Keysight Technologies, Inc. - Quarter Report: 2016 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-36334

KEYSIGHT TECHNOLOGIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



DELAWARE		46-4254555
(State or other jurisdiction of		(IRS employer
incorporation or organization)		Identification no.)

1400 FOUNTAINGROVE PARKWAY
SANTA ROSA, CALIFORNIA		95403
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (800) 829-4444

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the exchange act.



Large accelerated filer x		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company ¨
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of common stock outstanding at September 1, 2016 was 169,936,965.

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KEYSIGHT TECHNOLOGIES, INC.

TABLE OF CONTENTS



			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
		Condensed Consolidated Statement of Operations	3
		Condensed Consolidated Statement of Comprehensive Income	4
		Condensed Consolidated Balance Sheet	5
		Condensed Consolidated Statement of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	34
Part II.	Other Information		34
	Item 1.	Legal Proceedings	34
	Item 1A.	Risk Factors	34
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46
	Item 6.	Exhibits	46
Signature			47
Exhibit Index			48

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PART I	— FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
Net revenue:
Products	$	591		$	557		$	1,810		$	1,783
Services and other	124			108			357			323
Total net revenue	715			665			2,167			2,106
Costs and expenses:
Cost of products	246			236			776			760
Cost of services and other	63			59			187			177
Total costs	309			295			963			937
Research and development	104			90			320			282
Selling, general and administrative	200			183			607			581
Other operating expense (income), net	(4		)	(3		)	(22		)	(14		)
Total costs and expenses	609			565			1,868			1,786
Income from operations	106			100			299			320
Interest income	1			—			2			1
Interest expense	(11		)	(12		)	(35		)	(35		)
Other income (expense), net	1			(1		)	2			1
Income before taxes	97			87			268			287
Provision for income taxes	6			17			25			51
Net income	$	91		$	70		$	243		$	236

Net income per share:
Basic	$	0.54		$	0.41		$	1.43		$	1.40
Diluted	$	0.53		$	0.41		$	1.41		$	1.38

Weighted average shares used in computing net income per share:
Basic	170			169			170			169
Diluted	172			172			172			171

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
Net income	$	91		$	70		$	243		$	236
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net of tax benefit (expense) of $1, $(2), $2 and $(3)	2			(7		)	(5		)	1
Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $2, $1, $2 and $2	(3		)	(2		)	(4		)	(3		)
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of $(1), zero, $(3) and zero	1			—			6			(2		)
Foreign currency translation, net of tax benefit (expense) of zero	(1		)	(12		)	30			(46		)
Net defined benefit pension cost and post retirement plan costs:
Change in actuarial net loss, net of tax expense of $5, $4, $15 and $10	9			7			31			23
Change in net prior service benefit, net of tax benefit of $2, $3, $7 and $9	(4		)	(5		)	(12		)	(13		)
Other comprehensive income (loss)	4			(19		)	46			(40		)
Total comprehensive income	$	95		$	51		$	289		$	196

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share data)



	July 31, 2016			October 31, 2015
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	664		$	483
Accounts receivable, net	415			398
Inventory	479			487
Deferred tax assets	—			74
Other current assets	153			137
Total current assets	1,711			1,579
Property, plant and equipment, net	522			518
Goodwill	738			700
Other intangible assets, net	217			246
Long-term investments	56			70
Long-term deferred tax assets	317			295
Other assets	114			100
Total assets	$	3,675		$	3,508
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	156		$	209
Employee compensation and benefits	158			168
Deferred revenue	192			175
Income and other taxes payable	33			50
Other accrued liabilities	62			84
Total current liabilities	601			686
Long-term debt	1,100			1,099
Retirement and post-retirement benefits	235			280
Long-term deferred revenue	73			61
Other long-term liabilities	69			80
Total liabilities	2,078			2,206
Commitments and contingencies (Note 12)
Total equity:
Stockholders’ equity:
Preferred stock; $0.01 par value; 100 million shares authorized; none issued and outstanding	—			—
Common stock; $0.01 par value; 1 billion shares authorized; 172 million shares at July 31, 2016 and 170 million shares at October 31, 2015 issued	2			2
Treasury stock at cost; 2.3 million shares at July 31, 2016 and zero shares at October 31, 2015	(62		)	—
Additional paid-in-capital	1,233			1,165
Retained earnings	857			614
Accumulated other comprehensive loss	(433		)	(479		)
Total stockholders' equity	1,597			1,302
Total liabilities and equity	$	3,675		$	3,508

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)



	Nine Months Ended
	July 31,
	2016			2015
Cash flows from operating activities:
Net income	$	243		$	236
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	101			69
Share-based compensation	39			49
Excess tax loss (benefit) from share-based plans	4			(4		)
Deferred taxes	5			15
Excess and obsolete inventory related charges	14			23
Gain on sale of land	(10		)	—
Other non-cash expenses, net	4			2
Changes in assets and liabilities:
Accounts receivable	(16		)	31
Inventory	(23		)	(25		)
Accounts payable	(38		)	1
Payment to Agilent, net	—			(28		)
Employee compensation and benefits	1			(18		)
Retirement and post-retirement benefits	(30		)	(29		)
Income tax payable	3			1
Other assets and liabilities	(20		)	(28		)
Net cash provided by operating activities	277			295

Cash flows from investing activities:
Investments in property, plant and equipment	(76		)	(66		)
Purchase of investments	—			(7		)
Acquisition of businesses and intangible assets, net of cash acquired	(10		)	—
Proceeds from sale of land	10			—
Other investing activities	—			1
Net cash used in investing activities	(76		)	(72		)

Cash flows from financing activities:
Issuance of common stock under employee stock plans	42			23
Excess tax benefit (loss) from share-based plans	(4		)	4
Return of capital to Agilent	—			(49		)
Treasury stock repurchases	(62		)	—
Repayment of debt	(1		)	—
Net cash used in financing activities	(25		)	(22		)

Effect of exchange rate movements	5			(11		)

Net increase in cash and cash equivalents	181			190
Cash and cash equivalents at beginning of period	483			810
Cash and cash equivalents at end of period	$	664		$	1,000

Cash paid during the period for:
Interest	$	22		$	24
Income taxes, net of refunds	$	17		$	35

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KEYSIGHT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


1.	OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview. Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a measurement company providing electronic design and test solutions to communications and electronics industries.

Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarters.

On November 1, 2014, Keysight became an independent publicly-traded company through the distribution by Agilent Technologies, Inc. ("Agilent") of 100 percent of the outstanding common stock of Keysight to Agilent's shareholders (the "Separation"). Each Agilent shareholder of record as of the close of business on October 22, 2014 received one share of Keysight common stock for every two shares of Agilent common stock held on the record date, resulting in the distribution of approximately 167 million shares of Keysight common stock. Keysight's Registration Statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission ("SEC") on October 6, 2014. Keysight's common stock began trading "regular-way" under the ticker symbol "KEYS" on the New York Stock Exchange on November 3, 2014.

Basis of Presentation. We have prepared the accompanying financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The accompanying financial statements and information should be read in conjunction with our Annual Report on Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our condensed consolidated balance sheet as of July 31, 2016 and October 31, 2015, condensed consolidated statement of comprehensive income for the three and nine months ended July 31, 2016 and 2015, condensed consolidated statement of operations for the three and nine months ended July 31, 2016 and 2015, and condensed consolidated statement of cash flows for the nine months ended July 31, 2016 and 2015.

Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed 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 knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. 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, valuation of goodwill and other intangible assets, share-based compensation, retirement and post-retirement plan assumptions, restructuring, warranty and accounting for income taxes.

Land Sale. On April 30, 2014 we entered into a binding sales contract with real estate developers to sell land in the U.K. The contract calls for proportionate transfers and payments of three separate land tracts totaling approximately $34 million in May 2014, November 2015 and November 2016. In the nine months ended July 31, 2016 we recognized a $10 million gain on the sale of the second of three land tracts in other operating expense (income), net.

Restricted Cash. Restricted cash of $2 million primarily consists of deposits held as collateral against bank guarantees and is classified within other assets on the condensed consolidated balance sheet.

Reclassifications. Net revenue for the nine months ended July 31, 2016 includes $5 million of product revenue that was previously classified as services and other revenue in the condensed consolidated statement of operations. Cost and expenses for the nine months ended July 31, 2016 includes $7 million of costs of products that was previously classified as cost of services and other in the condensed consolidated statement of operations. The changes have no effect on reported net revenue, total costs and expenses and income for any period presented.

Update to Significant Accounting Policies. There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

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2. NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance related to revenue recognition. The amendment was the result of a joint project between the FASB and the International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop common revenue standards for U.S. GAAP and International Financial Reporting Standards ("IFRS"). To meet those objectives, the FASB amended the FASB Accounting Standards Codification and created a new Topic 606, Revenue from Contracts with Customers, and the IASB issued IFRS 15, Revenue from Contracts with Customers. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also permitted early adoption of the standard, but not before the original effective date of December 15, 2016. In addition, during March, April, and May 2016, the FASB issued guidance that clarified the reporting of revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, narrow-scope improvements, and practical expedients. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In November 2015, the FASB issued guidance that requires deferred income tax liabilities and assets to be classified as non-current in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax liabilities and assets into a current amount and a non-current amount in a classified balance sheet. The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We adopted this guidance prospectively during the third quarter of 2016. Accordingly, the condensed consolidated balance sheet as of July 31, 2016 reflects the new classification but the prior period amounts were not adjusted to conform to the new guidance. As a result of the adoption of this guidance, $75 million of current deferred tax assets and $2 million of deferred tax liabilities were reclassed to non-current.

In January 2016, the FASB issued guidance that amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The standard generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for various provisions of the standard. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.

In February 2016, the FASB issued guidance that will require organizations that lease assets to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In March 2016, the FASB issued guidance that simplifies the accounting for taxes related to share-based compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified. The standard is effective for annual and interim periods beginning after December 31, 2016. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.

In June 2016, the FASB issued guidance that replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.

In August 2016, the FASB issued guidance that adds or clarifies guidance on eight cash flow classification issues that have been creating diversity in practice. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.

Other amendments to GAAP that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

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3. ACQUISITION OF ANITE

On August 13, 2015, we acquired all share capital of Anite for a cash price of approximately $558 million, net of $43 million of cash acquired. Anite is a U.K.-based global company with strong software expertise and a leading supplier of wireless test solutions. As a result of the acquisition, Anite became a wholly-owned subsidiary of Keysight. Accordingly, the results of Anite have been included in Keysight's consolidated financial statements from the date of the acquisition. During the third quarter of 2016, the fair value measurements of assets acquired and liabilities assumed as of the acquisition date were revised. The total purchase price allocation adjustment to goodwill was approximately $3 million and related primarily to a reduction in the allocation to property, plant and equipment. The effect on earnings due to changes in depreciation and other income effects as a result of the change to the provisional purchase price allocation amounts were not material to our condensed consolidated financial statements.

In February 2016, we paid approximately $1 million related to the contingent consideration established during the preliminary purchase price allocation in connection with Anite's equity-settled share-based payment arrangements.

Acquisition and integration costs directly related to the Anite acquisition totaled $5 million and $12 million for the three and nine months ended July 31, 2016, respectively, and were recorded in selling, general and administrative expenses.

The following represents pro forma operating results as if Anite had been included in the company's condensed consolidated statements of operations as of the beginning of fiscal 2014 (in millions, except per share amounts):



	Three Months Ended July 31, 2015		Nine Months Ended July 31, 2015
Net revenue	$	700	$	2,243
Net income	$	53	$	222
Net income per share - Basic	$	0.31	$	1.32
Net income per share - Diluted	$	0.31	$	1.30

The unaudited pro forma financial information for the three and nine months ended July 31, 2015 combines the historical results of Keysight and Anite for the three and nine months ended July 31, 2015, assuming that the companies were combined as of November 1, 2013 and includes business combination accounting effects from the acquisition including amortization charges from acquired intangible assets, the impact on cost of sales due to the respective estimated fair value adjustments to inventory, and acquisition-related transaction costs and tax-related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2014.

