KEYSIGHT TECHNOLOGIES, INC.
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"), including disruption of the supply chain
causing delays in our ability to manufacture or deliver products and solutions
to customers, the impact of social distancing requirements, slowdown in customer
purchasing, order cancellations, a second wave of infection resulting in
additional government mandated shutdowns, labor shortages, and our estimated or
anticipated future results of operations, which involve risks and uncertainties.
Our actual results could differ materially from the results contemplated by
these forward-looking statements due to
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various factors, including but not limited to those risks and uncertainties discussed in Part II Item 1A and elsewhere in this Form 10-Q. 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, comprehensive income or cash flows. Our fiscal year-end isOctober 31 , and our fiscal quarters end onJanuary 31 ,April 30 andJuly 31 . Unless otherwise stated, these dates refer to our fiscal year and fiscal quarter periods. Overview and Executive SummaryKeysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated inDelaware onDecember 6, 2013 , is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product 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 research and development and have focused our development efforts on strategic opportunities to capture future growth. We completed an organizational change in the first quarter of fiscal 2020 to manage ourIxia Solutions Group within ourCommunications Solutions Group to enable us to create improved go-to market and product development alignment as well as accelerate solution synergies as new technologies emerge. Prior period segment results were revised to conform to the presentation. As a result, we now have two reportable operating segments,Communications Solutions Group ("CSG") andElectronic Industrial Solutions Group ("EISG"). Impact of COVID-19 pandemic and outlook InMarch 2020 , theWorld 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. In response to these measures and to protect the health and safety of our employees, we temporarily closed our locations globally, including our production and order fulfillment facilities, 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. Our customers, suppliers and vendors are all subject to these restrictions and orders and are similarly impacted. Working with local governments and health officials to implement health and safety measures at all of our locations, we are opening sites worldwide and ramping our production and services operations, despite the ongoing broader industry supply chain challenges. 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. We continue to make significant investment in R&D and have taken necessary steps to sustain employee productivity and deliver on our customer commitments, particularly those who provide essential services, and support the communities in which we operate around the world. Also given the uncertainty of the duration or severity of the pandemic, we have taken proactive measures to reduce costs and preserve liquidity, while supporting our customers and advancing key projects. These measures include a temporary hiring freeze and a reduction in other discretionary spending, along with lower variable compensation and a reduction in outsourced manufacturing costs, enabled by our flexible cost structure. Our revenue for three and six months endedApril 30, 2020 was lower when compared to the same periods last year due to the site closures and supply chain disruptions resulting from the mandatory government shutdown of our production facilities in the last half of the second quarter. The impact of lower revenue on gross margin and operating margin was partially offset by favorable mix and lower discretionary spending as a result of our mitigating measures. We continue to see steady demand across several end markets, with on-going investment in next-generation technologies, such as 5G, 400G, and advanced semiconductor node processes, while demand decreased in other markets, such as automotive and general electronics, including education. 28
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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 coronavirus outbreak. We have complied and will
continue to comply with recent U.S. Department of Commerce export control
regulations regarding China . While we expect ongoing COVID-19 demand and supply
chain headwinds over the next few quarters, we remain confident in our long-term
secular market growth trends and the strength of our operating model.
For discussion of risks related to COVID-19 on our operations, business results
and financial condition, see "Item 1A. Risk Factors."
Three and six months ended April 30, 2020 and 2019
Total orders for the three and six months ended April 30, 2020 were $1,089
million and $2,230 million , respectively, a decrease of 3 percent and an
increase of 4 percent, respectively, when compared to the same periods last year
and a decrease of 2 percent and an increase of 5 percent, respectively,
excluding the impact of foreign currency movements. Acquisitions had an
immaterial impact on the order growth for both the three and six months ended
April 30, 2020 . For the three months ended April 30, 2020 , order decline in
Americas and Europe was partially offset by growth in Asia Pacific . For the six
months ended April 30, 2020 , order growth in Asia and Americas was partially
offset by decline in Europe .
Net revenue for the three and six months ended April 30, 2020 was $895 million
and $1,990 million , respectively, a decrease of 18 percent and 5 percent,
respectively, when compared to the same periods last year and a decrease of 18
percent and 6 percent, respectively, excluding the impact of acquisitions.
