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EX-31.1 - EXHIBIT 31.1 - Keysight Technologies, Inc.keys-07312015xex311.htm
EX-32.1 - EXHIBIT 32.1 - Keysight Technologies, Inc.keys-07312015xex321.htm
EX-31.2 - EXHIBIT 31.2 - Keysight Technologies, Inc.keys-07312015xex312.htm
EX-32.2 - EXHIBIT 32.2 - Keysight Technologies, Inc.keys-07312015xex322.htm

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 
OR 
¨ 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




KEYSIGHT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 

2


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.


3


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.


4


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.

5


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.

6


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.

7


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.


8


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

9


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

10


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.


11


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

 
(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 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



12


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

13


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

14


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.


15


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



16


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.


17


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.


18


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


19


 
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
)


20


 
 
 
 
 
 
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").


21


16. SEGMENT INFORMATION

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

We have two reportable operati