4. SHARE-BASED COMPENSATION

Keysight accounts 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, including employee stock option awards, restricted stock units ("RSUs"), employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”) and performance share awards granted to selected members of our senior management under the Long-Term Performance (“LTP”) Program based on estimated fair values.

The impact of share-based compensation on our results was as follows:



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2016		2015		2016		2015
	(in millions)
Cost of products and services	$	2	$	2	$	9	$	10
Research and development	2		2		7		8
Selling, general and administrative	6		3		23		31
Total share-based compensation expense	$	10	$	7	$	39	$	49

At July 31, 2016 and 2015, there was no share-based compensation capitalized within inventory. The expense for the three and nine months ended July 31, 2016 includes $1 million and $4 million, respectively, related to special inaugural RSU awards granted during the three months ended January 31, 2015. The expense for the three and nine months ended July 31, 2015 includes

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$1 million and $16 million, respectively, related to these special inaugural RSU grants. These awards will vest over three years from the date of grant.

The following assumptions were used to estimate the fair value of employee stock options and LTP Program grants.



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2016		2015		2016		2015
Stock Option Plans:
Weighted average risk-free interest rate	—		—		—		1.6	%
Dividend yield	—		—		—		—	%
Weighted average volatility	—		—		—		31	%
Expected life	—		—		—		4.9 years
LTP Program:
Volatility of Keysight shares	25	%	26	%	25	%	26	%
Volatility of selected peer-company shares	14%-54%		17%-67%		14%-54%		17%-67%
Price-wise correlation with selected peers	38	%	38	%	38	%	38	%

The fair value of employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTP Program were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock awards is determined based on the market price of Keysight’s common stock on the date of grant.

We did not grant any option awards for the three and nine months ended July 31, 2016 and three months ended July 31, 2015. For the nine months ended July 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.

5. INCOME TAXES

As of July 31, 2016, we continue to include a best estimate of the deferred tax liability for foreign unremitted earnings due to the Separation as zero. Excess foreign tax credits associated with unremitted earnings are not recorded as an asset as they do not represent a separate deferred asset until earnings are remitted. However, unremitted foreign taxes reduce deferred tax liabilities associated with outside basis differences related to the investment in a foreign subsidiary to the extent the credit reduces a deferred tax liability of the investment. We continue to have ongoing discussions with Agilent regarding the allocation of certain deferred tax liability balances related to foreign unremitted earnings in accordance with the Separation agreements.

The company’s effective tax rate was 5.9 percent and 9.2 percent for the three and nine months ended July 31, 2016, respectively. Income tax expense was $6 million and $25 million for the three and nine months ended July 31, 2016, respectively. The company's effective tax rate was 19.0 percent and 17.7 percent for the three and nine months ended July 31, 2015, respectively. Income tax expense was $17 million and $51 million for the three and nine months ended July 31, 2015, respectively. The decrease in effective tax rate and income tax expense from the three and nine months ended July 31, 2015 to the three and nine months ended July 31, 2016 is primarily related to the repatriation of cash to the U.S. and the corresponding realization of foreign tax credits.

The income tax provision for the three and nine months ended July 31, 2016 included a net discrete benefit of $1 million and $2 million, respectively. The income tax provision for the three and nine months ended July 31, 2015 included a net discrete expense of $0.3 million and a net discrete benefit of $7 million, respectively.

Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore, and several jurisdictions have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions. The impact of tax incentives decreased the income tax provision for the three and nine months ended July 31, 2016 by $10 million and $27 million, respectively, resulting in a benefit to net income per share (diluted) of approximately $0.06 and $0.16 for the three and nine months ended July 31, 2016, respectively. The impact of tax incentives decreased the income tax provision for the three and nine months ended July 31, 2015 by $10 million and $31 million, respectively, resulting in a benefit

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to net income per share (diluted) of approximately $0.06 and $0.18 for the three and nine months ended July 31, 2015, respectively. The Singapore tax incentive is due for renewal in fiscal 2024.

For the majority of our entities, the open tax years for the IRS, state and most foreign audit authorities are from August 1, 2014, through the current tax year. For certain historical Agilent foreign entities that Keysight retained as part of the separation, the tax years generally remain open back to the year 2006. For certain entities acquired during 2015, the tax years also remain open back to the year 2006. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.

6. NET INCOME PER SHARE

The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2016		2015		2016		2015
	(in millions)
Numerator:
Net income	$	91	$	70	$	243	$	236
Denominator:
Basic weighted-average shares	170		169		170		169
Potential common shares— stock options and other employee stock plans	2		3		2		2
Diluted weighted-average shares	172		172		172		171

The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense, the tax benefits or shortfalls recorded to additional paid-in capital and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense and tax benefits or shortfalls collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.

We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because the effect would be anti-dilutive. For both the three and nine months ended July 31, 2016, 1.7 million options to purchase shares were excluded from the calculation of diluted earnings per share. In addition, we excluded stock options, ESPP shares, LTP Program and restricted stock awards, of which the combined exercise price, unamortized fair value and excess tax benefits or shortfalls collectively was greater than the average market price of our common stock because the effect would be anti-dilutive. For the three and nine months ended July 31, 2016, we excluded 17,700 and 21,300 shares, respectively.

7. INVENTORY



	July 31, 2016		October 31, 2015
	(in millions)
Finished goods	$	232	$	235
Purchased parts and fabricated assemblies	247		252
Total Inventory	$	479	$	487

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8.	GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents goodwill balances and the movements for each of our reportable segments as of and for the nine months ended July 31, 2016:



	Communications Solutions Group		Electronic Industrial Solutions Group		Services Solutions Group		Total
	(in millions)
Goodwill as of October 31, 2015	$	433	$	204	$	63	$	700
Foreign currency translation impact	18		9		2		29
Goodwill arising from acquisitions	6		3		—		9
Goodwill as of July 31, 2016	$	457	$	216	$	65	$	738

The components of other intangible assets as of July 31, 2016 and October 31, 2015 are shown in the table below:



	Other Intangible Assets at July 31, 2016						Other Intangible Assets at October 31, 2015
	Gross Carrying Amount		Accumulated Amortization and Impairments		Net Book Value		Gross Carrying Amount		Accumulated Amortization and Impairments		Net Book Value
	(in millions)
Developed technology	$	309	$	151	$	158	$	305	$	125	$	180
Backlog	4		4		—		4		4		—
Trademark/Tradename	20		3		17		20		2		18
Customer relationships	65		35		30		64		28		36
Total amortizable intangible assets	398		193		205		393		159		234
In-Process R&D	12		—		12		12		—		12
Total	$	410	$	193	$	217	$	405	$	159	$	246

During the nine months ended July 31, 2016, we recognized additions to goodwill and other intangible assets of $9 million and $9 million, respectively, due to an acquisition in 2016 and the revision to the preliminary purchase price allocation of the Anite acquisition. During the nine months ended July 31, 2016, we recorded $4 million of foreign exchange translation impact to other intangible assets.

Amortization of other intangible assets was $12 million and $34 million for the three and nine months ended July 31, 2016, respectively. Amortization of other intangible assets was $2 million and $6 million for the three and nine months ended July 31, 2015, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $11 million for the remainder of 2016, $41 million for 2017, $37 million for 2018, $37 million for 2019, $37 million for 2020 and $42 million thereafter.

9. FAIR VALUE MEASUREMENTS

The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The guidance establishes a fair value hierarchy that prioritizes inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.

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Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured at fair value on a recurring basis as of July 31, 2016 and October 31, 2015 were as follows:



	Fair Value Measurements at July 31, 2016								Fair Value Measurements at October 31, 2015
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	(in millions)
Assets:
Short-term
Cash equivalents (money market funds)	$	482	$	482	$	—	$	—	$	295	$	295	$	—	$	—
Derivative instruments (foreign exchange contracts)	3		—		3		—		1		—		1		—
Long-term
Trading securities	12		12		—		—		12		12		—		—
Available-for-sale investments	28		28		—		—		41		41		—		—
Total assets measured at fair value	$	525	$	522	$	3	$	—	$	349	$	348	$	1	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	8	$	—	$	8	$	—	$	10	$	—	$	10	$	—
Long-term
Deferred compensation liability	12		—		12		—		12		—		12		—
Total liabilities measured at fair value	$	20	$	—	$	20	$	—	$	22	$	—	$	22	$	—

Our money market funds, trading securities, and available-for-sale investments are generally valued using quoted market prices and therefore are classified within Level 1 of the fair value hierarchy. Our derivative financial instruments are classified within Level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as Level 2 because, although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.

Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Investments designated as available-for-sale and certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss). Realized gains and losses from the sale of these instruments are recorded in net income.


10.	DERIVATIVES

We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts and purchased options, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.

Cash Flow Hedges

We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified to cost of products in the condensed consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified to other income (expense), net in the current period. Changes in the fair value of the ineffective portion of derivative instruments

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are recognized in other income (expense), net in the condensed consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in other income (expense), net over the life of the option contract. Ineffectiveness in the three and nine months ended July 31, 2016 and 2015 was not significant.

Other Hedges

Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense), net in the condensed consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.

Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions that are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.

A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of July 31, 2016 was $7 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of July 31, 2016.

There were 132 foreign exchange forward contracts open as of July 31, 2016 that were designated as cash flow hedges. There were 66 foreign exchange forward contracts and zero foreign exchange option contract open as of July 31, 2016 that were not designated as hedging instruments. The aggregated notional amounts by currency and designation as of July 31, 2016 were as follows:



	Derivatives in Cash Flow Hedging Relationships			Derivatives Not Designated as Hedging Instruments
	Forward Contracts			Forward Contracts
Currency	Buy/(Sell)			Buy/(Sell)
	(in millions)
Euro	$	—		$	104
British Pound	—			33
Singapore Dollar	9			—
Malaysian Ringgit	72			(8		)
Japanese Yen	(76		)	(56		)
Other currencies	(16		)	4
Totals	$	(11	)	$	77

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Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance with the authoritative guidance. The gross fair values and balance sheet location of derivative instruments held in the condensed consolidated balance sheet as of July 31, 2016 and October 31, 2015 were as follows:



Fair Values of Derivative Instruments
Asset Derivatives					Liability Derivatives
	Fair Value					Fair Value
Balance Sheet Location	July 31, 2016		October 31, 2015		Balance Sheet Location	July 31, 2016		October 31, 2015
(in millions)
Derivatives designated as hedging instruments:
Cash flow hedges
Foreign exchange contracts
Other current assets	$	2	$	—	Other accrued liabilities	$	7	$	8
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Other current assets	1		1		Other accrued liabilities	1		2
Total derivatives	$	3	$	1		$	8	$	10

The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our condensed consolidated statement of operations were as follows:



	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
	(in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Foreign exchange contracts:
Gain (loss) recognized in accumulated other comprehensive income	$	(5	)	$	(3	)	$	(6	)	$	(5	)
Gain (loss) reclassified from accumulated other comprehensive income into cost of sales	$	(2	)	$	—		$	(9	)	$	2
Derivatives not designated as hedging instruments:
Gain (loss) recognized in other income (expense), net	$	(6	)	$	(1	)	$	(8	)	$	(5	)

The estimated amount of existing net loss at July 31, 2016 expected to be reclassified from other comprehensive income to cost of sales within the next twelve months is $6 million.