Foreign currency movements had an immaterial impact on revenue growth for the
three and six months ended April 30, 2020 . For the three and six months ended
April 30, 2020 , revenue for both the Communications Solutions Group and
Electronic Industrial Solutions Group revenue declined year over year, due to
the impact of site closures and supply chain disruptions related to the COVID-19
pandemic in the the last half of the second quarter. Revenue from the
Communications Solutions Group and Electronic Industrial Solutions Group
represented approximately 73 percent and 27 percent, respectively, of total
revenue for the three months ended April 30, 2020 . Revenue from the
Communications Solutions Group and Electronic Industrial Solutions Group
represented approximately 74 percent and 26 percent, respectively, of total
revenue for the six months ended April 30, 2020 .
Net income for the three and six months ended April 30, 2020 was income of $71
million and $234 million , respectively, compared to $153 million and $267
million , respectively, for the same periods last year. The decrease in net
income for the three months ended April 30, 2020 was primarily driven by gross
margin decline from lower revenue volume due to impact of the site closures and
supply chain disruptions in the the last half of the quarter, partially offset
by favorable mix, decline in variable people-related costs and reduction in
discretionary spending. The decrease in net income for the six months ended
April 30, 2020 was primarily driven by gross margin decline from lower revenue
volume due to impact of the site closures and supply chain disruptions in the
last half of the second quarter, partially offset by favorable mix and an
operating gain due to insurance proceeds received for property, plant and
equipment damaged in the 2017 northern California wildfires and lower variable
people-related costs.
In the first quarter of 2020, we received $37 million of insurance proceeds
primarily related to replacement of capital and recovery of expenses related to
the 2017 northern California wildfires. These proceeds resulted in an operating
gain of $32 million . No additional insurance proceeds or material expenses
related to the 2017 northern California wildfires are expected.
Critical Accounting Policies and Estimates
There were no material changes during the three and six months ended April 30,
2020 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, 2019 . Changes to our
accounting policy for leases as a result of adopting Accounting Standard Update
2016-02, Leases, are discussed in Note 2, "New Accounting Pronouncements," and
Note 13, "Leases," to the condensed consolidated financial statements.
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the condensed consolidated
financial statements for a description of new accounting pronouncements.
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Foreign Currency Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our consolidated statement of operations. We experience some fluctuations within individual lines of the consolidated balance sheet and consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis of up to a rolling twelve-month in advance. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact theU.S. dollar cost of the transaction. Results from OperationsNet 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. Cancellations are recorded in the period received from the customer and historically have not been material. Three Months Ended Six Months Ended
Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue:
Products $ 708 $ 911 $ 1,610 $ 1,748 (22)% (8)%
Services and other 187 179 380 348 5% 9%
Total net revenue $ 895 $ 1,090 $ 1,990 $ 2,096 (18)% (5)%
The following table provides the percent change in net revenue for the three and
six months ended April 30, 2020 by geographic region including and excluding the
impact of foreign currency movements as compared to the same periods last year.
Year over Year Change
Three Months Ended Six Months Ended
April 30, 2020 April 30, 2020
Geographic Region Actual Currency Adjusted Actual Currency Adjusted
Americas (22 )% (22 )% (6 )% (6 )%
Europe (19 )% (18 )% (7 )% (7 )%
Asia Pacific (14 )% (13 )% (3 )% (3 )%
Total net revenue (18 )% (18 )% (5 )% (5 )%
For the three and six months ended April 30, 2020 , revenue declined across all
regions due to the impact of site closures and supply chain disruptions related
to the COVID-19 pandemic in the last half of the second quarter. Foreign
currency movements had an immaterial impact on the revenue decline for the three
and six months ended April 30, 2020 . Currency had an unfavorable impact of 1
percentage point on revenue in Europe and Asia Pacific for the three months
ended April 30, 2020 .
