposed by foreign governments, we may not be aware of all conditions that could subject us to liability.
Risks Related to Our Common Stock
Our share price may fluctuate significantly.
Our common stock is listed on New York Stock Exchange ("NYSE") under the ticker symbol “KEYS.” The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including but not limited to:
actual or anticipated fluctuations in our operating results due to factors related to our business;
success or failure of our business strategy;
our quarterly or annual earnings, or those of other companies in our industry;
our ability to obtain third-party financing as needed;
announcements by us or our competitors of significant acquisitions or dispositions;
changes in accounting standards, policies, guidance, interpretations or principles;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
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the operating and share price performance of other comparable companies;
investor perception of our company;
natural or other disasters that investors believe may affect us;
the impact of global pandemics, such as COVID-19;
overall market fluctuations;
results from any material litigation or government investigations;
changes in laws or regulations affecting our business; and
general economic conditions and other external factors.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.
In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of management and other resources.
We do not currently pay dividends on our common stock.
We do not currently pay dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, to our stockholders fall within the discretion of our board of directors. The board's decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements, regulatory constraints and other factors that our board of directors deems relevant. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends.
Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of the company, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include but are not limited to:
the inability of our shareholders to call a special meeting;
the inability of our shareholders to act without a meeting of shareholders;
rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;
the right of our board of directors to issue preferred stock without shareholder approval;
the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;
a provision that shareholders may only remove directors with cause;
the ability of our directors, and not shareholders, to fill vacancies on our board of directors; and
the requirement that the affirmative vote of shareholders holding at least 80 percent of our voting stock is required to amend certain provisions in our amended and restated certificate of incorporation (relating to the number, term and removal of our directors, the filling of our board vacancies, the advance notice to be given for nominations for elections of directors, the calling of special meetings of shareholders, shareholder action by written consent, the ability of the board of directors to amend the bylaws, elimination of liability of directors to the extent permitted by Delaware law, exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders and amendments of the certificate of incorporation) and certain provisions in our amended and restated bylaws (relating to the calling of special meetings of shareholders, the business that may be conducted or considered at annual or special meetings, the advance notice of shareholder business and nominations, shareholder action by written consent, the number, tenure, qualifications and removal of our directors, the filling of our board vacancies, director and officer indemnification and amendments of the bylaws).
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In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the "DGCL"), this provision could also delay or prevent a change of control that some shareholders may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation (an "interested stockholder") shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85 percent of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of shareholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
We believe these provisions will protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of the company and our shareholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Our amended and restated certificate of incorporation designates that the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could discourage lawsuits against the company and our directors and officers.
Our amended and restated certificate of incorporation provide that unless the board of directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to the company or our shareholders, any action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the DGCL or Keysight's amended and restated certificate of incorporation or bylaws, or any action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our shareholders to bring a claim in a judicial forum that such shareholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers.
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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
The table below summarizes information about the company’s purchases, based on trade date; of its equity securities registered pursuant to Section 12 of the Exchange Act during the quarterly period ended January 31, 2021.
 Period
Total Number of Shares of Common Stock Purchased (1)
Weighted Average Price Paid per Share of Common Stock (2)
Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs (1)
Maximum Approximate Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Program (1)
November 1, 2020 through November 30, 2020$750,000,000
December 1, 2020 through December 31, 2020$750,000,000
January 1, 2021 through January 31, 2021137,200145.12137,200$730,089,433
Total137,200137,200
(1)On November 18, 2020, our board of directors approved a new stock repurchase program authorizing the purchase of up to $750 million of the company’s common stock.

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.
(2)The weighted average price paid per share of common stock does not include the cost of commissions.
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Item 6. Exhibits
Exhibit 
NumberDescription
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHXBRL Extension Schema Document
101.CALXBRL Extension Calculation Linkbase Document
101.LABXBRL Extension Label Linkbase Document
101.PREXBRL Extension Presentation Linkbase Document
101.DEFXBRL Extension Definition Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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SIGNATURES 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEYSIGHT TECHNOLOGIES, INC.
Dated:March 3, 2021By:/s/ Neil Dougherty
  Neil Dougherty
  Senior Vice President and Chief Financial Officer
  (Principal Financial Officer)
   
   
Dated:March 3, 2021By:/s/ John C. Skinner
  John C. Skinner
  Vice President and Corporate Controller
  (Principal Accounting Officer)
 
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