Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the combined and consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The forward-looking statements contained herein include, 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 product and service introductions, the ability of our products 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 acquisitions and other transactions, our transition to lower-cost regions, and the existence of economic instability, 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 those discussed in Item 1A and elsewhere in this Form 10-K.

Basis of Presentation and Separation from Agilent

Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a measurement company providing core electronic design and test solutions to communications and electronics industries. Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.

On November 1, 2014, Keysight Technologies, Inc. (“we,” "our," “Keysight” or "the company”) became an independent publicly-traded company through the distribution by Agilent Technologies, Inc. ("Agilent") of 100 percent of the outstanding common stock of Keysight to Agilent's shareholders (the "Separation"). Each Agilent shareholder of record as of the close of business on October 22, 2014, received one share of Keysight common stock for every two shares of Agilent common stock held on the record date. Keysight was incorporated in Delaware on December 6, 2013 and is comprised of Agilent's former electronic measurement business. Keysight's Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on October 6, 2014. Keysight's common stock began trading "regular-way" under the ticker symbol "KEYS" on the New York Stock Exchange on November 3, 2014.

Agilent transferred substantially all of the assets and liabilities and operations of the electronic measurement business to Keysight in August 2014 ("the Capitalization"). Combined financial statements prior to the Capitalization were prepared on a stand-alone basis derived from Agilent’s consolidated financial statements and accounting records, including expenses that were allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us.

Following the Capitalization, the consolidated financial statements include the accounts of the company and our subsidiaries. For the first half of fiscal year 2015, Agilent provided some services on a transitional basis for a fee, which were partially offset by other operating income from Keysight services provided to Agilent. These services were received or provided under a transition services agreement. The net costs associated with the transition services agreement were not materially different than the historical costs that were allocated to us related to these same services.

We are incurring other incremental costs as an independent, publicly traded company as compared to the costs historically allocated to us by Agilent. These incremental costs are estimated to be approximately $15 million on an annual pre-tax basis. In addition, for the years ended October 31, 2015 and 2014, we recognized non-recurring separation and related costs of $20 million and $78 million, respectively. We expect to recognize additional non-recurring separation and related costs, which are currently estimated to range from $12 million to $17 million through fiscal 2016. These costs are expected to include primarily costs related to infrastructure resizing and optimization.

Overview and Executive Summary

We provide electronic measurement instruments and systems and related software, software design tools, and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer's product lifecycle.

We plan to invest in product development to address the changing needs of the market and facilitate growth. We are investing in research and development to design measurement solutions that will satisfy the changing needs of our customers. These opportunities are being driven by the need for faster data rates and new form factors, and by evolving technology standards.

We have two reportable operating segments, measurement solutions and customer support and services. The measurement solutions segment is primarily the hardware and associated software businesses serving the electronic measurement market. The customer support and services segment provides repair and calibration of the hardware measurement solutions and the resale of used instrument equipment.

Years ended October 31, 2015, 2014 and 2013

Total orders in 2015 were $2,853 million, a decrease of 4 percent when compared to 2014. Order declines in aerospace and defense and communications markets were partially offset by a slight increase in industrial, computer, and semiconductor market. Foreign currency movements had an unfavorable impact of 4 percentage points on the year‑over‑year comparison. Orders associated with acquisitions accounted for 1 percentage point of order growth for the year ended October 31, 2015 when compared to 2014. Orders of $2,963 million in 2014 increased 3 percent when compared to 2013 with growth in all markets.

Net revenue of $2,856 million in 2015 decreased 3 percent when compared to 2014, with communications market contributing 2 percentage points of the decrease and industrial, computer and semiconductor market contributing 1 percentage point of the decrease, while aerospace and defense market revenue was flat. Foreign currency movements had an unfavorable impact of 4 percentage points on the year over year comparison. The revenue increase associated with acquisitions accounted for approximately 1 percentage point for the year ended October 31, 2015 when compared to 2014. Net revenue of $2,933 million in 2014 increased 2 percent when compared to 2013, with industrial, computer and semiconductor market contributing 2 percentage points of the increase, and communications market contributing 1 percentage point of the increase, partially offset by a decline in aerospace and defense market revenue. Foreign currency movements had an unfavorable impact of 1 percentage point on the year over year comparison.

Net income was $513 million in 2015 compared to net income of $392 million in 2014 and $457 million in 2013. In 2015, 2014 and 2013, we generated operating cash flows of $376 million, $563 million and $566 million, respectively.

Looking forward, we believe the long-term growth rate of our markets is 2 to 3 percent, although current macroeconomic indicators remain mixed. We intend to leverage our unique formula of hardware plus software plus people to create value for our customers and shareholders. Our focus is on delivering value through innovative electronic design and test solutions as well as improving our operational efficiency as an independent company.

We accelerated our efforts in both wireless communications and software by acquiring Anite in August 2015. This acquisition expands our solutions offering in wireless communications design and test, specifically into the software layer for design and validation and provides an adjacent market opportunity in Network Test.

Restructuring Activities

We initiated a targeted workforce reduction program in July 2015 that is expected to reduce Keysight's total headcount by approximately 104 employees, representing approximately 1 percent of our global workforce. The timing and scope of workforce reductions will vary based on local legal requirements. This is a targeted workforce management program designed to restructure our operations and cost structure for optimization of resources and cost savings. In the current year, we recognized $8 million of expense associated with the headcount reduction under this workforce reduction program. As of October 31, 2015, approximately 70 employees have left and $5 million was paid in severance under the above actions.