Costs and Expenses
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
Total gross margin 57.7 % 59.5 % 58.9% 58.5 % (2) ppts -
Operating margin 11.4 % 17.0 % 15.3% 14.6 % (6) ppts 1 ppt
in millions
Research and development $ 166 $ 171 $ 353 $ 344 (2)% 3%
Selling, general and administrative
$ 588 (16)% (6)%
Other operating expense (income), net
208%
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Gross margin decreased 2 percentage points for the three months endedApril 30, 2020 compared to the same period last year, primarily driven by lower revenue volume due to the impact of site closures and supply chain disruptions in the last half of the quarter, partially offset by favorable revenue mix and lower variable people-related costs and warranty costs. Gross margin was flat for the six months endedApril 30, 2020 compared to the same period last year, primarily driven by favorable mix and lower variable people-related costs and warranty costs, offset by lower revenue volume due to the impact of site closures and supply chain disruptions in the last half of the second quarter. Research and development expense decreased 2 percent for the three months endedApril 30, 2020 compared to the same period last year, primarily driven by declines in variable people-related costs and reduction in discretionary spending due to COVID-19 related restrictions, partially offset by incremental costs of an acquired business. Research and development expense increased 3 percent for the six months endedApril 30, 2020 compared to the same period last year, driven by greater investment in key growth opportunities in our end markets, leading-edge technologies and incremental costs of an acquired business, partially offset by declines in variable people-related costs and reduction in discretionary spending due to the impact of the restrictions in the last half of the second quarter. As a percentage of revenue, research and development expense was 19 percent and 18 percent for the three and six months endedApril 30, 2020 , respectively, as compared to 16 percent for both the three and six months endedApril 30, 2019 . Selling, general and administrative expense decreased 16 percent and 6 percent for the three and six months endedApril 30, 2020 , respectively, when compared to the same periods last year, primarily driven by declines in variable and other people-related costs, declines in travel costs due to shelter-in-place restrictions and reductions in restructuring and related costs, partially offset by incremental costs of an acquired business. Other operating expense (income), net was income of$3 million and$38 million for the three and six months endedApril 30, 2020 , respectively, compared to income of$8 million and$12 million for the three and six months endedApril 30, 2019 , respectively. Other operating expense (income), net for the six months endedApril 30, 2020 includes a gain of$32 million due to insurance proceeds received for property, plant and equipment damaged in the 2017 northernCalifornia wildfires. Operating margin for the three months endedApril 30, 2020 decreased 6 percentage points compared to the same period last year, primarily driven by lower revenue volume, partially offset by declines in variable people-related costs and travel costs due to COVID-19 related restrictions. Operating margin for the six months endedApril 30, 2020 increased 1 percentage point when compared to the same period last year, primarily due to a gain related to the 2017 northernCalifornia wildfires and declines in variable people-related costs and travel costs, partially offset by lower revenue volume. As ofApril 30, 2020 , our headcount was approximately 13,700 compared to approximately 13,000 atApril 30, 2019 . Interest Income and Expense Interest income for the three and six months endedApril 30, 2020 was$4 million and$10 million , respectively, as compared to$6 million and$10 million , respectively, for the comparable periods last year and primarily relates to interest earned on our cash balances. Interest expense for the three and six months endedApril 30, 2020 was$20 million and$39 million , respectively, as compared to$20 million and$40 million , respectively, for the comparable periods last year and primarily relates to interest on our senior notes. Other income (expense), net Other income (expense), net for the three and six months endedApril 30, 2020 was income of$22 million and$34 million , respectively, compared to$22 million and$37 million , respectively, for the same periods last year 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 34.9 percent and 24.6 percent for the three and six months endedApril 30, 2020 respectively. The income tax expense was$37 million and$76 million for the three and six months endedApril 30, 2020 respectively. The income tax expense for the three and six months endedApril 30, 2020 included a net discrete expense of$2 million and$5 million , respectively. The company's effective tax rate was 20.8 percent and 14.8 percent for the three and six months endedApril 30, 2019 , respectively. The income tax expense was$40 million and$46 million for the three and six months endedApril 30, 2019 , respectively. The income tax expense for the three and six months endedApril 30, 2019 included a net discrete benefit of$5 million and$29 31
