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

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new solution and service introductions, the ability of our solutions to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our completed acquisitions and other transactions, our transition to lower-cost regions, the existence of political or economic instability, and our and the combined group's estimated or anticipated future results of operations, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including but not limited to those risks and uncertainties discussed in Part II Item 1A and elsewhere in this Form 10-K.

Overview and Executive Summary

Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a technology company that helps enterprises, service providers and governments accelerate innovation to connect and secure the world by providing electronic design and test solutions that are used in the simulation, design, validation, manufacture, installation, optimization and secure operation of electronics systems in the communications, networking and electronics industries. We also offer customization, consulting and optimization services throughout the customer's product lifecycle, including start-up assistance, asset management, up-time services, application services and instrument calibration and repair.

In 2019 we completed an organizational change to align our services business with our customer-solutions-oriented, go-to-market strategy as reflected by our Keysight Leadership Model ("KLM"). This change enables us to provide our customers with complete solutions that incorporate both leading product capabilities and the appropriate services and support. Our services delivery is now fully reflected within the markets served, which is a further catalyst of the growth of our services solutions portfolio. Prior period segment results were revised to conform to the presentation. As a result, Keysight has three segments: Communications Solutions Group, Electronic Industrial Solutions Group and Ixia Solutions Group. The organizational structure continues to include centralized enterprise functions that provide support across the groups.

To more effectively and efficiently address customer solution needs across the communications ecosystem as the network transforms, in the first quarter of fiscal 2020, we completed an organizational change to manage our Ixia Solutions Group within our Communications Solutions Group. We believe this realignment will create improved go-to-market and product development alignment, as well as accelerate solution synergies in 5G as this new technology is deployed globally. As a result, beginning with our first quarter of fiscal 2020, we will have two reportable operating segments, Communications Solutions Group (“CSG”) and Electronic Industrial Solutions Group (“EISG”).

Years ended October 31, 2019, 2018 and 2017

Total orders for the year ended October 31, 2019 were $4,441 million, an increase of 9 percent when compared to 2018. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year comparison. Orders associated with acquisitions and divestitures had a net neutral impact on the order growth for the year ended October 31, 2019 when compared to 2018. Order growth in Asia Pacific and the Americas was partially offset by a decline in Europe. Total orders for the year ended October 31, 2018 were $4,082 million, an increase of 20 percent when compared to 2017. Foreign currency movements had a favorable impact of 1 percentage point on the year-over-year comparison. Orders associated with acquisitions accounted for 7 percentage points of order growth for the year ended October 31, 2018 when compared to 2017. Orders grew across all regions.

Net revenue of $4,303 million for the year ended October 31, 2019 increased 11 percent when compared to 2018. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year comparison. Revenue associated with acquisitions and divestitures had a net neutral impact on the revenue growth for the year ended October 31, 2019 when compared to 2018. The Communications Solutions Group led overall revenue growth with strong growth in the commercial communications market, complemented by growth in the Ixia Solutions Group and the Electronic Industrial Solutions Group. Revenue from the Communications Solutions Group, Electronic Industrial Solutions Group and Ixia Solutions Group represented approximately 63 percent, 26 percent and 11 percent respectively, of the total revenue for the year ended October 31, 2019. Net revenue of $3,878 million for the year ended October 31, 2018 increased 22 percent when compared to 2017. Foreign currency movements

had a favorable impact of 2 percentage points on the year-over-year comparison. Revenue associated with acquisitions accounted for 6 percentage points of revenue growth for the year ended October 31, 2018 when compared to 2017. For the same period, revenue excluding acquisitions and foreign currency movements grew 14% year over year, with growth in all our operating segments and across all our markets. Revenue from the Communications Solutions Group, Electronic Industrial Solutions Group and Ixia Solutions Group represented approximately 62 percent, 27 percent and 11 percent, respectively, of the total revenue for the year ended October 31, 2018 and approximately 65 percent, 29 percent and 6 percent, respectively, of the total revenue for the year ended October 31, 2017. Ixia Solutions Group revenue for 2017 included activity from the date of acquisition, April 18, 2017, through October 31, 2017.

Net income was $621 million in 2019 compared to net income of $165 million and $102 million in 2018 and 2017, respectively. The increase in net income for the year ended October 31, 2019 when compared to 2018 was driven by a significant non-recurring goodwill impairment charge in 2018, higher revenue volume, highly differentiated solutions, favorable mix, and lower acquisition and integration costs, partially offset by a favorable income tax benefit in the prior period from new U.S. tax legislation and higher research and development investments in leading-edge technologies and key growth opportunities in our end markets. The increase in net income for the year ended October 31, 2018 when compared to 2017 was driven by higher revenue volume and a favorable tax impact from the new U.S. tax legislation and Singapore tax incentives, partially offset by an unfavorable impact from a goodwill impairment charge and increases in variable people-related costs. In 2019, 2018 and 2017, we generated operating cash flows of $998 million, $555 million and $328 million, respectively.