We also announced a Pre-retirement notification program for retirement-eligible employees to provide early notice of their planned retirement in return for severance benefits. The program is entirely voluntary and can be initiated only by an employee. Approximately 160 employees of our total workforce opted for early retirement under this program as of October 31, 2015. In the current year, we recognized $8 million of expense associated with the headcount reductions and paid $6 million in severance under the Pre-Retirement Notification program.

When completed, these programs are expected to result in operational efficiency and net annual savings of approximately $18 million, while maintaining our focus on growing the business. As of October 31, 2015, we have a remaining accrual of $6 million under these plans. We expect to complete a majority of these actions by the end of first quarter of fiscal year 2016.

Acquisitions

Acquisition of Anite. On August 13, 2015, we acquired all share capital of Anite for a cash purchase price of $558 million, net of $43 million cash acquired. Anite is a U.K.-based global company and a leading supplier of wireless test solutions with strong software expertise. This acquisition strengthens our wireless software design and test portfolio and its Network Test business expands our served addressable market. Coupled with Keysight's expertise in helping customers design and test hardware, we can now provide customers with more comprehensive wireless hardware and software solutions. Anite’s Network Test business will also enable us to provide innovative solutions that help customers deliver an outstanding experience for mobile users in the network. Anite results are included in Keysight's consolidated financial statements from the date of acquisition and are reported in the measurement solutions segment. We financed the acquisition with available cash. For additional detail related to the acquisition of Anite, see Note 3, "Acquisitions."

Acquisition of Electroservices. On August 28, 2015, we acquired all share capital of Electroservices Enterprises Limited for a cash purchase price of $16 million, net of $1 million cash acquired. Electroservices is a U.K.-based company, specializing in test equipment service and solutions. Electroservices provides a broad range of electrical, mechanical and physical/dimensional calibration, repair and asset management services to defense, telecom and industrial customers. The Electroservices acquisition supports our initiative to grow Keysight services. Electroservices results are included in Keysight's consolidated financial statements from the date of acquisition and are reported in the customer support and services segment.

Investments

In June 2015, we purchased $7 million of preferred stock of a privately held radio frequency microstructure company. We

are accounting for this investment using the cost method. In 2015, other cost method investments with a carrying amount of $4 million were written down to their fair value of zero, resulting in an impairment charge of $4 million, which is included in other income (expense), net. There were no impairments recognized in 2014 and 2013.

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 combined and consolidated statement of operations. We experience some fluctuations within individual lines of the consolidated balance sheet and combined 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 period. 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-Years ended October 31, 2015, 2014 and 2013

Orders and Net Revenue

In general, recorded orders represent firm purchase commitments from our customers with established terms and conditions for products and services that will be delivered within six months. Revenue reflects the delivery and acceptance of the products and services as defined on the customer’s terms and conditions. Cancellations are recorded in the period received from the customer and historically have not been material.

	Years Ended October 31,												2015 over 2014 % Change		2014 over 2013 % Change
	2015				2014				2013
	(in millions)
Orders	$	2,853			$	2,963			$	2,866			(4)%		3%
Net revenue:
Products	$	2,408			$	2,479			$	2,434			(3)%		2%
Services and other	448				454				454				(1)%		—%
Total net revenue	$	2,856			$	2,933			$	2,888			(3)%		2%

	Years Ended October 31,									2015 over 2014 Ppts Change		2014 over 2013 Ppts Change
	2015			2014			2013
% of total net revenue:
Products	84	%		85	%		84	%		(1) ppt		1 ppt
Services and other	16	%		15	%		16	%		1 ppt		(1) ppt
Total	100	%		100	%		100	%

Orders

The following table provides the percent change in orders for the years ended October 31, 2015 and 2014 by geographic region, including and excluding the impact of currency changes, as compared to the respective prior year.

	Year over Year % Change
	2015 over 2014						2014 over 2013
Geographic Region	actual			currency adjusted			actual			currency adjusted
Americas	—	%		1	%		3	%		3	%
Europe	(9	)%		(3	)%		6	%		5	%
Japan	(2	)%		10	%		(16	)%		(9	)%
Asia Pacific ex-Japan	(6	)%		(4	)%		11	%		11	%
Total orders	(4	)%		—	%		3	%		4	%

Total orders decreased 4 percent in 2015 compared to 2014. Order declines in communications and aerospace and defense markets were partially offset by growth in the industrial, computers and semiconductor market. Foreign currency movements had an unfavorable impact of 4 percentage points on the year-over-year compare. The orders associated with acquisitions accounted for 1 percentage point of order growth for the year ended October 31, 2015 when compared to 2014. Total orders increased 3

percent in 2014 when compared to 2013. Orders increased in all markets, including aerospace and defense, industrial, computer, and semiconductor and communications. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year compare.

Net Revenue

The following table provides the percent change in revenue for the years ended October 31, 2015 and 2014 by geographic region, including and excluding the impact of currency changes, as compared to the respective prior year.