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11. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS

For the three and nine months ended July 31, 2016 and 2015, our net pension and post-retirement benefit costs were comprised of the following:



	Pensions
	U.S. Defined Benefit Plans						Non-U.S. Defined Benefit Plans						U.S. Post-Retirement Benefit Plan
	Three Months Ended July 31,
	2016			2015			2016			2015			2016			2015
	(in millions)
Service cost—benefits earned during the period	$	5		$	5		$	5		$	4		$	—		$	—
Interest cost on benefit obligation	6			5			8			10			2			2
Expected return on plan assets	(9		)	(9		)	(19		)	(18		)	(3		)	(4		)
Amortization:
Net actuarial losses	2			1			7			8			5			3
Prior service credit	(2		)	(2		)	—			(1		)	(4		)	(5		)
Total periodic benefit cost (benefit)	$	2		$	—		$	1		$	3		$	—		$	(4	)



	Pensions
	U.S. Defined Benefit Plans						Non-U.S. Defined Benefit Plans						U.S. Post-Retirement Benefit Plan
	Nine Months Ended July 31,
	2016			2015			2016			2015			2016			2015
	(in millions)
Service cost—benefits earned during the period	$	15		$	16		$	13		$	13		$	—		$	1
Interest cost on benefit obligation	18			15			24			31			6			6
Expected return on plan assets	(27		)	(28		)	(56		)	(55		)	(10		)	(11		)
Amortization:
Net actuarial losses	6			3			21			22			15			9
Prior service credit	(6		)	(5		)	—			(1		)	(12		)	(16		)
Total periodic benefit cost (benefit)	$	6		$	1		$	2		$	10		$	(1	)	$	(11	)

We did not contribute to our U.S. Defined Benefit Plans and U.S. Post-Retirement Benefit Plan during the three and nine months ended July 31, 2016 and 2015. We contributed $10 million and $29 million to our Non-U.S. Defined Benefit Plans during the three and nine months ended July 31, 2016, respectively, and contributed $10 million and $35 million to our Non-U.S. Defined Benefit Plans during the three and nine months ended July 31, 2015, respectively.

During the remainder of 2016, we do not expect to contribute to our U.S. Defined Benefit Plans, and we expect to contribute $8 million to our Non-U.S. Defined Benefit Plans.

Employees hired on or after August 1, 2015 are not eligible to participate in the U.S. Defined Benefit Plans or the U.S. Post-Retirement Benefit Plan. We provide matching contributions to these employees under the Keysight Technologies, Inc. 401(k) Plan up to a maximum of 6 percent of the employee's annual eligible compensation.

12. WARRANTY, COMMITMENTS AND CONTINGENCIES

Standard 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 as a percentage of net product shipments. 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.

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Activity related to the standard warranty accrual, which is included in other accrued and other long-term liabilities in our condensed consolidated balance sheet, is as follows:



	Nine Months Ended
	July 31,
	2016			2015
	(in millions)
Beginning balance	$	53		$	51
Accruals for warranties including change in estimate	16			26
Settlements made during the period	(24		)	(23		)
Ending balance	$	45		$	54

Accruals for warranties due within one year	$	23		$	42
Accruals for warranties due after one year	22			12
Ending balance	$	45		$	54

During the nine months ended July 31 2016, we reduced the standard warranty accrual by $5 million as a result of lower than expected historical warranty charges. This benefit was recognized in the three and nine months ended July 31, 2016 in the condensed consolidated statement of operations.

Commitments

There were no material changes during the nine months ended July 31, 2016 to the operating lease commitments reported in the company’s 2015 Annual Report on Form 10-K.

Contingencies

We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.

13. DEBT

Short-Term Debt

On September 15, 2014, we entered into a five year credit agreement, which provides for a $300 million unsecured credit facility that will expire on November 1, 2019. On July 21, 2015, the total amount available under the credit facility was increased to $450 million. The company may use amounts borrowed under the facility for general corporate purposes. As of July 31, 2016, we had no borrowings outstanding under the credit facility. We were in compliance with the covenants of the credit facility during the nine months ended July 31, 2016.

As a result of the Anite acquisition, we have an overdraft facility of £25 million that expired on July 31, 2016, but by mutual agreement this facility continues to be available while a replacement short-term facility is negotiated. As of July 31, 2016, we had no borrowings outstanding under the facility. We were in compliance with the covenants of the facility during the nine months ended July 31, 2016.

Long-Term Debt

The following table summarizes the components of our long-term debt:



	July 31, 2016		October 31, 2015
	(in millions)
3.30% Senior Notes due 2019	$	500	$	499
4.55% Senior Notes due 2024	600		600
Total	$	1,100	$	1,099

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The notes issued are unsecured and rank equally in right of payment with all of our other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes, detailed in the table above, during the nine months ended July 31, 2016 as compared to the senior notes described in our Annual Report on Form 10-K for fiscal year ended October 31, 2015.

In March 2016, we assumed approximately $1 million of long-term debt in connection with an acquisition. In May 2016, this debt was subsequently repaid in full.

As of July 31, 2016 and October 31, 2015, we had $16 million and $19 million, respectively, of outstanding letters of credit unrelated to the credit facility that were issued by various lenders.

The fair value of our long-term debt, calculated from quoted prices that are primarily Level 1 inputs under the accounting guidance fair value hierarchy, was above the carrying value by approximately $36 million and was below the carrying value by $8 million as of July 31, 2016 and October 31, 2015, respectively.

14. STOCKHOLDERS' EQUITY

Stock Repurchase Program

On February 18, 2016, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $200 million of the company’s common stock. Under the program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. 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.

For the nine months ended July 31, 2016, we repurchased 2.3 million shares of common stock for $62 million. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component and related tax effects for the three and nine months ended July 31, 2016 and 2015 were as follows:



							Net defined benefit pension cost and post retirement plan costs
	Unrealized gain on investments			Foreign currency translation			Actuarial losses			Prior service costs			Unrealized gains (losses) on derivatives			Total
	(in millions)
As of April 30, 2016	$	14		$	(17	)	$	(489	)	$	57		$	(2	)	$	(437	)
Other comprehensive income (loss) before reclassifications	1			(1		)	—			—			(5		)	(5		)
Amounts reclassified out of accumulated other comprehensive loss	—			—			14			(6		)	2			10
Tax (expense) benefit	1			—			(5		)	2			1			(1		)
Other comprehensive income (loss)	2			(1		)	9			(4		)	(2		)	4
As of July 31, 2016	$	16		$	(18	)	$	(480	)	$	53		$	(4	)	$	(433	)

As of October 31, 2015	$	21		$	(48	)	$	(511	)	$	65		$	(6	)	$	(479	)
Other comprehensive income (loss) before reclassifications	(7		)	30			4			—			(6		)	21
Amounts reclassified out of accumulated other comprehensive loss	—			—			42			(19		)	9			32
Tax (expense) benefit	2			—			(15		)	7			(1		)	(7		)
Other comprehensive income (loss)	(5		)	30			31			(12		)	2			46
As of July 31, 2016	$	16		$	(18	)	$	(480	)	$	53		$	(4	)	$	(433	)

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							Net defined benefit pension cost and post retirement plan costs
	Unrealized gain on investments			Foreign currency translation			Actuarial losses			Prior service costs			Unrealized gains (losses) on derivatives			Total
	(in millions)
As of April 30, 2015	$	24		$	(28	)	$	(428	)	$	75		$	—		$	(357	)
Other comprehensive income (loss) before reclassifications	(5		)	(12		)	—			—			(3		)	(20		)
Amounts reclassified out of accumulated other comprehensive loss	—			—			11			(8		)	—			3
Tax (expense) benefit	(2		)	—			(4		)	3			1			(2		)
Other comprehensive income (loss)	(7		)	(12		)	7			(5		)	(2		)	(19		)
As of July 31, 2015	$	17		$	(40	)	$	(421	)	$	70		$	(2	)	$	(376	)

As of October 31, 2014	$	16		$	6		$	(444	)	$	83		$	3		$	(336	)
Other comprehensive income (loss) before reclassifications	4			(46		)	—			—			(5		)	(47		)
Amounts reclassified out of accumulated other comprehensive loss	—			—			33			(22		)	(2		)	9
Tax (expense) benefit	(3		)	—			(10		)	9			2			(2		)
Other comprehensive income (loss)	1			(46		)	23			(13		)	(5		)	(40		)
As of July 31, 2015	$	17		$	(40	)	$	(421	)	$	70		$	(2	)	$	(376	)

Reclassifications out of accumulated other comprehensive loss for the three and nine months ended July 31, 2016 and 2015 were as follows:



Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Loss												Affected Line Item in Statement of Operations
	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
	(in millions)
Unrealized gain (loss) on derivatives	$	(2	)	$	—		$	(9	)	$	2		Cost of sales
	1			—			3			—			Provision for income taxes
	(1		)	—			(6		)	2			Net of income tax

Net defined benefit pension cost and post retirement plan costs:
Actuarial net loss	(14		)	(11		)	(42		)	(33		)
Prior service benefit	6			8			19			22
	(8		)	(3		)	(23		)	(11		)	Total before income tax
	3			1			8			1			Provision for income taxes
	(5		)	(2		)	(15		)	(10		)	Net of income tax

Total reclassifications for the period	$	(6	)	$	(2	)	$	(21	)	$	(8	)

An amount in parentheses indicates a reduction to income and an increase to the accumulated other comprehensive income.

Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 11, "Retirement Plans and Post Retirement Pension Plans").

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15. SEGMENT INFORMATION

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

We have completed our previously announced organizational change to align our organization with the industries we serve. As a result of this organizational realignment, we now have three reportable operating segments, Communications Solutions Group (“CSG”), Electronic Industrial Solutions Group (“EISG”), and Services Solutions Group (“SSG”). CSG and EISG are from our previous Measurement Solutions segment, while SSG was formerly reported as the company's Customer Support and Services segment. The new organizational structure continues to include centralized enterprise functions that provide support across the groups. Prior period amounts were revised to conform to the current presentation.

Our three operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Segment operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to each segment and to assess performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.

Descriptions of our three reportable segments are as follows:

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

The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of industries within the electronic industrial end market, 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.

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.

A significant portion of the segments' expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments.

The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with GAAP. The performance of each segment is measured based on several metrics, including income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.

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

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	Communications Solutions Group			Electronic Industrial Solutions Group		Services Solutions Group		Total Segments
	(in millions)
Three Months Ended July 31, 2016:
Total segment revenue	$	424		$	191	$	103	$	718
Acquisition related fair value adjustments	(3		)	—		—		(3		)
Total net revenue	$	421		$	191	$	103	$	715
Segment income from operations	$	77		$	44	$	19	$	140
Three Months Ended July 31, 2015:
Total net revenue	$	389		$	175	$	101	$	665
Segment income from operations	$	72		$	32	$	20	$	124



	Communications Solutions Group			Electronic Industrial Solutions Group		Services Solutions Group		Total Segments
	(in millions)
Nine Months Ended July 31, 2016:
Total segment revenue	$	1,310		$	575	$	294	$	2,179
Acquisition related fair value adjustments	(12		)	—		—		(12		)
Total net revenue	$	1,298		$	575	$	294	$	2,167
Segment income from operations	$	239		$	122	$	43	$	404
Nine Months Ended July 31, 2015:
Total net revenue	$	1,250		$	558	$	298	$	2,106
Segment income from operations	$	240		$	110	$	52	$	402

The following table reconciles reportable segments’ income from operations to our total enterprise income before taxes:



	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2016			2015			2016			2015
	(in millions)
Total reportable segments' income from operations	$	140		$	124		$	404		$	402
Share-based compensation expense	(10		)	(7		)	(39		)	(49		)
Restructuring and related costs	—			(10		)	—			(10		)
Amortization of intangibles	(12		)	(2		)	(34		)	(6		)
Acquisition and integration costs	(4		)	(2		)	(11		)	(2		)
Separation and related costs	(6		)	(3		)	(16		)	(15		)
Acquisition related fair value adjustments	(3		)	—			(12		)	—
Other	1			—			7			—
Interest income	1			—			2			1
Interest expense	(11		)	(12		)	(35		)	(35		)
Other income (expense), net	1			(1		)	2			1
Income before taxes, as reported	$	97		$	87		$	268		$	287

The following table presents assets directly managed by each segment. Unallocated assets primarily consist of cash and cash equivalents, investments and other assets.



