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

You should read the following discussion in conjunction with the 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, the existence of economic instability, and our and the combined group's estimated or anticipated future results of operations, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Item 1A and elsewhere in this Form 10-K.

Overview and Executive Summary

Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company") incorporated in Delaware on December 6, 2013 and became an independent publicly-traded company following the separation from Agilent Technologies, Inc. ("Agilent") on November 1, 2014. We are a measurement company providing electronic test and design solutions to communications and electronics industries. Following the acquisition of Ixia, we also provide testing, visibility, and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers, and network equipment manufacturers.

We provide electronic design and test instrumentation systems and related software, software design tools, and services that are used in the design, development, manufacture, installation, deployment, validation, optimization and secure operation of electronics systems. Related services include start-up assistance, instrument productivity, 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 evolving technology standards and the need for faster data rates and new form factors.

In fiscal year 2016, we completed an organizational change to align our organization with the industries we serve which resulted in 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. On April 18, 2017, we completed the acquisition of Ixia, which became our fourth reportable segment, the Ixia Solutions Group (“ISG”). The group provides testing, visibility and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers and network equipment manufacturers. 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, 2017, 2016 and 2015

Keysight’s total orders in 2017 were $3,406 million, an increase of 15 percent when compared to 2016. Foreign currency movements had a negligible impact on the year-over-year comparison. Orders associated with acquisitions accounted for 9 percentage points of order growth for the year ended October 31, 2017 when compared to 2016. 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.

Net revenue of $3,189 million for the year ended October 31, 2017 increased 9 percent when compared to 2016. Foreign currency movements had a negligible impact on the year-over-year comparison. Revenue associated with acquisitions accounted for 7 percentage points of revenue growth for the year ended October 31, 2017 when compared to 2016. Excluding acquisitions, revenue grew year-over-year with growth in the Electronic Industrial Solutions Group, driven by semiconductor measurement and automotive and energy markets and growth in the Services Solutions Group. The Communications Solution Group revenue was

flat as gains in the commercial communications market were offset by declines in the aerospace, defense and government market. 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 income was $102 million in 2017 compared to net income of $335 million and $513 million in 2016 and 2015, respectively. In 2017, 2016 and 2015, we generated operating cash flows of $313 million, $416 million and $376 million, respectively. The decline in net income for the year ended October 31, 2017 is primarily driven by the unfavorable impact from amortization of acquisition-related balances.

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, sales and human resources. The second phase of the program, which was initiated in the third quarter of fiscal 2016, primarily addressed the optimization of the IT infrastructure to support the services business. We recognized costs related to this program of $20 million, $24 million and $20 million in the years ended October 31, 2017, 2016 and 2015, respectively. We expect to recognize additional costs estimated to range from $2 million to $3 million through fiscal 2018.

Impact of Northern California Wildfires

During the week of October 8, 2017, wildfires in northern California adversely impacted the Keysight corporate headquarters site in Santa Rosa, CA. Our headquarters was under mandatory evacuation for more than three weeks, and while direct damage to our core facilities was limited, our buildings did experience some smoke and other fire-related impacts. Cleaning and additional restoration efforts are ongoing in both production and non-production areas of the site. To ensure business continuity, the company has leased temporary office space that will support Santa Rosa employees who are not immediately re-occupying the site. Keysight is insured for the damage caused by the fire, including business interruption insurance, and though we do not expect the fire to have a net impact on our business results, the disruption will impact the seasonality of revenue in the first half of fiscal 2018.

For the three and twelve months ended October 31, 2017, we recognized costs of $16 million, net of $2 million of estimated insurance recovery, including the write-off of damaged fixed assets, unabsorbed overhead costs, cleaning and other direct costs related to the impact of this event.

As we are still in the investigation phase, we have only recognized an insurance receivable for known losses for which we believe insurance reimbursement is probable in excess of our self-insured retention amount of $10 million. In many cases, our insurance coverage exceeds the amount of these covered losses, but no gain contingencies have been recognized as our ability to realize those gains remains uncertain for financial reporting purposes. We currently estimate that total losses and expenses related to the fire will range from $80 million to $110 million, primarily including cleaning and recovery costs, and believe that the expenses will be recoverable under our insurance policy. There may be a difference in timing of costs incurred and the related insurance reimbursement.