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million, respectively. The net discrete benefit for the six months endedApril 30, 2019 primarily related to a change in tax reserves resulting from a change in judgment. Keysight benefits from tax incentives in several jurisdictions, most significantly inSingapore , 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$13 million and$19 million for the six months endedApril 30, 2020 and 2019, respectively, resulting in a benefit to net income per share (diluted) of approximately$0.07 and$0.10 for the six months endedApril 30, 2020 and 2019, respectively. The majority of our tax incentives are due for renewal between 2024 and 2025. With regard to the incentive inMalaysia , a formal application must be filed during fiscal year 2020 to renew the tax incentive through 2025. Keysight intends to file the application timely and does not anticipate any impediments to the renewal process. The open tax years for theIRS and most states are fromNovember 1, 2015 through the current tax year. For the majority of our foreign entities, the open tax years are fromNovember 1, 2014 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to the year 2008. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits. The company was audited inMalaysia for the 2008 tax year. 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, includingMalaysia , any historical tax liability is the responsibility of Keysight. In the fourth quarter of fiscal 2017, Keysight paid income taxes and penalties to theMalaysian Tax Authority of$68 million on gains related to intellectual property rights. Our appeal to the Special Commissioners of Income Tax inMalaysia was unsuccessful. An appeal has now been lodged with theHigh Court . The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year inMalaysia was closed, and the income in question is exempt from tax inMalaysia . The company is pursuing all avenues to resolve this issue favorably for the company. In response to the COVID-19 outbreak, various jurisdictions in which the company operates have enacted emergency economic stimulus packages that contain certain income tax provisions. This includes the US federal government enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") onMarch 27, 2020 . Although the company continues to evaluate the impact of such legislation, we have not identified any material impacts on the income tax provision. The company will continue to monitor the impact of these stimulus packages as new clarifying guidance is issued throughout 2020 or as additional legislation is enacted. AtApril 30, 2020 , our estimated annual effective tax rate for fiscal 2020 is an expense of 22.5 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 differs from theU.S. statutory rate primarily due to the beneficial impact of the mix of earnings in non-U.S. jurisdictions taxed at lower rates and theU.S. federal research and development tax credit, offset by the expense impact of theU.S. GILTI tax on earnings in non-U.S. jurisdictions net ofU.S. foreign tax credits and otherU.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 We completed an organizational change in the first quarter of fiscal 2020 to manage ourIxia Solutions Group within ourCommunications Solutions Group to enable us to create improved go-to market and product development alignment as well as accelerate solution synergies as new technologies emerge. As a result of this organizational change, we have two reportable operating segments,Communications Solutions Group ("CSG") andElectronic Industrial Solutions Group ("EISG"). Prior period segment results were revised to conform to the current presentation. The profitability of each segment is measured after excluding share-based compensation expense, amortization of acquisition-related balances, acquisition and integration costs, restructuring and related costs, northernCalifornia wildfire-related impacts, interest income, interest expense and other items. Communications Solutions GroupThe 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 32
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measurement instruments, systems and related services. These solutions are used
in the simulation, design, validation, manufacturing, installation, and
optimization of electronic equipment and networks. Prior period amounts have
been revised to conform to our new organizational structure described previously
in the Segment Overview.
Net Revenue
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions) (in millions)
Net revenue $ 653 $ 794 $ 1,471 $ 1,546 (18)% (5)%
The Communications Solutions Group revenue for the three and six months ended
April 30, 2020 decreased 18 percent and 5 percent, respectively, when compared
to the same periods last year and declined 19 percent and 6 percent,
respectively, excluding the impact of acquisitions. For the three and six months
ended April 30, 2020 , foreign currency movements had an immaterial impact on
revenue decline. For the three and six months ended April 30, 2020 , revenue
declined in both aerospace, defense and government and commercial communications
end markets and across all regions, primarily driven by site closures and supply
chain disruptions due to the impact of the COVID-19 pandemic in the last half of
the second quarter.
Revenue from the commercial communications market represented approximately 72
percent and 71 percent, respectively, of the total Communications Solutions
Group revenue for the three and six months ended April 30, 2020 , and decreased
15 percent and 3 percent year-over-year, respectively. For the three and six
months ended April 30, 2020 , revenue declined across all regions. We continue to
see investments in 5G, fueled by the ongoing redesign of every aspect of
communications systems, including wireless access, infrastructure, wireline
technologies, data centers and the cloud.
Revenue from the aerospace, defense and government market represented
approximately 28 percent and 29 percent, respectively, of the total
Communications Solutions Group revenue for the three and six months ended April
30, 2020 , and decreased 25 percent and 8 percent year-over-year, respectively.
For the three and six months ended April 30, 2020 , revenue declined across all
regions.
Gross Margin and Operating Margin
The following table shows the Communications Solutions Group margins, expenses
and income from operations for the three and six months ended April 30, 2020
versus the three and six months ended April 30, 2019 .