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. While direct damage to our core facilities was limited, our buildings did experience some smoke and other fire-related impacts. Keysight is insured for the damage caused by the fire.

In 2019, 2018 and 2017, we recognized operating expenses of $3 million, $97 million and $18 million, respectively, offset by income of $3 million, $90 million and $2 million, respectively, for expected insurance recoveries. Expenses were primarily for cleaning and restoration activities, write-off of damaged fixed assets and other direct costs related to recovery from this event.

In 2019 and 2018, we received insurance proceeds of $22 million and $68 million, respectively, which has substantially covered our total fire-related expenses in excess of our $10 million self-insured retention amount. At October 31, 2019, we had a receivable of $5 million for losses and expenses for which insurance reimbursement is probable. The receivable is included in other current assets in the consolidated balance sheet.

In addition, in 2019 and 2018, we made investments in property, plant and equipment related to fire recovery of $7 million and $27 million, respectively, that are expected to be covered by insurance.

Subsequent to October 31, 2019, we received $37 million of insurance proceeds primarily related to replacement of capital and recovery of fire-related expenses. These proceeds will result in an other operating gain of approximately $32 million in the first quarter of fiscal 2020. No additional insurance proceeds or material expenses related to the 2017 northern California wildfires are expected.

Outlook

Our strategy of bringing solutions to market that help customers develop new technologies and accelerate innovation provides a platform for long-term growth. We expect to continue to see our customers make R&D investments in certain next-generation technologies. We are still in the early market stages for these emerging technologies, such as 5G, next-generation automotive, internet of things ("IoT") and defense modernization and expect technology investments to continue. Internally, we are working to improve operational efficiency across all functions. We continue to closely monitor the current macro environment related to trade, tariffs, monetary and fiscal policies. We have complied and will continue to comply with recent U.S. Department of Commerce export control regulations regarding China. While short-term uncertainties exist, we remain confident in our strategy and believe we are well-positioned to capture future growth opportunities.

Currency Exchange Rate Exposure

Our revenues, 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 twelve months in advance. Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.

Results from Operations - Years ended October 31, 2019, 2018 and 2017

Net Revenue

Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Cancellations are recorded in the period received from the customer and historically have not been material.

	Year Ended October 31,												2019 over 2018 % Change		2018 over 2017 % Change
	2019				2018				2017
	(in millions)
Net revenue:
Products	$	3,554			$	3,229			$	2,664			10%		21%
Services and other	749				649				525				15%		24%
Total net revenue	$	4,303			$	3,878			$	3,189			11%		22%

	Year Ended October 31,									2019 over 2018 % Change		2018 over 2017 % Change
	2019			2018			2017
% of total net revenue:
Products	83	%		83	%		84	%		—		(1) ppt
Services and other	17	%		17	%		16	%		—		1 ppt
Total	100	%		100	%		100	%

The following table provides the percent change in revenue for the years ended October 31, 2019 and 2018 by geographic region, including and excluding the impact of foreign currency movements, as compared to the respective prior year.

	Year over Year % Change
	2019 over 2018						2018 over 2017
Geographic Region	actual			currency adjusted			actual			currency adjusted
Americas	12	%		12	%		28	%		28	%
Europe	(2	)%		1	%		29	%		25	%
Asia Pacific	16	%		17	%		13	%		12	%
Total revenue	11	%		12	%		22	%		20	%

Net revenue for the year ended October 31, 2019 was $4,303 million, an increase of 11 percent when compared to 2018. Foreign currency movements had an unfavorable impact of 1 percentage point on the year-over-year comparison. Revenue associated with acquisitions and divestitures had a net neutral impact on revenue growth for the year ended October 31, 2019 when compared to 2018. Currency had an unfavorable impact of 3 percentage points and 1 percentage point on revenue growth in Europe and Asia Pacific, respectively, for the year ended October 31, 2019.

Net revenue for the year ended October 31, 2018 was $3,878 million, an increase of 22 percent when compared to 2017. Foreign currency movements had a favorable impact of 2 percentage points on the year-over-year comparison. Revenue associated with acquisitions accounted for 6 percentage points of revenue growth for the year ended October 31, 2018 when compared to

2017. Currency had a favorable impact of 4 percentage points and 1 percentage point on revenue growth in Europe and Asia Pacific, respectively, for the year ended October 31, 2018.

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 and/or completion of a commitment to a customer.

At October 31, 2019, our unfilled backlog was approximately $1,380 million as compared to approximately $1,311 million at October 31, 2018. Our unfilled backlog as of October 31, 2019 reflects the impact of the deferred revenue adjustment related to the adoption of Accounting Standards Update 2014-09, Revenue From Contracts With Customers ("ASC 606"). See Note 2, "New Accounting Pronouncements," for additional information. 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 the majority of unfilled backlog will be recognized as revenue within six months. While backlog on any particular date can be an indicator of short-term revenue performance, it is not necessarily a reliable indicator of medium or long-term revenue performance.