	Year over Year % Change
	2015 over 2014						2014 over 2013
Geographic Region	actual			currency adjusted			actual			currency adjusted
Americas	3	%		4	%		(3	)%		(2	)%
Europe	(8	)%		—	%		5	%		4	%
Japan	(6	)%		6	%		(9	)%		—	%
Asia Pacific ex-Japan	(5	)%		(4	)%		8	%		9	%
Total revenue	(3	)%		1	%		2	%		3	%

Net revenue of $2,856 million in 2015 decreased 3 percent when compared to 2014. Foreign currency movements had an unfavorable impact of 4 percentage points on the year-over-year compare. The revenue increase associated with acquisitions accounted for approximately 1 percentage point for the year ended October 31, 2015 when compared to 2014. Revenue from the Americas grew 3 percent, driven by strong aerospace and defense and industrial, computer and semiconductor markets, partially offset by a decline in the communications market. Revenue from Asia Pacific excluding Japan declined 5 percent due to weakness in communications and industrial, computer and semiconductor markets, partially offset by strength in the aerospace and defense market. Europe revenue declined 8 percent with declines in aerospace and defense and communications markets, partially offset by growth in the industrial, computer and semiconductor markets. Japan revenues declined 6 percent impacted by an unfavorable currency impact of 12 percentage points on the year-over-year compare. Declines in the aerospace and defense market were partially offset by an increase in the communications market.

Net revenue of $2,933 million for 2014 increased 2 percent as compared to 2013. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year compare. Revenue from Asia Pacific excluding Japan grew 8 percent, driven by growth in communications and industrial, computer and semiconductor markets. Europe revenue increased 5 percent year-over-year from growth in the communications markets. Revenue from the Americas declined 3 percent year-over-year, with lower revenue from aerospace and defense and communications markets. Japan revenues declined 9 percent year-over-year, impacted by an unfavorable currency impact of 9 percentage points. Declines were primarily in the Communications market.

Communications market revenue, representing approximately 33 percent of total revenue for the year ended October 31, 2015, contributed 2 percentage points to the total revenue decline with decreases in wireless manufacturing partially offset by growth in broadband communications and wireless R&D. The decrease in wireless manufacturing reflects the difficult compares to last year’s strength in 4G base station and infrastructure manufacturing for China. Weakness in the smartphone/device manufacturing segment continued. Wireless R&D grew year-over-year with LTE and LTE-Advanced technology development continuing to drive investment. In 2014, communications market revenue, representing approximately 34 percent of total revenue, contributed 1 percentage point to the total revenue increase as compared to 2013 with increases in wireless manufacturing and the broadband communications business, partially offset by modest declines in wireless R&D.

Aerospace and defense market revenue, representing approximately 23 percent of total revenue for the year ended October 31, 2015, increased 1 percent year-over-year with growth in Americas and Asia Pacific excluding Japan, partially offset by declines in Europe and Japan. In 2014, aerospace and defense market revenue, representing approximately 22 percent of total revenue, contributed a 1 percentage point decline in total revenue as compared to 2013, with declines in all regions, however we saw positive growth in the last half of fiscal 2014.

Industrial, computer and semiconductor market revenue, representing approximately 44 percent of total revenue for the year ended October 31, 2015, contributed 1 percentage point to the total revenue decline as compared to 2014. Declines in Japan and Asia Pacific excluding Japan were partially offset by growth in the Americas and Europe. In 2014, industrial, computer and semiconductor market revenue, representing approximately 44 percent of the total revenue, contributed 2 percentage points to the year-over-year increase compared to 2013. The computer and semiconductor increase was driven by investment in capacity growth and the overall strength in the semiconductor market. The industrial test business grew for the year with particular strength in the last fiscal quarter driven by growth in the Americas and Asia Pacific, excluding Japan.

Backlog

Backlog represents the amount of revenue expected from orders that have already been booked, including orders for goods and services that have not been delivered to customers, orders invoiced but not yet recognized as revenue, and orders for goods that were shipped but not invoiced, awaiting acceptance by customers.

At October 31, 2015, our unfilled backlog was approximately $779 million as compared to approximately $781 million at October 31, 2014. For the measurement solutions business, our backlog was approximately $653 million at October 31, 2015 as compared to approximately $627 million at October 31, 2014. Within our customer services and support business, our backlog was approximately $126 million at October 31, 2015 as compared to approximately $154 million at October 31, 2014. The reduction in the customer services and support business backlog in fiscal 2015 was primarily due to a change in our standard warranty term, which increased from one to three years for most of our products in the second quarter of fiscal 2013. Revenue associated with extended warranties, which provide coverage beyond the standard warranty term, is deferred and amortized over the extended period of coverage. As a result of the extension of the standard warranty term, backlog associated with extended warranties has declined. Three-year warranty is now included as part of the total solution, and the value is captured as part of the initial sales price.

We expect that a majority of the backlog will be recognized as revenue within six months. On average, our backlog represents approximately three months' of revenue. We believe backlog on any particular date, while indicative of short-term revenue performance, is not necessarily a reliable indicator of medium or long-term revenue performance.

Costs and Expenses

	Years Ended October 31,									2015 over 2014 % Change		2014 over 2013 % Change
	2015			2014			2013
Gross margin on products	57.4	%		56.3	%		57.1	%		1 ppt		(1) ppt
Gross margin on services and other	45.6	%		49.4	%		51.3	%		(4) ppts		(2) ppts
Total gross margin	55.6	%		55.2	%		56.2	%		—		(1) ppt
Operating margin	15.1	%		16.0	%		17.2	%		(1) ppt		(1) ppt

(in millions)
Research and development	$	387			$	361			$	375			7%		(4)%
Selling, general and administrative	$	787			$	790			$	752			—%		5%
Other operating expense (income), net	$	(18	)		$	—			$	—			—%		—%

Gross margin remained flat in 2015 compared to 2014 primarily due to lower depreciation, warranty and inventory charges, offset by lower volume. Gross margin declined 1 percentage point in 2014 compared to 2013 on slightly higher revenue. Higher inventory charges and pricing pressure in the wireless manufacturing market were the primary reasons for the lower gross margin.

