Keysight 10Q 2015 Q3 Quarterly report

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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, 2015

¨ 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 ¨		Accelerated filer ¨

Non-accelerated filer x		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, 2015 was 169,470,653.

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KEYSIGHT TECHNOLOGIES, INC.

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PART I	— FINANCIAL INFORMATION

ITEM 1. CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

KEYSIGHT TECHNOLOGIES, INC.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)



	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2015			2014		2015			2014
Net revenue:
Products	$	557		$	643	$	1,783		$	1,833
Services and other	108			114		323			338
Total net revenue	665			757		2,106			2,171
Costs and expenses:
Cost of products	236			286		760			801
Cost of services and other	59			57		177			169
Total costs	295			343		937			970
Research and development	90			91		282			270
Selling, general and administrative	183			202		581			592
Other operating expense (income), net	(3		)	—		(14		)	—
Total costs and expenses	565			636		1,786			1,832
Income from operations	100			121		320			339
Interest income	—			—		1			—
Interest expense	(12		)	—		(35		)	—
Other income (expense), net	(1		)	1		1			3
Income before taxes	87			122		287			342
Provision for income taxes	17			15		51			51
Net income	$	70		$	107	$	236		$	291

Net income per share:^(a)
Basic	$	0.41		$	0.64	$	1.40		$	1.74
Diluted	$	0.41		$	0.64	$	1.38		$	1.74

Weighted average shares used in computing net income per share:^(a)
Basic	169			167		169			167
Diluted	172			167		171			167

^(a)On November 1, 2014, Agilent Technologies, Inc. distributed 167 million shares of Keysight common stock to existing holders of Agilent common stock. Basic and diluted net income per share for the three and nine months ended July 31, 2014 is calculated using the shares distributed on November 1, 2014.

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

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2015			2014			2015			2014

Net income	$	70		$	107		$	236		$	291
Other comprehensive income (loss):
Unrealized gain (loss) on investments, net of tax expense of $2, zero, $3 and zero	(7		)	9			1			9
Unrealized loss on derivative instruments, net of tax benefit of $1, zero, $2 and zero	(2		)	—			(3		)	—
Amounts reclassified into earnings related to derivative instruments, net of tax benefit (expense) of zero	—			—			(2		)	—
Foreign currency translation, net of tax benefit (expense) of zero, $(2), zero and $(2)	(12		)	(6		)	(46		)	(17		)
Net defined benefit pension cost and post retirement plan costs:
Change in actuarial net loss, net of tax expense of $4, zero, $10 and zero	7			—			23			—
Change in net prior service benefit, net of tax benefit of $3, zero, $9 and zero	(5		)	—			(13		)	—
Other comprehensive income (loss)	(19		)	3			(40		)	(8		)
Total comprehensive income	$	51		$	110		$	196		$	283

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

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)



	July 31, 2015			October 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	1,000		$	810
Accounts receivable, net	313			357
Receivable from Agilent	—			23
Inventory	478			498
Deferred tax assets	73			83
Other current assets	119			79
Total current assets	1,983			1,850
Property, plant and equipment, net	462			470
Goodwill	372			392
Other intangible assets, net	12			18
Long-term investments	70			63
Long-term deferred tax assets	112			163
Other assets	86			94
Total assets	$	3,097		$	3,050
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	171		$	173
Payable to Agilent	—			125
Employee compensation and benefits	144			167
Deferred revenue	161			175
Income and other taxes payable	56			72
Other accrued liabilities	88			57
Total current liabilities	620			769
Long-term debt	1,099			1,099
Retirement and post-retirement benefits	160			213
Long-term deferred revenue	61			69
Other long-term liabilities	52			131
Total liabilities	1,992			2,281
Commitments and contingencies (Note 13)
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; 169 million shares at July 31, 2015 and 167 million shares at October 31, 2014 issued and outstanding	2			2
Additional paid-in-capital	1,142			1,002
Retained earnings	337			101
Accumulated other comprehensive loss	(376		)	(336		)
Total stockholders' equity	1,105			769
Total liabilities and equity	$	3,097		$	3,050

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

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KEYSIGHT TECHNOLOGIES, INC.

CONDENSED COMBINED AND CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)



	Nine Months Ended
	July 31,
	2015			2014
Cash flows from operating activities:
Net income	$	236		$	291
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	69			59
Share-based compensation	49			35
Excess tax benefit from share-based plans	(4		)	—
Deferred taxes	15			39
Excess and obsolete inventory related charges	23			26
Other non-cash expenses (income), net	2			(1		)
Changes in assets and liabilities:
Accounts receivable	31			20
Inventory	(25		)	(40		)
Accounts payable	1			(19		)
Payment to Agilent, net	(28		)	—
Employee compensation and benefits	(18		)	(12		)
Retirement and post-retirement benefits	(29		)	—
Other assets and liabilities	(27		)	(36		)
Net cash provided by operating activities	295			362

Cash flows from investing activities:
Investments in property, plant and equipment	(66		)	(52		)
Purchase of investments	(7		)	—
Proceeds from sale of investments	1			—
Acquisitions of businesses and intangible assets, net of cash acquired	—			(1		)
Other	—			1
Net cash used in investing activities	(72		)	(52		)

Cash flows from financing activities:
Issuance of common stock under employee stock plans	23			—
Excess tax benefit from share-based plans	4			—
Return of capital to Agilent	(49		)	—
Net transfers to Agilent	—			(310		)
Net cash used in financing activities	(22		)	(310		)

Effect of exchange rate movements	(11		)	—

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

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

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

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KEYSIGHT TECHNOLOGIES, INC.

NOTES TO CONDENSED COMBINED AND 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 core electronic measurement 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 for the three and nine months ended July 31, 2015 and 2014 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 (“GAAP”) in the U.S. 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.

Agilent transferred substantially all of the assets and liabilities and operations of the electronic measurement business to Keysight in August 2014 ("the Capitalization"). Combined financial statements prior to the Capitalization were prepared on a stand-alone basis and were derived from Agilent’s consolidated financial statements and accounting records. For the three and nine months ended July 31, 2014, expenses were allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us.

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

We recognized non-recurring separation and related costs of $3 million and $15 million for the three and nine months ended July 31, 2015, respectively, and $26 million and $51 million for the three and nine months ended July 31, 2014, respectively, including branding, legal, accounting and other advisory fees and other costs to separate and transition from Agilent, which were principally classified in selling, general and administrative expenses.

In the opinion of management, the accompanying condensed combined and consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our condensed consolidated balance sheet as of July 31, 2015 and October 31, 2014, condensed combined and consolidated statement of comprehensive income for the three and nine months ended July 31, 2015 and 2014, condensed combined and consolidated statement of operations for the three and nine months ended July 31, 2015 and 2014, and condensed combined and consolidated statement of cash flows for the nine months ended July 31, 2015 and 2014.

The preparation of condensed combined and consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed combined and consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s 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, allocation methods and allocated expenses from Agilent prior to the separation, valuation of goodwill and other intangible assets, share-based compensation, retirement and post-retirement plan assumptions, restructuring, warranty and accounting for income taxes.

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Investments. In June 2015, we purchased $7 million of preferred stock of a privately held radio frequency microstructure company. We are accounting for this investment using the cost method.

Reclassifications. Other operating expense (income), net for the nine months ended July 31, 2015 includes $11 million of miscellaneous income and expense that was previously classified as other income (expense), net in the condensed combined and consolidated statement of operations, primarily representing rental income, as management believes this is more appropriately classified within our operating results. Of the $11 million, $6 million and 5 million was recognized in the three months ended January 31, 2015 and April 30, 2015, respectively. This change had no effect on reported net 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, 2014.

