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 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, we 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.

In fiscal 2015, we initiated a phased program associated with our separation from Agilent to resize and optimize our infrastructure from the one that had been established to serve a diversified technology company. The focus of the first phase of the program was on the IT infrastructure to support finance, field and human resources. The second phase of the program, which was initiated in the third quarter of fiscal 2016, primarily addresses the optimization of the IT infrastructure to support the services business. We recognized costs related to this program of $24 million for the year ended October 31, 2016 and $20 million for the year ended October 31, 2015. We expect to recognize additional costs estimated to range from $25 million to $35 million through fiscal 2018.

Overview and Executive Summary

We provide electronic design and test 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 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.

In fiscal year 2016, we completed an organizational change to align our organization with the industries we serve. As a result of this organizational realignment, we have three reportable operating segments: Communications Solutions Group, Electronic Industrial Solutions Group and Services Solutions Group. The Communications Solutions Group serves customers spanning the worldwide commercial communications end market, which includes internet infrastructure, and the aerospace, defense and

government end market. The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of electronic industrial end markets. The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight equipment. In addition, our global team of experts provides startup assistance, consulting, optimization and application support across all of our end markets.

Years ended October 31, 2016, 2015 and 2014

Keysight’s total orders in 2016 were $2,953 million, an increase of 3 percent when compared to 2015. Foreign currency movements had an unfavorable impact of 1 percent on the year-over-year comparison. Orders associated with acquisitions accounted for 5 percentage points of order growth for the year ended October 31, 2016 when compared to 2015. Total orders in 2015 were $2,853 million, a decrease of 4 percent when compared to 2014. 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.

Keysight’s net revenue of $2,918 million in 2016 increased 2 percent when compared to 2015. Foreign currency movements had no impact on the year-over-year comparison. The revenue increase associated with acquisitions accounted for approximately 5 percentage points for the year ended October 31, 2016 when compared to 2015. Excluding acquisitions, revenue declined year-over-year as weakness in the smartphone supply chain and restructuring and consolidation activities in the industry offset strength in 5G technologies and data center expansion. 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 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 income was $335 million in 2016 compared to net income of $513 million and $392 million in 2015 and 2014. In 2016, 2015 and 2014, we generated operating cash flows of $416 million, $376 million and $563 million. respectively.

Looking forward, we believe the long-term growth rate of our markets is 2 to 3 percent, although near-term macroeconomic indicators remain mixed. Our focus is on delivering value through innovative electronic design and test solutions as well as continuously improving our operational efficiency.

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

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, 2016, 2015 and 2014

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.

	Year Ended October 31,												2016 over 2015 % Change		2015 over 2014 % Change
	2016				2015				2014
	(in millions)
Orders	$	2,953			$	2,853			$	2,963			3%		(4)%
Net revenue:
Products	$	2,440			$	2,408			$	2,479			1%		(3)%
Services and other	478				448				454				7%		(1)%
Total net revenue	$	2,918			$	2,856			$	2,933			2%		(3)%

	Year Ended October 31,									2016 over 2015 % Change		2015 over 2014 % Change
	2016			2015			2014
% of total net revenue:
Products	84	%		84	%		85	%		—		(1) ppt
Services and other	16	%		16	%		15	%		—		1 ppt
Total	100	%		100	%		100	%

Orders

Total orders for the year ended October 31, 2016 were $2,953 million, an increase of 3 percent when compared to 2015. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year compare. Orders associated with acquisitions accounted for 5 percentage points of order growth for the year ended October 31, 2016 when compared to 2015. Orders grew across all operating segments with growth in all regions. Total orders decreased 4 percent in 2015 compared to 2014, with declines in the Communication Solutions Group and the Electronic Industrial Solutions Group, partially offset by growth in the Services Solutions Group. 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.

Net Revenue

The following table provides the percent change in revenue for the years ended October 31, 2016 and 2015 by geographic region, including and excluding the impact of currency changes, as compared to the respective prior year.