Excess and obsolete inventory charges were $28 million in 2015, $33 million in 2014 and $21 million in 2013. Sales of previously written-down inventory were $2 million in 2015 and $1 million in 2014 and 2013.

Research and development expense increased 7 percent in 2015 compared to 2014. The increased expenditure was due to our continued investment in research and development programs and increased costs due to the acquisitions, partially offset by the favorable impact of currency movements. As a percentage of total revenue, research and development expenses increased 2 percentage points to 14 percent in 2015 from 12 percent in 2014. We expect investment in research and development to continue at current levels and have focused our development efforts on strategic growth opportunities. Research and development expenses declined 4 percent in 2014 compared to 2013 primarily due to lower infrastructure-related expenses. Reductions in development spending, variable and incentive pay, and infrastructure-related expenses, and the favorable impact of currency movements were partially offset by investments in acquisitions and wage increases.

Selling, general and administrative expenses were flat in 2015 when compared to 2014, primarily driven by lower separation costs and favorable impact of currency movements, offset by increases in share-based compensation, restructuring programs and increased costs due to acquisitions, primarily Anite. Selling, general and administrative expenses increased 5 percent in 2014 compared to 2013 primarily due to higher costs related to non-recurring pre-separation transaction costs and an increase in marketing expenses, partially offset by reductions in infrastructure costs and the favorable impact of currency movements.

Other operating expense (income), net for 2015 was $(18) million, which includes primarily rental income.

Operating margins declined 1 percentage point in 2015 compared to 2014 on lower revenue volume and increases in research and development expenses, restructuring programs, acquisition and integration related expenses, offset by decline in separation costs and the favorable impact of foreign currency. Operating margins declined 1 percentage point in 2014 compared to 2013 driven primarily by one-time separation costs.

As of October 31, 2015, our headcount was approximately 10,250 compared to 9,600 in 2014 primarily as a result of the acquisition of Anite.

Interest Expense

Interest expense for the year ended October 31, 2015 and 2014 was $46 million and $3 million, respectively, and relates to interest on our senior notes issued in October 2014.

Income Taxes

	Years Ended October 31,
	2015				2014				2013
	(in millions)
Provision (benefit) for income taxes	$	(125	)		$	83			$	44

For 2015, the effective tax rate was a benefit of 32 percent, which is lower than the U.S. statutory rate primarily due to the retroactive benefit of two tax incentives in Singapore approved during 2015. Also, the tax rate was lower than the U.S. statutory rate due to the mix of earnings in the non-U.S. jurisdictions taxed at lower statutory tax rates.

For 2014, the effective tax rate was 18 percent. The 18 percent effective tax is lower than the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower statutory tax rates in particular Singapore, where we benefited from tax incentives for the first three quarters of 2014, which resulted in $40 million lower income tax expense. The 2014 rate was also favorably impacted by a $55 million benefit from a prior year reserve release, which was offset by $62 million of tax expense as a result of the repatriation of foreign earnings.

For 2013, the effective tax rate was 9 percent. The 9 percent effective tax is lower than the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower statutory tax rates in particular Singapore, where we benefited from tax incentives.

We benefit from tax incentives in several different jurisdictions, most significantly in Singapore, and several jurisdictions have granted or are anticipated to grant 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 various thresholds of investments and employment or specific types of income in those jurisdictions. The tax incentives are due for renewal between 2016 and 2023. The impact of the tax incentives decreased income taxes by $250 million, $40 million and $68 million in 2015, 2014, and 2013, respectively.

In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the combined and consolidated statements of operations.

For the majority of our entities, the open tax years for the IRS, state and most foreign audit authorities are from August 1, 2014, through the current tax year. For certain historical Agilent foreign entities that Keysight retained as part of the separation, the tax years generally remain open back to the year 2005. For certain entities acquired during 2015, the tax years also remain open back to the year 2005. 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.

For fiscal 2014 and prior, we have calculated our taxes on a separate return basis. However, the amounts recorded for fiscal 2014 and prior are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Agilent. Consequently, our results after our separation from Agilent may be materially different from our historical results.

Segment Overview

We have two reportable operating segments, measurement solutions and customer support and services. The measurement solutions segment is primarily the hardware and associated software businesses serving the electronic measurement market. The customer support and services segment provides hardware repair and calibration and the resale of used instrument equipment.

The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, separation and related costs, acquisition-related fair value adjustments and non-cash amortization. In 2015, we began excluding share-based compensation expense in addition to the items noted above to derive segment profitability. Prior year numbers have been revised to reflect the change.

Measurement Solutions Business

Our measurement solutions business provides electronic measurement instruments and systems with related software and software design tools that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment. We provide start-up assistance, consulting, optimization and application support throughout our customer’s product lifecycle. Our electronic design and test solutions serve the following markets: communications, aerospace and defense, and industrial, computer and semiconductor.