	Communications Solutions Group		Electronic Industrial Solutions Group		Services Solutions Group		Total Segments
	(in millions)
Assets:
As of July 31, 2016	$	1,794	$	772	$	274	$	2,840
As of October 31, 2015	$	1,779	$	752	$	265	$	2,796

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, the ability of our products to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, and other regulatory approvals, the integration of our acquisitions and other transactions, our transition to lower-cost regions, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Part II Item 1A and elsewhere in this Form 10-Q.

Basis of Presentation

The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, comprehensive income or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarter periods.

Keysight Technologies, Inc. ("we," "us," "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a measurement company providing electronic test and design solutions to communications and electronics industries.

In fiscal 2015, we initiated a phased program associated with our separation from Agilent to resize and optimize our infrastructure from the one that had been established to serve a diversified technology company. The focus of the first phase of the program was on the IT infrastructure to support finance, field and human resources. The second phase of the program, which was initiated in the third quarter of fiscal 2016, primarily addresses the optimization of the IT infrastructure to support the services business. We recognized costs related to this program of $6 million and $16 million for the three and nine months ended July 31, 2016, respectively, and $3 million and $15 million for the three and nine months ended July 31, 2015, respectively. We expect to recognize additional costs through fiscal 2018 of approximately $25 million, of which approximately $7 million is anticipated to be incurred in the fourth quarter of fiscal 2016 and the majority of the remaining costs are expected in fiscal 2017.

Executive Summary

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

We have three reportable operating segments: Communications Solutions Group, Electronic Industrial Solutions Group and Services Solutions Group. The Communications Solutions Group serves customers spanning the worldwide commercial communications end market, which includes internet infrastructure, and the aerospace, defense and government end market. The Electronic Industrial Solutions Group provides test and measurement solutions across a broad set of industries within the electronic industrial end market. The Services Solutions Group provides repair, calibration and consulting services, and remarkets used Keysight equipment. In addition, our global team of experts provides startup assistance, consulting, optimization and application support across all of our end markets.

Three and nine months ended July 31, 2016 and 2015

Net revenue of $715 million and $2,167 million for the three and nine months ended July 31, 2016, respectively, increased 7 percent and 3 percent, respectively, when compared to the same periods last year and increased 7 percent and 4 percent, respectively, excluding the impact of currency fluctuations. For the three and nine months ended July 31, 2016, acquisitions added revenue growth of approximately 5 percentage points and 6 percentage points, respectively, which was partially offset by a decline in revenue primarily driven by a slowdown in communications revenue excluding acquisitions.

Net income for the three and nine months ended July 31, 2016 was $91 million and $243 million, respectively, compared to $70 million and $236 million, respectively, for the corresponding periods last year.

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

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

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. 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, restructuring, warranty, valuation of goodwill and other intangible assets and accounting for income taxes. For a detailed description of our critical accounting policies and estimates, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2015. 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.

Adoption of New Pronouncements

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

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Foreign Currency

Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short-term and anticipated basis. The result of the hedging has been included in our condensed consolidated statement of operations. We do experience some fluctuations within individual lines of the condensed consolidated balance sheet and condensed 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 (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

Orders and Net Revenue

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



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2016		2015		2016		2015		Months	Months
	(in millions)
Orders	$	707	$	685	$	2,147	$	2,073	3%	4%
Net revenue:
Products	$	591	$	557	$	1,810	$	1,783	6%	2%
Services and other	124		108		357		323		15%	10%
Total net revenue	$	715	$	665	$	2,167	$	2,106	7%	3%

Orders

The following table provides the percent change in orders for the three and nine months ended July 31, 2016 by geographic region including and excluding the impact of currency changes as compared to the same periods last year.



	Year over Year % Change
	Three Months Ended				Nine Months Ended
	July 31, 2016				July 31, 2016
Geographic Region	actual		currency adjusted		actual		currency adjusted
Americas	1	%	2	%	(1	)%	(1	)%
Europe	(10	)%	(10	)%	6	%	9	%
Japan	8	%	(3	)%	6	%	2	%
Asia Pacific ex-Japan	11	%	12	%	7	%	8	%
Total orders	3	%	3	%	4	%	4	%

Total orders for the three and nine months ended July 31, 2016 were $707 million and $2,147 million, respectively, an increase of 3 percent and 4 percent, respectively, when compared to the same periods last year. Foreign currency movements had a negligible impact on each of the year‑over‑year comparisons. Orders associated with acquisitions accounted for 6 percentage points and 7 percentage points of order growth for the three and nine months ended July 31, 2016, respectively, when compared to the same periods last year. For the three months ended July 31, 2016, orders grew across all operating segments, with growth in Asia Pacific excluding Japan, Japan and the Americas, partially offset by decline in Europe. For the nine months ended July 31, 2016, orders grew in Communications Solutions Group and Services Solutions Group while Electronic Industrial Solutions Group was flat, with growth in all regions except the Americas.

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Net Revenue

The following table provides the percent change in net revenue for the three and nine months ended July 31, 2016 by geographic region including and excluding the impact of currency changes as compared to the same periods last year.



	Year over Year % Change
	Three Months Ended				Nine Months Ended
	July 31, 2016				July 31, 2016
Geographic Region	actual		currency adjusted		actual		currency adjusted
Americas	7	%	8	%	—	%	1	%
Europe	2	%	3	%	6	%	8	%
Japan	13	%	1	%	5	%	2	%
Asia Pacific ex-Japan	9	%	11	%	4	%	5	%
Total net revenue	7	%	7	%	3	%	4	%

Net revenue of $715 million and $2,167 million for the three and nine months ended July 31, 2016 increased 7 percent and 3 percent, respectively, when compared to the same periods last year and increased 7 percent and 4 percent, respectively, excluding the impact of currency fluctuations. Revenue associated with acquisitions accounted for 5 percentage points and 6 percentage points of revenue growth for the three and nine months ended July 31, 2016, respectively, when compared to the same periods last year.

Revenue from the Communications Solutions Group, represented approximately 59 percent of total revenue for the three and nine months ended July 31, 2016, and increased 8 percent and 4 percent year-over-year, respectively. For the three months ended July 31, 2016, the Communications Solutions Group contributed 5 percentage points to the total revenue growth, with growth in all the regions. For the nine months ended July 31, 2016, the Communications Solutions Group contributed 2 percentage points to the total revenue growth, with growth in Europe, Asia Pacific excluding Japan and Japan, partially offset by decline in the Americas. Excluding revenue from Anite, Communications Solutions Group revenue declined year-over-year as weakness in the smartphone supply chain and restructuring and consolidation activities offset strength in 5G technologies and data center expansion.

Revenue from the Electronic Industrial Solutions Group represented approximately 27 percent of total revenue for both the three and nine months ended July 31, 2016, and grew 9 percent and 3 percent year-over-year, respectively. The Electronic Industrial Solutions Group contributed 2 percentage points and 1 percentage point to the total revenue growth for the three and nine months ended July 31, 2016, respectively, with growth in Asia Pacific excluding Japan, Japan and the Americas, partially offset by decline in Europe.

Revenue from the Services Solutions Group represented approximately 14 percent of total revenue for both the three and nine months ended July 31, 2016, and grew 2 percent and declined 1 percent year-over-year, respectively. The Services Solutions Group contribution to the total revenue growth was negligible for the three months ended July 31, 2016, with growth in the Americas, Europe and Japan, partially offset by a decline in Asia Pacific excluding Japan. For the nine months ended July 31, 2016, revenue declined with negligible impact on the overall growth. Decline in Asia Pacific excluding Japan was partially offset by growth in the Americas and Japan, while revenue from Europe was flat.

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Costs and Expenses



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three	Nine
	2016			2015			2016			2015			Months	Months
Total gross margin	56.8		%	55.6		%	55.6		%	55.5		%	1 ppt	—
Operating margin	14.9		%	15.0		%	13.8		%	15.2		%	—	(1) ppt

in millions
Research and development	$	104		$	90		$	320		$	282		15%	14%
Selling, general and administrative	$	200		$	183		$	607		$	581		9%	4%
Other operating expense (income), net	$	(4	)	$	(3	)	$	(22	)	$	(14	)	9%	50%

Gross margin increased 1 percentage point and was flat for the three and nine months ended July 31, 2016, respectively, compared to the same periods last year. For the three months ended July 31, 2016, the increase in gross margin was driven by favorable impacts from a higher percentage of revenue from software and R&D solutions, lower warranty and lower inventory charges, partially offset by an unfavorable impact from acquisition-related intangible amortization. For the nine months ended July 31, 2016, the favorable impacts from a higher percentage of revenue from software and R&D solutions, lower warranty and lower inventory charges were offset by unfavorable impacts from acquisition-related intangible amortization and foreign currency.

Research and development expense increased 15 percent and 14 percent for the three and nine months ended July 31, 2016, respectively, compared to the same periods last year, primarily driven by the Anite acquisition. As a percentage of revenue, research and development expense increased to 15 percent for both the three and nine months ended July 31, 2016 from 14 percent and 13 percent in the same periods last year. 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 increased 9 percent for the three months ended July 31, 2016, compared to the same period last year, primarily driven by increases in people-related and integration costs, both associated with the acquisition of Anite. Selling, general and administrative expenses increased 4 percent for the nine months ended July 31, 2016 compared to the same period last year, primarily driven by acquisition and integration costs as well as higher separation-related costs, partially offset by favorable impact from foreign currency movements and lower share-based compensation expense.

Other operating expense (income), net for the three months ended July 31, 2016 and 2015 was income of $4 million and$3 million, respectively. For the nine months ended July 31, 2016 and 2015, other operating expense (income), net was income of $22 million and $14 million, respectively. The increase in other operating income for the nine months ended July 31, 2016 was largely driven by a gain on the sale of land.

Operating margin for the three months ended July 31, 2016 was flat compared to the same period last year, as favorable gross margin was offset by the impacts of acquisition-related intangible amortization, the addition of the Anite cost structure and higher integration costs. Operating margin for the nine months ended July 31, 2016 decreased 1 percentage point compared to the same period last year, primarily driven by the impacts of acquisition-related intangible amortization, higher integration and the addition of the Anite cost structure, partially offset by favorable impact from foreign currency movements and lower share-based compensation expense.

At July 31, 2016, our headcount was approximately 10,300 as compared to approximately 9,700 at July 31, 2015. The increase was primarily driven by acquisitions.

Interest Expense

Interest expense for the three and nine months ended July 31, 2016 was $11 million and $35 million, respectively, as compared to $12 million and $35 million, respectively, for the comparable periods last year, and relates to interest on our senior notes issued in October 2014.

Income Taxes

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not represent a separate deferred asset until earnings are remitted. However, unremitted foreign taxes reduce deferred tax liabilities associated with outside basis differences related to the investment in a foreign subsidiary to the extent the credit reduces a deferred tax liability of the investment. We continue to have ongoing discussions with Agilent regarding the allocation of certain deferred tax liability balances related to foreign unremitted earnings in accordance with the Separation agreements.

At July 31, 2016, our estimated annual effective tax rate is 10.1 percent excluding discrete items. We determine our interim tax provision using an estimated annual effective tax rate methodology except in jurisdictions where we anticipate a full year loss or we have a year-to-date ordinary loss for which no tax benefit can be recognized. In these jurisdictions, tax expense is computed separately. Our effective tax rate differs from the U.S. statutory rate primarily due to the mix of earnings in non-U.S. jurisdictions taxed at lower rates, our permanent reinvestment assertion of foreign subsidiary earnings outside of the U.S., reserves for uncertain tax positions, the U.S. federal research and development tax credit and the impact of permanent differences.