	Year over Year % Change
	2016 over 2015						2015 over 2014
Geographic Region	actual			currency adjusted			actual			currency adjusted
Americas	—	%		1	%		3	%		4	%
Europe	3	%		5	%		(8	)%		—	%
Japan	5	%		(1	)%		(6	)%		6	%
Asia Pacific ex-Japan	3	%		4	%		(5	)%		(4	)%
Total revenue	2	%		2	%		(3	)%		1	%

Net revenue of $2,918 million for the year ended October 31, 2016 increased 2 percent when compared to 2015. Foreign currency movements had a negligible impact on the year-over-year comparison. Revenue associated with acquisitions accounted for 5 percentage points of revenue growth for the year ended October 31, 2016 when compared to 2015. 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 Communications Solutions Group represented approximately 60 percent of total revenue for the year ended October 31, 2016 and increased 3 percent when compared to 2015. The Communications Solutions Group contributed 1 percentage point to the total revenue growth in 2016, with growth in Europe, Japan and Asia pacific excluding Japan, while the Americas revenue was flat when compared to 2015. Excluding revenue from Anite, the Communications Solutions Group revenue declined year-over-year as weakness in the smartphone supply chain and restructuring and consolidation activities in the industry offset strength in 5G technologies and data center expansion. For 2015, the Communications Solutions Group represented approximately 59 percent of total revenue and declined 4 percent when compared to 2014, with declines in Europe, Asia Pacific excluding Japan and Japan, partially offset by growth in the Americas. The Communication Solutions Group contributed 2 percentage points to the total Keysight revenue decrease in 2015.

Revenue from the Electronic Industrial Solutions Group represented approximately 26 percent of total revenue for 2016 and grew 2 percent year-over-year when compared to the same period last year. The Electronic Industrial Solutions Group contributed 1 percentage point to total revenue growth in 2016, with growth in Asia Pacific excluding Japan and Japan, partially offset by declines in Europe and the Americas. Revenue from the Electronic Industrial Solutions Group represented approximately 27 percent of total revenue for 2015 and declined 1 percent year-over-year when compared to 2014. The Electronic Industrial Solutions Group’s contribution to the total revenue decline for 2015 was negligible, with declines in Asia Pacific excluding Japan and Japan, partially offset by growth in the Americas and Europe.

Revenue from the Services Solutions Group represented approximately 14 percent of total revenue for both 2016 and 2015, and was flat when compared year-over-year. The Services Solutions Group contribution to the total revenue growth was negligible in 2016, with growth in the Americas and Japan, partially offset by decline in Asia Pacific excluding Japan, while Europe was flat. For 2015, the Services Solutions Group had no impact on the overall decline. Growth in the Americas, Europe and Japan was partially offset by decline in 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, 2016, our unfilled backlog was approximately $807 million as compared to approximately $779 million at October 31, 2015. For the Communications Solutions Group, our backlog was approximately $459 million at October 31, 2016 as compared to approximately $442 million at October 31, 2015. For the Electronic Industrial Solutions Group, our backlog was approximately $218 million at October 31, 2016 as compared to approximately $211 million at October 31, 2015. Within our Services Solutions Group, our backlog was approximately $130 million at October 31, 2016 as compared to approximately $126 million at October 31, 2015.

We expect that a majority of the backlog will be recognized as revenue within six months. 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

	Year Ended October 31,									2016 over 2015 % Change		2015 over 2014 % Change
	2016			2015			2014
Gross margin on products	57.3	%		57.4	%		56.3	%		— ppt		1 ppt
Gross margin on services and other	47.4	%		45.6	%		49.4	%		2 ppts		(4) ppts
Total gross margin	55.7	%		55.6	%		55.2	%		— ppt		— ppt
Operating margin	13.9	%		15.1	%		16.0	%		(1) ppt		(1) ppt

(in millions)
Research and development	$	425			$	387			$	361			10%		7%
Selling, general and administrative	$	818			$	787			$	790			4%		—%
Other operating expense (income), net	$	(25	)		$	(18	)		$	—			37%		—%

Gross margin remained flat in 2016 compared to 2015 as the favorable impacts from a higher percentage of revenue from software and R&D solutions, lower inventory and warranty charges were offset by unfavorable impacts from acquisition-related intangible amortization. Gross margin remained flat in 2015 compared to 2014 primarily due to lower depreciation, warranty and inventory charges, offset by the unfavorable impact of lower revenue volume.

Excess and obsolete inventory charges were $17 million in 2016, $28 million in 2015 and $33 million in 2014. Sales of previously written-down inventory were $2 million in 2016, $2 million in 2015 and $1 million in 2014.

Research and development expense increased 10 percent in 2016 compared to 2015 due to increased expenses associated with acquired companies and our continued investment in research and development programs. As a percentage of total revenue, research and development expenses increased 1 percentage point to 15 percent in 2016 from 14 percent in 2015. 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.