Net Revenue

	Years Ended October 31,												2015 over 2014 % Change		2014 over 2013 % Change
	2015				2014				2013
	(in millions)
Total net revenue	$	2,461			$	2,533			$	2,493			(3)%		2%

Measurement solutions net revenue in 2015 decreased 3 percent compared to 2014, and was flat excluding the impact of currency fluctuations. The decline is driven primarily by lower revenue from the communications market, which contributed 2 percentage points to the decline, and the industrial, computer and semiconductor market which contributed 1 percentage point to the decline, while aerospace and defense market revenue was flat. Revenue from the Anite acquisition added approximately 1 percentage point to the revenue increase for the year ended October 31, 2015. Measurement solutions net revenue in 2014 increased 2 percent compared to 2013, with modest growth in the industrial, computer and semiconductor market contributing 2 percentage points to the increase, and the communications market contributing 1 percentage point to the increase, partially offset by a decline in aerospace and defense market revenue.

Gross Margin and Operating Margin

The following table shows the measurement solutions business' margins, expenses and income from operations for 2015 versus 2014, and 2014 versus 2013.

	Years Ended October 31,									2015 over 2014 % Change		2014 over 2013 % Change
	2015			2014			2013
Total gross margin	59.1	%		57.6	%		58.6	%		2 ppts		(1) ppt
Operating margin	19.8	%		20.1	%		19.4	%		—		1 ppt

in millions
Research and development	$	367			$	343			$	351			7%		(2)%
Selling, general and administrative	$	613			$	608			$	625			1%		(2)%
Other operating expense (income), net	$	(13	)		$	—			$	—			—%		—%
Income from operations	$	487			$	508			$	484			(4)%		5%

Gross margin in 2015 increased 2 percentage points when compared to 2014 primarily due to lower depreciation, warranty and inventory charges. Gross margin in 2014 decreased 1 percentage point when compared to 2013 primarily due to higher inventory charges and pricing pressure in the wireless manufacturing market.

Research and development expenses increased 7 percent in 2015 compared to 2014. Increased expenditures were due to our continued investment in research and development programs and increased costs due to the Anite acquisition, partially offset by the favorable impact of currency movements. Research and development expenses decreased 2 percent in 2014 compared to 2013 driven primarily by lower infrastructure costs. We expect investment in research and development to continue at current levels and have focused our development efforts on strategic growth opportunities.

Selling, general and administrative expenses increased 1 percent in 2015 compared to 2014, driven primarily by the increased costs related to the Anite acquisition, higher infrastructure-related costs and advertising and marketing expenses, which are partially offset by lower people-related costs and favorable currency movements. Selling, general and administrative expenses decreased 2 percent in 2014 compared to 2013. Decreases in infrastructure costs were partially offset by increases in marketing and discretionary spending.

Operating margin remained flat in 2015 compared to 2014 as higher gross margin was offset by increases in operating expenses, primarily due to increased costs related to the Anite acquisition and investments in R&D programs. Operating margin increased by 1 percentage point in 2014 compared to 2013 on higher revenue and lower operating expenses.

Income from Operations

Income from operations in 2015 decreased by $21 million, or 4 percent, on revenue decline of $72 million. Income from operations in 2014 increased by $24 million, or 5 percent, on a revenue increase of $40 million.

Customer Support and Services Business

Our customer support and services business provides hardware repair and calibration services and facilitates the resale of used equipment. Our customer support and services business enables our customers to maximize the value from their electronic measurement equipment and strengthens customer loyalty. Providing these services assures a high level of instrument performance and availability, while minimizing the cost of ownership and downtime.

Net Revenue

	Years Ended October 31,												2015 over 2014 % Change		2014 over 2013 % Change
	2015				2014				2013
	(in millions)
Total net revenue	$	401			$	400			$	395			—%		1%

Customer support and services net revenue in 2015 remained flat compared to 2014. Growth in calibration services and re-marketing sales of used equipment was offset by declines in the equipment repair business due to a reduction in extended warranty revenue as a result of extension of the standard warranty term from one to three years, as discussed previously under "Backlog." Customer support and services net revenue in 2014 increased 1 percent compared to 2013. Growth in calibration services and remarketing sales of used equipment was partially offset by declines in the equipment repair business due to a reduction in extended warranty revenue as a result of extension of the standard warranty term from one to three years.

Gross Margin and Operating Margin

The following table shows the customer support and services business' margins, expenses and income from operations for 2015 versus 2014, and 2014 versus 2013.

	Years Ended October 31,									2015 over 2014 % Change		2014 over 2013 % Change
	2015			2014			2013
Total gross margin	42.9	%		46.3	%		48.4	%		(3) ppts		(2) ppts
Operating margin	17.9	%		23.1	%		24.9	%		(5) ppts		(2) ppts

in millions
Research and development	$	9			$	9			$	9			—%		—%
Selling, general and administrative	$	94			$	83			$	83			12%		—%
Other operating expense (income), net	$	(3	)		$	—			$	—			—%		—%
Income from operations	$	72			$	93			$	99			(22)%		(6)%

Gross margins in 2015 decreased 3 percentage points compared to 2014 primarily due to an increase in people related costs, higher infrastructure-related costs and an unfavorable service mix. Gross margins in 2014 decreased 2 percentage points compared to 2013. Increased costs for extended warranty contracts and the service mix change with increased calibrations were the primary reasons for the lower gross margin.

Research and development expenses for customer support and services represent the segment’s share of centralized investment. Research and development expenses were flat in both 2015 and 2014 as compared to respective prior year.

Selling, general, and administrative expenses increased 12 percent in 2015 compared to 2014 due to increases in infrastructure-related costs and higher field selling costs. Selling, general, and administrative expenses were flat in 2014 compared to 2013.