On July 27, 2015, the U.S. Tax Court issued an opinion (Altera Corp. et al. v. Commissioner), which invalidated the 2003 final Treasury rule that requires participants in qualified cost-sharing arrangements to share stock-based compensation costs. However, the regulations continue to retain the requirement to include stock-based compensation. The IRS has filed a notice of appeal of the Tax Court decision to the Ninth Circuit, and thus, there is uncertainty related to the final resolution of this issue, and the potential favorable benefits to the company. As such, no impact has been recorded at this time. We will continue to monitor developments related to this opinion and the potential impact of those developments on our current and prior fiscal years.

Segment Overview

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

Communications Solutions Group

Net Revenue



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2016		2015		2016		2015		Months	Months
	(in millions)				(in millions)
Net revenue	$	424	$	389	$	1,310	$	1,250	9%	5%

The Communications Solutions Group revenue for the three and nine months ended July 31, 2016 increased 9 percent and 5 percent, respectively, when compared to the same periods last year, driven by growth in the commercial communications market and aerospace, defense and government market. For the three and nine months ended July 31, 2016, acquisitions added approximately 9 percentage points and 10 percentage points, respectively, to revenue growth.

Revenue from the commercial communications market, including revenue from acquisitions, represents approximately 59 percent and 58 percent of the total Communications Solutions Group revenue for the three and nine months ended July 31, 2016, and increased 14 percent and 5 percent year-over-year, respectively. For the three months ended July 31, 2016, revenue grew in Asia Pacific excluding Japan, Europe and Japan, while the Americas remained flat. For the nine months ended July 31, 2016, growth in Asia Pacific excluding Japan, Europe and Japan was partially offset by decline in the Americas. Excluding acquisitions, commercial communications market revenue declined year-over-year as weakness in the smartphone supply chain and restructuring and consolidation activities offset strength in 5G technologies and data center expansion.

Revenue from the aerospace, defense and government market represents approximately 41 percent and 42 percent of the total Communications Solutions Group revenue for the three and nine months ended July 31, 2016, respectively, and increased 3 percent and 4 percent year-over-year, respectively. For the three months ended July 31, 2016, growth in the Americas and Japan was partially offset by declines in Asia Pacific excluding Japan and Europe. For the nine months ended July 31, 2016, the aerospace, defense and government market grew in all regions.

Gross Margin and Operating Margin

The following table shows the Communications Solutions Group margins, expenses and income from operations for the three and nine months ended July 31, 2016 versus the three and nine months ended July 31, 2015.



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three	Nine
	2016			2015			2016			2015			Months	Months
Total gross margin	61.7		%	59.9		%	61.0		%	59.3		%	2 ppts	2 ppts
Operating margin	18.1		%	18.4		%	18.2		%	19.2		%	—	(1) ppt

in millions
Research and development	$	75		$	61		$	227		$	189		22%	20%
Selling, general and administrative	$	112		$	102		$	340		$	318		10%	7%
Other operating expense (income), net	$	(2	)	$	(2	)	$	(7	)	$	(7	)	20%	8%
Income from operations	$	77		$	72		$	239		$	240		7%	(1)%

Gross margin for the three and nine months ended July 31, 2016 increased 2 percentage points compared to each of the same periods last year, primarily due to a higher percentage of revenue from software and R&D solutions, lower warranty and lower inventory charges.

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Research and development expense for the three and nine months ended July 31, 2016 increased 22 percent and 20 percent, respectively, compared to the same periods last year, primarily driven by acquisition 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 for the three and nine months ended July 31, 2016, increased 10 percent and 7 percent, respectively, compared to the same periods last year, primarily driven by acquisitions.

Other operating expense (income) for both the three months ended July 31, 2016 and 2015 was income of $2 million. Other operating expense (income) for both the nine months ended July 31, 2016 and 2015 was income of $7 million.

Income from Operations

Income from operations for the three and nine months ended July 31, 2016 increased $5 million and decreased $1 million, respectively, on a corresponding revenue increase of $35 million and $60 million, respectively, when compared to the same periods last year.

Operating margin for the three months ended July 31, 2016 was flat when compared to the same period last year. Operating margin for the nine months ended July 31, 2016 decreased 1 percentage point when compared to the same period last year, driven by higher operating expenses primarily due to acquisitions and lower organic revenue.

Electronic Industrial Solutions Group

Net Revenue



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2016		2015		2016		2015		Months	Months
	(in millions)				(in millions)
Net revenue	$	191	$	175	$	575	$	558	9%	3	%

The Electronic Industrial Solutions Group revenue for the three and nine months ended July 31, 2016 increased 9 percent and 3 percent, respectively, when compared to the same periods last year. For the three and nine months ended July 31, 2016, growth in Asia Pacific excluding Japan, Japan and the Americas was partially offset by decline in Europe. For both the three and nine months ended July 31, 2016, acquisitions added approximately 1 percentage point to revenue growth.

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Gross Margin and Operating Margin

The following table shows the Electronic Industrial Solutions Group margins, expenses and income from operations for the three and nine months ended July 31, 2016 versus the three and nine months ended July 31, 2015.



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three	Nine
	2016			2015			2016			2015			Months	Months
Total gross margin	60.7		%	57.3		%	59.1		%	57.4		%	3 ppts	2 ppts
Operating margin	23.1		%	18.5		%	21.3		%	19.8		%	5 ppts	1 ppt

in millions
Research and development	$	27		$	25		$	81		$	77		9%	6%
Selling, general and administrative	$	46		$	44		$	139		$	136		4%	2%
Other operating expense (income), net	$	(1	)	$	(1	)	$	(3	)	$	(3	)	5%	(12)%
Income from operations	$	44		$	32		$	122		$	110		36%	11%

Gross margin for the three and nine months ended July 31, 2016 increased 3 percentage points and 2 percentage points, respectively, compared to each of the same periods last year, primarily driven by favorable volume and mix impact, along with lower warranty expenses.

Research and development expense for the three and nine months ended July 31, 2016 increased 9 percent and 6 percent, respectively, compared to the same periods last year, primarily driven by new investments. 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 for the three and nine months ended July 31, 2016, increased 4 percent and 2 percent, respectively, compared to the same periods last year, primarily driven by our focus on solution selling and market expansion activities.

Other operating expense (income) for both the three months ended July 31, 2016 and 2015 was income of $1 million. Other operating expense (income) for both the nine months ended July 31, 2016 and 2015 was income of $3 million.

Income from Operations

Income from operations for the three and nine months ended July 31, 2016 increased $12 million each, on a corresponding revenue increase of $16 million and $17 million, respectively, when compared to the same periods last year.

Operating margin for the three and nine months ended July 31, 2016 increased 5 percentage points and 1 percentage point, respectively, when compared to the same periods last year, driven by higher gross margins partially offset by higher investment in research and development and increased marketing activities.

Services Solutions Group

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Net Revenue



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2016		2015		2016		2015		Months	Months
	(in millions)				(in millions)
Net revenue	$	103	$	101	$	294	$	298	2%	(1	)%

The Services Solutions Group revenue for the three and nine months ended July 31, 2016 increased 2 percent and decreased 1 percent, respectively, when compared to the same periods last year. The revenue increase associated with acquisitions accounted for approximately 2 percentage points for both the three and nine months ended July 31, 2016 when compared to the same periods last year. For the three months ended July 31, 2016, increases in revenue from calibration services and used equipment was partially offset by decline in revenue from repair services. Growth in the Americas, Japan and Europe was partially offset by declines in Asia Pacific excluding Japan. For the nine months ended July 31, 2016, declines in sales of used equipment and repair services was partially offset by growth in calibration services. Declines in Asia Pacific excluding Japan was partially offset by growth in Japan and the Americas, while Europe remained flat.

Gross Margin and Operating Margin

The following table shows the Services Solutions Group margins, expenses and income from operations for the three and nine months ended July 31, 2016 versus the three and nine months ended July 31, 2015.



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three	Nine
	2016			2015			2016			2015			Months	Months
Total gross margin	42.4		%	42.7		%	40.5		%	42.9		%	—	(2	) ppts
Operating margin	18.7		%	19.4		%	14.7		%	17.4		%	(1) ppt	(3	) ppts

in millions
Research and development	$	—		$	1		$	5		$	7		(67)%	(28)%
Selling, general and administrative	$	25		$	23		$	73		$	71		8%	3%
Other operating expense (income), net	$	(1	)	$	(1	)	$	(2	)	$	(2	)	—%	(5)%
Income from operations	$	19		$	20		$	43		$	52		(2)%	(16)%

Gross margin for the three and nine months ended July 31, 2016 was flat and decreased 2 percentage points, respectively, compared to the same periods last year, primarily driven by lower 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 expense for the three and nine months ended July 31, 2016 decreased 67 percent and 28 percent, respectively, compared to the same periods last year. The decline is primarily driven by change in Services Solutions Group's share in centralized investment on research and development.

Selling, general and administrative expense for the three months ended July 31, 2016 increased 8 percent when compared to the same period last year due to higher field selling costs, higher infrastructure related costs and an increase in people related costs. For the nine months ended July 31, 2016, selling, general and administrative expense increased 3 percent when compared to the same period last year due to higher infrastructure related costs and an increase in people related costs.

Income from Operations

Income from operations for the three and nine months ended July 31, 2016 decreased $1 million and $9 million, respectively, when compared to the same periods last year, on a corresponding revenue increase of $2 million and decrease of $4 million, when compared to the same periods last year.

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Operating margin for the three months ended July 31, 2016 decreased 1 percentage point, driven by increase in operating expenses on flat gross margin. Operating margin for the nine months ended July 31, 2016 decreased 3 percentage points, primarily driven by unfavorable gross margin and an increase in operating expenses.

FINANCIAL CONDITION

Liquidity and Capital Resources

Our financial position as of July 31, 2016 consisted of cash and cash equivalents of $664 million as compared to $483 million as of October 31, 2015.

As of July 31, 2016, approximately $462 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries. Much of the non-U.S. cash will be used for non-U.S. growth and expansion, however, some of this non-U.S. cash could be repatriated to the U.S. Under current law, such repatriation would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. We continue to be in discussions with Agilent regarding the allocation of certain deferred tax liability balances related to foreign unremitted earnings in accordance with the separation agreements. Excess foreign tax credits associated with unremitted earnings are not recorded as an asset as they do not represent a separate deferred asset until earnings are remitted. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. All significant international locations have access to internal funding through an offshore cashpool for working capital needs, in addition to temporary local overdraft and short-term working capital lines of credit.

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 $277 million for the nine months ended July 31, 2016 compared to net cash provided of $295 million for the same period in 2015.

•

Net income for the first nine months of fiscal 2016 increased $7 million. Changes to non-cash income and expenses included an $28 million increase to amortization expense as compared to the same period last year due to the impact of recently acquired businesses, a $4 million increase in depreciation, a $10 million decrease to stock-based compensation expense as the first nine months of fiscal 2015 included expense associated with one-time inaugural grants, a $10 million gain from a land sale in the first nine months of fiscal 2016, a $9 million decline in excess and obsolete inventory related charges, a $10 million decrease in deferred tax expense and a $2 million increase in other miscellaneous non-cash expenses.

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The aggregate of accounts receivable, inventory and accounts payable used net operating cash of $77 million during the first nine months of fiscal 2016, compared to cash provided of $7 million in the comparable period last year. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventory and accounts payable depends upon how effectively we manage the cash conversion cycle, which represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers and can be significantly impacted by the timing of shipments and purchases, as well as collections and payments in a period.


•	Net cash paid to Agilent under separation and distribution agreement was zero for the nine months ended July 31, 2016 as compared to the $28 million during the corresponding period last year.