Selling, general and administrative expenses increased 4 percent for 2016, compared to the same period last year, primarily driven by the acquisition of Anite, higher field selling costs, higher intangible amortization and higher separation-related costs, partially offset by the favorable impact from foreign currency movements and lower share-based compensation expense. Selling, general and administrative expenses were flat in 2015 when compared to 2014, primarily driven by lower separation costs and the favorable impact of currency movements, offset by increases in share-based compensation, restructuring programs and increased costs due to acquisitions, primarily Anite.

Other operating expense (income), net for 2016 and 2015 was $(25) million and $(18) million, respectively, which includes primarily rental income. The increase in other operating income for 2016 was largely driven by a gain on the sale of land.

Operating margin decreased 1 percentage point in 2016 when compared to 2015, primarily driven by the impacts of acquisition-related intangible amortization, higher integration costs and the addition of the Anite cost structure, partially offset by favorable impacts from foreign currency movements and lower share-based compensation expense. 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.

As of October 31, 2016, our headcount was approximately10,300 compared to 10,250 in 2015.

Interest Expense

Interest expense for the year ended October 31, 2016 and 2015 was $47 million and $46 million, respectively, and relates to interest on our senior notes issued in October 2014.

Income Taxes

	Year Ended October 31,
	2016				2015				2014
	(in millions)
Provision (benefit) for income taxes	$	31			$	(125	)		$	83

For 2016, the effective tax rate was 8 percent, which is lower than the U.S. statutory rate primarily due to a higher percentage of earnings in the non-U.S. jurisdictions taxed at lower statutory tax rates. Also, the tax rate was lower than the U.S. statutory rate due to the net tax benefit of $45 million resulting from the repatriation of earnings from Japan, which includes a U.S. tax expense of $27 million offset by $72 million of foreign tax credits recorded in connection with the repatriation.

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 a higher percentage 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 a higher percentage 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.

We benefit from tax incentives in several different jurisdictions, most significantly in Singapore, and several jurisdictions have granted 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 2024 and 2025. The impact of the tax incentives decreased income taxes by $34 million, $250 million and $40 million in 2016, 2015, and 2014, 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 2006. 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 than those periods prior to the Separation.

Segment Overview

In fiscal year 2016, we completed an organizational change to align our organization with the industries we serve. As a result of this organizational realignment, we have three reportable operating segments: Communications Solutions Group, Electronic Industrial Solutions Group and Services Solutions Group. The Communications Solutions Group serves customers spanning the worldwide commercial communications end market, which includes internet infrastructure, and the aerospace, defense and government end market. The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of electronic industrial end markets. The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight equipment. In addition, our global team of experts provides startup assistance, consulting, optimization and application support across all of our end markets.

The profitability of each segment is measured after excluding, among other things, charges related to the amortization of intangibles, the impact of restructuring and related costs, asset impairments, acquisition and integration costs, share-based compensation, separation and related costs, acquisition related fair value adjustments, interest income and interest expense.

Communications Solutions Group

The Communications Solutions Group serves customers spanning the worldwide commercial communications end market, which includes internet infrastructure, and the aerospace, defense and government end market. The group provides electronic design and test software, instruments, and systems used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment.

Net Revenue

	Year Ended October 31,												2016 over 2015 % Change		2015 over 2014 % Change
	2016				2015				2014
	(in millions)
Total net revenue	$	1,752			$	1,703			$	1,767			3%		(4)%

The Communications Solutions Group revenue in 2016 increased 3 percent when compared to 2015, primarily driven by growth in the commercial communications market, while the aerospace, defense and government market remained flat. Revenue grew in all regions except the Americas, which was flat when compared with last year. Acquisitions added approximately 8 percentage points to the 2016 revenue growth. Communication Solutions Group revenue in 2015 decreased 4 percent compared to 2014, with declines in the commercial communications market, partially offset by growth in the aerospace, defense and government market. Declines in Europe, Japan and Asia Pacific excluding Japan were partially offset by growth in the Americas. Acquisitions added approximately 2 percentage point to the 2015 revenue growth.