Outlook

Looking forward, we believe our increased investments in R&D combined with our completed acquisitions, which have expanded of our technology portfolio and the size of our addressable market, positions Keysight for growth. We remain focused on delivering value through innovative solutions targeted at faster growing markets where customers are investing in next-generation digital and electronic technologies. Internally, we are continuously working to improve operational efficiency within, and across, all functions.

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 consolidated statement of operations. We experience some fluctuations within individual lines of the consolidated balance sheet and consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis of up to a rolling twelve-month 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, 2017, 2016 and 2015

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. Consistent with our strategy, we are seeing an increase in solution sales, which have a longer order-to-revenue conversion cycle; however, the majority of recorded orders 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,												2017 over 2016 % Change		2016 over 2015 % Change
	2017				2016				2015
	(in millions)
Orders	$	3,406			$	2,953			$	2,853			15%		3%
Net revenue:
Products	$	2,664			$	2,440			$	2,408			9%		1%
Services and other	525				478				448				10%		7%
Total net revenue	$	3,189			$	2,918			$	2,856			9%		2%

	Year Ended October 31,									2017 over 2016 % Change		2016 over 2015 % Change
	2017			2016			2015
% of total net revenue:
Products	84	%		84	%		84	%		—		—
Services and other	16	%		16	%		16	%		—		—
Total	100	%		100	%		100	%

Orders

Total orders for the year ended October 31, 2017 were $3,406 million, an increase of 15 percent when compared to 2016. Foreign currency movements had a negligible impact on the year-over-year comparison. Orders associated with acquisitions accounted for 9 percentage points of order growth for the year ended October 31, 2017 when compared to 2016. Orders grew across all operating segments with growth in all regions. 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.

Net Revenue

The following table provides the percent change in revenue for the years ended October 31, 2017 and 2016 by geographic region, including and excluding the impact of currency changes, as compared to the respective prior year.

	Year over Year % Change
	2017 over 2016						2016 over 2015
Geographic Region	actual			currency adjusted			actual			currency adjusted
Americas	11	%		11	%		—	%		1	%
Europe	6	%		7	%		3	%		5	%
Japan	5	%		6	%		5	%		(1	)%
Asia Pacific ex-Japan	11	%		11	%		3	%		4	%
Total revenue	9	%		10	%		2	%		2	%

Net revenue of $3,189 million for the year ended October 31, 2017 increased 9 percent when compared to 2016. Foreign currency movements had a negligible impact on the year-over-year comparison. Revenue associated with acquisitions accounted for 7 percentage points of revenue growth for the year ended October 31, 2017 when compared to 2016. 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.

Revenue from the Communications Solutions Group represented approximately 54 percent of total revenue in 2017 and was flat when compared to 2016. The Communications Solutions Group contribution to total revenue growth was negligible in 2017, with growth in Japan and Asia Pacific excluding Japan offset by declines in the Americas and Europe when compared to 2016. The Communications Solutions Group revenue remained flat as strength in 5G technologies and data center technologies was offset by decline in the aerospace, defense and government market. In 2016, the Communications Solutions Group represented approximately 60 percent of total revenue and increased 3 percent when compared to 2015. The Communications Solutions Group contributed 1 percentage point to 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.

Revenue from the Electronic Industrial Solutions Group represented approximately 27 percent of total revenue in 2017 and grew 8 percent year-over-year when compared to the same period last year, driven by strong growth in semiconductor measurement and automotive and energy markets. The Electronic Industrial Solutions Group contributed 2 percentage points to total revenue growth in 2017, with growth in Asia Pacific excluding Japan and Europe, partially offset by declines in Japan, while revenue from the Americas remained flat. Revenue from the Electronic Industrial Solutions Group represented approximately 26 percent of total revenue in 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 Ixia Solutions Group represented approximately 6 percent of total revenue in 2017. Revenue from the Ixia Solutions Group contributed 7 percentage points to total revenue growth in 2017.

Revenue from the Services Solutions Group represented approximately 13 percent of total revenue in 2017 and grew 4 percent when compared year-over-year. The Services Solutions Group contribution to the total revenue growth was negligible in 2017, with growth in all regions. Revenue from the Services Solutions Group represented approximately 14 percent of total revenue in 2016 and was flat when compared year-over-year. The Services Solutions Group contribution to 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.