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 is amending the FASB Accounting Standards Codification and creating a new Topic 606, Revenue from Contracts with Customers, and the IASB is issuing 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. We are evaluating the impact of adopting this guidance to our combined and consolidated financial statements.

In June 2014, the FASB issued an amendment to the accounting guidance relating to share-based compensation to resolve what it saw as diverse accounting treatment of certain awards. With this amendment, the FASB has given explicit guidance to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting rather than as a non-vesting condition that affects the grant-date fair value of an award. The new guidance is effective for annual periods beginning after December 15, 2015 and for the interim periods within those annual periods. Earlier adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

In August 2014, the FASB issued guidance related to the disclosures around going concern. The standard provided guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

In February 2015, the FASB issued guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. The new guidance is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

In April 2015, the FASB issued guidance to simplify presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

In April 2015, the FASB issued guidance that clarifies the circumstances under which a cloud computing customer would account for an arrangement as a license of internal-use software. The standard is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

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In May 2015, the FASB issued guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The standard also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

In July 2015, the FASB issued guidance to simplify the subsequent measurement of inventory. The standard requires most inventory to be measured at the lower of cost and net realizable value, thereby simplifying the current guidance under which inventory must be measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). The standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted. We do not expect a material impact to our combined and consolidated financial statements due to the adoption of this guidance.

Other amendments to GAAP in the U.S. 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 combined and consolidated financial statements upon adoption.

3. TRANSACTIONS WITH AGILENT

Prior to the Separation, we were the Electronic Measurement segment of Agilent. After the Capitalization and prior to November 1, 2014, our transactions with Agilent were considered related party transactions since Agilent owned 100% of our outstanding common stock.

For the three and nine months ended July 31, 2015 and 2014, the amount of materials and services sold by us to other Agilent businesses was immaterial, and we did not purchase any materials from the other Agilent businesses.

Allocated Costs

The condensed combined and consolidated statement of operations for the three and nine months ended July 31, 2014 included our direct expenses for cost of products and services sold, research and development, sales and marketing, distribution, and administration as well as allocations of expenses arising from shared services and infrastructure provided by Agilent to us. These allocated expenses include costs of information technology, accounting and legal services, real estate and facilities, corporate advertising, insurance services, treasury and other corporate and infrastructure services and costs for central research and development efforts. In addition, other costs allocated to us included restructuring costs, share-based compensation expense and retirement plan expenses related to Agilent’s corporate and shared services employees and are included in the table below. These expenses were allocated to us using estimates that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by us. These costs were allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of revenue, square footage, headcount or other measures.

Allocated costs included in the accompanying condensed combined and consolidated statement of operations are as follows:



	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2015		2014			2015		2014
	(in millions)					(in millions)
Cost of products and services	$	—	$	25		$	—	$	73
Research and development	—		11			—		33
Selling, general and administrative	—		78			—		217
Other (income) expense, net	—		(1		)	—		(2		)
Total allocated costs	$	—	$	113		$	—	$	321

Receivable from and Payable to Agilent

The payable to Agilent was reduced by $25 million during the first quarter of fiscal 2015 as a result of finalization of discussions with Agilent as provided in the separation and distribution agreement. This adjustment was reflected as an increase

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in additional paid-in-capital in the condensed consolidated balance sheet. The remaining receivables from and payables to Agilent were settled as of July 31, 2015.

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.

Prior to the Separation, Keysight employees participated in Agilent’s equity plans. Upon the Separation, outstanding Keysight employee stock options, RSUs and LTP Program awards previously issued under Agilent’s equity plans were adjusted and converted into new Keysight stock-based awards under the Keysight 2014 Equity and Incentive Compensation Plan using a formula designed to preserve the intrinsic value and fair value of the awards immediately prior to the separation. These adjusted awards retained the vesting schedule and expiration date of the original awards.

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



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2015		2014		2015		2014
	(in millions)
Cost of products and services	$	2	$	2	$	10	$	9
Research and development	2		2		8		6
Selling, general and administrative	3		5		31		21
Total share-based compensation expense	$	7	$	9	$	49	$	36

At July 31, 2015 and October 31, 2014, there was no share-based compensation capitalized within inventory. For the three and nine months ended July 31, 2015, the windfall tax benefit realized from exercised stock options and similar awards was zero and $3 million, respectively. For the three and nine months ended July 31, 2014, the windfall tax benefit realized from exercised stock options and similar awards was zero. The expense for the three and nine months ended July 31, 2015 includes expense of $1 million and $16 million, respectively, related to special inaugural RSU awards. 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,
	2015		2014		2015		2014
Stock Option Plans:
Weighted average risk-free interest rate	—		1.7	%	1.6	%	1.7	%
Dividend yield	—		1	%	—	%	1	%
Weighted average volatility	—		38	%	31	%	39	%
Expected life	—		5.8 years		4.9 years		5.8 years
LTP Program:
Volatility of Keysight shares	26	%	NA		26	%	NA
Volatility of selected peer-company shares	17%-67%		NA		17%-67%		NA
Price-wise correlation with selected peers	38	%	NA		38	%	NA

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

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employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.

As of November 1, 2014, Agilent’s fiscal 2013 LTP Program grants to Keysight executives are classified as liability awards in our condensed combined and consolidated financial statements as the payout of Keysight shares is dependent upon Agilent Total Shareholder Return (“TSR”) as compared to its peer companies at the end of fiscal 2015. The mark-to-market adjustment resulted in gains of $3 million and $2 million for the three and nine months ended July 31, 2015, respectively.

For the three months ended July 31, 2015, no stock option awards were granted. 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. For the three and nine months ended July 31, 2014, we used the historical volatility of Agilent stock to estimate the volatility for stock option awards. In estimating the expected life of our options, we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.

5. INCOME TAXES

Our combined and consolidated financial statements for periods prior to November 1, 2014 reflect the calculation of certain deferred tax assets and deferred tax liabilities based on a separate return methodology. Subsequent to the Separation, we are filing tax returns on our own behalf and certain current and non-current deferred tax assets and deferred tax liabilities have been adjusted to reflect our stand-alone income tax positions. As of the Separation date, as a result of no longer reporting under the separate return methodology, current and non-current deferred tax assets decreased by approximately $5 million and $46 million, respectively. The net decrease in non-current deferred tax assets of $46 million was primarily due to the decrease in the deferred tax assets related to tax attributes of $83 million offset by a decrease in the deferred tax liability related to foreign unremitted earnings of approximately $53 million.

As of July 31, 2015, 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 19 percent and 17.7 percent for the three and nine months ended July 31, 2015, respectively. The company's effective tax rate was 12.3 percent and 14.9 percent for the three and nine months ended July 31, 2014, respectively. Income tax expense was $17 million and $51 million for the three and nine months ended July 31, 2015, respectively. Income tax expense was $15 million and $51 million for the three and nine months ended July 31, 2014, 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. The income tax provision for the three and nine months ended July 31, 2014 included a net discrete expense of $6 million and $18 million, respectively, primarily due to the recognition of tax expense related to the repatriation of previously unasserted earnings to the U.S., offset somewhat by the settlement of an IRS audit in the U.S.