Revenue from the commercial communications market, including revenue from acquisitions, represented approximately 58 percent and 57 percent of total Communications Solutions Group revenue in 2016 and 2015, respectively, and increased 5 percent and decreased 8 percent year-over-year, respectively. In 2016, revenue grew in Europe, Asia Pacific excluding Japan and Japan, partially offset by a decline in the Americas. Excluding acquisitions, the commercial communications market revenue declined year-over-year as weakness in the smartphone supply chain and restructuring and consolidation activities in the industry offset strength in 5G technologies and data center expansion. In 2015, the decline in commercial communications revenue was driven by softness across all regions and reflected the difficult compares to 2014, strengths in 4G base station and infrastructure manufacturing in China, coupled with continued weakness in smartphone/device manufacturing.

Revenue from the aerospace, defense and government market represented approximately 42 percent and 43 percent of total communications solutions group revenue in 2016 and 2015, respectively, and was flat and increased 3 percent year-over-year, respectively. For the year ended October 31, 2016, growth in the Americas and Japan was partially offset by declines in Europe and Asia Pacific excluding Japan. For the year ended October 31, 2015, growth in the Americas was partially offset by declines in Japan, Europe and Asia pacific excluding Japan.

Gross Margin and Operating Margin

The following table shows the Communications Solutions Group margins, expenses and income from operations for 2016 versus 2015, and 2015 versus 2014.

	Year Ended October 31,									2016 over 2015 % Change		2015 over 2014 % Change
	2016			2015			2014
Total gross margin	60.8	%		59.7	%		57.1	%		1 ppt		3 ppts
Operating margin	17.9	%		19.3	%		18.3	%		(1) ppt		1 ppt

(in millions)
Research and development	$	303			$	263			$	250			15%		5%
Selling, general and administrative	$	457			$	432			$	437			6%		(1)%
Other operating expense (income), net	$	(9	)		$	(9	)		$	—			5%		—
Income from operations	$	314			$	329			$	323			(5)%		2%

Gross margin in 2016 increased 1 percentage points compared to 2015, primarily due to a higher percentage of revenue from software and R&D solutions, lower warranty and lower inventory charges. Gross margin in 2015 increased 3 percentage points when compared to 2014 primarily due to lower depreciation, warranty and inventory charges.

Research and development expenses increased 15 percent compared to 2015. Increased expenditures were primarily driven by acquisitions and increased investments in R&D engineers and programs. In 2015, research and development expense increased 5 percent primarily due to increased investments in research and development programs and increased costs due to acquisitions. We remain committed to investment in research and development and have focused our development efforts on strategic opportunities in order to capture future growth.

Selling, general and administrative expenses in 2016 increased 6 percent when compared to 2015, primarily driven by the acquisitions and higher field selling expenses. Selling, general and administrative expenses in 2015 decreased 1 percent when compared to 2014, primarily due to lower field selling expenses.

Other operating expense (income) 2016 and 2015 was income of $9 million each, respectively.

Income from Operations

Income from operations for 2016 decreased $15 million on a corresponding revenue increase of $49 million. Income from operations in 2015 increased by $6 million, or 2 percent, on revenue decline of $64 million.

Operating margin decreased by 1 percentage point in 2016 compared to 2015, driven by investments in research and development and field selling costs. Operating margin increased by 1 percentage point in 2015 compared to 2014 driven by higher gross margins and relatively flat operating expenses.

Electronic Industrial Solutions Group

The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of electronic industrial end markets, focusing on high-growth applications in the automotive and energy industry and measurement solutions for semiconductor design and manufacturing, consumer electronics, education and general electronics manufacturing. The group provides electronic design and test software, instruments, and systems used in the simulation, design, validation, manufacturing, installation and optimization of electronic equipment.

Net Revenue

	Year Ended October 31,												2016 over 2015 % Change		2015 over 2014 % Change
	2016				2015				2014
	(in millions)
Total net revenue	$	776			$	758			$	766			2%		(1)%

The Electronic Industrial Solutions Group revenue in 2016 increased 2 percent when compared to 2015 with growth in Asia Pacific excluding Japan and Japan, partially offset by declines in the Americas and Europe. The revenue increase associated with

acquisitions accounted for approximately 1 percentage point in 2016. The Electronic Industrial Solutions Group revenue in 2015 decreased 1 percent compared to 2014 with declines in Asia Pacific excluding Japan and Japan, partially offset by growth in Americas and Europe.

Gross Margin and Operating Margin

The following table shows the Electronic Industrial Solutions Group margins, expenses and income from operations for 2016 versus 2015, and 2015 versus 2014.