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, 2017, our unfilled backlog was approximately $950 million as compared to approximately $807 million at October 31, 2016. Consistent with our strategy, we are seeing an increase in solution sales, which have a longer order-to-revenue conversion cycle; however, we expect that a majority of the unfilled 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,									2017 over 2016 % Change		2016 over 2015 % Change
	2017			2016			2015
Gross margin on products	54.7	%		57.3	%		57.4	%		(3) ppts		— ppt
Gross margin on services and other	46.5	%		47.4	%		45.6	%		(1) ppts		2 ppts
Total gross margin	53.4	%		55.7	%		55.6	%		(2) ppts		— ppt
Operating margin	7.5	%		13.9	%		15.1	%		(6) ppts		(1) ppt

(in millions)
Research and development	$	498			$	425			$	387			17%		10%
Selling, general and administrative	$	1,049			$	818			$	787			28%		4%
Other operating expense (income), net	$	(84	)		$	(25	)		$	(18	)		237%		37%

Gross margin declined 2 percentage points in 2017 compared to 2016, primarily driven by the unfavorable impacts from amortization of acquisition-related assets, fire-related costs at our corporate headquarters, an increase in people-related costs and an increase in warranty expense due to a lower compare as a result of a one-time reduction in the standard warranty accrual during the three months ended July 31, 2016. 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.

Excess and obsolete inventory charges were $16 million in 2017, $17 million in 2016 and $28 million in 2015. Sales of previously written-down inventory were $1 million in 2017, $2 million in 2016 and $2 million in 2015.

Research and development expense increased 17 percent in 2017 compared to 2016 primarily driven by the addition of Ixia to the cost structure, an increase in people-related costs, acquisition-related compensation costs and our continued investment in research and development programs. As a percentage of total revenue, research and development expenses increased 1 percentage point to 16 percent in 2017 from 15 percent in 2016. 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. 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 28 percent for 2017, compared to the same period last year, primarily driven by the addition of Ixia to our cost structure, increases in amortization of acquisition-related assets, acquisition and integration costs, acquisition-related compensation costs, investments in sales resources, people-related costs and the unfavorable impact from fire-related costs at our corporate headquarters and restructuring-related costs. Selling, general and administrative expenses increased 4 percent for 2016, compared to the same period last year, primarily driven by increased expenses associated with acquired companies, 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.

Other operating expense (income), net for 2017 was income of $84 million, which primarily includes a $68 million gain from a settlement related to our Japan pension fund and rental income. Other operating expense (income), net for 2016 was income of $25 million, which primarily includes rental income.

Operating margin decreased 6 percentage points in 2017 when compared to 2016, primarily driven by increases in amortization of acquisition-related assets, acquisition and integration costs, investments in sales resources and people-related costs, partially offset by favorable impact from higher revenue and revenue mix. 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.

As of October 31, 2017, our headcount was approximately 12,600 compared to 10,300 in 2016. The increase is primarily driven by acquisition of Ixia.

Interest Expense

Interest expense for the year ended October 31, 2017 and 2016 was $80 million and $47 million, respectively, and relates to interest on our senior notes issued in October 2014 and April 2017. The increase in interest expense for the year ended October 31, 2017 is primarily due to costs related to a bridge loan facility that expired in April, interest expense and amortization of debt issuance costs on $700 million of senior notes issued in April 2017, and new borrowings under a senior unsecured term loan and revolving credit facility. The new debt issuances provided partial funding for the acquisition of Ixia.

Income Taxes

	Year Ended October 31,
	2017				2016				2015
	(in millions)
Provision (benefit) for income taxes	$	77			$	31			$	(125	)

For 2017, the effective tax rate was 43 percent, which is higher than the U.S. statutory rate primarily due to the payment of a prior year Malaysia tax assessment of $68 million, including tax and penalties, which we are currently in the process of appealing to the Special Commissioners of Income Tax (“SCIT”) in Malaysia.

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.

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 investment 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 $49 million, $34 million and $250 million in 2017, 2016, and 2015, 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 consolidated statements of operations. Accrued interest and penalties are included on the related tax liability line in the consolidated balance sheet.