Costs and Expenses

	Year Ended October 31,									2019 over 2018 % Change		2018 over 2017 % Change
	2019			2018			2017
Gross margin on products	59.5	%		55.1	%		54.6	%		4 ppts		—
Gross margin on services and other	56.0	%		51.1	%		46.3	%		5 ppts		5 ppts
Total gross margin	58.9	%		54.4	%		53.2	%		5 ppts		1 ppt
Operating margin	16.5	%		(10.2	)%		4.6	%		27 ppts		(15) ppts

(in millions)
Research and development	$	688			$	624			$	507			10%		23%
Selling, general and administrative	$	1,155			$	1,205			$	1,058			(4)%		14%
Goodwill impairment	$	—			$	709			$	—			—		—
Other operating expense (income), net	$	(20	)		$	(33	)		$	(16	)		(40)%		105%

Gross margin increased 5 percentage points in 2019 compared to 2018, primarily driven by higher revenue volume, highly differentiated solutions, favorable mix and a decline in warranty costs. Gross margin increased 1 percentage point in 2018 compared to 2017, primarily driven by gains related to revenue volume and favorable mix, partially offset by increases in variable people-related costs and amortization of acquisition-related balances.

Excess and obsolete inventory charges were $27 million in 2019, $25 million in 2018 and $16 million in 2017. Sales of previously written-down inventory were $2 million in 2019, $2 million in 2018 and $1 million in 2017.

Research and development expense increased 10 percent in 2019 compared to 2018, primarily driven by greater investment in key growth opportunities in our end markets, leading-edge technologies, people and infrastructure. Research and development expense increased 23 percent in 2018 compared to 2017, primarily driven by the addition of acquired companies to our cost structure, an increase in variable people-related costs and our continued investment in research and development programs, partially offset by non-recurring acquisition-related compensation expense in 2017. Research and development expenses as a percent of total revenue were 16 percent in each of the three years 2019, 2018 and 2017.

Selling, general and administrative expenses decreased 4 percent in 2019 compared to 2018, primarily driven by a decline in litigation and restructuring costs and acquisition and integration costs, partially offset by an increase in people- related costs. Selling, general and administrative expenses increased 14 percent for 2018 compared to 2017, primarily driven by the addition of acquired companies to our cost structure and increases in variable people-related, litigation and restructuring costs, partially offset by the elimination of non-recurring acquisition-related compensation expense, separation and related costs, acquisition and integration costs and the unfavorable impact from northern California wildfire-related costs.

In 2018 we recorded a goodwill impairment charge of $709 million for the Ixia Solutions Group based on the results of our annual impairment test of goodwill. See Note 11, "Goodwill and Other Intangible Assets," to our consolidated financial statements for additional information.

Other operating expense (income), net primarily includes property rental income and was income of $20 million, $33 million and $16 million for 2019, 2018 and 2017, respectively. Other operating expense (income), net for 2018 also includes income from business divestitures.

Operating margin increased 27 percentage points in 2019 when compared to 2018, primarily driven by a non-recurring goodwill impairment charge in 2018, higher revenue volume, highly differentiated solutions, favorable mix, lower acquisition and integration costs, and lower litigation and restructuring-related costs, partially offset by an increase in people-related costs. Operating margin decreased 15 percentage points in 2018 when compared to 2017, primarily driven by goodwill impairment and an increase in variable people-related costs, partially offset by gains related to revenue volume and favorable mix.

Our headcount was approximately 13,600 at October 31, 2019 compared to 12,900 at October 31, 2018.

Interest Income and Expense

Interest income for the years ended October 31, 2019, 2018 and 2017 was $23 million, $12 million and $7 million, respectively, and primarily relates to interest earned on our cash balances. Interest expense for the years ended October 31, 2019, 2018 and 2017 was $80 million, $83 million and $80 million, respectively, and primarily relates to interest on our senior notes.

Other income (expense), net

Other income (expense), net for the years ended October 31, 2019, 2018 and 2017 was income of $61 million, $54 million and $104 million, respectively, and primarily includes income related to our defined benefit and post-retirement benefit plans (interest cost, expected return on assets and amortization of net actuarial loss and prior service credits) and the change in fair value of our equity investments. Other income for 2017 also includes a $68 million gain from a settlement related to our Japan pension fund.

Income Taxes

	Year Ended October 31,
	2019				2018				2017
	(in millions)
Provision (benefit) for income taxes	$	94			$	(576	)		$	77

For 2019, the effective tax rate was 13 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.

For 2018, the effective tax rate was 140 percent, which is higher than the U.S. statutory rate primarily due to the net impact of U.S. tax law changes, the Singapore restructuring and tax incentive modifications completed in 2018 in response to Singapore tax law changes, and the tax impact of goodwill impairment.

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.

We benefit from tax incentives in several different jurisdictions, most significantly in Singapore, that 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 $47 million, $567 million and $49 million in 2019, 2018 and 2017, respectively. The decrease in the tax benefit from 2018 to 2019 is primarily due to the one-time impacts of the Singapore restructuring and tax incentive modifications that were completed in 2018 in response to Singapore tax law changes.