Keysight enjoys tax incentives in several jurisdictions, most notably in Singapore. The tax incentives provide lower rates of taxation on certain classes of income and require that certain conditions be met, including thresholds of employment, ownership of certain assets as well as specific type of investment activities within Singapore. As a result of the Singapore tax rate incentive that was granted during the quarter ended April 30, 2015, the income tax provision for the nine months period ended July 31, 2015 decreased by $31 million, resulting in a net income per share (diluted) benefit of approximately $0.18 per share for the nine months ended July 31, 2015. Further, the discrete impact to the tax provision was a decrease of $6 million, resulting in a net income per share (diluted) benefit of approximately $0.03 per share related to the fiscal 2014 impact. 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 2005. We do not believe it is reasonably possible that a material change to our unrecognized tax benefits will occur in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement.

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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,
	2015		2014		2015		2014
	(in millions)
Numerator:
Net income	$	70	$	107	$	236	$	291
Denominator:
Basic weighted-average shares^(a)	169		167		169		167
Potential common shares— stock options and other employee stock plans	3		—		2		—
Diluted weighted-average shares^(a)	172		167		171		167

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 their effect would be anti-dilutive. For the three and nine months ended July 31, 2015, no options to purchase shares were excluded from the calculation of diluted earnings per share. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTP Program and restricted stock awards, whose combined exercise price, unamortized fair value and excess tax benefits or shortfalls collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. For the three and nine months ended July 31, 2015, we excluded 122,900 and 56,400 shares, respectively.

7. INVENTORY



	July 31, 2015		October 31, 2014
	(in millions)
Finished goods	$	224	$	219
Purchased parts and fabricated assemblies	254		279
Total Inventory	$	478	$	498

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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 during the nine months ended July 31, 2015:



	Measurement Solutions			Customer Support and Services			Total

Goodwill as of October 31, 2014	$	337		$	55		$	392
Foreign currency translation impact	(17		)	(3		)	(20		)
Goodwill as of July 31, 2015	$	320		$	52		$	372

The components of other intangible assets as of July 31, 2015 and October 31, 2014 are shown in the table below:



	Other Intangible Assets
	Gross Carrying Amount		Accumulated Amortization and Impairments		Net Book Value
	(in millions)
As of October 31, 2014:
Developed technology	$	125	$	114	$	11
Backlog	4		4		—
Trademark/Tradename	1		1		—
Customer relationships	32		25		7
Total	$	162	$	144	$	18
As of July 31, 2015:
Developed technology	$	125	$	118	$	7
Backlog	4		4		—
Trademark/Tradename	1		1		—
Customer relationships	32		27		5
Total	$	162	$	150	$	12

During the nine months ended July 31, 2015, we recorded no additions to goodwill or other intangible assets. During the nine months ended July 31, 2015, there was no impact to other intangible assets due to foreign exchange translation.

Amortization of other intangible assets was $2 million and $6 million for the three and nine months ended July 31, 2015 and 2014, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $2 million for the remainder of 2015, $6 million for 2016, $3 million for 2017, $1 million for 2018, and zero 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

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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.

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, 2015 were as follows:



			Fair Value Measurement at July 31, 2015 Using
	July 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Assets:
Short-term
Cash equivalents (money market funds)	$	849	$	849	$	—	$	—
Derivative instruments (foreign exchange contracts)	4		—		4		—
Long-term
Trading securities	13		13		—		—
Available-for-sale investments	38		38		—		—
Total assets measured at fair value	$	904	$	900	$	4	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	7	$	—	$	7	$	—
Long-term
Deferred compensation liability	13		—		13		—
Total liabilities measured at fair value	$	20	$	—	$	20	$	—

Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2014 were as follows:



			Fair Value Measurement at October 31, 2014 Using
	October 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in millions)
Assets:
Short-term
Cash equivalents (money market funds)	$	634	$	634	$	—	$	—
Derivative instruments (foreign exchange contracts)	9		—		9		—
Long-term
Trading securities	13		13		—		—
Available-for-sale investments	35		35		—		—
Total assets measured at fair value	$	691	$	682	$	9	$	—
Liabilities:
Short-term
Derivative instruments (foreign exchange contracts)	$	3	$	—	$	3	$	—
Long-term
Deferred compensation liability	13		—		13		—
Total liabilities measured at fair value	$	16	$	—	$	16	$	—

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

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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. Prior to the Capitalization, there were no derivatives contracts legally held by us and the below disclosures represent the activity pertaining to the contracts entered into by us subsequently.

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 combined and 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 are recognized in other income (expense), net in the condensed combined and 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, 2015 and 2014 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 combined and consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.

In connection with the acquisition of Anite plc ("Anite"), which was announced in the current fiscal quarter and closed on August 13, 2015 (see Note 17, "Subsequent events"), Keysight entered into foreign currency forward contracts to mitigate the currency exchange risk associated with the payment of the purchase price in British Pound ("GBP") currency. The aggregate notional amount of the currencies hedged was $608 million as of July 31, 2015. These foreign exchange contracts did not qualify for hedge accounting treatment and were not designated as hedging instruments. The resulting unrealized loss on outstanding contracts was $1 million and was recorded in other income (expense) in the condensed consolidated statement of operations in the three and nine months ended July 31, 2015.

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.

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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, 2015 was $6 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of July 31, 2015.

There were 79 foreign exchange forward contracts open as of July 31, 2015 that were designated as cash flow hedges. There were 63 foreign exchange forward contracts open as of July 31, 2015 that were not designated as hedging instruments. The aggregated notional amounts by currency and designation as of July 31, 2015 were as follows:



	Derivatives in Cash Flow Hedging Relationships					Derivatives Not Designated as Hedging Instruments
	Forward Contracts			Option Contracts		Forward Contracts
Currency	Buy/(Sell)			Buy/(Sell)		Buy/(Sell)
	(in millions)
Euro	$	—		$	—	$	63
British Pound	—			—		649
Singapore Dollar	13			—		(2		)
Malaysian Ringgit	82			—		(1		)
Japanese Yen	(93		)	—		2
Other	(2		)	—		13
Totals	$	—		$	—	$	724

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, 2015 and October 31, 2014 were as follows:



Fair Values of Derivative Instruments
Asset Derivatives					Liability Derivatives
	Fair Value					Fair Value
Balance Sheet Location	July 31, 2015		October 31, 2014		Balance Sheet Location	July 31, 2015		October 31, 2014
(in millions)
Derivatives designated as hedging instruments:
Cash flow hedges
Foreign exchange contracts
Other current assets	$	4	$	7	Other accrued liabilities	$	5	$	1
Derivatives not designated as hedging instruments:
Foreign exchange contracts
Other current assets	—		2		Other accrued liabilities	2		2
Total derivatives	$	4	$	9		$	7	$	3

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



	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2015			2014		2015			2014
	(in millions)					(in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Foreign exchange contracts:
Gain (loss) recognized in accumulated other comprehensive income	$	(3	)	$	—	$	(5	)	$	—
Gain (loss) reclassified from accumulated other comprehensive income into cost of products	$	—		$	—	$	2		$	—
Derivatives not designated as hedging instruments:
Gain (loss) recognized in other income (expense), net	$	(1	)	$	—	$	(5	)	$	—

The estimated amount of existing net loss at July 31, 2015 expected to be reclassified from other comprehensive income to cost of sales within the next twelve months is $2 million.


11.	RESTRUCTURING

We initiated a targeted workforce reduction program in July 2015 that is expected to reduce Keysight's total headcount by approximately 85 regular employees, representing approximately 1 percent of our global workforce. The timing and scope of workforce reductions will vary based on local legal requirements. This is a targeted workforce management program designed to restructure our operations and cost structure for optimization of resources and cost savings.

We also announced a Pre-Retirement Notification program for retirement-eligible employees to provide early notice of their planned retirement in return for severance benefits. The program is entirely voluntary and can be initiated only by an employee. Approximately 160 employees of our total workforce opted for early retirement under this program as of July 31, 2015.