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 foreign entities, the tax years generally remain open, at most, back to the year 2007. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.

The company is being audited in Malaysia for the 2008 tax year. Although this tax year pre-dates our spin-off from Agilent, pursuant to the agreement between Agilent and Keysight pertaining to tax matters, as finalized at the time of separation, for certain entities including Malaysia, any historical tax liability is the responsibility of Keysight. In the fourth quarter of this year, Keysight paid income taxes and penalties of $68 million on gains related to intellectual property rights, although we are currently in the process of appealing to the Special Commissioners of Income Tax (“SCIT”) in Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia is closed and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company.

On December 15, 2017, the conference committee comprised of representatives of both the U.S. House of Representatives and the U.S. Senate approved proposed U.S. tax reform legislation entitled Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act will become law if passed by both the U.S. House of Representatives and the U.S. Senate and signed by the U.S. President. If this tax

reform is enacted as currently drafted, it will have numerous impacts on our financial statements. For example, we would expect impacts to tax expense, deferred tax assets and liabilities. These impacts would primarily result from the proposed deemed repatriation of foreign earnings as well as the proposed reduction in the U.S. corporate tax rate. In addition, the current version of the Tax Cuts and Jobs Act contains numerous, complex provisions impacting U.S. multinational companies, and we continue to review and assess the proposed legislative language and its potential impact to Keysight.

Segment Overview

In fiscal 2016, we completed an organizational change to align our organization with the industries we serve which resulted in 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. On April 18, 2017, we completed the acquisition of Ixia, which became our fourth reportable segment, the Ixia Solutions Group (“ISG”). The group provides testing, visibility and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers and network equipment manufacturers. 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 acquisition-related assets, the impact of restructuring and related costs, asset impairments, acquisition and integration costs, share-based compensation, separation and related costs, interest income and interest expense.

Communications Solutions Group

The Communications Solutions Group serves customers spanning the worldwide commercial communications end market 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,												2017 over 2016 % Change		2016 over 2015 % Change
	2017				2016				2015
	(in millions)
Total net revenue	$	1,738			$	1,752			$	1,703			(1)%		3%

The Communications Solutions Group revenue in 2017 decreased 1 percent when compared to 2016, primarily driven by decline in the aerospace, defense and government market, partially offset by growth in the commercial communications market. Revenue declines in the Americas and Europe were partially offset by growth in Asia Pacific excluding Japan and Japan. 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 to 2015. Acquisitions added approximately 8 percentage points to the 2016 revenue growth.

Revenue from the commercial communications market represented approximately 60 percent and 58 percent of total Communications Solutions Group revenue in 2017 and 2016, respectively, and increased 3 percent and 5 percent year-over-year, respectively. In 2017, revenue grew in Asia Pacific excluding Japan, the Americas and Japan, partially offset by a decline in Europe. Revenue from the commercial communications market grew year-over-year, driven by growth in 5G and next-generation data center technologies, partially offset by lower 4G-related investments. In 2016, revenue grew in Europe, Asia Pacific excluding Japan and Japan, partially offset by a decline in the Americas. Excluding acquisitions, revenue from the commercial communications market 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.

Revenue from the aerospace, defense and government market represented approximately 40 percent of total Communications Solutions Group revenue in 2017 and declined 6 percent year-over-year. The decline in revenue from the aerospace, defense and government market was driven by continued weakness in the U.S. combined with lower spending in China. For the year ended October 31, 2017, revenue declines in the Americas and Asia Pacific excluding Japan was partially offset by growth in Europe and Japan. Revenue from the aerospace, defense and government market represented approximately 42 percent of total Communications Solutions Group revenue in 2016 and was flat year-over-year. 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.

Gross Margin and Operating Margin

The following table shows the Communications Solutions Group margins, expenses and income from operations for 2017 versus 2016, and 2016 versus 2015.