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
Total gross margin 63.1 % 64.6 % 64.6 % 63.7 % (1) ppt 1 ppt
Operating margin 17.5 % 24.0 % 21.4 % 22.0 % (6) ppts (1) ppt
in millions
Research and development $ 123 $ 125 $ 262 $ 253 (2)% 4%
Selling, general and administrative
$ 396 (11)% (5)% Other operating expense (income), net$ (2 ) $ (3 ) $ (5 ) $ (5 ) (1)% 8% Income from operations$ 114 $ 190 $ 315 $ 340 (40)% (7)% Gross margin for the three months endedApril 30, 2020 decreased 1 percentage point when compared to the same period last year, driven by lower revenue volume due to site closures and supply chain disruptions in the last half of the quarter, partially offset by favorable revenue mix and lower warranty costs. Gross margin for the six months endedApril 30, 2020 increased 1 percentage point when compared to the same period last year, driven by favorable mix and lower warranty costs, partially offset by lower revenue volume due to site closures and supply chain disruptions in the last half of the second quarter. Research and development expense for the three months endedApril 30, 2020 decreased 2 percent when compared to the same period last year, driven by reduction in discretionary spending and lower variable people-related costs due to COVID-19 related restrictions, partially offset by incremental costs of an acquired business. Research and development expense for the six months endedApril 30, 2020 increased 4 percent when compared to the same period last year, driven by greater investment in key growth opportunities in our end markets and leading-edge technologies and incremental costs of an acquired business, partially offset by lower variable people-related costs. 33
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Selling, general and administrative expense for the three and six months endedApril 30, 2020 decreased 11 percent and 5 percent, respectively, when compared to the same periods last year, driven by lower variable people-related costs, infrastructure-related costs, a decline in travel costs due to shelter-in-place restrictions and lower discretionary expenses, partially offset by incremental costs of an acquired business. Other operating expense (income), net was income of$2 million and$5 million , respectively, for the three and six months endedApril 30, 2020 , compared to income of$3 million and$5 million , respectively, for the same periods last year. Income from Operations Income from operations for the three and six months endedApril 30, 2020 decreased$76 million and$25 million , respectively, on a corresponding revenue decrease of$141 million and$75 million , respectively, for the same periods last year. Operating margin decreased 6 percentage points and 1 percentage point for the three and six months endedApril 30, 2020 compared to the same periods last year, driven by lower revenue volume, partially offset by favorable revenue mix, lower variable people-related costs and reductions in discretionary expenses due to COVID-19 related restrictions.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 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. Net Revenue Three Months Ended Six Months Ended
Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions) (in millions)
Net revenue $ 242 $ 299 $ 519 $ 556 (19)% (7)%
The Electronic Industrial Solutions Group revenue for the three and six months endedApril 30, 2020 decreased 19 percent and 7 percent, respectively, when compared to the same periods last year. For the three and six months endedApril 30, 2020 , foreign currency movements had an immaterial impact on revenue decline. The revenue decline was primarily driven by site closures and supply chain disruptions due to the impact of the COVID-19 pandemic in the last half of the second quarter. Declines in general electronics measurement and automotive and energy were partially offset by growth in semiconductor measurement solutions driven by continued investments in next-generation technologies. Revenue declined across all regions for the three and six months endedApril 30, 2020 compared to the same periods last year. Gross Margin and Operating Margin The following table shows theElectronic Industrial Solutions Group margins, expenses and income from operations for the three and six months endedApril 30, 2020 versus the three and six months endedApril 30, 2019 . Three Months Ended Six Months Ended Year over Year Change April 30, April 30, Three Six 2020 2019 2020 2019 Months Months Total gross margin 62.0 % 61.3 % 61.5 % 60.2 % 1 ppt 1 ppt Operating margin 24.4 % 26.1 % 25.4 % 23.7 % (2) ppts 2 ppts in millions Research and development$ 39 $ 42 $ 80 $ 81 (7)% (2)%
Selling, general and administrative
$ 123 (17)% (11)% Other operating expense (income), net$ (1 ) $ (1 ) $ (2 ) $ (2 ) 24% 20% Income from operations$ 59 $ 78 $ 132 $ 132 (24)% - 34
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Gross margin increased 1 percentage point for both the three and six months endedApril 30, 2020 compared to the same periods last year, primarily driven by favorable mix and lower warranty and other period costs, partially offset by lower revenue volume due to site closures and supply chain disruptions in the last half of the second quarter. Research and development expense for the three and six months endedApril 30, 2020 decreased 7 percent and 2 percent, respectively, compared to the same periods last year, primarily driven by reduced discretionary spending and lower variable people-related costs due to the impact of COVID-19 pandemic in the last half of the second quarter. Selling, general and administrative expense for the three and six months endedApril 30, 2020 decreased 17 percent and 11 percent, respectively, compared to the same periods last year, primarily due to lower selling costs, infrastructure-related costs and variable people-related costs. Other operating expense (income) for the three and six months endedApril 30, 2020 was income of$1 million and$2 million , respectively. Other operating expense (income) for the three and six months endedApril 30, 2019 was income of$1 million and$2 million , respectively. Income from Operations Income from operations for the three and six months endedApril 30, 2020 decreased$19 million and was flat, respectively, on a corresponding revenue decrease of$57 million and$37 million , respectively, when compared