When completed, the restructuring programs are expected to result in operational savings and efficiency while maintaining our focus on growing the business. We expect to complete a majority of these actions by the end of first quarter of fiscal year 2016.

A summary of balances and restructuring activity is shown in the table below:



	Workforce reduction			U.S. Pre-retirement Plan
	(in millions)
Balance as of October 31, 2014	$	1		$	—
Income statement expense	8			4
Cash payments	(2		)	(2		)
Balance as of July 31, 2015	$	7		$	2

The restructuring accrual of $7 million at July 31, 2015 relating to workforce reduction are recorded in other accrued liabilities, and $2 million related to the Pre-Retirement Notification program is included in employee compensation and benefits in the condensed consolidated balance sheet.

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A summary of the charges in the consolidated statement of operations resulting from all restructuring plans is shown below:



	Three Months Ended		Nine Months Ended
	July 31,		July 31,
	2015	2014	2015	2014
	(in millions)
Cost of products and services	3	—	3	(1	)
Research and development	1	—	1	(1	)
Selling, general and administrative	7	—	8	(1	)
Total restructuring and other related costs	11	—	12	(3	)

12. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS

Components of net periodic costs. For the three and nine months ended July 31, 2015 and 2014, 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,
	2015			2014		2015			2014		2015			2014
	(in millions)
Service cost—benefits earned during the period	$	5		$	—	$	4		$	—	$	—		$	—
Interest cost on benefit obligation	5			—		10			—		2			—
Expected return on plan assets	(9		)	—		(18		)	—		(4		)	—
Amortization:
Net actuarial losses	1			—		8			—		3			—
Prior service credit	(2		)	—		(1		)	—		(5		)	—
Allocated benefit cost (benefit) from Agilent	—			1		—			3		—			(3		)
Total periodic benefit cost (benefit)	$	—		$	1	$	3		$	3	$	(4	)	$	(3	)



	Pensions
	U.S. Defined Benefit Plans					Non-U.S. Defined Benefit Plans					U.S. Post-Retirement Benefit Plan
	Nine Months Ended July 31,
	2015			2014		2015			2014		2015			2014
	(in millions)
Service cost—benefits earned during the period	$	16		$	—	$	13		$	—	$	1		$	—
Interest cost on benefit obligation	15			—		31			—		6			—
Expected return on plan assets	(28		)	—		(55		)	—		(11		)	—
Amortization:
Net actuarial losses	3			—		22			—		9			—
Prior service credit	(5		)	—		(1		)	—		(16		)	—
Allocated benefit cost (benefit) from Agilent	—			3		—			9		—			(9		)
Total periodic benefit cost (benefit)	$	1		$	3	$	10		$	9	$	(11	)	$	(9	)

We did not contribute to our U.S. Defined Benefit Plans during the three and nine months ended July 31, 2015. Agilent contributed zero and $15 million to the U.S. Defined Benefit Plans on our behalf for the three and nine months ended July 31, 2014, respectively. There were no contributions made to the U.S. Post-Retirement Benefit Plan during the three and nine months ended July 31, 2015 and 2014. We 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. Contributions of $12 million and $32 million to the Non-U.S. Defined Benefit Plans were made by Agilent on our behalf for the three and nine months ended July 31, 2014, respectively.

We do not expect to contribute to our U.S. Defined Benefit Plans during the remainder of 2015, and we expect to contribute $10 million to our Non-U.S. Defined Benefit Plans during the remainder of 2015.

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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.

13. COMMITMENTS AND CONTINGENCIES

Standard Warranty

Our standard warranty term for most of our products from the date of delivery is typically three years, which increased from one year in the second quarter of fiscal 2013. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product 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. 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,
	2015			2014
	(in millions)
Beginning balance as of November 1	$	51		$	38
Accruals for warranties including change in estimate	26			34
Settlements made during the period	(23		)	(24		)
Ending balance as of July 31	$	54		$	48

Accruals for warranties due within one year	$	42		$	30
Accruals for warranties due after one year	12			18
Ending balance as of July 31	$	54		$	48

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, combined and consolidated financial condition, results of operations or cash flows.

14. DEBT

Short-Term Debt

Credit Facility

On September 15, 2014, we entered into a five year credit agreement, which provides for a $300 million unsecured credit facility that will expire on November 1, 2019. On July 21, 2015, the total amount available under the credit facility was increased to $450 million. The company may use amounts borrowed under the facility for general corporate purposes. As of July 31, 2015, 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, 2015.

Long-Term Debt

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



	July 31, 2015		October 31, 2014
	(in millions)
3.30% Senior Notes due 2019	$	499	$	499
4.55% Senior Notes due 2024	600		600
Total	$	1,099	$	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, in the nine months ended July 31, 2015 as compared to the senior notes described in our Annual Report on Form 10-K for fiscal year ended October 31, 2014.

As of July 31, 2015 and October 31, 2014, we had $17 million and $13 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 below the carrying value by approximately $20 million as of July 31, 2015 and exceeded the carrying value by approximately $1 million as of October 31, 2014.

15. 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, 2015 and 2014 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, 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	)

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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, 2014	$	5	$	15		$	—	$	—	$	—	$	20
Other comprehensive income before reclassifications	9		(4		)	—		—		—		5
Amounts reclassified out of accumulated other comprehensive income	—		—			—		—		—		—
Tax expense	—		(2		)	—		—		—		(2		)
Other comprehensive income	9		(6		)	—		—		—		3
As of July 31, 2014	$	14	$	9		$	—	$	—	$	—	$	23

As of October 31, 2013	$	5	$	26		$	—	$	—	$	—	$	31
Other comprehensive loss before reclassifications	9		(15		)	—		—		—		(6		)
Amounts reclassified out of accumulated other comprehensive income	—		—			—		—		—		—
Tax (expense) benefit	—		(2		)	—		—		—		(2		)
Other comprehensive loss	9		(17		)	—		—		—		(8		)
As of July 31, 2014	$	14	$	9		$	—	$	—	$	—	$	23

Reclassifications out of accumulated other comprehensive loss for the three and nine months ended July 31, 2015 and 2014 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,
	2015			2014		2015			2014
	(in millions)					(in millions)
Unrealized gain on derivatives	$	—		$	—	$	2		$	—	Cost of products
	—			—		—			—		Provision for income taxes
	—			—		2			—		Net of income tax

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

Total reclassifications for the period	$	(2	)	$	—	$	(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 12, "Retirement Plans and Post Retirement Pension Plans").

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16. SEGMENT INFORMATION

Description of segments. We provide core electronic measurement solutions to the communications and electronics industries.

We have two reportable operating segments, measurement solutions and customer support and services. The two operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its 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.

A description of our two reportable segments is as follows:

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

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 restructuring-related charges, share-based compensation expense, investment gains and losses, interest expense, acquisition and integration costs, separation-related costs, amortization of intangibles and other items as noted in the reconciliations below.