The calculation of our tax liabilities involves 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 the payment of these additional

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.

The open tax years for the IRS and most states are from November 1, 2015 through the current tax year. For the majority of our foreign entities, the open tax years are from November 1, 2014 through the current tax year. For certain foreign entities, the tax years remain open, at most, back to 2008. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.

The company is being audited in Malaysia for the 2008 tax year. Although this tax year pre-dates our separation 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 fiscal 2017, 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 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 was 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.

Segment Overview

In 2019 we completed an organizational change to align our services business with our customer-solutions-oriented, go-to-market strategy as reflected by our Keysight Leadership Model ("KLM"). This change was made to fully reflect our services delivery within the markets served and further enable the growth of our services solutions portfolio. Prior period segment results were revised to conform to the presentation. As a result, Keysight has three segments: Communications Solutions Group, Electronic Industrial Solutions Group and Ixia Solutions Group. The organizational structure continues to include centralized enterprise functions that provide support across the groups. The Communications Solutions Group provides electronic design and test software, instruments, systems, services and solutions that span both the global commercial communications and aerospace, defense and government end markets. The Electronic Industrial Solutions Group provides electronic design and test software, instruments, systems, services and solutions across a broad range of electronic industrial end markets, which include automotive and energy, semiconductor, general electronics and education markets. The Ixia Solutions Group provides network testing, visibility and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers, network equipment manufacturers and governments.

The profitability of each of the segments is measured after excluding share-based compensation expense, restructuring and related costs, amortization of acquisition-related balances, acquisition and integration costs, acquisition-related compensation expense, separation and related costs, pension curtailment and settlement loss (gain), northern California wildfire-related costs, goodwill impairment, legal settlement, gain on divestitures, interest income, interest expense and other items.

Communications Solutions Group

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

Net Revenue

	Year Ended October 31,												2019 over 2018 % Change		2018 over 2017 % Change
	2019				2018				2017
	(in millions)
Total net revenue	$	2,688			$	2,392			$	2,064			12%		16%

The Communications Solutions Group's revenue in 2019 increased 12 percent when compared to 2018, primarily driven by strong growth in the commercial communications market, while the aerospace, defense and government market was flat. Revenue growth in the Asia Pacific and the Americas was partially offset by a decline in Europe. The Communications Solutions Group's revenue in 2018 increased 16 percent when compared to 2017, primarily driven by strong growth in the commercial communications and the aerospace, defense and government markets. Revenue grew across all geographies and all markets.

Revenue from the commercial communications market represented approximately 64 percent of total Communications Solutions Group revenue in 2019 and increased 21 percent year over year, with growth across all geographies. This revenue growth was primarily driven by increased 5G investment across the wireless ecosystem and growth in data-center-related next-generation 400 gigabit Ethernet and higher digital test. Revenue from the commercial communications market represented approximately 59

percent of total Communications Solutions Group revenue in 2018 and increased 17 percent compared to 2017, growing across all geographies. In 2018 the revenue growth was primarily driven by growth in our 5G-related solutions across the wireless ecosystem, with strong demand for network access applications and steady investments in the network and data center markets.

Revenue from the aerospace, defense and government market represented approximately 36 percent of total Communications Solutions Group revenue in 2019 and was flat when compared to 2018. In 2019 revenue grew in the Americas and Asia Pacific, partially offset by a decline in Europe. Revenue from the aerospace, defense and government market represented approximately 41 percent of total Communications Solutions Group revenue in 2018 and increased 15 percent compared to 2017, growing across all geographies. The growth was primarily driven by higher global defense spending and overall improvement in the global economy.

Gross Margin and Operating Margin

The following table provides Communications Solutions Group margins, expenses and income from operations for 2019 versus 2018, and 2018 versus 2017.

	Year Ended October 31,									2019 over 2018 % Change		2018 over 2017 % Change
	2019			2018			2017
Total gross margin	62.6	%		58.5	%		58.1	%		4 ppts		—
Operating margin	26.6	%		19.8	%		16.8	%		7 ppts		3 ppts

(in millions)
Research and development	$	385			$	345			$	310			12%		11%
Selling, general and administrative	$	592			$	590			$	551			—		7%
Other operating expense (income), net	$	(9	)		$	(9	)		$	(9	)		(3)%		5%
Income from operations	$	714			$	474			$	347			51%		36%

Gross margin for the Communications Solutions Group in 2019 increased 4 percentage points compared to 2018, primarily driven by higher revenue volume, highly differentiated solutions, favorable mix, and lower warranty costs. Gross margin for the Communications Solutions Group in 2018 was flat compared to 2017, as gains from higher revenue volume were offset by an increase in people-related costs.

Research and development expense in 2019 and 2018 increased 12 percent and 11 percent, respectively when compared to 2018 and 2017, primarily driven by greater investment in key growth opportunities in our end markets, leading-edge technologies, people and infrastructure.