	Year Ended October 31,									2016 over 2015 % Change		2015 over 2014 % Change
	2016			2015			2014
Total gross margin	59.2	%		58.0	%		58.8	%		1 ppt		(1) ppt
Operating margin	21.8	%		20.9	%		24.2	%		1 ppt		(3) ppts

(in millions)
Research and development	$	108			$	104			$	93			5%		12%
Selling, general and administrative	$	186			$	181			$	171			2%		6%
Other operating expense (income), net	$	(4	)		$	(4	)		$	—			(8)%		—
Income from operations	$	169			$	158			$	185			7%		(15)%

Gross margin in 2016 increased 1 percentage point compared to 2015, primarily driven by higher revenue, lower warranty expenses and higher system sales for new semiconductor process technology. Gross margin in 2015 decreased 1 percentage point, primarily driven by a mix change with less systems sales for new semiconductor process technology as well as higher depreciation, warranty and inventory costs.

Research and development expenses in 2016 and 2015 increased 5 percent and 12 percent, respectively, primarily driven by continued investments in R&D programs. We remain committed to investment in research and development and have focused our development efforts on strategic opportunities in order to capture future growth.

Selling, general and administrative expenses in 2016 and 2015, increased 2 percent and 6 percent, respectively, primarily driven by our focus on solution selling and market expansion activities.

Other operating expense (income) in 2016 and 2015 was income of $4 million.

Income from Operations

Income from operations for 2016 increased $11 million on a corresponding revenue increase of $18 million. Income from operations in 2015 decreased by $27 million, on a revenue decline of $8 million.

Operating margin increased by 1 percentage point in 2016 compared to 2015, driven by higher gross margin partially offset by increased investments in R&D programs and market expansion activities. Operating margins in 2015 decreased by 3 percentage points driven by lower volume and higher operating costs.

Services Solutions Group

The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight equipment. In addition to providing repair and calibration support for Keysight equipment, we also calibrate non-Keysight equipment. The group serves the same markets as Keysight’s Communications Solutions and Electronic Industrial Solutions Groups, providing industry-specific services to deliver complete Keysight solutions and help customers reduce their total cost of ownership for their design and test equipment. This segment was formerly reported as the company’s Customer Support and Services segment.

Net Revenue

	Year Ended October 31,												2016 over 2015 % Change		2015 over 2014 % Change
	2016				2015				2014
	(in millions)
Total net revenue	$	402			$	401			$	400			—%		—%

The Services Solutions Group revenue in 2016 remained flat compared to 2015. Acquisitions accounted for approximately 2 percentage points of total revenue growth. Increases in revenue from calibration services and used equipment was offset by a decline in revenue from repair services. Growth in the Americas and Japan was offset by a decline in Asia Pacific excluding Japan, while Europe remained flat. Services Solutions Group 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.

Gross Margin and Operating Margin

The following table shows the Services Solutions Group margins, expenses and income from operations for 2016 versus 2015, and 2015 versus 2014.

	Year Ended October 31,									2016 over 2015 % Change		2015 over 2014 % Change
	2016			2015			2014
Total gross margin	40.9	%		42.9	%		46.3	%		(2) ppts		(3) ppts
Operating margin	15.6	%		17.9	%		23.1	%		(2) ppts		(5) ppts

(in millions)
Research and development	$	5			$	9			$	9			(40)%		—%
Selling, general and administrative	$	99			$	94			$	83			5%		12%
Other operating expense (income), net	$	(2	)		$	(3	)		$	—			(14)%		—
Income from operations	$	63			$	72			$	93			(12)%		(22)%

Gross margin in 2016 decreased 2 percentage points compared to 2015, primarily driven by flat volume and higher expenses associated with the investments we are making in additional capacity to expand our multi-vendor calibration and asset management services. Gross margin 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.

Research and development expenses for the Services Solutions Group represent the segment’s share of centralized investment. Research and development expenses declined 40 percent when compared to 2015, primarily driven by a change in the Services Solutions Group’s share of centralized investments in research and development. Research and development expenses were flat in 2015 when compared to 2014.

For 2016, selling, general and administrative expense increased 5 percent compared to 2015 driven by higher field selling costs, an increase in infrastructure related costs and acquisitions. 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.

Other operating expense (income) in 2016 and 2015 was income of $2 million and $3 million, respectively.