	Measurement Solutions		Customer Support and Services		Total Segments
	(in millions)
Three Months Ended July 31, 2015:
Total net revenue	$	564	$	101	$	665
Segment income from operations	$	104	$	20	$	124
Three Months Ended July 31, 2014:
Total net revenue	$	656	$	101	$	757
Segment income from operations	$	133	$	25	$	158

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	Measurement Solutions		Customer Support and Services		Total Segments
	(in millions)
Nine Months Ended July 31, 2015:
Total net revenue	$	1,808	$	298	$	2,106
Segment income from operations	$	350	$	52	$	402
Nine Months Ended July 31, 2014:
Total net revenue	$	1,870	$	301	$	2,171
Segment income from operations	$	363	$	70	$	433

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,
	2015			2014			2015			2014
	(in millions)						(in millions)
Total reportable segments' income from operations	$	124		$	158		$	402		$	433
Share-based compensation expense	(7		)	(9		)	(49		)	(36		)
Restructuring-related costs	(10		)	—			(10		)	3
Asset impairment	(1		)	—			(3		)	—
Transformational programs	—			—			—			(1		)
Amortization of intangibles	(2		)	(2		)	(6		)	(6		)
Acquisition and integration costs	(3		)	—			(3		)	(1		)
Separation and related costs	(3		)	(26		)	(15		)	(51		)
Other	—			—			—			(2		)
Interest income	—			—			1			—
Interest expense	(12		)	—			(35		)	—
Other income (expense), net	1			1			5			3
Income before taxes, as reported	$	87		$	122		$	287		$	342

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



	Measurement Solutions		Customer Support and Services		Total
	(in millions)
Assets:
As of July 31, 2015	$	1,784	$	245	$	2,029
As of October 31, 2014	$	1,740	$	236	$	1,976

17. SUBSEQUENT EVENTS

Singapore tax incentive. On August 6, 2015, the Singapore Minister of Finance’s ministerial order was gazetted, which officially sanctioned a waiver under Section 19B(2A)(a) of the Income Tax Act dated July 25, 2014 and an exemption under Section 19B(10A) of the Income Tax Act dated October 1, 2014 allowing us to claim amortization in Singapore of approximately $4.4 billion of intellectual property that we acquired from Agilent. The waiver and exemption is retroactive to August 1, 2014 and will result in a deferred tax asset and an income tax benefit of approximately $186 million to $208 million, net of uncertain tax benefits, which will be recorded during the fiscal quarter ended October 31, 2015.

Acquisition of Anite. On August 13, 2015, we acquired all of the outstanding common stock of Anite for approximately $600 million in cash. Anite is a U.K.-based global company with strong software expertise and a leading supplier of wireless test solutions. This acquisition expands our solutions offering in wireless research and development design and test, coupling Keysight's expertise in helping customers design and test hardware, we can now provide customers with comprehensive wireless solutions. Anite also has a Network Test business that brings innovative solutions that help deliver an outstanding experience for mobile users in the network. The initial accounting for the business combination is currently being completed and will be included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2015.

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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 combined and 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 core electronic measurement solutions to communications and electronics industries.

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

We are incurring other incremental costs as an independent, publicly traded company as compared to the costs historically allocated to us by Agilent. These incremental costs are estimated to be approximately $20 million on an annual pre-tax basis. In addition, for the three and nine months ended July 31, 2015, we recognized non-recurring separation and related costs of $3 million and $15 million, respectively, and for the three and nine months ended July 31, 2014, we recognized non-recurring separation and related costs of $26 million and $51 million, respectively. We expect to recognize additional non-recurring separation costs, which are currently estimated to range from $12 million to $17 million through fiscal 2016. These costs are expected to include, among other things, branding, legal, accounting and other advisory fees and other costs to separate and transition from Agilent.

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classified within our operating results. Of the $11 million, $6 million and $5 million was recognized in the three months ended January 31, 2015 and April 30, 2015, respectively. This change had no effect on reported net income for any period presented.

Executive Summary

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

We plan to invest in product development to address the changing needs of the market and facilitate growth. We are investing

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

In fiscal 2014, we implemented changes in our organizational structure that resulted in the formation of two reportable operating segments, measurement solutions and customer support and services. The measurement solutions segment is primarily the hardware and associated software businesses serving the electronic measurement market. The customer support and services segment provides repair and calibration of the hardware measurement solutions and the resale of used instrument equipment.

Total orders for the three months ended July 31, 2015 decreased 5 percent compared to the same period last year and decreased 1 percent, excluding the impact of currency fluctuations. Order decreases in communications and aerospace and defense test markets were partially offset by growth in industrial, computer and semiconductor test markets. Orders for the nine months ended July 31, 2015 decreased 6 percent compared to the same period last year and decreased 3 percent, excluding the impact of currency fluctuations. Orders declined for all market segments.

Net revenue of $665 million and $2,106 million for the three and nine months ended July 31, 2015 decreased 12 percent and 3 percent, respectively, compared to the same periods last year and decreased 8 percent and remained flat, respectively, excluding the impact of currency fluctuations.

Net income for the three and nine months ended July 31, 2015 was $70 million and $236 million, respectively, compared to $107 million and $291 million, respectively, for the corresponding periods last year.

When completed, these programs are expected to result in operational efficiency and net annual savings of approximately $18 million, while maintaining our focus on growing the business. We expect to complete a majority of these actions by the end of first quarter of fiscal year 2016.

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

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

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Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed combined and consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the U.S. The preparation of financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed combined and 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, allocation methods and allocated expenses from Agilent, 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, 2014. 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 combined and consolidated financial statements for a description of new accounting pronouncements.

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 combined and consolidated statement of operations. We do experience some fluctuations within individual lines of the condensed consolidated balance sheet and condensed combined and consolidated statement of operations because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (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
	2015		2014		2015		2014		Months	Months
	(in millions)
Orders	$	685	$	722	$	2,073	$	2,203	(5)%	(6)%
Net revenue:
Products	$	557	$	643	$	1,783	$	1,833	(13)%	(3)%
Services and other	108		114		323		338		(5)%	(4)%
Total net revenue	$	665	$	757	$	2,106	$	2,171	(12)%	(3)%

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Orders

The following table provides the percent change in orders for the three and nine months ended July 31, 2015 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, 2015				July 31, 2015
Geographic Region	actual		currency adjusted		actual		currency adjusted
Americas	1	%	2	%	—	%	—	%
Europe	(3	)%	7	%	(12	)%	(5	)%
Japan	(12	)%	3	%	(6	)%	7	%
Asia Pacific ex-Japan	(10	)%	(9	)%	(8	)%	(8	)%
Total orders	(5	)%	(1	)%	(6	)%	(3	)%

Total orders for the three and nine months ended July 31, 2015 decreased 5 percent and 6 percent, respectively, compared to the same periods last year. For the three months ended July 31, 2015, order decreases in communications and aerospace and defense test markets were partially offset by growth in industrial, computer and semiconductors test markets. For the nine months ended July 31, 2015, orders declined for all three market segments.

Net Revenue

The following table provides the percent change in net revenue for the three and nine months ended July 31, 2015 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, 2015				July 31, 2015
Geographic Region	actual		currency adjusted		actual		currency adjusted
Americas	(11	)%	(11	)%	7	%	7	%
Europe	(14	)%	(5	)%	(8	)%	(1	)%
Japan	(1	)%	14	%	(5	)%	7	%
Asia Pacific ex-Japan	(15	)%	(14	)%	(9	)%	(8	)%
Total net revenue	(12	)%	(8	)%	(3	)%	—	%

Net revenue of $665 million and $2,106 million for the three and nine months ended July 31, 2015, respectively, decreased 12 percent and 3 percent, when compared to the same periods last year. For the three months ended July 31, 2015, revenue from the Americas declined 11 percent, with declines in aerospace and defense and communications, partially offset by growth in industrial, computer and semiconductors test markets. Asia Pacific excluding Japan declined 15 percent, with declines in all market segments. Europe declined 14 percent, with declines in the aerospace and defense and communications markets, partially offset by growth in industrial, computer and semiconductors test market segments. Japan declined 1 percent, with declines in industrial, computer and semiconductors and aerospace and defense test markets, partially offset by growth in the communications test market. For the nine months ended July 31, 2015, revenue from the Americas increased 7 percent, with growth in aerospace and defense and industrial, computer and semiconductors test, partially offset by decline in the communications test market. Asia Pacific excluding Japan declined 9 percent, with declines in industrial, computer and semiconductors and communications test markets, partially offset by growth in the aerospace and defense test market. Europe declined 8 percent, with declines in aerospace and defense and communications test markets, partially offset by growth in industrial, computer and semiconductors test markets. Japan declined 5 percent, with declines in industrial, computer and semiconductors and aerospace and defense test markets, partially offset with growth in the communications test market.

