Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Keysight Technologies, Inc.keys-04302018xex322.htm
EX-32.1 - EXHIBIT 32.1 - Keysight Technologies, Inc.keys-04302018xex321.htm
EX-31.2 - EXHIBIT 31.2 - Keysight Technologies, Inc.keys-04302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - Keysight Technologies, Inc.keys-04302018xex311.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 APRIL 30, 2018 
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the exchange act.
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
(do not check if a smaller reporting company)
 
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a)of the Exchange Act. ¨
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 June 4, 2018 was 187,919,243




KEYSIGHT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 

2


PART I
— FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
Net revenue:
 

 
 

 
 
 
 
Products
$
830

 
$
634

 
$
1,514

 
$
1,240

Services and other
160

 
119

 
313

 
239

Total net revenue
990

 
753

 
1,827

 
1,479

Costs and expenses:
 
 
 
 
 
 
 
Cost of products
367

 
273

 
704

 
527

Cost of services and other
80

 
67

 
153

 
135

Total costs
447

 
340

 
857

 
662

Research and development
156

 
119

 
302

 
227

Selling, general and administrative
299

 
256

 
588

 
469

Other operating expense (income), net
(12
)
 
(4
)
 
(15
)
 
(83
)
Total costs and expenses
890

 
711

 
1,732

 
1,275

Income from operations
100

 
42

 
95

 
204

Interest income
2

 
2

 
5

 
3

Interest expense
(21
)
 
(24
)
 
(43
)
 
(36
)
Other income (expense), net
2

 
2

 
3

 
3

Income before taxes
83

 
22

 
60

 
174

Provision (benefit) for income taxes
19

 
(27
)
 
(98
)
 
16

Net income
$
64

 
$
49

 
$
158

 
$
158

 
 
 
 
 
 
 
 
Net income per share:
 

 
 

 
 
 
 
Basic
$
0.34

 
$
0.28

 
$
0.84

 
$
0.91

Diluted
$
0.34

 
$
0.27

 
$
0.83

 
$
0.90

 
 
 
 
 
 
 
 
Weighted average shares used in computing net income per share:
 
 
 
 
 
 
Basic
188

 
177

 
187

 
174

Diluted
190

 
179

 
190

 
176


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


3


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
64

 
$
49

 
$
158

 
$
158

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on investments, net of tax benefit of $1, $1, $1 and zero

 

 
(2
)
 
4

Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of zero, zero, zero and $(1)

 
(1
)
 
2

 
1

Amounts reclassified into earnings related to derivative instruments, net of tax expense of zero, $1, zero and $1
(1
)
 

 
(3
)
 
1

Foreign currency translation, net of tax benefit (expense) of zero
(13
)
 
9

 
28

 
(15
)
Net defined benefit pension cost and post retirement plan costs:
 
 
 
 
 
 
 
Change in actuarial net loss, net of tax expense of $4, $5, $7 and $18
11

 
12

 
21

 
40

Change in net prior service credit, net of tax benefit of $2, $2, $3 and $4
(4
)
 
(4
)
 
(8
)
 
(8
)
Other comprehensive income (loss)
(7
)
 
16

 
38

 
23

Total comprehensive income
$
57

 
$
65

 
$
196

 
$
181


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


4


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share data)

 
April 30,
2018
 
October 31,
2017
 
(unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
784

 
$
818

Accounts receivable, net
579

 
547

Inventory
597

 
588

Other current assets
229

 
224

Total current assets
2,189

 
2,177

Property, plant and equipment, net
546

 
530

Goodwill
1,891

 
1,882

Other intangible assets, net
754

 
855

Long-term investments
59

 
63

Long-term deferred tax assets
203

 
186

Other assets
281

 
240

Total assets
$
5,923

 
$
5,933

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 

 
 

Current portion of long-term debt
$

 
$
10

Accounts payable
240

 
211

Employee compensation and benefits
241

 
217

Deferred revenue
347

 
291

Income and other taxes payable
47

 
28

Other accrued liabilities
78

 
62

Total current liabilities
953

 
819

Long-term debt
1,789

 
2,038

Retirement and post-retirement benefits
309

 
309

Long-term deferred revenue
119

 
101

Other long-term liabilities
230

 
356

Total liabilities
3,400

 
3,623

Commitments and contingencies (Note 13)


 