Income from Operations

Income from operations for 2016 decreased $9 million on a corresponding revenue increase of $1 million. Income from operations in 2015 decreased by $21 million, or 22 percent, on a revenue increase of $1 million.

Operating margin decreased by 2 percentage points in 2016 and 5 percentage points in 2015 when compared year-over-year, respectively, driven by flat revenue, lower gross margins, higher infrastructure-related costs and field selling costs.

Financial Condition

Liquidity and Capital Resources

Our financial position as of October 31, 2016 consisted of cash and cash equivalents of $783 million as compared to $483 million as of October 31, 2015.

As of October 31, 2016, approximately $556 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries. Under current tax laws, most of the cash could be repatriated to the U.S., but it would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. Cash held outside of the U.S. can be used for non-U.S. growth and expansion. Our cash and cash equivalents mainly consist 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 to temporary local overdraft and short-term working capital lines of credit.

As of October 31, 2016, we have concluded our ongoing 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 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

Cash flows from operating activities can fluctuate 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 $416 million for the year ended October 31, 2016 as compared to $376 million provided in 2015 and $563 million provided in 2014.

•

Net income for fiscal 2016 decreased $178 million as compared to fiscal 2015. Changes to non-cash income and expenses in fiscal 2016 as compared to 2015 included a $165 million decrease in deferred tax expense primarily due to the impact of significant tax incentives granted in fiscal 2015, particularly in Singapore, a $31 million increase to amortization expense as compared to the same period last year due to the impact of recently acquired businesses, a $4 million increase in depreciation, a $6 million decrease to stock-based compensation expense relating to special inaugural RSU awards granted in fiscal 2015, a $10 million gain from a land sale in fiscal 2016, a $11 million decline in excess and obsolete inventory charges, and a $10 million decrease in other miscellaneous non-cash expenses.

•

The aggregate of accounts receivable, inventory and accounts payable used net cash of $72 million during fiscal 2016, compared to net cash used of $27 million in fiscal 2015 and $24 in fiscal 2014. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon how effectively we manage the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.

•	Net cash paid to Agilent under separation and distribution agreement was zero for fiscal 2016 as compared to payments to Agilent of $28 million during fiscal 2015 and payments from Agilent of $23 million in 2014.

•

The aggregate of employee compensation and benefits, income and other taxes payable and other assets and liabilities used net operating cash of $36 million during fiscal 2016 as compared to $73 million used in 2015 and $26 provided in 2014. The difference between fiscal 2016 and 2015 balances is primarily due to an increase in deferred revenue balances, lower income tax payments and other miscellaneous differences due to timing of accruals and collections versus payments between the periods.

•

We contributed $38 million to our non-U.S. defined benefit plans during the fiscal 2016 compared to $48 million in fiscal 2015 and Agilent contributed $41 million on our behalf to the non-U.S.multi-employer plans in 2014. We did not contribute to our U.S. Defined Benefit Plans in 2016 and 2015 and Agilent contributed $15 million on our behalf to the U.S. multi-employer plans in 2014. We contributed $1 million to the U.S. Post-Retirement Benefit Plan during the fiscal 2016 as compared to $1 million in fiscal 2015 and zero in 2014. 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 was $90 million in 2016 as compared to $671 million in 2015 and $82 million in 2014. Investments in property, plant and equipment were $91 million in 2016 compared to $92 million in 2015 and $70 million in 2014.

In fiscal 2016, we used $10 million, net of cash acquired, for the acquisition of a small business and a contingent payment related to the Anite acquisition as compared to $574 million for the acquisitions of Anite and Electroservices in fiscal 2015 and $11 million for business acquisitions in 2014. We also received $10 million of proceeds from the sale of land in fiscal 2016.

In fiscal 2015, we invested $7 million in preferred stock of a privately held radio frequency microstructure company, accounted for using the cost method.

Net Cash Used in Financing Activities

Cash flows related to financing activities consist primarily of cash flows associated with the issuance of common stock, excess tax benefits from share based plans and treasury stock repurchases. Net cash used in financing activities in fiscal 2016 was $25 million compared to cash used of $19 million in fiscal 2015 and $335 million provided in 2014.

We received proceeds of $43 million from issuance of common stock under employee stock plans in fiscal 2016 as compared to $26 million in fiscal 2015.