Communications test revenue, representing approximately one-third of our total revenue for the three and nine months ended July 31, 2015, declined year-over-year with decreases in wireless manufacturing and wireless R&D, partially offset with growth in broadband communications. The decrease in wireless manufacturing reflects the difficult compares to last year’s strength in 4G base station/infrastructure manufacturing for China. Weakness in the smartphone/device manufacturing segment also continued. Wireless R&D declined year-over-year with reduced spending by wireless chipset developers.

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Aerospace and defense test revenue, representing approximately 23 percent of our total revenue for the three months ended July 31, 2015, declined due to continued weakness in overseas markets and a difficult year-over-year comparison in the U.S. For the nine months ended July 31, 2015, aerospace and defense test revenue, representing approximately 23 percent of our total revenue, grew year-over-year, with strength in Americas supported by modest growth in Asia Pacific excluding Japan, partially offset by declines in Europe and Japan.

Industrial, computer and semiconductor test revenue, representing approximately 44 percent of our total revenue for the three months ended July 31, 2015, declined year-over-year. Declines in Japan and Asia Pacific excluding Japan were partially offset by growth in the Americas and Europe. For the nine months ended July 31, 2015, industrial, computer and semiconductor test revenue, representing approximately 44 percent of our total revenue, saw modest growth year-over year with strength across the Americas and Europe, partially offset by weakness in Asia Pacific.

Costs and Expenses



	Three Months Ended						Nine Months Ended						Year over year change
	July 31,						July 31,						Three	Nine
	2015			2014			2015			2014			Months	Months
Total gross margin	55.6		%	54.7		%	55.5		%	55.3		%	1 ppt	— ppt
Operating margin	15.0		%	16.0		%	15.2		%	15.6		%	(1) ppt	— ppt

in millions
Research and development	$	90		$	91		$	282		$	270		—%	4%
Selling, general and administrative	$	183		$	202		$	581		$	592		(10)%	(2)%
Other operating expense (income), net	$	(3	)	$	—		$	(14	)	$	—		—%	—%

Gross margin increased 1 percentage point and was flat for the three and nine months ended July 31, 2015, respectively, compared to the same periods last year. For the three months ended July 31, 2015, gross margin was positively impacted by favorable mix, disciplined price management, lower inventory charges, lower than expected US benefits expenses and lower trading expenses. For the nine months ended July 31, 2015, gross margin was flat primarily due to lower depreciation, warranty, inventory charges and manufacturing variances, offset by infrastructure charges.

Research and development expense was flat for the three months ended July 31, 2015, compared to the same period last year, primarily due to favorable people cost driven by lower than expected US benefits expense and favorable impact of currency movements offset by investments in research and development programs. Research and development expense increased 4 percent for the nine months ended July 31, 2015 compared to the same period last year, primarily due to an increase in people-related costs and investments in research and development programs, partially offset by the favorable impact of currency movements. 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 decreased 10 percent and 2 percent for the three and nine months ended July 31, 2015, respectively, compared to the same periods last year. For the three months ended July 31, 2015, decreases were primarily driven by lower separation costs and favorable impact of currency movements, focused short-term cost reduction plans and lower than expected US benefit expenses, partially offset by infrastructure related costs, restructuring and expenses related to acquisition activities. For the nine months ended July 31, 2015, decreases were primarily driven by lower separation costs and favorable impact of currency movements, partially offset by increases in share-based compensation, restructuring programs and acquisition related expenses.

Other operating expense (income), net for the three months and nine months ended July 31, 2015 includes income of $3 million and $14 million, respectively, and primarily represents rental income.

Operating margin for the three months ended July 31, 2015 decreased 1 percentage point compared to the same period last year on lower revenue, partially offset by decreases in other operating expenses. Operating margin remained flat for the nine months ended July 31, 2015 when compared to the same period last year on lower revenue and flat gross margin, increase in research and development expenses, offset by decreases in selling, general and administration expenses.

At July 31, 2015, our headcount was approximately 9,700 as compared to approximately 9,500 at July 31, 2014.

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Interest Expense

Interest expense for the three and nine months ended July 31, 2015 was $12 million and $35 million, respectively, as compared to zero for both comparable periods last year, and relates to interest on our senior notes issued in October 2014.

Income Taxes

At July 31, 2015, our estimate of annual effective tax rate is 20.1 percent excluding discrete items and 17.7 percent including 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 impact of permanent differences, reserves for uncertain tax positions, the mix of earnings in non-U.S. jurisdictions taxed at lower rates and our permanent reinvestment assertion of foreign subsidiary earnings outside of the U.S.

On July 27, 2015, the 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. Also, there is uncertainty related to the

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IRS response to the Tax Court opinion, 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

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

Measurement Solutions Business

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

Net Revenue



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2015		2014		2015		2014		Months	Months
	(in millions)				(in millions)
Net revenue	$	564	$	656	$	1,808	$	1,870	(14)%	(3	)%

Measurement solutions revenue for the three and nine months ended July 31, 2015 decreased 14 percent and 3 percent, respectively, when compared to the same periods last year, decreasing 11 percent and remaining flat, respectively, excluding the impact of currency fluctuations. For the three months ended July 31, 2015, there was decline in all three test markets. For the nine months ended July 31, 2015, declines in communications and industrial, computer and semiconductors test markets was partially offset by growth in the aerospace and defense test market.

Looking forward, we expect our fourth fiscal quarter to be seasonally stronger than our third fiscal quarter, which is in line with historical norms, although macroeconomic indicators remain mixed. In addition, we will benefit from the Anite acquisition, which expands our solutions offering in wireless communications design and test, and provides an adjacent market opportunity in Network Test.

Gross Margin and Operating Margin

The following table shows the measurement solutions business' margins, expenses and income from operations for the three and nine months ended July 31, 2015 versus the three and nine months ended July 31, 2014.



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three	Nine
	2015			2014			2015			2014			Months	Months
Total gross margin	59.1		%	56.9		%	58.7		%	57.6		%	2 ppts	1 ppt
Operating margin	18.4		%	20.3		%	19.4		%	19.4		%	(2) ppts	—

in millions
Research and development	$	86		$	87		$	266		$	257		(1)%	3%
Selling, general and administrative	$	146		$	153		$	454		$	456		(5)%	—%
Other operating expense (income), net	$	(3	)	$	—		$	(10	)	$	—		—%	—%
Income from operations	$	104		$	133		$	350		$	363		(22)%	(3)%

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Gross margin for the three months ended July 31, 2015 increased 2 percentage points compared to the same period last year primarily due to favorable product mix, disciplined price management, lower inventory charges, lower than expected U.S. benefit expenses and lower trading expenses. Gross margin for the nine months ended July 31, 2015 increased slightly compared to the same period last year primarily due to lower depreciation, warranty, and inventory charges, and favorable currency and manufacturing variances, partially offset by higher infrastructure charges.