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The aggregate of employee compensation and benefits, income tax payable and other assets and liabilities used net operating cash of $16 million during the first nine months of fiscal 2016, compared to $45 million used in the comparable period last year. The difference is primarily due to an increase in deferred revenue balances, decrease in income tax payments and lower variable compensation payments in the first nine months of fiscal 2016 as compared to the same period last year and other differences due to timing of accruals and collections versus payments between the periods.

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We contributed $29 million to our non-U.S. defined benefit plans during the first nine months of fiscal 2016, compared to $35 million in the same period last year. We expect to contribute approximately $8 million to our non-U.S. defined benefit plans during the remainder of 2016. For the nine months ended July 31, 2016 and 2015, we did not contribute to our U.S. defined benefit plans or U.S. post-retirement benefit plan and we do not expect to contribute to our U.S. defined benefit plans during the remainder of 2016.

Net Cash Used in Investing Activities

Net cash used in investing activities was $76 million for the nine months ended July 31, 2016 as compared to $72 million for the same period last year. Investments in property, plant and equipment were $76 million for the nine months ended July 31, 2016 compared to $66 million in the same period last year. The increase in capital expenditures is primarily due to the timing of payments. We expect that total capital expenditures for the current year will be approximately $95 million.

In the nine months ended July 31, 2016, we used $10 million, net of cash acquired, for the acquisition of a small business and related intangibles assets and a contingent payment related to the Anite acquisition. We also received $10 million of proceeds from the sale of land in the nine months ended July 31, 2016.

In the nine months ended July 31, 2015, we invested $7 million in preferred stock of a privately held radio frequency microstructure company. We have accounted for this investment using the cost method.

Net Cash Used in Financing Activities

Cash flows related to financing activities consist primarily of cash flows associated with the issuance of common stock, excess tax benefits from share-based plans and treasury stock repurchases. Net cash used in financing activities for the nine months ended July 31, 2016 was $25 million compared to cash used of $22 million for the same period in 2015.

We received proceeds of $42 million from issuance of common stock under employee stock plans in the nine months ended July 31, 2016 as compared to $23 million in the same period last year.

On February 18, 2016, our Board of Directors approved a stock repurchase program under which the company is authorized to repurchase up to $200 million of the company’s outstanding common stock through open market purchases, privately negotiated transactions or other means. The new repurchase program may be suspended or discontinued at any time at the company’s discretion. For the nine months ended July 31, 2016, the company used $62 million to repurchase shares.

Financing activities in the nine months ended July 31, 2015 also reflects $49 million of cash returned to Agilent in accordance with the separation and distribution agreement.

Credit Facility

As a result of the Anite acquisition, we have an overdraft facility of £25 million that expired on July 31, 2016, but by mutual agreement this facility continues to be available while a replacement short-term facility is negotiated. As of July 31, 2016, the company had no borrowings outstanding under the facility. We were in compliance with the covenants of the facility during the nine months ended July 31, 2016.

Long-term debt

There have been no changes to the principal, maturity, interest rates and interest payment terms of the outstanding senior notes in the nine months ended July 31, 2016 as compared to the senior notes as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015

In March 2016, we assumed approximately $1 million of long-term debt in connection with an acquisition. In May 2016, this debt was subsequently repaid in full.

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Other

There were no material changes from our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, to our contractual commitments in the first nine months of 2016. We have contractual commitments for non-cancelable operating leases. We have no other material non-cancelable guarantees or commitments.

Other long-term liabilities include $20 million and $21 million of liabilities related to uncertain tax positions as of July 31, 2016 and October 31, 2015, respectively. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk appear in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2015. There were no material changes during the nine months ended July 31, 2016 to this information reported in the company’s 2015 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial, employment and environmental matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are probable of having a material impact to our business, consolidated financial condition, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Risks, Uncertainties and Other Factors That May Affect Future Results

Risks Related to Our Business

Depressed and uncertain general economic conditions may adversely affect our operating results and financial condition.

Our business is sensitive to negative changes in general economic conditions, both inside and outside the United States. The continued economic downturn may adversely impact our business, resulting in:


•	reduced demand for our products, delays in the shipment of orders or increases in order cancellations;


•	increased risk of excess and obsolete inventories;


•	increased price pressure for our products and services; and


•	greater risk of impairment to the value, and a detriment to the liquidity, of our future investment portfolio.

In addition, macroeconomic developments, such as the recent downturn in Europe, the economic slowdown in Asia and economic uncertainties caused by the result of the United Kingdom's referendum advising for its exit from the European Union

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could negatively affect our ability to conduct business in those geographies. Financial difficulties experienced by our suppliers and customers, including distributors, could result in product delays and inventory issues. Risks to accounts receivable could result in delays in collection and greater bad debt expense.

Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated.

Visibility into our markets is limited. Our quarterly sales and operating results are highly dependent on the volume and timing of technology-related spending and orders received during the fiscal quarter, which are difficult to forecast and may be cancelled by our customers. In addition, our revenues and earnings forecasts for future fiscal quarters are often based on the expected seasonality or cyclicality of our markets. However, the markets we serve do not always experience the seasonality or cyclicality that we expect. Any decline in our customers' markets would likely result in a reduction in demand for our products and services. The broader semiconductor market is one of the drivers for our business, and therefore, a decrease in the semiconductor market could harm our business. Also, if our customers' markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our financial position, results of operations, cash flows and stock price, and could limit our profitability. Also, in such an environment, pricing pressures could intensify. Since a significant portion of our operating expenses is relatively fixed in nature due to sales, R&D and manufacturing costs, if we were unable to respond quickly enough, these pricing pressures could further reduce our operating margins.

If we do not introduce successful new products and services in a timely manner to address increased competition, rapid technological changes and changing industry standards, our products and services will become obsolete, and our operating results will suffer.

We generally sell our products in industries that are characterized by increased competition through frequent new product and service introductions, rapid technological changes and changing industry standards. In addition, many of the markets in which we operate are seasonal and cyclical. Without the timely introduction of new products, services and enhancements, our products and services will become technologically obsolete over time, in which case our revenue and operating results would suffer. The success of new products and services will depend on several factors, including our ability to:


•	properly identify customer needs;


•	innovate and develop new technologies, services and applications;


•	successfully commercialize new technologies in a timely manner;


•	manufacture and deliver our products in sufficient volumes and on time;


•	differentiate our offerings from our competitors' offerings;


•	price our products competitively;


•	anticipate our competitors' development of new products, services or technological innovations; and control product quality in our manufacturing process.

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation. Dependence on outsourced information technology and other administrative functions may impair our ability to operate effectively.

As part of our efforts to streamline operations and to cut costs, we outsource aspects of our manufacturing processes and other functions and continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers' orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Additionally, changing or replacing our contract manufacturers or other outsourcees could cause disruptions or delays. In addition, we outsource significant portions of our information technology ("IT") and other administrative functions. Since IT is critical to our operations, any failure of our IT providers to perform could impair our ability to operate effectively. In addition to the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues and unrealized efficiencies, and could impact our results of operations and stock price. Much of our outsourcing takes place in developing countries and, as a result, may be subject to geopolitical uncertainty.

Failure to adjust our purchases due to changing market conditions or failure to estimate our customers' demand could adversely affect our income.

Our income could be harmed if we are unable to adjust our purchases to market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate. The sale of our products and services are dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile, making demand difficult to anticipate. During a market upturn, we may

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not be able to purchase sufficient supplies or components to meet increasing product demand, which could materially affect our results. In the past, we have seen a shortage of parts for some of our products. In addition, some of the parts that require custom design are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work. Should a supplier cease manufacturing such a component, we would be forced to reengineer our product. In addition to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In order to secure components for the production of products, we may continue to enter into non-cancellable purchase commitments with vendors, or at times make advance payments to suppliers, which could impact our ability to adjust our inventory to declining market demands. Prior commitments of this type have resulted in an excess of parts when demand for electronic products has decreased. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges.

Our operating results may suffer if our manufacturing capacity does not match the demand for our products.

Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand does not meet our expectations, our manufacturing capacity will likely exceed our production requirements. If, during a general market upturn or an upturn in our business, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner, which could lead to order cancellations, contract breaches or indemnification obligations. This inability could materially and adversely limit our ability to improve our income, margin and operating results. By contrast, if, during an economic downturn, we had excess manufacturing capacity, then our fixed costs associated with excess manufacturing capacity would adversely affect our income, margins and operating results.

Industry consolidation and consolidation among our customer base may lead to increased competition and may harm our operating results.

There is potential for industry consolidation in our markets. As companies attempt to strengthen or hold their market positions in an evolving industry, companies could be acquired or may be unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors and could lead to more variability in our operating results and could have a material adverse effect on our business, operating results, and financial condition. Furthermore, particularly in the communications market, rapid consolidation would lead to fewer customers, with the effect that loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.

Additionally, if there is consolidation among our customer base, our customers may be able to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing such that our gross margins are diminished, we could decide not to sell our products under such less favorable terms, which would decrease our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products by the combined entity with those of our competitors and cancellations of orders, each of which could harm our operating results.

Economic, political and other risks associated with international sales and operations could adversely affect our results of operations.

Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a majority of our total revenue. However, there can be no assurances that our international sales will continue at existing levels or grow in accordance with our effort to increase foreign market penetration. In addition, many of our employees, contract manufacturers, suppliers, job functions and manufacturing facilities are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:


•	interruption to transportation flows for delivery of parts to us and finished goods to our customers;


•	changes in foreign currency exchange rates;


•	changes in a specific country's or region's political, economic or other conditions;


•	trade protection measures, sanctions, and import or export licensing requirements or restrictions;


•	negative consequences from changes in tax laws;


•	difficulty in staffing and managing widespread operations;


•	differing labor regulations;


•	differing protection of intellectual property;


•	unexpected changes in regulatory requirements; and


•	volatile political environments or geopolitical turmoil, including regional conflicts, terrorism, and war.

We centralize most of our accounting processes at two locations: India and Malaysia. These processes include general accounting, inventory cost accounting, accounts payable and accounts receivables functions. If conditions change in those countries,

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it may adversely affect operations, including impairing our ability to pay our suppliers. Our results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial results.

Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to governmental officials, and anti-competition regulations. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our products in one or more countries, and could also materially affect our brand, ability to attract and retain employees, international operations, business and operating results. Although we actively maintain policies and procedures designed to ensure ongoing compliance with these laws and regulations, there can be no assurance that our employees, contractors or agents will not violate these policies and procedures.

In addition, although a substantial amount of our products are priced and paid for in U.S. Dollars, many of our products are priced in local currencies and a significant amount of certain types of expenses, such as payroll, utilities, tax and marketing expenses, are paid in local currencies. Our hedging programs are designed to reduce, but not entirely eliminate, within any given 12-month period, the impact of currency exchange rate movements, including those caused by currency controls, which could impact our business, operating results and financial condition by resulting in lower revenue or increased expenses. However, for expenses beyond a 12-month period, our hedging strategy will not mitigate our exchange rate risk. In addition, our currency hedging programs involve third-party financial institutions as counterparties. The weakening or failure of these counterparties may adversely affect our hedging programs and our financial condition through, among other things, a reduction in the number of available counterparties, increasingly unfavorable terms or the failure of counterparties to perform under hedging contracts.

Key customers or large orders may expose us to additional business and legal risks that could have a material adverse impact on our operating results and financial condition.

Certain key customers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may demand contract terms that differ considerably from our standard terms and conditions. Large orders may also include severe contractual liabilities for us if we fail to provide the quantity and quality of product at the required delivery times. While we attempt to contractually limit our potential liability under such contracts, we may have to agree to some or all of these types of provisions to secure these orders and to continue to grow our business. Such actions expose us to significant additional risks, which could result in a material adverse impact on our operating results and financial condition.

Our business will suffer if we are not able to retain and hire key personnel.

Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. If we fail to retain and hire a sufficient number of these personnel, we may not be able to maintain or expand our business. The markets in which we operate are dynamic, and we may need to respond with reorganizations, workforce reductions and site closures from time to time. We believe our pay levels are competitive within the regions that we operate. However, there is also intense competition for certain highly technical specialties in geographic areas in which we operate, and it may become more difficult to retain key employees.