Selling, general and administrative expense in 2019 was flat when compared to 2018, as higher marketing-related investments were offset by declines in selling costs and infrastructure-related costs. Selling, general and administrative expense in 2018 increased 7 percent when compared to 2017, primarily driven by higher infrastructure-related costs, variable people-related costs and investment in sales resources.

Other operating expense (income), net primarily includes property rental income and was income of $9 million in 2019, 2018 and 2017.

Income from Operations

Income from operations for 2019 increased $240 million on corresponding revenue growth of $296 million. Income from operations for 2018 increased $127 million on corresponding revenue growth of $328 million.

Operating margin in 2019 increased 7 percentage points when compared to 2018 driven by higher revenue volume, highly differentiated solutions and favorable mix, while selling, general and administrative expense was flat. Operating margin in 2018 increased 3 percentage points when compared to 2017 as gains from revenue growth were partially offset by increases in variable people-related costs, infrastructure-related costs and investments in sales resources.

Electronic Industrial Solutions Group

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

Net Revenue

	Year Ended October 31,												2019 over 2018 % Change		2018 over 2017 % Change
	2019				2018				2017
	(in millions)
Total net revenue	$	1,135			$	1,071			$	929			6%		15%

The Electronic Industrial Solutions Group's revenue in 2019 increased 6 percent when compared to 2018, driven by strong growth in general electronics solutions and automotive and energy, while semiconductor measurement solutions remained flat when compared to 2018. Revenue grew across all regions. The Electronic Industrial Solutions Group's revenue in 2018 increased 15 percent when compared to 2017, driven by strong growth in general electronics, automotive and energy and semiconductor solutions. Revenue associated with acquisitions accounted for 3 percentage points of revenue growth for the year ended October 31, 2018 when compared to 2017. Revenue grew across all regions.

Gross Margin and Operating Margin

The following table provides Electronic Industrial Solutions Group margins, expenses and income from operations for 2019 versus 2018, and 2018 versus 2017.

	Year Ended October 31,									2019 over 2018 % Change		2018 over 2017 % Change
	2019			2018			2017
Total gross margin	61.1	%		58.9	%		59.0	%		2 ppts		—
Operating margin	25.9	%		22.9	%		22.5	%		3 ppts		—

(in millions)
Research and development	$	159			$	145			$	123			10%		17%
Selling, general and administrative	$	244			$	245			$	219			—		11%
Other operating expense (income), net	$	(4	)		$	(4	)		$	(4	)		(11)%		5%
Income from operations	$	294			$	245			$	209			20%		18%

Gross margin in 2019 increased 2 percentage points as compared to 2018, primarily driven by higher revenue volume, highly differentiated solutions, favorable mix and lower warranty costs. Gross margin in 2018 was flat when compared to 2017 as gains from higher revenue were offset by unfavorable revenue mix.

Research and development expense in 2019 increased 10 percent when compared to 2018, primarily driven by continued investments in key growth opportunities in our end markets, leading-edge technologies and infrastructure. Research and development expense in 2018 increased 17 percent when compared to 2017, primarily driven by increased investments in key growth opportunities in our end markets and leading-edge technologies, the addition of an acquired company and higher variable people-related costs.

Selling, general and administrative expense in 2019 was flat when compared to 2018, primarily driven by increases in marketing-related investments and selling costs, offset by a decrease in infrastructure-related costs. Selling, general and administrative expense in 2018 increased 11 percent when compared to 2017, primarily driven by the addition of an acquired company and higher infrastructure-related costs, investments in sales resources and variable people-related costs.

Other operating expense (income), net primarily includes property rental income and was income of $4 million in 2019, 2018 and 2017.

Income from Operations

Income from operations for 2019 increased $49 million on corresponding revenue growth of $64 million. Income from operations for 2018 increased $36 million on corresponding revenue growth of $142 million.

Operating margin increased 3 percentage points in 2019 compared to 2018, driven by higher revenue volume, highly differentiated solutions and favorable mix, while the selling general and administrative expenses remained flat. Operating margin was flat in 2018 compared to 2017 as gains from higher revenue were offset by increases in infrastructure-related costs, investments in sales resources and variable people-related costs.

Ixia Solutions Group

The Ixia Solutions Group helps customers design, validate and optimize the performance and security resilience of their networks and associated components and applications both pre and post go live. Network test, network visibility and security solutions help organizations and their customers strengthen their physical and virtual networks. The group’s solutions consist of software applications and services, including warranty and maintenance offerings, and high-performance hardware platforms.

Net Revenue

	Year Ended October 31,												2019 over 2018 % Change		2018 over 2017 % Change
	2019				2018				2017
	(in millions)
Total net revenue	$	489			$	451			$	256			9%		n/a

The Ixia Solutions Group's revenue in 2019 increased 9 percent when compared to 2018, driven by strong growth in both visibility network and network test solutions. Revenue growth in Asia Pacific and the Americas was partially offset by a decline in Europe. The Ixia Solutions Group's operating results in 2019 and 2018 are not comparable with 2017, which only includes activity from the date of acquisition, April 18, 2017, through October 31, 2017.