On February 18, 2016, our Board of Directors approved a stock repurchase program under which the company is authorized to repurchase up to $200 million of the company’s outstanding common stock through open market purchases, privately negotiated transactions or other means. The new repurchase program may be suspended or discontinued at any time at the company’s discretion. In fiscal 2016, the company used $62 million to repurchase shares.

Financing activities in fiscal 2015 also reflects $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, the total amount available under the credit facility was increased to $450 million. The company may use amounts borrowed under the facility for general corporate purposes. As of October 31, 2016, we had no borrowings outstanding under the credit facility. We were in compliance with the covenants of the credit facility during the year ended October 31, 2016.

As a result of the Anite acquisition, we had an overdraft facility of £25 million that expired on July 31, 2016, but by mutual agreement this facility continued to be available while a replacement short-term facility was negotiated. On September 8, 2016, we entered into a replacement overdraft facility of £20 million that expired on October 31, 2016. As of October 31, 2016, the company had no borrowings outstanding under the facility. We were in compliance with the covenants of the facilities during the year ended October 31, 2016.

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 percent of their principal amount. The notes will mature on October 30, 2019, and bear interest at a fixed rate of 3.30 percent 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 percent of their principal amount. The notes will mature on October 30, 2024, and bear interest at a fixed rate of 4.55 percent per annum. The interest is payable semi-annually on April 30 and October 30 of each year.

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, 2016 (in millions). The amounts presented in the table do not reflect $23 million of liabilities for uncertain tax positions as of October 31, 2016. 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
	(in millions)
Long-term debt obligations	$	1,100			$	—			$	500			$	—			$	600
Interest payments on long-term debt	269				44				88				55				82
Operating lease commitments	134				32				50				24				28
Capital lease commitments	1				—				—				—				1
Commitments to contract manufacturers and suppliers	222				221				1				—				—
Retirement plans	32				32				—				—				—
Other purchase commitments	35				35				—				—				—
Total	$	1,793			$	364			$	639			$	79			$	711

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 86 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, 2016, the liability for our excess firm, non-cancellable and unconditional purchase commitments was $9 million, compared to $8 million as of October 31, 2015. 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 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 Benefit Plans," 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 disclose the amounts we are obligated to pay to a supplier under each contract in that period before such contract can be canceled. As of October 31, 2016, our contractual obligations with these suppliers was approximately $35 million within the next fiscal year, as compared to approximately $51 million as of October 31, 2015.

We had no material off-balance sheet arrangements as of October 31, 2016 or October 31, 2015.

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 prior to the separation, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and other intangible assets, warranty, 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 Long-Term Performance 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 did not grant any option awards in 2016. For the year ended October 31, 2015, 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, 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.

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 as of October 31, 2016 and 2015 were determined based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. discount rates as of October 31, 2016 and 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. If we changed our discount rate by 1 percent, the impact would be $4 million on U.S. net periodic benefit cost and $12 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 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.

Prior to the Separation, we conducted our business in a single operating segment and reporting unit. In 2014, in conjunction with the planned separation, we implemented changes in our organizational structure which resulted in the formation of two reportable operating segments, which were also our reporting units. In 2016, we implemented changes in our organizational structure designed to align our organization with the industries we serve which resulted in the formation of three reportable operating segments, which are also our reporting units. In 2016, we assessed goodwill impairment by performing a quantitative test for our three reporting units. Based on the results of our testing, the fair values of these reporting units were significantly in excess of the carrying values. There was no impairment of goodwill during the years ended October 31, 2016, 2015 and 2014. 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 10 years. No impairments of purchased intangible assets were recorded during the years ended October 31, 2016, 2015 and 2014.

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 that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. Our indefinite-lived intangible assets are in-process research and development ("IPR&D") intangible assets. In 2016, we assessed impairment by performing a qualitative test and concluded that it was more-likely-than-not that all indefinite-lived assets were not impaired. There were no impairments in fiscal years 2016, 2015 and 2014.

Warranty. Our standard warranty term for most of our products from the date of delivery is typically three years. We accrue for standard warranty costs based on historical trends in warranty charges. The accrual is reviewed regularly and periodically

adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.

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, 2016, the company maintains a valuation allowance mainly related to deferred tax assets for capital losses in the U.K. and net operating losses in the Netherlands. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support their 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 2014, we have calculated our taxes on a separate return basis. However, the amounts recorded for 2014 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 than those periods prior to the Separation.

New Accounting Standards

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