Any inability to complete acquisitions on acceptable terms could negatively impact our growth rate and financial performance.

Our ability to grow revenues, earnings and cash flow depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies and business performance. Appropriate targets for acquisition are difficult to identify and complete for a variety of reasons, including but not limited to, limited due diligence, high valuations, business and intellectual property evaluations, other interested parties, negotiations of the definitive documentation, satisfaction of closing conditions, the need to obtain antitrust or other regulatory approvals on acceptable terms, and availability of funding. The inability to close appropriate acquisitions on acceptable terms could adversely impact our growth rate, revenue, and financial performance.

Our acquisitions, strategic alliances, joint ventures and divestitures may result in financial results that are different than expected.

In the normal course of business, we may engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of such transactions, our financial results may differ from our own or the investment community's expectations in a given fiscal quarter, or over the long term. If market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. Further, such transactions often have post-closing arrangements, including, but not limited to, post-closing adjustments, transition services, escrows or indemnifications, the financial results of which can be difficult to predict. In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure. We may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances the performance of our businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, the successful integration of the entity depends on a variety of factors, including:

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•	the retention of key employees and/or customers;


•	the management of facilities and employees in different geographic areas; and


•	the compatibility of our infrastructure, policies and organizations with those of the acquired company.

If we do not realize the expected benefits or synergies of such transactions, our combined and consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.

In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and to effectively prevent fraud. We are devoting significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we design, implement and maintain adequate control over our financial processes and reporting in the future, especially in the context of acquisitions of other businesses. Any difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital. All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

Environmental contamination from past operations could subject us to unreimbursed costs and could harm on-site operations and the future use and value of the properties involved, and environmental contamination caused by ongoing operations could subject us to substantial liabilities in the future.

Some of our properties are undergoing remediation by HP Inc. ("HP") for subsurface contaminations that were known at the time of Agilent's separation from HP in 1999. In connection with Agilent's separation from HP, HP and Agilent entered into an agreement pursuant to which HP agreed to retain the liability for this subsurface contamination, perform the required remediation and indemnify Agilent with respect to claims arising out of that contamination. Agilent has assigned its rights and obligations under this agreement to Keysight in respect of facilities transferred to us in the separation. As a result, HP will have access to a limited number of our properties to perform remediation. Although HP agreed to minimize interference with on-site operations at such properties, remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the properties. In connection with the separation, Agilent will indemnify us directly for any liabilities related thereto. We cannot be sure that HP will continue to fulfill its remediation obligations or that Agilent will continue to fulfill its indemnification obligations.

In connection with the separation from Agilent, Agilent also agreed to indemnify us for any liability associated with contamination from past operations at all properties transferred from Agilent to Keysight. We cannot be sure that Agilent will fulfill its indemnification obligations.

Our current manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment. As a result, we may become subject to liabilities for environmental contamination, and these liabilities may be substantial. Although our policy is to apply strict standards for environmental protection at our sites inside and outside the United States, even if the sites outside the United States are not subject to regulations imposed by foreign governments, we may not be aware of all conditions that could subject us to liability.

We and our customers are subject to various governmental regulations, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.

We and our customers are subject to various significant international, federal, state and local regulations, including, but not limited to, health and safety, packaging, product content, labor and import/export regulations. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. If demand for our products is adversely affected or our costs increase, our business would suffer.

Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies such as the U.S. Federal Communications Commission. We also must comply with work safety rules. If we fail to adequately address any of these regulations, our businesses could be harmed.

Third parties may claim that we are infringing their intellectual property rights, and we could suffer significant litigation or licensing expenses or be prevented from selling products or services.

From time to time, third parties may claim that one or more of our products or services infringe their intellectual property rights. We analyze and take action in response to such claims on a case-by-case basis. Any dispute or litigation regarding patents

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or other intellectual property could be costly and time-consuming due to the complexity of our technology and the uncertainty of intellectual property litigation and could divert our management and key personnel from business operations. A claim of intellectual property infringement could cause us to enter into a costly or restrictive license agreement (which may not be available under acceptable terms, or at all), require us to redesign certain of our products (which would be costly and time-consuming) and/or subject us to significant damages or an injunction against the development and sale of certain products or services. In certain of our businesses, we rely on third-party intellectual property licenses, and we cannot ensure that these licenses will be available to us in the future on terms favorable to us or at all.

Third parties may infringe our intellectual property rights, and we may suffer competitive injury or expend significant resources enforcing our intellectual property rights.

Our success depends in part on our proprietary technology, including technology we obtained through acquisitions. We rely on various intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as confidentiality provisions and licensing arrangements, to establish our proprietary rights. If we do not enforce our intellectual property rights successfully, our competitive position may suffer, which could harm our operating results.

Our pending patent, copyright and trademark registration applications may not be allowed or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights, trademarks and other intellectual property rights may not provide us with a significant competitive advantage. In preparation for the separation and distribution, we have applied for trademarks related to our new global brand name in various jurisdictions worldwide. Any successful opposition to our applications in material jurisdictions could impose material costs on us or make it more difficult to protect our brand. Different jurisdictions vary widely in the level of protection and priority they give to trademark and other intellectual property rights.

We may be required to spend significant resources monitoring our intellectual property rights, and we may or may not be able to detect infringement of such rights by third parties. Our competitive position may be harmed if we cannot detect infringement and enforce our intellectual property rights in a timely manner, or at all. In some circumstances, we may choose to not pursue enforcement due to a variety of reasons. In addition, competitors may avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Intellectual property rights and our ability to enforce them may be unavailable or limited in some countries, which could make it easier for competitors to capture market share and could result in lost revenues to the company. Furthermore, some of our intellectual property is licensed to others, which allows them to compete with us using that intellectual property.

We are or will be subject to ongoing tax examinations of our tax returns by the IRS and other tax authorities. An adverse outcome of any such audit or examination by the IRS or other tax authority could have a material adverse effect on our results of operations, financial condition and liquidity.

We are or will be subject to ongoing tax examinations of our tax returns by the IRS and other tax authorities in various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from ongoing tax examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable estimates and judgments. Intercompany transactions associated with the sale of inventory, services, intellectual property and cost sharing arrangements are complex and affect our tax liabilities. The calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. The outcomes of any tax examinations could have an adverse effect on our operating results and financial condition. Due to the complexity of tax contingencies, the ultimate resolution of any tax matters related to operations post-separation may result in payments greater or less than amounts accrued.

Our operations may be adversely impacted by changes in our business mix or changes in the tax legislative landscape.

Our effective tax rate may be adversely impacted by, among other things, changes in the mix of our earnings among countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, and changes in tax laws. We cannot give any assurance as to what our effective tax rate will be in the future because, among other things, there is uncertainty regarding the tax policies of the jurisdictions where we operate. Changes in tax laws, such as tax reform in the United States or changes in tax laws resulting from the Organization for Economic Co-operation and Development’s (“OECD”) multi-jurisdictional plan of action to address “base erosion and profit shifting,” could impact our effective tax rate.

If tax incentives change or cease to be in effect, our income taxes could increase significantly.

We benefit from tax incentives extended to our foreign subsidiaries to encourage investment or employment. Several jurisdictions have granted us tax incentives that require renewal at various times in the future, the most significant being Singapore. We do not expect incentives granted by other jurisdictions to have a material impact on our financial statements. The Singapore tax incentive requires that specific conditions be satisfied, which include achieving thresholds of employment, ownership of certain

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assets, as well as specific types of investment activities within Singapore. We believe that we will satisfy such conditions in the future. The Singapore tax incentive is due for renewal in fiscal 2024.

Our taxes could increase if the incentives are not renewed upon expiration. If we cannot or do not wish to satisfy all or portions of the tax incentive conditions, we may lose the related tax incentive and could be required to refund the benefits that the tax incentives previously provided. As a result, our effective tax rate could be higher than it would have been had we maintained the benefits of the tax incentives.

If we suffer a loss to our factories, facilities or distribution system due to a catastrophic event, our operations could be significantly harmed.

Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural or manmade disasters. In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake or other natural disasters due to their locations. For example, our production facilities, headquarters and laboratories in California and our production facilities in Japan are all located in areas with above-average seismic activity. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. If such a disruption were to occur, we could breach our agreements, our reputation could be harmed and our business and operating results could be adversely affected. In addition, since we have consolidated our manufacturing facilities, we are more likely to experience an interruption to our operations in the event of a catastrophe in any one location. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism. Also, our third-party insurance coverage will vary from time to time in both type and amount depending on availability, cost and our decision with respect to risk retention. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third-party insurance. If our third-party insurance coverage is adversely affected, or to the extent we have elected to self-insure, we may be at a greater risk that our operations will be harmed by a catastrophic loss.

If we experience a significant disruption in, or breach in security of, our information technology systems, our business could be adversely affected.

We rely on several centralized information technology systems to provide products and services, maintain financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. If we experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. Furthermore, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to the company or our employees, partners, customers or suppliers, which could result in significant financial or reputational damage to the company.

Man-made problems such as cybersecurity attacks, computer viruses or terrorism may disrupt our operations and harm our business, reputation and operating results

Despite our implementation of network security measures, our network may be vulnerable to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, operating results and financial condition.

Our daily business operations require us to retain sensitive data such as intellectual property, proprietary business information and data related to customers, suppliers and business partners within our networking infrastructure. The ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals, and organizations like Keysight are susceptible to multiple variations of attacks on our networks on a daily basis.

Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee errors, or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial condition could be materially and adversely affected resulting in a possible loss of business or brand reputation.

In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruption to the economy and create further uncertainties in the economy. Energy

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shortages, such as gas or electricity shortages, could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

Our business and financial results may be adversely affected by various legal and regulatory proceedings.

We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could become subject to additional claims in the future, some of which could be material. The outcome of existing proceedings, lawsuits and claims may differ from our expectations because the outcomes of litigation are often difficult to reliably predict. Various factors or developments can lead us to change current estimates of liabilities and related insurance receivables where applicable, or permit us to make such estimates for matters previously not susceptible to reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling, settlement or unfavorable development could result in charges that could adversely affect our business, operating results or financial condition.

We have substantial cash requirements in the United States, although most of our cash is generated outside of the United States. The failure to maintain a level of cash sufficient to address our cash requirements in the United States could adversely affect our financial condition and results of operations.

Although the cash generated in the United States from our operations, including any cash and non-permanently invested earnings repatriated to the United States, is expected to cover our normal operating requirements and debt service requirements, a substantial amount of additional cash may be required for special purposes such as the maturity of our current and future debt obligations, any dividends that may be declared, any future stock repurchase programs and any acquisitions. If we encounter a significant need for liquidity domestically that we cannot fulfill through borrowings, equity offerings or other internal or external sources, the transfer of cash into the United States may incur an overall tax rate higher than our tax rates have been in the past and negatively impact after-tax earnings.

We have outstanding debt and may incur other debt in the future, which could adversely affect our financial condition, liquidity and results of operations.

We currently have outstanding debt as well as availability to borrow under a revolving credit facility. We may borrow additional amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business or repurchases of our outstanding shares of common stock.

Our incurrence of this debt, and increases in our aggregate levels of debt, may adversely affect our operating results and financial condition by, among other things:


•	requiring a portion of our cash flow from operations to make interest payments on this debt;


•	increasing our vulnerability to general adverse economic and industry conditions;


•	reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business; and


•	limiting our flexibility in planning for, or reacting to, changes in our business and the industry.

Our current revolving credit facility imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of our subsidiaries to incur indebtedness, and requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, the indenture governing our senior notes contains covenants that may adversely affect our ability to incur certain liens or engage in certain types of sale and leaseback transactions. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.