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; 190 million shares at April 30, 2018 and 188 million shares at October 31, 2017 issued
2

 
2

Treasury stock at cost; 3.1 million shares at April 30, 2018 and 2.3 million shares at October 31, 2017
(102
)
 
(62
)
Additional paid-in-capital
1,837

 
1,786

Retained earnings
1,205

 
1,041

Accumulated other comprehensive loss
(419
)
 
(457
)
Total stockholders' equity
2,523

 
2,310

Total liabilities and equity
$
5,923

 
$
5,933

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

5


KEYSIGHT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
 
Six Months Ended
 
April 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
158

 
$
158

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
157

 
73

Share-based compensation
34

 
31

Debt issuance expense

 
9

Deferred tax benefit
(237
)
 
(13
)
Excess and obsolete inventory-related charges
11

 
6

Gain on sale of assets and divestiture
(8
)
 
(8
)
Asset impairment

 
7

Pension curtailment and settlement gains

 
(68
)
Other non-cash expenses, net
5

 
1

Changes in assets and liabilities:
 

 
 

Accounts receivable
(31
)
 
10

Inventory
(18
)
 
(10
)
Accounts payable
20

 
(17
)
Employee compensation and benefits
23

 

Retirement and post-retirement benefits
(22
)
 
(6
)
Deferred revenue
71

 
30

Income taxes payable
125

 
(7
)
Other assets and liabilities
(6
)
 
(32
)
Net cash provided by operating activities
282

 
164

 
 
 
 
Cash flows from investing activities:
 

 
 

Investments in property, plant and equipment
(58
)
 
(33
)
Proceeds from sale of property, plant and equipment

 
8

Change in restricted cash and cash equivalents, net

 
1

Proceeds from sale of investments

 
4

Proceeds from divestiture
12

 

Acquisition of businesses and intangible assets, net of cash acquired
(3
)
 
(1,622
)
Net cash used in investing activities
(49
)
 
(1,642
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock under employee stock plans
33

 
21

Proceeds from issuance of common stock under public offering

 
444

Payment of taxes related to net share settlement of equity awards
(16
)
 
(11
)
Proceeds from short-term borrowings
40

 
170

Proceeds from issuance of long-term debt

 
1,069

Payment of debt issuance costs

 
(16
)
Repayment of debt and credit facility
(300
)
 

Treasury stock repurchases
(28
)
 

Net cash provided (used) by financing activities
(271
)
 
1,677

 
 
 
 
Effect of exchange rate movements
4

 
1

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(34
)
 
200

Cash and cash equivalents at beginning of period
818

 
783

Cash and cash equivalents at end of period
$
784

 
$
983


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

6


KEYSIGHT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Keysight Technologies, Inc. ("we", "us", "Keysight" or the "company"), incorporated in Delaware on December 6, 2013, is a measurement company providing electronic design and test solutions to communications and electronics industries. Following the acquisition of Ixia on April 18, 2017, the company also provides testing, visibility, and security solutions, strengthening applications across physical and virtual networks for enterprises, service providers, and network equipment manufacturers.
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.
Basis of Presentation. We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The accompanying financial statements and information should be read in conjunction with our Annual Report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly our condensed consolidated balance sheet as of April 30, 2018 and October 31, 2017, condensed consolidated statement of comprehensive income for the three and six months ended April 30, 2018 and 2017, condensed consolidated statement of operations for the three and six months ended April 30, 2018 and 2017, and condensed consolidated statement of cash flows for the six months ended April 30, 2018 and 2017.
Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and other intangible assets, warranty, restructuring, and accounting for income taxes.
Land Sale. On April 30, 2014 we entered into a binding contract to sell land in the United Kingdom ("U.K.") that resulted in the transfer of three separate land tracts in May 2014, November 2015 and November 2016 for £21 million. In the six months ended April 30, 2017, we recognized a gain of $8 million on the sale of the land tracts in other operating expense (income).
Restricted Cash. As of April 30, 2018 and October 31, 2017, restricted cash of approximately $2 million consisted of deposits held as collateral against bank guarantees and is classified within other assets in the condensed consolidated balance sheet.
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, 2017.
2. NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers. In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance which will replace numerous requirements in GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 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. During 2016, the FASB issued several amendments to the standard, including clarification to the guidance on reporting revenues as a principal versus an agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability, presentation of sales taxes, impairment testing for contract costs and disclosure of performance obligations.