Operating margins decreased by 5 percentage points in 2015 compared to 2014 driven by flat revenues, higher infrastructure-related costs and field selling costs. Operating margins decreased by 2 percentage points in 2014 compared to 2013. Revenue growth was more than offset by the reductions in gross margins.

Income from Operations

Income from operations in 2015 decreased by $21 million, or 22 percent on a revenue increase of $1 million. Income from operations in 2014 increased by $6 million or 6 percent on a revenue increase of $5 million.

Financial Condition

Liquidity and Capital Resources

Our financial position as of October 31, 2015 consisted of cash and cash equivalents of $483 million as compared to $810 million as of October 31, 2014.

As of October 31, 2015, approximately $338 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries. Much of the non-U.S. cash will be needed for non-U.S. growth and expansion. However, some non-U.S. cash could be repatriated to the U.S. Under current law, such repatriation would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. We continue to be in discussions with Agilent regarding the allocation of certain deferred tax liability balances related to foreign unremitted earnings in accordance with the separation agreements. Excess foreign tax credits associated with unremitted earnings are not recorded as an asset as they do not represent a separate deferred asset until earnings are remitted. 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. All significant international locations have access to internal funding through an offshore cashpool for working capital needs, in addition to temporary local overdraft and short-term working capital lines of credit.

On August 13, 2015, we acquired all share capital of Anite for a cash price of approximately $558 million, net of $43 million of cash acquired. As a result of the acquisition, Anite has become a wholly-owned subsidiary of Keysight. Keysight funded the acquisition using existing cash. The acquisition has been accounted for in accordance with the authoritative accounting guidance and the results of Anite are included in Keysight's consolidated financial statements from the date of acquisition.

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.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $376 million in 2015 as compared to $563 million provided in 2014 and $566 million provided in 2013. As compared to 2014, the $187 million decrease in operating cash flow was primarily due to cash flows associated with separation from Agilent and becoming an independent company, including payments to Agilent of $28 million in 2015 as compared to payments from Agilent of $23 million in 2014, interest payments of $46 million in 2015 as compared to zero in 2014, pension contributions of $48 million as compared to zero in 2014 and income tax payments of $40 million in 2015 as compared to $4 million in 2014.

Key working capital accounts (accounts receivable, accounts payable and inventory) had net cash outflows of $27 million in 2015, $24 million in 2014 and $33 million in 2013.

We did not contribute to our U.S. Defined Benefit Plans in 2015. Agilent contributed $15 million on our behalf to the U.S. multi-employer plans on our behalf in each of 2014 and 2013. We contributed $48 million to the non-U.S. Defined Benefit Plans in 2015 and Agilent contributed $41 million and $45 million on our behalf to the non-U.S. multi-employer plans in 2014 and 2013, respectively. There were no contributions to the U.S. Post-Retirement Benefit Plan or the U.S. multi-employer post-retirement health care plan in 2015, 2014 and 2013. At the Capitalization, the assets and liabilities of the multi-employer plans that were allocable to Keysight employees were transferred to Keysight plans; therefore, the plans were no longer considered multi-employer plans.

Net Cash Used in Investing Activities

Net cash used in investing activities in 2015 was $671 million as compared to cash used of $82 million in 2014 and $85 million in 2013. Purchases of property, plant and equipment were $92 million in 2015, $70 million in 2014 and $69 million in 2013. Cash used for acquisitions of businesses and intangible assets, net of cash acquired, was $574 million in 2015, $11 million in 2014 and $1 million in 2013. In 2015, we invested $7 million in preferred stock of a privately held radio frequency microstructure company. We are accounting for this investment using the cost method. We purchased investments of $15 million in 2013 as compared to zero in 2014. Proceeds from the sale of investment securities were $1 million in 2015 and zero in each of the fiscal years 2014 and 2013.

Net Cash Provided by/Used in Financing Activities

Net cash used in financing activities in 2015 was $19 million compared to $335 million provided in 2014 and $481 million used in 2013. Financing activities in the twelve months ended October 31, 2015 reflects $26 million of proceeds from issuance of common stock under employee stock option plans and $49 million of cash returned to Agilent in accordance with the separation and distribution agreement. We issued senior notes of $1.1 billion and made a repayment of capital of $940 million to Agilent in the year ended October 31, 2014.

Credit Facility

On September 15, 2014, we entered into a five-year credit agreement, which provides for a $300 million unsecured credit facility that will expire on November 1, 2019. On July 21, 2015, we entered into an Accession Agreement, increasing the credit facility from $300 million to $450 million. The company may use amounts borrowed under the facility for general corporate purposes. As of October 31, 2015, the company had no borrowings outstanding under the facility. We were in compliance with the covenants of the credit facility during the year ended October 31, 2015.

As a result of the Anite acquisition, we have an overdraft facility of $39 million (£25 million) that will expire on July 31, 2016. As of October 31, 2015, the company had no borrowings outstanding under the facility. We were in compliance with the covenants of the credit facility from the date of acquisition to October 31, 2015.

Short-term debt

On July 10, 2014, our wholly owned subsidiary in India entered into a short-term loan agreement with a financial institution, which provided up to $50 million of unsecured borrowings. On July 25, 2014, we borrowed $35 million against the loan agreement at an interest rate of 9.95 percent per annum. The loan was repaid in fiscal 2014 and as of October 31, 2014, no balance was outstanding.