We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions, and such financing may not be available on terms favorable to us, if at all, and may be dilutive to existing shareholders.

We may need to seek additional financing for our general corporate purposes. For example, we may need to increase our investment in R&D activities or need funds to make acquisitions. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our shareholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to further limitations on our operations and ability to pay dividends due to restrictive covenants.

Adverse conditions in the global banking industry and credit markets may adversely impact the value of our cash investments or impair our liquidity.

Our cash and cash equivalents are invested or held in a mix of money market funds, time deposit accounts and bank demand deposit accounts. Disruptions in the financial markets may, in some cases, result in an inability to access assets such as money

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market funds that traditionally have been viewed as highly liquid. Any failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash equivalent positions and, in turn, our results and financial condition.

Future investment returns on pension assets may be lower than expected or interest rates may decline, requiring us to make significant additional cash contributions to our future plans.

We sponsor several defined benefit pension plans that cover many of our salaried and hourly employees. The Federal Pension Protection Act of 2006 requires that certain capitalization levels be maintained in each of the U.S. plans, and there may be similar funding requirements in the plans outside the United States. Because it is unknown what the investment return on and the fair value of our pension assets will be in future years or what interest rates and discount rates may be at any point in time, no assurances can be given that applicable law will not require us to make future material plan contributions. Any such contributions could adversely affect our financial condition.

Risks Related to the Separation

Our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly-traded company and may not be a reliable indicator of our future results.

The historical information about the company prior to fiscal year 2015 refers to our business as operated by and integrated with Agilent. Accordingly, the historical financial information does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly-traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

•

prior to the separation, our business was operated by Agilent as part of its broader corporate organization, rather than as an independent company. Agilent or one of its affiliates performed various corporate functions for us such as legal, treasury, accounting, auditing, human resources, corporate affairs and finance. Our historical financial results reflect allocations of corporate expenses from Agilent for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly-traded company. Following the separation, we are responsible for the cost related to such functions previously performed by Agilent;

•

generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Agilent. Following the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; and


•	our historical financial information does not reflect the debt or the associated interest expense that we have incurred as part of the separation and distribution.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from Agilent. For additional information about the past financial performance of our business and the basis of presentation of the historical combined and consolidated financial statements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and accompanying notes included elsewhere in this Form 10-Q.

Potential indemnification liabilities to Agilent pursuant to the separation and distribution agreement could materially and adversely affect our business, financial condition, results of operations and cash flows.

The separation and distribution agreement provides for, among other things, indemnification obligations designed to make us financially responsible for any liabilities associated with assets used by our business; our failure to pay, perform or otherwise promptly discharge any such liabilities or contracts, in accordance with their respective terms, whether prior to, at or after the distribution; any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by Agilent for our benefit, unless they are liabilities related to assets used in the Agilent business; any breach by us of the separation agreement or any of the ancillary agreements or any action by us in contravention of our amended and restated certificate of incorporation or amended and restated bylaws; and any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the registration statement or any other disclosure document that describes the separation or the distribution or the company and its subsidiaries or primarily relates to the transactions contemplated by the separation and distribution agreement, subject to certain exceptions. If we are required to indemnify Agilent under the circumstances set forth in the separation and distribution agreement, we may be subject to substantial liabilities.

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In connection with our separation from Agilent, Agilent will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Agilent's ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the separation and distribution agreement and certain other agreements with Agilent, Agilent agreed to indemnify us for certain liabilities. However, third parties could also seek to hold us responsible for any of the liabilities that Agilent has agreed to retain, and there can be no assurance that the indemnity from Agilent will be sufficient to protect us against the full amount of such liabilities, or that Agilent will be able to fully satisfy its indemnification obligations. In addition, Agilent's insurers may attempt to deny us coverage for liabilities associated with certain occurrences of indemnified liabilities prior to the separation. Moreover, even if we ultimately succeed in recovering from Agilent or such insurance providers any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our business, financial position, results of operations and cash flows.

We will be subject to continuing contingent liabilities of Agilent following the separation.

After the separation, there are several significant areas where the liabilities of Agilent may become our obligations. For example, under the Internal Revenue Code and the related rules and regulations, each corporation that was a member of the Agilent U.S. consolidated group during a taxable period or portion of a taxable period ending on or before the effective time of the distribution is severally liable for the U.S. federal income tax liability of the entire Agilent U.S. consolidated group for that taxable period. Consequently, if Agilent is unable to pay the consolidated U.S. federal income tax liability for a prior period, we could be required to pay the entire amount of such tax, which could be substantial and in excess of the amount allocated to it under the tax matters agreement between us and Agilent. Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.

There could be significant liability if the distribution is determined to be a taxable transaction.

A condition to the distribution is that Agilent received an opinion of Baker & McKenzie LLP, tax counsel to Agilent, regarding the qualification of the separation and the distribution as a reorganization within the meaning of Sections 355(a) and 368(a)(1)(D) of the Code. The opinion relies on certain facts, assumptions, representations and undertakings from Agilent and Keysight, including those regarding the past and future conduct of the companies' respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not satisfied, Agilent and its shareholders may not be able to rely on the opinion, and could be subject to significant tax liabilities. Notwithstanding the opinion of tax counsel, the IRS could determine on audit that the distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion.

If the distribution were determined to be taxable for U.S. federal income tax purposes, Agilent and its shareholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. For example, if the distribution failed to qualify for tax-free treatment, Agilent would for U.S. federal income tax purposes be treated as if it had sold the Keysight common stock in a taxable sale for its fair market value, and Agilent's shareholders, who are subject to U.S. federal income tax, would be treated as receiving a taxable distribution in an amount equal to the fair market value of the Keysight common stock received in the distribution. In addition, if the separation and distribution failed to qualify for tax-free treatment under federal, state and local tax law and/or foreign tax law, Agilent (and, under the tax matters agreement described below, Keysight) could incur significant tax liabilities under U.S. federal, state, local and/or foreign tax law.

Under the tax matters agreement between Agilent and Keysight, we are generally required to indemnify Agilent against taxes incurred by Agilent that arise as a result of our taking or failing to take, as the case may be, certain actions that result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Code. Under the tax matters agreement between Agilent and Keysight, we may also be required to indemnify Agilent for other contingent tax liabilities, which could materially adversely affect our financial position.

We may not be able to engage in certain corporate transactions for a two-year period after the separation.

To preserve the tax-free treatment for U.S. federal income tax purposes to Agilent of the separation and distribution, under the tax matters agreement that we have entered into with Agilent, we are restricted from taking any action that prevents the separation and distribution from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution, we are prohibited, except in certain circumstances, from entering into acquisition, merger, liquidation, sale and stock redemption transactions with respect to our stock if such transactions, taken as a whole, would result in one or more persons acquiring forty percent (40%) or more of the outstanding Keysight stock.

These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our shareholders or that might increase the value of our business. In addition, under the tax matters agreement, we may be required to indemnify Agilent against any such tax liabilities as a result of the acquisition of Keysight's stock or assets, even if we did not participate in or otherwise facilitate the acquisition.

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Risks Related to Our Common Stock

Our share price may fluctuate significantly.

Our common stock is listed on NYSE under the ticker symbol “KEYS.” The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:


•	actual or anticipated fluctuations in our operating results due to factors related to our business;


•	success or failure of our business strategy;


•	our quarterly or annual earnings, or those of other companies in our industry;


•	our ability to obtain third-party financing as needed;


•	announcements by us or our competitors of significant acquisitions or dispositions;


•	changes in accounting standards, policies, guidance, interpretations or principles;


•	the failure of securities analysts to cover our common stock;


•	changes in earnings estimates by securities analysts or our ability to meet those estimates;


•	the operating and share price performance of other comparable companies;


•	investor perception of our company;


•	natural or other disasters that investors believe may affect us;


•	overall market fluctuations;


•	results from any material litigation or government investigations;


•	changes in laws or regulations affecting our business; and


•	general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of management and other resources.

We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends.

We do not currently expect to pay dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, to our shareholders will fall within the discretion of our board of directors. The board's decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements, regulatory constraints and other factors that the board deems relevant. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends.

Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of the company, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:


•	the inability of our shareholders to call a special meeting;


•	the inability of our shareholders to act without a meeting of shareholders;


•	rules regarding how shareholders may present proposals or nominate directors for election at shareholder meetings;


•	the right of our board to issue preferred stock without shareholder approval;


•	the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;


•	a provision that shareholders may only remove directors with cause;


•	the ability of our directors, and not shareholders, to fill vacancies on our board of directors; and

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•

the requirement that the affirmative vote of shareholders holding at least 80% of our voting stock is required to amend certain provisions in our amended and restated certificate of incorporation (relating to the number, term and removal of our directors, the filling of our board vacancies, the advance notice to be given for nominations for elections of directors, the calling of special meetings of shareholders, shareholder action by written consent, the ability of the board of directors to amend the bylaws, elimination of liability of directors to the extent permitted by Delaware law, exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders and amendments of the certificate of incorporation) and certain provisions in our amended and restated bylaws (relating to the calling of special meetings of shareholders, the business that may be conducted or considered at annual or special meetings, the advance notice of shareholder business and nominations, shareholder action by written consent, the number, tenure, qualifications and removal of our directors, the filling of our board vacancies, director and officer indemnification and amendments of the bylaws).

In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the "DGCL"), this provision could also delay or prevent a change of control that some shareholders may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an "interested stockholder") shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of shareholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

We believe these provisions will protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of the company and our shareholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. Under the tax matters agreement, we would be required to indemnify Agilent for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that some shareholders may consider favorable.

Our amended and restated certificate of incorporation designates that the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could discourage lawsuits against the company and our directors and officers.

Our amended and restated certificate of incorporation provide that unless the board of directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to the company or our shareholders, any action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the DGCL or Keysight's amended and restated certificate of incorporation or bylaws, or any action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our shareholders to bring a claim in a judicial forum that such shareholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors and officers.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

The table below summarizes information about the company’s purchases, based on trade date; of its equity securities registered pursuant to Section 12 of the Exchange Act during the quarterly period ended July 31, 2016.



Period	Total Number of Shares of Common Stock Purchased ⁽¹⁾	Weighted Average Price Paid per Share of Common Stock ⁽²⁾		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Maximum Approximate Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Program ⁽¹⁾

May 1, 2016 through May 31, 2016	326,976	$	25.89	326,976	$	150,000,030
June 1, 2016 through June 30, 2016	380,420	$	30.19	380,420	$	138,515,618
July 1, 2016 through July 31, 2016	—	$	—	—	$	138,515,618
Total	707,396	$	28.20	707,396



(1)	On February 18, 2016, the Board of Directors approved a stock repurchase program authorizing the purchase of up to $200 million of the company’s common stock. Under the program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. 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. All such shares and related costs are held as treasury stock and accounted for using the cost method.
(2)	The weighted average price paid per share of common stock does not include the cost of commissions.

ITEM 6. EXHIBITS

(a)Exhibits:

A list of exhibits is set forth in the Exhibit Index found on page 48 of this report.

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KEYSIGHT TECHNOLOGIES, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Dated:	September 2, 2016	By:	/s/ Neil Dougherty
			Neil Dougherty
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer)


Dated:	September 2, 2016	By:	/s/ John C. Skinner
			John C. Skinner
			Vice President and Corporate Controller
			(Principal Accounting Officer)

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KEYSIGHT TECHNOLOGIES, INC.

EXHIBIT INDEX



Exhibit
Number			Description
11.1			See Note 6, “Net Income Per Share,” to our Condensed Consolidated Financial Statements.

31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS			XBRL Instance Document

101.SCH			XBRL Schema Document

101.CAL			XBRL Calculation Linkbase Document

101.LAB			XBRL Labels Linkbase Document

101.PRE			XBRL Presentation Linkbase Document

101.DEF			XBRL Definition Linkbase Document