	Year Ended October 31,									2017 over 2016 % Change		2016 over 2015 % Change
	2017			2016			2015
Total gross margin	61.5	%		60.8	%		59.7	%		1 ppt		1 ppt
Operating margin	17.9	%		17.9	%		19.3	%		—		(1) ppt

(in millions)
Research and development	$	302			$	303			$	263			—%		15%
Selling, general and administrative	$	463			$	457			$	432			1%		6%
Other operating expense (income), net	$	(7	)		$	(9	)		$	(9	)		(27)%		5%
Income from operations	$	311			$	314			$	329			(1)%		(5)%

Gross margin in 2017 increased 1 percentage point compared to 2016, primarily due to a higher percentage of revenue from software, lower inventory charges and lower infrastructure-related costs, partially offset by higher warranty costs. Gross margin in 2016 increased 1 percentage point compared to 2015, primarily due to a higher percentage of revenue from software and R&D solutions, lower warranty and lower inventory charges.

Research and development expenses were flat when compared to 2016. Increased investments in R&D engineers and programs were offset by reduction in infrastructure-related costs and discretionary spending. In 2016, research and development expenses increased 15 percent, primarily driven by acquisitions and increased investments in R&D engineers and 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 2017 increased 1 percent when compared to 2016, primarily driven by investments in sales resources. Selling, general and administrative expenses in 2016 increased 6 percent when compared to 2015, primarily driven by the acquisitions and higher field selling expenses.

Other operating expense (income) in 2017 and 2016 was income of $7 million and $9 million, respectively.

Income from Operations

Income from operations for 2017 decreased $3 million on a corresponding revenue decline of $14 million. Income from operations for 2016 decreased $15 million on a corresponding revenue increase of $49 million.

Operating margin in 2017 was flat when compared to 2016, as improvement in gross margin was offset by investments in sales resources. Operating margin decreased 1 percentage point in 2016 compared to 2015, driven by investments in research and development and field selling costs.

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,												2017 over 2016 % Change		2016 over 2015 % Change
	2017				2016				2015
	(in millions)
Total net revenue	$	836			$	776			$	758			8%		2%

The Electronic Industrial Solutions Group revenue in 2017 increased 8 percent when compared to 2016, driven by strong growth in semiconductor measurement, automotive and energy markets. Strong revenue growth in Asia Pacific excluding Japan and Europe was partially offset by declines in Japan and the Americas. 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.

Gross Margin and Operating Margin

The following table shows the Electronic Industrial Solutions Group margins, expenses and income from operations for 2017 versus 2016, and 2016 versus 2015.

	Year Ended October 31,									2017 over 2016 % Change		2016 over 2015 % Change
	2017			2016			2015
Total gross margin	61.1	%		59.2	%		58.0	%		2 ppts		1 ppt
Operating margin	23.8	%		21.8	%		20.9	%		2 ppts		1 ppt

(in millions)
Research and development	$	121			$	108			$	104			12%		5%
Selling, general and administrative	$	194			$	186			$	181			4%		2%
Other operating expense (income), net	$	(3	)		$	(4	)		$	(4	)		(13)%		(8)%
Income from operations	$	199			$	169			$	158			18%		7%

Gross margin in 2017 increased 2 percentage points compared to 2016, primarily driven by higher revenue and favorable revenue mix. 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.

Research and development expenses in 2017 and 2016 increased 12 percent and 5 percent, respectively, primarily driven by increased investments in leading-edge technologies and key growth opportunities in our end markets. 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 2017 and 2016, increased 4 percent and 2 percent, respectively, primarily driven by our focus on solution selling and market expansion activities.

Other operating expense (income) in 2017 and 2016 was income of $3 million and $4 million, respectively.

Income from Operations

Income from operations for 2017 increased $30 million on a corresponding revenue increase of $60 million. Income from operations for 2016 increased $11 million on a corresponding revenue increase of $18 million.

Operating margin increased 2 percentage points in 2017 compared to 2016, driven by higher gross margin. Operating margin increased 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.

Ixia Solutions Group

The Ixia Solutions Group helps customers validate the performance and security resilience of their networks and associated applications. The test, visibility and security products help organizations and their customers strengthen their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on the group's solutions to validate new products before shipping and secure ongoing operation of their networks with better visibility and security. The group’s product solutions consist of our high-performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

	Year Ended October 31,												2017 over 2016 % Change		2016 over 2015 % Change
	2017				2016				2015
Total gross margin	76.6		%		—		%		—		%		n/a		n/a
Operating margin	16.4		%		—		%		—		%		n/a		n/a
(in millions)
Net revenue	$	256			$	—			$	—			n/a		n/a
Research and development	$	50			$	—			$	—			n/a		n/a
Selling, general and administrative	$	103			$	—			$	—			n/a		n/a
Other operating expense (income), net	$	—			$	—			$	—			n/a		n/a
Income from operations	$	42			$	—			$	—			n/a		n/a

The above table represents the Ixia Solution Group's results from the date of acquisition.