The following table provides Ixia Solutions Group margins, expenses and income from operations for 2019 versus 2018, and 2018 versus 2017. The Ixia Solutions Group's operating results in 2019 and 2018 are not comparable with 2017, which only includes activity from the date of acquisition.

	Years Ended October 31,												2019 over 2018 % Change		2018 over 2017 % Change
	2019				2018				2017
Total gross margin	71.7		%		74.2		%		76.5		%		(3) ppts		n/a
Operating margin	5.9		%		3.6		%		16.3		%		2 ppts		n/a
(in millions)
Research and development	$	126			$	119			$	51			6%		n/a
Selling, general and administrative	$	198			$	199			$	103			—		n/a
Other operating expense (income), net	$	(2	)		$	—			$	—			—		n/a
Income from operations	$	29			$	16			$	42			75%		n/a

Gross margin in 2019 decreased 3 percentage points as compared to 2018, primarily due to a higher allocation of company infrastructure-related costs after integration.

Research and development expense in 2019 increased 6 percent when compared to 2018, primarily driven by higher people-related costs and continued investments in leading-edge technologies and key growth opportunities in our end markets.

Selling, general and administrative expense in 2019 was flat when compared to 2018, primarily driven by declines in selling and marketing-related costs and synergies derived from integration, offset by an increase in infrastructure-related costs.

Other operating expense (income), net primarily includes property rental income and was income of $2 million in 2019 and zero in both 2018 and 2017.

Income from Operations

Income from operations for 2019 increased $13 million on a corresponding revenue increase of $38 million.

Operating margin increased 2 percentage points in 2019 compared to 2018, driven by higher revenue volume and cost synergies resulting from integration, partially offset by higher allocation of company infrastructure-related costs after integration.

Financial Condition

Liquidity and Capital Resources

Our financial position as of October 31, 2019 consisted of cash, cash equivalents and restricted cash of $1,600 million as compared to $917 million as of October 31, 2018.

As of October 31, 2019, approximately $1,108 million of our cash, cash equivalents and restricted cash was held outside of the U.S. in our foreign subsidiaries. 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, a few locations that are unable to access internal funding have access to temporary local overdraft and short-term working capital lines of credit.

We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.

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 $998 million for the year ended October 31, 2019 as compared to $555 million provided in 2018 and $328 million provided in 2017.

•

Net income in 2019 increased by $456 million as compared to 2018. Non-cash adjustments in 2019 increased $102 million compared to 2018, driven by a $787 million decrease in the adjustment for deferred tax benefits due to the 2018 impact of U.S. and Singapore tax law changes and the tax impact of goodwill impairment, a $23 million increase in share-based compensation expense, a $19 million reduction in the gain on sales of assets and divestitures and a $5 million increase in amortization expense, partially offset by a $709 million reduction in the goodwill impairment, a $7 million decrease in depreciation expense and a $16 million decrease from other miscellaneous non-cash activities.

Net income in 2018 increased by $63 million as compared to 2017. Non-cash adjustments in 2018 increased $111 million compared to 2017 due to a $709 million goodwill impairment, a $74 million increase in amortization expense, a $70 million increase from a prior-period pension curtailment and settlement gain, an $11 million increase in depreciation expense and $1 million from other miscellaneous non-cash activities, partially offset by a $742 million increase in the adjustment for deferred tax benefits due to the 2018 impact of U.S. and Singapore tax law changes and the tax impact of goodwill impairment, and a $12 million gain on the sale of assets and divestitures.

•

The aggregate of accounts receivable, inventory and accounts payable used net cash of $105 million during 2019, compared to net cash used of $128 million in 2018 and zero in 2017. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends on the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.

•

The aggregate of employee compensation and benefits, income taxes payable, deferred revenue, and other assets and liabilities provided net operating cash of $107 million during 2019 as compared to net cash provided of $335 million and $42 million in 2018 and 2017, respectively. The difference between 2019 and 2018 activities is primarily driven by an increase in income taxes payable due to the establishment of a long-term transition tax liability resulting from new U.S. tax legislation that was enacted in 2018 and higher variable compensation payments, partially offset by lower cash outflow for fire-related recovery. In 2019 and 2018, we received insurance proceeds of $37 million and $94 million, respectively, associated with recovery from the northern California wildfires and a 2016 Singapore warehouse fire.

•

Net cash used for retirement and post-retirement benefits was $37 million, $127 million and $15 million in 2019, 2018 and 2017, respectively. In 2019 we made no contributions to our U.S. Defined Benefit Plans as compared to an accelerated contribution of $85 million in 2018 to secure tax deductibility prior to new tax legislation taking effect and no contributions in 2017. We contributed $26 million to our non-U.S. defined benefit plans during 2019 compared to $33 million in 2018 and $34 million in 2017. We did not contribute to the U.S. Post-Retirement Benefit Plan in 2019, 2018 and 2017.