Long-term debt

In October 2014, the company issued an aggregate principal amount of $500 million in senior notes ("2019 senior notes"). The 2019 senior notes were issued at 99.902% of their principal amount. The notes will mature on October 30, 2019, and bear interest at a fixed rate of 3.30% per annum. The interest is payable semi-annually on April 30 and October 30 of each year.

In October 2014, the company issued an aggregate principal amount of $600 million in senior notes ("2024 senior notes"). The 2024 senior notes were issued at 99.966% of their principal amount. The notes will mature on October 30, 2024, and bear interest at a fixed rate of 4.55% per annum. The interest is payable semi-annually on April 30 and October 30 of each year.

Off Balance Sheet Arrangements and Other

We have contractual commitments for non-cancellable operating leases. See Note 18, "Commitments and Contingencies," to our combined and consolidated financial statements for further information on our non-cancellable operating leases.

Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization.

Contractual Commitments

Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.

The following table summarizes our total contractual obligations at October 31, 2015 (in millions). The amounts presented in the table do not reflect $21 million of liabilities for uncertain tax positions as of October 31, 2015. We are unable to accurately predict when these amounts 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.

	Total				Less than one year				One to three years				Three to five years				More than five years
Long-term debt obligations	$	1,100			$	—			$	—			$	500			$	600
Interest payments on long-term debt	312				44				88				71				109
Operating leases	152				32				54				31				35
Commitments to contract manufacturers and suppliers	260				259				1				—				—
Retirement plans	45				45				—				—				—
Other purchase commitments	51				51				—				—				—
Total	$	1,920			$	431			$	143			$	602			$	744

Interest on senior notes. We have contractual obligations for interest payments on our senior notes. Interest rates and payment dates are detailed above under "Long-term debt."

Operating leases. Commitments under operating leases relate primarily to leasehold property, See Note 18, "Commitments and Contingencies."

Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. Our agreements with these suppliers usually provide us with the option to cancel, reschedule, and adjust our requirements based on business needs prior to firm orders being placed. Purchase orders outstanding with delivery dates within 30 days are typically non-cancellable. Approximately 88 percent

of our reported purchase commitments arising from these agreements are firm, non-cancellable, and unconditional commitments. We expect to fulfill most of our purchase commitments for inventory within one year.

In addition to the commitments to contract manufacturers and suppliers referenced above, we record a liability for firm, non-cancellable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with our policy relating to excess inventory. As of October 31, 2015, the liability for our excess firm, non-cancellable and unconditional purchase commitments was $8 million, compared to $5 million as of October 31, 2014 and 2013. These amounts are included in other accrued liabilities in our combined and consolidated balance sheet.

Retirement Plans. Commitments under the retirement plans relate to expected contributions to be made to our non-U.S. defined benefit plans and to our post-retirement medical plans for the next year only. Contributions beyond the next year are impractical to estimate.

We also have benefit payments due under our defined benefit retirement plans and post-retirement benefit plan that are not required to be funded in advance, but are paid in the same period that benefits are provided. See Item 8-Financial Statements and Supplementary Data, Note 16, "Retirement Plans and Post-Retirement Pension Plan," for additional information.

Other purchase commitments. Other purchase commitments relate to contracts with professional services suppliers. We can typically cancel these contracts within 90 days without penalties. For those contracts that are not cancellable within 90 days without penalties, we are disclosing the amounts we are obligated to pay to a supplier under each contract in that period before such contract can be canceled. As of October 31, 2015, our contractual obligations with these suppliers was approximately $51 million within the next fiscal year, as compared to approximately $33 million as of October 31, 2014.

We had no material off-balance sheet arrangements as of October 31, 2015 or October 31, 2014.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, allocation methods and allocated expenses from Agilent, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and purchased intangible assets, restructuring and accounting for income taxes.

Revenue recognition. We enter into agreements to sell products (hardware and/or software), services, and other arrangements (multiple-element arrangements) that include combinations of products and services. Revenue from product sales, net of trade discounts and allowances, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, for products, or when the service has been provided. Revenue is reduced for estimated product returns, when appropriate. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue occurs when the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete. Revenue from services is deferred and recognized over the contractual period or as services are rendered. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on our vendor specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or estimated selling price ("ESP") if neither VSOE nor TPE is available. Revenue from the sale of software products that are not required to deliver the tangible product's essential functionality are accounted for under software revenue recognition rules. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements.

We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately.

TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve, changes may occur in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple-element arrangements, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.

Inventory valuation. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based upon estimates about future demand and actual usage. Such estimates are difficult to make under most economic conditions. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of sales and higher income from operations than expected in that period.

Allocations. Prior to the Capitalization, Agilent allocated certain costs such as share-based compensation expense and retirement and post-retirement benefit plan expense relating to our employees and Agilent's corporate and shared services employees. These expenses were subject to certain underlying assumptions mentioned below.

Share-based compensation. We account for share-based awards in accordance with the provisions of the authoritative accounting guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors. The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTP Program were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock awards is determined based on the market price of Keysight’s common stock on the date of grant. Prior to the Separation, it was determined based on the market price of Agilent’s common stock on the date of grant, adjusted for expected dividend yield. We used the average historical volatility of eleven peer companies to estimate the volatility for our stock option awards. We considered our ability to find traded options of peer companies in the current market with similar terms and prices to our options. For the year ended October 31, 2014 and 2013, we used the historical volatility of Agilent stock to estimate the volatility for stock option awards. In estimating the expected life of our options, we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior. A 10 percent increase in our estimated volatility from 31 percent to 41 percent for our most recent employee stock option grant would generally increase the value of an award and the associated compensation cost by approximately 26 percent if no other factors were changed.