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,												2017 over 2016 % Change		2016 over 2015 % Change
	2017				2016				2015
	(in millions)
Total net revenue	$	419			$	402			$	401			4%		—%

The Services Solutions Group revenue in 2017 grew 4 percent compared to 2016. Acquisitions accounted for approximately 1 percentage point of total revenue growth. An increase in revenue from sales of used equipment and calibration services was partially offset by a decline in revenue from repair services. Revenue grew in all regions, led by strong growth in Asia Pacific excluding Japan and the Americas. Services Solutions Group revenue in 2016 remained flat compared to 2015. Acquisitions accounted for approximately 2 percentage points of total revenue growth. An increase in revenue from calibration services and used equipment was partially offset by a decline in revenue from repair services. Growth in the Americas and Japan was partially offset by a decline in Asia Pacific excluding Japan, while Europe remained flat.

Gross Margin and Operating Margin

The following table shows the Services Solutions Group margins, expenses and income from operations for 2017 versus 2016, and 2016 versus 2015.

	Year Ended October 31,									2017 over 2016 % Change		2016 over 2015 % Change
	2017			2016			2015
Total gross margin	41.2	%		40.9	%		42.9	%		— ppt		(2) ppts
Operating margin	16.3	%		15.6	%		17.9	%		1 ppt		(2) ppts

(in millions)
Research and development	$	2			$	5			$	9			(67)%		(40)%
Selling, general and administrative	$	105			$	99			$	94			7%		5%
Other operating expense (income), net	$	(3	)		$	(2	)		$	(3	)		25%		(14)%
Income from operations	$	68			$	63			$	72			8%		(12)%

Gross margin in 2017 was flat compared to 2016, primarily driven by higher volume and favorable revenue mix offset by 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 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.

Research and development expenses for the Services Solutions Group represent the segment’s share of centralized investment. Research and development expenses declined 67 percent when compared to 2016 and declined 40 percent in 2016 when compared to 2015, primarily driven by a change in the Services Solutions Group’s share of centralized investments in research and development.

For 2017, selling, general and administrative expense increased 7 percent compared to 2016 due to increased investment in sales resources, higher people-related costs and acquisitions. Selling, general and administrative expense increased 5 percent in 2016 compared to 2015 due to higher field selling costs, an increase in infrastructure-related costs and acquisitions.

Other operating expense (income) in 2017 and 2016 was income of $3 million and $2 million, respectively.

Income from Operations

Income from operations for 2017 increased $5 million on a corresponding revenue increase of $17 million. Income from operations for 2016 decreased $9 million on a corresponding revenue increase of $1 million.

Operating margin increased 1 percentage point in 2017 compared to 2016, primarily driven by higher revenue and lower share in R&D expenses, partially offset by increased investment in sales resources. Operating margin decreased 2 percentage points in 2016 compared to 2015, 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, 2017 consisted of cash and cash equivalents of $818 million as compared to $783 million as of October 31, 2016.

As of October 31, 2017, approximately $767 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 for a few locations which are unable to access internal funding.

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 significantly from period to period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding, variable pay and other items impact reported cash flows.

Net cash provided by operating activities was $313 million for the year ended October 31, 2017 as compared to $416 million provided in 2016 and $376 million provided in 2015.

•

Net income in 2017 decreased by $233 million as compared to 2016. Changes to non-cash income and expenses in 2017 as compared to 2016 included a $91 million increase in depreciation and amortization expense, a $64 million decrease in deferred tax expense, a $69 million gain due to pension curtailment and settlement, a $9 million fee associated with a bridge loan facility, an impairment charge of $7 million related to cancellation of an in-process R&D project, a $7 million increase in share-based compensation expense, a $2 million decline in gain from sale of land, a $1 million decline in excess and obsolete inventory-related charges and a $6 million increase in other miscellaneous non-cash expenses as compared to the same period last year. Additionally, we paid $28 million of acquisition-related compensation expense to redeem certain of Ixia's outstanding unvested stock awards as of the date of the Merger Agreement that were determined

to relate to post-merger service periods and expensed in Keysight's consolidated financial statements. Further, during fiscal 2017, we paid $68 million to the Malaysia tax authority associated with a tax assessment, including penalties, on gains related to intellectual property transfers that we are currently in the process of appealing to the Special Commissioners of Income Tax (“SCIT”) in Malaysia.