Net Cash Used in Investing Activities

Net cash used in investing activities was $196 million, $108 million and $1,722 million in 2019, 2018 and 2017, respectively. Investments in property, plant and equipment were $120 million, $132 million and $72 million in 2019, 2018 and 2017, respectively. Capital spending in 2019 and 2018 includes $7 million and $27 million, respectively, related to recovery from the northern California wildfires.

In 2019 we paid $88 million, net of $56 million of cash acquired, for the acquisition of Prisma Telecom Testing, a global provider of radio access network test solutions. We also received $7 million of proceeds from the sale of investments and $2 million from divestitures. In 2018 we paid $5 million for acquisitions and received proceeds of $29 million from divestitures. In 2017 we paid $1,622 million, net of $72 million of cash acquired, for the acquisition of Ixia, $60 million, net of $2 million of cash acquired for the acquisition of ScienLab, and $20 million, net, for other acquisition activity. We also received $8 million of proceeds from the sale of land and $45 million of proceeds from the sale of investments in 2017.

Net Cash Used in Financing Activities

Net cash used in financing activities was $122 million in 2019 compared to $341 million used in 2018 and $1,425 million provided in 2017.

In 2019 we used net cash of $122 million, primarily for a $500 million repayment of short-term debt, $159 million for treasury stock purchases and $26 million of tax payments related to net share settlement of equity awards, partially offset by proceeds from issuance of long-term debt of $496 million, net of issuance costs, and $67 million from issuance of common stock under employee stock plans.

On May 29, 2019, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to $500 million of the company’s common stock, replacing a previously approved 2018 program authorizing the purchase of up to $350 million of the company’s common stock. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date. See "Issuer Purchases of Equity Securities" under Item 5 for additional information.

In 2018 we used $341 million for financing activities, primarily for a $260 million repayment of term loan borrowings, $120 million for treasury stock purchases, $18 million of tax payments related to net share settlement of equity awards and $6 million for acquisition-related contingent consideration, partially offset by proceeds of $64 million from issuance of common stock under employee stock plans.

In 2017 net cash provided by financing activities was $1,425 million 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 and made $12 million of tax payments related to net share settlement of equity awards.

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 + 1.10%. In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to $150 million in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. As of October 31, 2019, we had no borrowings outstanding under the Revolving Credit Facility. We were in compliance with the covenants of the Revolving Credit Facility during the year ended October 31, 2019. During fiscal 2018, we borrowed and repaid $40 million under the Revolving Credit Facility.

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 the commitment letter, the Bridge Facility was automatically terminated upon the acquisition of Ixia 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.

2019 Senior Notes

In October 2014, the company issued an aggregate principal amount of $500 million in senior notes ("2019 Senior Notes"). These notes matured on October 30, 2019, and were fully repaid.

Long-term debt

The below senior notes are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness.

2024 Senior Notes

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.

2027 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, are being amortized to interest expense over the term of the senior notes.

2029 Senior Notes

In October 2019, the company issued an aggregate principal amount of $500 million in unsecured senior notes ("2029 Senior Notes"). The 2029 Senior Notes were issued at 99.914 percent of their principal amount. The notes will mature on October 30, 2029 and bear interest at a fixed rate of 3.00 percent per annum. The interest is payable semi-annually on April 30 and October 30 of each year, commencing on April 30, 2020. We incurred issuance costs of $4 million in connection with the 2029 Senior Notes that, along with the debt discount, are being amortized to interest expense over the term of the senior notes.

Senior Unsecured Term Loan

On February 15, 2017, we entered into a term credit agreement that provided for a three-year $400 million senior unsecured term loan that bore interest at an annual rate of LIBOR + 1.50%. The term loan was drawn upon the closing of the Ixia acquisition. On February 27, 2018, we fully repaid the borrowings outstanding under the term loan of $260 million and terminated the term credit agreement. We had previously repaid $140 million of the term loan during the year ended October 31, 2017.

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, 2019. The amounts presented in the table do not reflect $130 million of liabilities for uncertain tax positions as of October 31, 2019. 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)
Senior notes obligations	$	1,800			$	—			$	—			$	600			$	1,200
Interest payments on senior notes	526				75				149				149				153
Operating lease commitments	196				48				71				31				46
Capital lease commitments	4				—				1				2				1
Commitments to contract manufacturers and suppliers	410				408				2				—				—
Retirement plans	11				11				—				—				—
US transition tax liability	68				—				9				20				39
Other purchase commitments	69				69				—				—				—
Total	$	3,084			$	611			$	232			$	802			$	1,439

Interest on senior notes. We have contractual obligations for interest payments on our senior notes. Interest rates and payment dates are detailed above under "Short-term debt" and "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. The reported purchase commitments represent the commitments under open purchase orders with our suppliers that have not been received. However, 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. 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, 2019, the liability for our excess firm, non-cancellable and unconditional purchase commitments was $21 million, compared to $17 million as of October 31, 2018. 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.

U.S. transition tax liability. The obligation for the U.S. transition tax liability relates to the one-time U.S. tax on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”). Keysight has elected to pay the Transition Tax over 8 years. See Item 7. Management's Discussion and Analysis, “Income Taxes,” for additional information on the Transition Tax.