7


The two permitted transition methods under the new standard are (1) the full retrospective method, in which case the standard would be applied to each prior reporting period presented, and the cumulative effect of applying the standard would be recognized at the earliest period shown, or (2) the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We currently anticipate adopting the standard on November 1, 2018 under the modified retrospective transition method. Based on the progress to date, we have not identified any material impacts of the new standard on the amount and timing of revenue recognition to our consolidated statement of operations. We expect recognition of revenue for a majority of customer contracts to remain substantially unchanged. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for software license revenue, as under the new standard we expect to recognize software license revenue at the time of delivery rather than over the contractual term since control of the software license is transferred, and our performance obligation is satisfied at that point in time. The new standard will also require certain costs, primarily sales-related commissions on contracts greater than one year in duration, to be capitalized rather than expensed as currently.
ASU 2016-02, Leases. In February 2016, the FASB issued guidance that will require organizations that lease assets to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new guidance will require both types of leases to be recognized on the balance sheet. We expect our leases designated as operating leases in Note 17 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 will be reported on the consolidated balance sheets upon adoption. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued guidance that amends the accounting for stock-based compensation and requires excess tax benefits and deficiencies to be recognized as a component of income tax expense rather than equity. The inclusion of excess tax benefits and deficiencies as a component of income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based compensation awards depends on our stock price at the date the awards vest. This guidance also requires excess tax benefits and deficiencies to be presented as operating activity in the statement of cash flows and allows an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. We adopted this guidance during the first quarter of 2018 and elected to recognize forfeitures as they occur. As a result, a $6 million cumulative-effect adjustment was recorded directly to retained earnings as of November 1, 2017, the beginning of the annual period of adoption, with a corresponding reduction to deferred tax liabilities. Additionally, we reported an income tax benefit of $2 million for the six months ended April 30, 2018 due to recognition of excess tax benefits from share-based compensation.
We elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively to all periods presented, which resulted in the following change to our previously reported condensed consolidated statement of cash flows for the six months ended April 30, 2017:
 
Six Months Ended
April 30, 2017
 
As Originally
Reported
 
As
Adjusted
 
Change
 
(in millions)
Net cash provided by operating activities
$
151

 
$
164

 
$
13

Net cash provided by financing activities
$
1,690

 
$
1,677

 
$
(13
)
ASU 2017-07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued guidance that requires the service cost component of net periodic pension cost and net periodic postretirement benefit cost to be included in operating expenses (together with other employee compensation costs) and the other components of the cost to presented in the statement of operations separately from the service cost component and outside of income from operations. The standard is effective for annual and interim periods beginning after December 31, 2017. Early adoption is permitted. We currently anticipate adopting the standard on November 1, 2018. See Note 12 herein and Note 15 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 for the amount of each component of net periodic pension and postretirement benefit costs we have reported historically. The amounts of net periodic pension and postretirement benefit costs in these filings are not necessarily indicative of future amounts that may arise in years following implementation of the new accounting pronouncement.

8


ASU 2017-09, Scope of Modification Accounting. In May 2017, the FASB issued guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The standard is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption is permitted. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued guidance to enable entities to better portray the economics of their risk management activities in the financial statements and enhance transparency and understandability of hedge results. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued guidance that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. The standard is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements.
Other amendments to GAAP that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
3. ACQUISITIONS
Acquisition of Ixia

On April 18, 2017, pursuant to the terms of an Agreement and Plan of Merger dated January 30, 2017, between Keysight and Ixia (the "Merger Agreement"), we acquired all of the outstanding common stock of Ixia for $1,622 million, net of $72 million of cash acquired, pursuant to an exchange offer for $19.65 per share (the "Merger Consideration"). We funded the acquisition with a combination of cash and proceeds from debt and equity financings. As a result of the acquisition, Ixia became a wholly-owned subsidiary of Keysight. Accordingly, the results of Ixia are included in Keysight's consolidated financial statements from the date of the acquisition and are reported in the Ixia Solutions Group operating segment.
The following table summarizes the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of April 18, 2017 (in millions):
Cash and cash equivalents
$
72

Short-term investments
44

Accounts receivable
91

Inventory
107

Other current assets
34

Property, plant and equipment
50

Goodwill
1,117

Other intangible assets
744

Other assets
4

Total assets acquired
2,263

Accounts payable
(10
)
Employee compensation and benefits
(32
)
Deferred revenue
(35
)
Income and other taxes payable
(1
)
Other accrued liabilities
(32
)
Other long-term liabilities
(459
)
Net assets acquired
$
1,694

A portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, a deferred tax liability of approximately $186 million was established primarily for the future amortization of these intangibles and is included in "other long-term liabilities" in the table above.