Retirement and post-retirement benefit plan assumptions. Prior to the Capitalization, our combined and consolidated statements of operations include expense that was allocated to us based on Keysight employees participating in these plans and our share of Agilent's corporate and shared services employee costs. We consider the expense allocation methodology and results to be reasonable for all periods presented. At the Capitalization, we established defined benefit retirement and post-retirement plans for our current and former employees. The defined benefit retirement and post-retirement obligations relating to those participants in these plans were transferred from Agilent’s plans to our defined benefit plans. A proportionate share of the defined benefit plan assets was allocated from the Agilent pension trust in each applicable country to a newly established Keysight pension trust. The share of assets allocated to us was in the same proportion as the projected benefit obligation of our participants to the total projected benefit obligation of Agilent.

Retirement and post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service to Keysight based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of accounting principles generally accepted in the U.S. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and investment portfolio composition. We evaluate these assumptions at least annually.

The discount rate is used to determine the present value of future benefit payments at the measurement date, which is October 31 for both U.S. and non-U.S. plans. The U.S. discount rates at October 31, 2015 and 2014 were determined based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. discount rates at October 31, 2015 were determined using spot rates along the yield curve to calculate disaggregated discount rates. In addition, we used this method to calculate two components of the periodic benefit cost: service cost and interest cost. The non-U.S. discount rates at October 31, 2014 were generally based on published rates for high-quality corporate bonds. If we changed our discount rate by 1 percent, the impact would be $4 million on U.S. net periodic benefit cost and $13 million on non-U.S. net periodic benefit cost. Lower discount rates increase the present value of the liability and subsequent year pension expense; higher discount rates decrease the present value of the liability and subsequent year pension expense.

The company uses alternate methods of amortization, as allowed by the authoritative guidance, that amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. plans, gains and losses are amortized over the average future working lifetime. For most non-U.S. plans and U.S. post-retirement benefit plans, gains and losses are amortized using a separate layer for each year's gains and losses. The expected long-term return on plan assets is estimated using current and expected asset allocations as well as historical and expected returns. Plan assets are valued at fair value. If we changed our estimated return on assets by 1 percent, the impact would be $6 million on U.S. net periodic benefit cost and $13 million on non-U.S. net periodic benefit cost.

Goodwill and other intangible assets. We review goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregated components of an operating segment that have similar economic characteristics into our reporting units. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination.

Companies have the option to perform a qualitative assessment to determine whether performing the two-step quantitative test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. > 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.

The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These examples include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers. The qualitative indicators replace those previously used to determine whether an interim goodwill impairment test is required. If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step, if necessary, measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit.

Historically we conducted our business in a single operating segment and reporting unit. In fiscal 2014, in conjunction with the planned separation, we implemented changes in our organizational structure which resulted in the formation of two reportable operating segments. In fiscal year 2015, we assessed goodwill impairment for our two reporting units which consisted of our two segments, Measurement Solutions and Customer Support and Services. We performed a qualitative test of goodwill impairment for both reporting units as of September 30, 2015. Based on the results of our testing, it was determined that it is more-likely-than-not that the fair value of the reporting units are greater than their carrying amounts. There was no impairment of goodwill during the years ended October 31, 2015, 2014 and 2013. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated.

Other intangible assets consist primarily of developed technologies, proprietary know-how, trademarks and customer relationships and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 15 years. No impairments of purchased intangible assets were recorded during the years ended October 31, 2015, 2014 and 2013.

We review other intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. The authoritative accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the impairment testing guidance for goodwill. It allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset. The qualitative factors assist in determining whether it is more-likely-than-not (i.e. > 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any

period and proceed directly to calculating its fair value. Our indefinite-lived intangible assets are IPR&D intangible assets. Due to specific cancellation of an IPR&D project, we recorded an impairment of $1 million in 2013. There were no impairments in fiscal years 2015 and 2014. In all other instances we used the qualitative test and concluded that it was more-likely-than-not that all other indefinite-lived assets were not impaired.

Warranty. Our standard warranty term for most of our products from the date of delivery is typically three years, which increased from one year in the second quarter of fiscal 2013. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product revenue. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.

We also sell extended warranties that provide warranty coverage beyond the standard warranty term. Revenue associated with extended warranties is deferred and recognized over the extended coverage period.

Restructuring. The main component of our restructuring plan is related to workforce reductions. Workforce reduction charges are accrued when payment of benefits becomes probable and the amounts can be estimated. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and other related charges could be materially different, either higher or lower, than those we have recorded.

Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of losses in recent years and our forecast of future taxable income. At October 31, 2015, the company maintains a valuation allowance mainly related to deferred tax assets for acquired capital losses in the U.K. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support its reversal.

We have provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of our foreign subsidiaries for the portion of earnings we do not intend to reinvest permanently. For the amount of foreign earnings that we consider reinvested permanently, should we decide to remit this income to the U.S. in a future period, our provision for income taxes will increase materially in that period.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes in the combined and consolidated statements of operations.

For fiscal 2014 and prior, we have calculated our taxes on a separate return basis. However, the amounts recorded for fiscal 2014 and prior are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independent of Agilent. Consequently, our results after our separation from Agilent may be materially different from our historical results.

New Accounting Standards

See Note 2, "New Accounting Pronouncements," to the combined and consolidated financial statements for a description of new accounting pronouncements.