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, 2019, our contractual obligations with these suppliers was approximately $69 million within the next fiscal year, as compared to approximately $59 million as of October 31, 2018.

We had no material off-balance sheet arrangements as of October 31, 2019 or October 31, 2018.

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, loss contingencies, restructuring and accounting for income taxes.

Revenue recognition. In May 2014, the Financial Accounting Standards Board issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers, which became effective for us beginning November 1, 2018. For additional information on the new revenue recognition guidance and the impact of adoption, see Note 1, “Overview, Basis of Presentation and Summary of Significant Accounting Policies,” Note 2, “New Accounting Pronouncements,” and Note 4, “Revenue” to the consolidated financial statements.

Revenue is recognized upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We primarily generate revenue from the sale of products (hardware and/or software), services, or a combination thereof. We enter into contracts that may involve multiple performance obligations, and we allocate the transaction price between each performance obligation on the basis of relative standalone selling price (“SSP”). We recognize revenue following the five-step model.

1.

Identify the contract with a customer: Generally, we consider customer purchase orders which, in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before we consider an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the agreement has commercial substance; and, (v) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable. We exercise reasonable judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures that we implement.

2.

Identify the performance obligations in the contract: We assess whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and, (ii) our promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract.

3.

Determine the transaction price: Transaction price reflects the amount of consideration to which we expect to be entitled in exchange for transferring goods or services. Our contracts may include terms that could cause variability in the transaction price including rebates, rights of return, trade-in credits, and discounts. Variable consideration is generally accounted for at the portfolio level and estimated based on historical information.

4.

Allocate the transaction price to performance obligations in the contract: If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Many of our contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training. For contracts with multiple performance obligations, we allocate the total transaction value to each distinct performance obligation based on relative SSP. Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when we sell that good or service separately under similar circumstances to similar customers. Since most contracts contain multiple performance obligations, we use information that may include market conditions and other observable inputs to estimate SSP when we don’t have standalone transactions.

5.

Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and custom solutions or in instances where products are sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. For fixed-price support and extended warranty contracts, or certain software arrangements which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services outside of an extended warranty or support contract is recognized at the time of completion

of the related service. For other professional services or time-based labor contracts, revenue is recognized as we perform the services and the customers receive and/or consume the benefits.

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 Keysight Technologies, Inc. Long-Term Performance ("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 2019, 2018 and 2017.

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, 2019 and 2018 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, 2019 and 2018 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 $6 million on U.S. net periodic benefit cost and $11 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 $7 million on U.S. net periodic benefit cost and $14 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. 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 a 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 quantitative impairment test involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. We determine the fair value of a reporting unit using the results derived using the market approach, when available and appropriate, or the income approach, or a combination of both. If multiple valuation methodologies are used, the results are weighted accordingly. The income approach is estimated through the discounted cash flow (“DCF”) analysis. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, revenue growth rates, and the amount and timing of expected future cash flows. Discount rates are based on a weighted average cost of capital (“WACC”), which represents the average rate a business must pay its providers of debt and equity, plus a risk premium. The WACC used to test goodwill is derived from a group of comparable companies. The cash flows employed in the DCF analysis are derived from internal forecasts and external market forecasts. The market approach estimates the fair value of the reporting unit by utilizing the market comparable method which is based on revenue and earnings multiples from comparable companies. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, then an impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit's fair value up to a maximum amount of the goodwill balance for the reporting unit.

In 2019 we performed our annual impairment test for all our reporting units. Based on the results of our testing, the fair value of each of our reporting units exceeded the carrying value. In 2018 we recorded impairment losses of $709 million for our Ixia Solutions Group. See Note 11, "Goodwill and Other Intangible Assets," to the consolidated financial statements for additional information. There was no impairment of goodwill during the year ended October 31, 2017.

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 6 months to 10 years. 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. No impairments of purchased intangible assets were recorded during the years ended October 31, 2019, 2018 and 2017.

We review indefinite-lived 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 2019, 2018 and 2017, we assessed impairment by performing a qualitative test. No impairment of indefinite-lived intangible assets was recorded in 2019. In 2018 and 2017, we recorded impairment charges of $5 million and $7 million, respectively, related to cancellations of IPR&D projects.

Warranty. Keysight warranties on products sold through direct sales channels are primarily for one year. Warranties for products sold through distribution channels are primarily for three years. We accrue for standard warranty costs based on historical trends in 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.

Loss Contingencies. As discussed in Note 16 and 17 to the consolidated financial statements, we are, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to our business (or the business operations of previously owned entities). We recognize a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors. Changes in these factors could materially impact our financial position or our results of operation.

Restructuring. The main component of our restructuring plan is related to workforce reductions and site restructuring. 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, 2019, the company maintains a valuation allowance mainly related to capital losses in the U.K., net operating losses in the Netherlands and U.K., and California research credits. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support their reversal.

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.