9


All goodwill was assigned to the Ixia Solutions Group. We do not expect the goodwill recognized or any potential impairment charges in the future to be deductible for income tax purposes.
Valuation of Intangible Assets Acquired
The components of other intangible assets acquired in connection with the Ixia acquisition were as follows (in millions):
 
Estimated Fair Value
 
Estimated useful life
Developed product technology
$
423

 
4 years
Customer relationships
234

 
7 years
Tradenames and trademarks
12

 
3 years
Backlog
8

 
90 days
Total intangible assets subject to amortization
677

 
 
In-process research and development
67

 
 
Total intangible assets
$
744

 
 
Acquisition and integration costs directly related to the Ixia acquisition were recorded in the condensed consolidated statement of operations as follows:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Cost of products and services
$
1

 
$

 
$
3

 
$

Research and development

 

 
1

 

Selling, general and administrative
14

 
15

 
29

 
17

Other income (expense), net

 
9

 

 
9

Total acquisition and integration costs
$
15

 
$
24

 
$
33

 
$
26


In addition, for the three and six months ended April 30, 2017, we incurred $28 million of acquisition-related compensation expense to redeem certain of Ixia's outstanding unvested stock awards as of the date of the Merger Agreement that were determined to relate to post-merger service periods.
Acquisition of ScienLab
On August 31, 2017, we acquired all of the outstanding common stock of ScienLab for $60 million, net of $2 million of cash acquired. As a result of the acquisition, ScienLab became a wholly-owned subsidiary of Keysight. Accordingly, the results of ScienLab are included in Keysight's consolidated financial statements from the date of the acquisition and are reported in the Electronic Industrial Solutions Group operating segment.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of August 31, 2017 (in millions):
Cash and cash equivalents
$
2

Accounts receivable
3

Inventory
16

Other current assets
1

Goodwill
23

Other intangible assets
40

Total assets acquired
85

Accounts payable
(1
)
Deferred revenue
(3
)
Income and other taxes payable
(2
)
Current portion of long-term debt
(1
)
Other long-term liabilities
(16
)
Net assets acquired
$
62


10


As additional information becomes available, we may revise the preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the acquisition date). Any such revisions or changes may be material.
A portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, a deferred tax liability of approximately $13 million was established primarily for the future amortization of these intangibles and is included in "other long-term liabilities" in the table above.
All goodwill was assigned to the Electronic Industrial Solutions Group. We do not expect the goodwill recognized or any potential impairment charges in the future to be deductible for income tax purposes.
Valuation of Intangible Assets Acquired
The components of intangible assets acquired in connection with the ScienLab acquisition were as follows (in millions):
 
Estimated Fair Value
 
Estimated useful life
Developed product technology
$
33

 
6 years
Customer relationships
4

 
5 years
Non-compete agreements
1

 
3 years
Tradenames and trademarks
1

 
3 years
Backlog
1

 
6 months
Total intangible assets
$
40

 
 
Acquisition and integration costs directly related to the ScienLab acquisition totaled zero and $1 million for the three and six months ended April 30, 2018, respectively, which were recorded in selling, general and administrative expenses. There were no acquisition and integration costs directly related to the ScienLab acquisition for the three and six months ended April 30, 2017.
Supplemental Pro Forma Information
The following represents pro forma operating results as if Ixia had been included in the company's condensed consolidated statements of operations as of the beginning of fiscal 2017. Pro forma results of operations for ScienLab have not been presented because the effects of the acquisition were not material to the company’s financial results.
 
 
Six Months Ended
in millions, except per share amounts
 
April 30, 2017
Net revenue
 
$
1,698

Net income
 
$
90

Net income per share - Basic
 
$
0.49

Net income per share - Diluted
 
$
0.48

The unaudited pro forma financial information for the six months ended April 30, 2017 combines the historical results of Keysight and Ixia for the six months ended April 30, 2017, assuming that the companies were combined as of November 1, 2016 and include business combination accounting effects from the acquisition including amortization and depreciation charges from acquired intangible assets, property plant and equipment, interest expense on the financing transactions used to fund the acquisition and acquisition-related transaction costs and tax-related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2017.
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. 