•

The aggregate of accounts receivable, inventory and accounts payable provided net cash of zero during 2017, compared to net cash used of $72 million in 2016 and $27 million in 2015. The fiscal 2017 inventory change included $61 million of amortization related to the fair value adjustment to inventory due to the Ixia acquisition. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.

•	Net cash paid to Agilent under separation and distribution agreement was zero in 2017 and 2016 as compared to payments to Agilent of $28 million in 2015.

•

The aggregate of employee compensation and benefits, income taxes payable, deferred revenue, and other assets and liabilities provided net operating cash of $30 million during 2017 as compared to net cash used of $31 million and $67 million in 2016 and 2015, respectively. The difference between 2017 and 2016 activities is primarily due to an increase in deferred revenue balances as a result of acquisition activity, partially offset by an increase in variable compensation payments and other differences due to timing of accruals and collections versus payments between the periods.

•	We contributed $34 million to our non-U.S. defined benefit plans during 2017 compared to $38 million in 2016 and $48 million in 2015. We did not contribute to our U.S. Defined Benefit Plans in 2017, 2016 and 2015. We did not contribute to the U.S. Post-Retirement Benefit Plan in 2017, and we contributed $1 million in 2016 and $1 million in 2015.

Net Cash Used in Investing Activities

Net cash used in investing activities was $1,722 million in 2017, $90 million in 2016 and $671 million in 2015. Investments in property, plant and equipment were $72 million in 2017, $91 million in 2016 and $92 million in 2015.

In 2017, we paid $1,622 million, net of $72 million of cash acquired, for the acquisition of Ixia, $60 million for the acquisition of ScienLab, net of $2 million of cash acquired, and $20 million, net, for other acquisition activity. The purchase consideration includes approximately $47 million paid to Ixia employees for vested equity awards. In 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 2015.

We received $8 million of proceeds from the sale of land in 2017 compared to $10 million in 2016. We also received $45 million of proceeds from the sale of investments in 2017 as compared to $1 million in 2016 and $1 million in 2015.

In 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, proceeds from and repayments of borrowings, issuance of common stock under employee stock plans, treasury stock repurchases and debt issuance cost. Net cash provided by financing activities in 2017 was $1,440 million compared to cash used of $25 million in 2016 and cash used of $19 million in 2015, primarily due to proceeds used to fund the acquisition of Ixia, including the issuance of long-term debt of $1,069 million, short-term borrowings of $212 million, and the issuance of common stock under public offering of $444 million, net of issuance costs. We repaid $323 million of the borrowings in 2017, including $182 million of the revolving facility, $140 million of the term loan and a $1 million short-term loan acquired with the acquisition of ScienLab. In addition, during 2017, we issued common stock under employee stock plans of $51 million compared to $43 million during 2016 and $26 million during 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 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 2015 also reflects $49 million of cash returned to Agilent in accordance with the separation and distribution agreement.

Short-term debt

Revolving Credit Facility

On February 15, 2017, we entered into an amended and restated credit agreement (the “Revolving Credit Facility”) that replaced our existing $450 million unsecured credit facility dated September 15, 2014. The Revolving Credit Facility provides for a $450 million, five-year unsecured revolving credit facility that will expire on February 15, 2022 and bears interest at an annual rate of LIBOR + 1.30%. In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to $150 million in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. During the year ended October 31, 2017, we borrowed and repaid $182 million of borrowings outstanding under the Revolving Credit Facility. As of October 31, 2017, we had no borrowings outstanding under the Revolving Credit Facility. We were in compliance with the covenants of the Revolving Credit Facility during the year ended October 31, 2017.