For the three and nine months ended July 31, 2015 research and development expense decreased 1 percent and increased 3 percent, respectively, when compared to the same periods last year. Decreases for the three months ended July 31, 2015 were primarily driven by lower than expected US benefit costs and favorable currency movements, partially offset by higher infrastructure-related costs. For the nine months ended July 31, 2015, the increase is primarily driven by additional headcount and related people costs, investments in research and development programs and infrastructure-related costs, partially offset by the favorable impact of currency movements.

Selling, general and administrative expense for the three months ended July 31, 2015 decreased 5 percent compared to the same period last year primarily driven by focused short-term cost reduction plans, lower than expected U.S. benefit expenses and favorable impact of currency movements. Selling, general and administrative expense remained flat for the nine months ended July 31, 2015, driven by lower people-related costs and favorable currency movements, offset by higher infrastructure-related costs and advertising and marketing expenses.

Operating margin for the three and nine months ended July 31, 2015 decreased 2 percentage points and remained flat, respectively, when compared to the same periods last year driven by lower revenue, partially offset by the favorable impact of lower operating expenses.

Income from Operations

Income from operations for the three and nine months ended July 31, 2015 decreased $29 million and $13 million, respectively, on a corresponding revenue decrease of $92 million and $62 million, respectively, when compared to the same periods last year.

Customer Support and Services Business

The customer support and services business provides repair and calibration services for our installed base instrument customers and facilitates the resale of used equipment. Our customer support and services business broadly addresses the same markets as the measurement solutions business, which includes the communications, aerospace and defense and industrial, computer and semiconductor test markets.

Net Revenue



	Three Months Ended				Nine Months Ended				Year over Year Change
	July 31,				July 31,				Three	Nine
	2015		2014		2015		2014		Months	Months
	(in millions)				(in millions)
Net revenue	$	101	$	101	$	298	$	301	—%	(1	)%

Customer support and services revenue for the three and nine months ended July 31, 2015 was flat and decreased 1 percent, respectively, when compared to the same periods last year and increased 5 percent and 3 percent, respectively, excluding the impact of currency fluctuations. Growth in calibration services and re-marketing sales of used equipment was partially offset by declines in the equipment repair business due to a reduction in extended warranty revenue as a result of extension of the standard warranty term from one to three years.

Looking forward, while the customer support and services business will be impacted by the same market trends as the measurement solutions business, it is typically less variable as orders and revenue are primarily driven from the existing installed base of previously purchased measurement solutions products and less impacted by economic cycles.

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Gross Margin and Operating Margin

The following table shows the customer support and services business' margins, expenses and income from operations for the three and nine months ended July 31, 2015 versus the three and nine months ended July 31, 2014.



	Three Months Ended						Nine Months Ended						Year over Year Change
	July 31,						July 31,						Three		Nine
	2015			2014			2015			2014			Months		Months
Total gross margin	42.7		%	46.4		%	42.9		%	46.7		%	(4	) ppts	(4	) ppts
Operating margin	19.4		%	24.4		%	17.4		%	23.2		%	(5	) ppts	(6	) ppts

in millions
Research and development	$	1		$	2		$	7		$	7		(29)%		(2)%
Selling, general and administrative	$	23		$	20		$	71		$	64		12%		11%
Other operating expense (income), net	$	—		$	—		$	(2	)	$	—		—%		—%
Income from operations	$	20		$	25		$	52		$	70		(21)%		(26)%

Gross margin for the three and nine months ended July 31, 2015 decreased 4 percentage points compared to each of the same periods last year, primarily due to higher infrastructure-related costs as well as an unfavorable service mix.

Research and development expense for customer support and services represents the segment's share of centralized investment. Research and development expenses for the three and nine months ended July 31, 2015 decreased 29 percent and 2 percent, respectively, compared to the same periods last year.

Selling, general and administrative expenses for the three and nine months ended July 31, 2015 increased 12 percent and 11 percent, respectively, when compared to the same periods last year due to higher field selling costs and increases in infrastructure-related costs.

Operating margin for the three and nine months ended July 31, 2015 decreased 5 percentage points and 6 percentage points, respectively, compared to the same periods last year due to reductions in gross margin and increased costs.

Income from Operations

Income from operations for the three and nine months ended July 31, 2015 decreased $5 and $18 million, respectively, on corresponding flat revenue and a decrease of $3 million, respectively, when compared to the same periods last year.

FINANCIAL CONDITION

Liquidity and Capital Resources

Our financial position as of July 31, 2015 consisted of cash and cash equivalents of $1,000 million as compared to $810 million as of October 31, 2014.

As of July 31, 2015, approximately $875 million of our cash and cash equivalents was held outside of the U.S. in our foreign subsidiaries. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. We are in discussions with Agilent regarding the allocation of certain deferred tax liability balances related to foreign unremitted earnings in accordance with the separation agreements, and under the currently existing circumstances, non-current deferred tax liabilities have decreased approximately $53 million, which includes our best estimate of zero for the deferred tax liability related to foreign unremitted earnings. 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 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

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following: working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $295 million for the nine months ended July 31, 2015 compared to cash provided of $362 million for the same period in 2014. In the nine months ended July 31, 2015, we paid approximately $50 million under our variable and incentive pay programs. Net cash paid for income taxes and interest was approximately $35 million and $24 million, respectively, in the nine months ended July 31, 2015. In the nine months ended July 31, 2015, we paid the remaining outstanding related party balances of approximately $28 million to Agilent. For the nine months ended July 31, 2015 and 2014, other assets and liabilities used cash of $27 million and $36 million, respectively. The usage of cash in other assets and liabilities was largely the result of changes in prepaid assets, interest on senior notes, mark-to-market of derivatives, and deferred revenue accruals.

In the nine months ended July 31, 2015, accounts receivable provided cash of $31 million compared to cash provided of $20 million for the same period in 2014. Improved collections and a decrease in revenue of approximately 3 percent in the nine months ended July 31, 2015 as compared to the same period in 2014 contributed to the reduction in accounts receivable. Accounts payable provided cash of $1 million for the nine months ended July 31, 2015 compared to cash used of $19 million in the same period in 2014. Cash used to purchase inventory was $25 million for the nine months ended July 31, 2015 compared to cash used of $40 million for the same period in 2014.

For the nine months ended July 31, 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 2015. During the same period, we contributed $35 million to our non-U.S. defined benefit plans and we expect to contribute approximately $10 million to our non-U.S. defined benefit plans during the remainder of 2015.

Net Cash Used in Investing Activities

Net cash used in investing activities was $72 million for the nine months ended July 31, 2015 as compared to net cash used in investing activities of $52 million for the same period last year. Investments in property, plant and equipment were $66 million for the nine months ended July 31, 2015 compared to $52 million in the same period last year. In the nine months ended July 31, 2015, we invested $7 million in preferred stock of a privately held radio frequency microstructure company. We are accounting for this investment using the cost method. We expect that total capital expenditures for the current year will be approximately $95 million.

Net Cash Used in Financing Activities

Net cash used in financing activities for the nine months ended July 31, 2015 was $22 million compared to cash used of $310 million for the same period in 2014. Financing activities in the nine months ended July 31, 2015 reflect $23 million of proceeds from issuance of common stock under employee stock option plans and $49 million of cash returned to Agilent in accordance with the separation and distribution agreement. Cash used in financing activities for the nine months ended July 31, 2014 represents cash returned to Agilent.

Credit Facility

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

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, 2015 as compared to the senior notes as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

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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, 2014, to our contractual commitments in the first nine months of 2015. We have contractual commitments for non-cancelable operating leases. We have no other material non-cancelable guarantees or commitments.