to the same periods last year. Operating margin for the three months endedApril 30, 2020 decreased 2 percentage points when compared to the same period last year, primarily driven by lower revenue volume, partially offset by favorable mix and lower operating expenses due to COVID-19 related restrictions. Operating margin for the six months endedApril 30, 2020 increased 2 percentage points, when compared to the same period last year, primarily driven by favorable mix and lower operating expenses due to COVID-19 related restrictions, partially offset by decline in revenue volume. FINANCIAL CONDITION Liquidity and Capital Resources Our financial position as ofApril 30, 2020 consisted of cash, cash equivalents and restricted cash of$1,843 million as compared to$1,600 million as ofOctober 31, 2019 . As ofApril 30, 2020 , approximately$1,304 million of our cash, cash equivalents and restricted cash was held outside of theU.S. in our foreign subsidiaries. Our cash and cash equivalents consist mainly of short-term deposits held at major global financial institutions, investments in institutional money market funds, 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. Although recent disruption and volatility in global capital markets due to the ongoing COVID-19 pandemic has not had a significant impact on our financial position, liquidity, and ability to meet our debt covenants, we continue to monitor the capital markets and general global economic conditions. Given the uncertainty of the duration or severity of the pandemic, we have taken proactive measures to reduce costs and preserve liquidity, while supporting our customers and advancing key projects. These measures include a temporary hiring freeze and other discretionary spending, along with lower variable compensation and a reduction in outsourced manufacturing costs, enabled by our flexible cost structure. 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 could 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." 35
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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$495 million for the six months endedApril 30, 2020 , compared to$461 million for the same period last year. • Net income for the six months endedApril 30, 2020 decreased$33 million
compared to the same period last year. Non-cash adjustments increased
million primarily due to a
share-based compensation expense, partially offset by a
decrease from other miscellaneous non-cash activities and an adjustment
for a gain of
property, plant and equipment damaged in the 2017 California wildfires,
which is reflected in investing activities.
• The aggregate of accounts receivable, inventory and accounts payable
provided net cash of
2020 compared to net cash used of
last year. This increase was primarily driven by strong collections and
lower revenue from the impact of the COVID-19 pandemic, which drove a
reduction in our trade receivables, partially offset by higher net
payments on our trade payables and higher inventory. 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 ofshipments 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
net cash provided of $88 million in the comparable period last year. The
decline is primarily due to lower variable compensation accruals, lowercash inflow from deferred revenue and lower insurance recoveries related
to the northern
cash from income taxes payable as compared to the same period last year.
• We contributed
first six months of fiscal 2020 compared to
last year. For the remainder of 2020, we expect to contribute
to our non-
2020, we did not contribute to our
post-retirement benefit plan. For the remainder of 2020, we are evaluating
potential contributions to our U.S. defined benefit plans, although a
contribution is not required.
Net Cash Used in Investing Activities
Net cash used in investing activities was $28 million for the six months ended
April 30, 2020 as compared to $49 million for the same period last year. For the
six months ended April 30, 2020 and 2019, investments in property, plant and
equipment were $55 million and $60 million , respectively. For the six months
ended April 30, 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 a small acquisition. For the six months ended April
30, 2019 , we received proceeds of $7 million from the sale of a cost-method
investment and $2 million from a small divestiture that closed in 2018.
We anticipate total fiscal 2020 capital spending to be approximately $105
million .
Net Cash Used in Financing Activities
For the six months ended April 30, 2020 , we used $220 million for financing
activities, which included $196 million for treasury stock repurchases and $50
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 May 29, 2019 , the Board of Directors approved a new stock repurchase program
authorizing the purchase of up to $500 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. At April
30, 2020 , the maximum approximate dollar value of shares of common stock that
may yet be purchased under the program was $215 million .
For the six months ended April 30, 2019 , we used $54 million for financing
activities, including $69 million for treasury stock repurchases and $24 million
for tax payments related to net share settlement of equity awards, partially
offset by proceeds of $39 million from issuance of common stock under employee
stock plans.
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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 onFebruary 15, 2022 . In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to$150 million in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. As ofApril 30, 2020 andOctober 31, 2019 , we had no borrowings outstanding under the Revolving Credit Facility. We were in compliance with the covenants of the Revolving Credit Facility during the six months endedApril 30, 2020 . Long-Term Debt There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the six months endedApril 30, 2020 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Other There were no other material changes from our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 , to our contractual commitments in the first three months of 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 endedOctober 31, 2019 . 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.
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