Bridge Facility

On January 30, 2017, we entered into a commitment letter, pursuant to which certain lenders agreed to provide a senior unsecured 364-day bridge loan facility of up to $1.684 billion (“the Bridge Facility”) for the purpose of providing the financing to support Keysight's acquisition of Ixia. Under the terms of commitment letter, the Bridge Facility was automatically terminated upon the Ixia acquisition on April 18, 2017. For the year ended October 31, 2017, we incurred costs in connection with the Bridge Facility of $9 million that were amortized to interest expense.

Long-term debt

Senior Notes

In April 2017, the company issued an aggregate principal amount of $700 million in senior notes ("2027 Senior Notes"). The 2027 Senior Notes were issued at 99.873 percent of their principal amount. The notes will mature on April 6, 2027 and bear interest at a fixed rate of 4.60 percent per annum. The interest is payable semi-annually on April 6 and October 6 of each year, commencing on October 6, 2017. We incurred issuance costs of $6 million in connection with the 2027 Senior Notes that, along with the debt discount of $1 million, are being amortized to interest expense over the term of the senior notes. The 2027 Senior Notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.

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.

Senior Unsecured Term Loan

On February 15, 2017, we entered into a term credit agreement that provides for a three-year $400 million senior unsecured term loan that bears interest at an annual rate of LIBOR + 1.50%. The term loan was drawn upon the closing of the Ixia acquisition. During the year ended October 31, 2017, we repaid $140 million of the term loan. As of October 31, 2017, we had borrowings outstanding under the term loan of $260 million, of which $10 million is due in the next twelve months. In connection with the term loan, we incurred issuance costs of $1 million that are being amortized to interest expense over the term of loan.

Off Balance Sheet Arrangements and Other

We have contractual commitments for non-cancellable operating leases. See Note 17, "Commitments and Contingencies," to our 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, 2017 (in millions). The amounts presented in the table do not reflect $41 million of liabilities for uncertain tax positions as of October 31, 2017. 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)
Debt obligations	$	2,060			$	10			$	750			$	—			$	1,300
Interest payments on long-term debt	547				84				147				119				197
Operating lease commitments	222				51				75				43				53
Capital lease commitments	5				1				1				1				2
Commitments to contract manufacturers and suppliers	336				332				4				—				—
Retirement plans	35				35				—				—				—
Other purchase commitments	42				42				—				—				—
Total	$	3,247			$	555			$	977			$	163			$	1,552

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 17, "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. The majority 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, 2017, the liability for our excess firm, non-cancellable and unconditional purchase commitments was $10 million, compared to $9 million as of October 31, 2016. These amounts are included in other accrued liabilities in our 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 15, "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, 2017, our contractual obligations with these suppliers was approximately $42 million within the next fiscal year, as compared to approximately $35 million as of October 31, 2016.

We had no material off-balance sheet arrangements as of October 31, 2017 or October 31, 2016.

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 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, 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.

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. Awards granted under the LTP Program are based on a variety of targets, such as total shareholder return (TSR) or financial metrics such as operating margin, cost synergies and others. The awards based on TSR

were valued using a Monte Carlo simulation model and those based on financial metrics were valued based on the market price of Keysight’s common stock on the date of grant. 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. We did not grant any option awards in 2017 and 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. 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. 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, 2017 and 2016 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, 2017 and 2016 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 $7 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.

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 that are also our reporting units. On April 18, 2017, we completed the acquisition of Ixia, which became our fourth reportable operating segment. In 2017, we assessed goodwill impairment by performing a qualitative test for our four reporting units. Based on the results of our testing, it was determined that it is more-likely-than-not that the fair values of the reporting units are greater than their carrying values. There was no impairment of goodwill during the years ended October 31, 2017, 2016 and 2015. 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, customer relationships, non-compete agreements, and backlog and are amortized using the straight-line method over estimated useful lives ranging from 3 months to 10 years. No impairments of purchased intangible assets were recorded during the years ended October 31, 2017, 2016 and 2015.

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 2017, we assessed impairment by performing a qualitative test and recorded an impairment charge of $7 million related to the cancellation of an IPR&D project. There were no impairments in fiscal years 2016 and 2015.

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, 2017, the company maintains a valuation allowance mainly related to deferred tax assets for capital losses in the U.K., California research credits, and net operating losses in the U.K. and 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 consolidated statements of operations.

New Accounting Standards

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