Other long-term liabilities include $10 million and $82 million of liabilities related to uncertain tax positions as of July 31, 2015 and October 31, 2014, respectively (See Note 5, "Income Taxes"). 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, 2014. There were no material changes during the nine months ended July 31, 2015 to this information reported in the company’s 2014 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, 2015 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 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.

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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 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.

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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 communications and electronics 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.

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. 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, 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 plan to implement policies and procedures designed to ensure 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 always 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.

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Significant 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 significant 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.

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 Hewlett-Packard Company ("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, it 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.

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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 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.

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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 or are anticipated to grant 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 assets, as well as specific types of investment activities within Singapore. We believe that we will satisfy such conditions in the future.

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.

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.

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

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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:


•	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.

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,

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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 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 pension assets will be in future years or what interest 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

We have limited history of operating as an independent company, and 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. Our historical financial information prior to fiscal year 2015 included in this Form 10-Q is derived from the consolidated financial statements and accounting records of 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, our cost related to such functions previously performed by Agilent may therefor increase;

•

our business was integrated with the other businesses of Agilent. Historically, we shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although our transition agreements with Agilent took effect upon the separation, these arrangements may not fully capture the benefits that we enjoyed as a result of being integrated with Agilent and may result in the company paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition following the separation;

•

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;


•	after the separation, the cost of capital for our business may be higher than Agilent's cost of capital prior to the separation; 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.

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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.

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 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

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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 it 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.

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we are subject as an independent, publicly-traded company.

Our financial results previously were included within the consolidated results of Agilent, and we believe that our financial reporting and internal controls were appropriate for those of subsidiaries of a public company. However, prior to the separation we were not directly subject to the reporting and other requirements of the Exchange Act. As an independent, publicly-traded company, we are subject to reporting and other obligations under the Exchange Act, and we are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which will require annual management assessments of the effectiveness of our internal control over financial reporting. The Sarbanes-Oxley Act also requires that we obtain a report by our independent registered public accounting firm expressing an opinion on the effectiveness of our internal control over financial reporting. These reporting and other obligations may place significant demands on our management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Certain of our executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Agilent and because certain converted Keysight performance share awards held by them will be earned based on the performance of Agilent.

The ownership by our executive officers and some of our directors of common shares of Agilent may create, or may create the appearance of, conflicts of interest. Because of their current or former positions with Agilent, certain of our executive officers and directors own Agilent common shares. The individual holdings of common shares may be significant for some of these persons compared to these persons' total assets. Further, the fact that our executive officers hold certain converted Keysight performance share awards which will be earned based on Agilent's performance may create, or may create the appearance of, conflicts of interest. Specifically, the outstanding Agilent performance share awards with a fiscal year 2013-2015 performance period held by our executive officers were converted into performance share awards with respect to Keysight common stock upon the separation, but will continue to be subject, for the remainder of the performance period, to the same performance criteria (Agilent total shareholder return) as applied immediately prior to the separation. Even though our board of directors consist of a majority of directors who are independent, and our executive officers ceased to be employees of Agilent upon the separation, continuing ownership of Agilent common shares by our executive officers and some of our directors, and continued application of performance criteria based on Agilent total shareholder return to certain converted Keysight performance share awards held by our executive officers, could create, or appear to create, potential conflicts of interest if Keysight and Agilent pursue the same corporate opportunities or face decisions that could have different implications for Keysight and Agilent.

We may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution is expected to provide the following benefits, among others:


•	a distinct investment identity allowing investors to evaluate the merits, performance and future prospects of Keysight separately from Agilent;


•	more effective pursuit of each company's distinct operating priorities and strategies;

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•	more efficient allocation of capital for Keysight;


•	direct access by Keysight to the capital markets; and

•

facilitation of incentive compensation arrangements for employees more directly tied to the performance of the relevant company's business, and potential enhancement of employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives, while at the same time creating an independent equity structure that will facilitate our ability to affect future acquisitions utilizing Keysight common stock.

We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Agilent and (ii) our business is less diversified and have less scale than Agilent's business prior to the separation. If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our business, operating results and financial condition could be adversely affected.

Keysight or Agilent may fail to perform under various transaction agreements that have been executed as part of the separation, or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, Keysight and Agilent have entered into a separation agreement and various other agreements, including a services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a trademark license agreement and a real estate matters agreement. The separation agreement, tax matters agreement, employee matters agreement, intellectual property matters agreement, trademark license agreement and real estate matters agreement determine the allocation of assets and liabilities between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities and obligations. The services agreement provides for the performance of certain services by each company for the benefit of the other for a period of time after the separation. We will rely on Agilent to satisfy its performance and payment obligations under these agreements. If Agilent is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our business effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that Agilent previously provided to us. However, we may not be successful in implementing these systems and services or in transitioning data from Agilent's systems to our own.

The one-time and ongoing costs of the spin-off may be greater than we expected.

We have and will continue to incur costs in connection with our transition to being a stand-alone public company that relate primarily to accounting, tax, legal and other professional costs; financing costs in connection with obtaining our financing as a stand-alone company; compensation, such as modifications to certain incentive awards as a result of spin-off; recruiting and relocation costs associated with hiring our senior management personnel; and costs to separate assets and information systems. These costs, whether incurred before or after the spin-off, may be greater than anticipated and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financial condition and our results of operations.

In connection with the separation and distribution, Agilent has undertaken several corporate restructuring transactions which, along with the separation and distribution, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the separation and distribution, any entity involved in these restructuring transactions or the separation and distribution:


•	was insolvent;


•	was rendered insolvent by reason of the separation and distribution;


•	had remaining assets constituting unreasonably small capital; or


•	intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured,

then the court could void the separation and distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require our shareholders to return to Agilent some or all of the shares of Keysight common stock issued in the distribution, or require Agilent or Keysight, as the case may be, to fund liabilities of the other company for the benefit of creditors. The measure of insolvency will vary depending upon the jurisdiction whose law is being applied. Generally, however, an entity would be considered insolvent if the fair value of its assets was less than the amount of its liabilities or if it incurred debt beyond its ability to repay the debt as it matures.

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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.

An individual shareholder's percentage ownership in Keysight may be diluted in the future.

In the future, the percentage ownership in Keysight may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees and purchases of our shares through our employee stock purchase plan. Our employees will have options to purchase shares of our common stock after the distribution as a result of conversion of their Agilent stock options to Keysight stock options. Our compensation committee has granted and will grant additional stock options or other stock-based awards to our employees and directors, from time to time, under our employee benefit plans. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

In addition, our amended and restated certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of the common stock.

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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

•

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.

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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.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock depends, to some extent, on the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts and the reports they issue. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or negatively change their opinion of our shares, our share price would likely decline. If one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

ITEM 6. EXHIBITS

(a)Exhibits:

A list of exhibits is set forth in the Exhibit Index found on page 49 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 3, 2015	By:	/s/ Neil Dougherty
			Neil Dougherty
			Senior Vice President and Chief Financial Officer
			(Principal Financial Officer)


Dated:	September 3, 2015	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 Combined and 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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg



			Page Number
Part I.	Financial Information		3
	Item 1.	Condensed Combined and Consolidated Financial Statements (Unaudited)	3
		Condensed Combined and Consolidated Statement of Operations	3
		Condensed Combined and Consolidated Statement of Comprehensive Income	4
		Condensed Consolidated Balance Sheet	5
		Condensed Combined and Consolidated Statement of Cash Flows	6
		Notes to Condensed Combined and Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	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 6.	Exhibits	47
Signature			48
Exhibit Index			49

Keysight (KEYS) 10-Q2015 Q3 Quarterly report

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