11


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

Three Months Ended
 
Six Months Ended

April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Cost of products and services
$
4

 
$
3

 
$
7

 
$
6

Research and development
2

 
2

 
6

 
6

Selling, general and administrative
9

 
8

 
21

 
19

Total share-based compensation expense
$
15

 
$
13

 
$
34

 
$
31

 At both April 30, 2018 and 2017, there was no share-based compensation capitalized within inventory.
The following assumptions were used to estimate the fair value of LTP Program grants:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
LTP Program:
 
 
 
 
 
 
 
Volatility of Keysight shares
25
%
 
26
%
 
25
%
 
27
%
Volatility of selected index
14
%
 
15
%
 
14
%
 
15
%
Price-wise correlation with selected peers
57
%
 
57
%
 
57
%
 
57
%
Awards granted under the LTP Program are based on a variety of targets, such as total shareholder return (TSR) or financial metrics such as operating margin, cost synergies and others. Awards based on TSR were valued using a Monte Carlo simulation model, and awards based on financial metrics were valued based on the market price of Keysight’s common stock on the date of grant. Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock awards is determined based on the market price of Keysight’s common stock on the date of grant. We did not grant any option awards for the three and six months ended April 30, 2018 and 2017, respectively.
5.     INCOME TAXES
The company’s effective tax rate was an expense of 22.5 percent and a benefit of 162.8 percent for the three and six months ended April 30, 2018, respectively. The income tax expense was $19 million and income tax benefit was $98 million for the three and six months ended April 30, 2018, respectively. The income tax expense for the three months ended April 30, 2018 included a net discrete expense of $11 million, and the income tax benefit for the six months ended April 30, 2018 included a net discrete benefit of $104 million, primarily due to $103 million discrete tax benefit resulting from changes in U.S. tax law. The increase in tax expense for the three months ended April 30, 2018 is primarily due to provisional adjustments to the discrete impact recorded for the U.S. tax law change related to the one-time toll charge, as discussed below.
The company’s effective tax rate was a benefit of 126.1 percent and an expense of 9.0 percent for the three and six months ended April 30, 2017, respectively. Income tax benefit was $27 million and income tax expense was $16 million for the three and six months ended April 30, 2017, respectively. The income tax provision for the three and six months ended April 30, 2017 included a net discrete expense of $8 million and $31 million, respectively, primarily related to $22 million of tax resulting from the transfer of a portion of the Japanese Employees’ Pension Fund (see Note 12).
Keysight benefits from tax incentives in several jurisdictions, most significantly in Singapore, that have granted us tax incentives that require renewal at various times in the future. The tax incentives provide lower rates of taxation on certain classes of income and require thresholds of investments and employment or specific types of income in those jurisdictions.  The 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 acquired U.S. entities, the tax years generally remain open back to year 2009. For foreign entities, the tax years remain open, at most, back to the year 2007. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
The company is being audited in Malaysia for the 2008 tax year. Although this tax year pre-dates our spin-off from Agilent, pursuant to the agreement between Agilent and Keysight pertaining to tax matters, as finalized at the time of separation, for certain

12


entities, including Malaysia, any historical tax liability is the responsibility of Keysight. In the fourth quarter of fiscal 2017, Keysight paid income taxes and penalties of $68 million on gains related to intellectual property rights, although we are currently in the process of appealing to the Special Commissioners of Income Tax in Malaysia. The company believes there are numerous defenses to the current assessment; the statute of limitations for the 2008 tax year in Malaysia was closed and the income in question is exempt from tax in Malaysia. The company is disputing this assessment and pursuing all avenues to resolve this issue favorably for the company.
On December 22, 2017, the U.S. government enacted comprehensive Federal tax legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system, including but not limited to: the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”); creation of new minimum taxes such as the Global Intangible Low Taxed Income (“GILTI”) tax and the base erosion anti-abuse tax; a federal corporate income tax rate reduction from 35 percent to 21 percent; and limitations on the deductibility of interest expense and executive compensation.
The corporate tax rate reduction is effective as of January 1, 2018. Since the company has a fiscal year rather than a calendar year, it is subject to rules relating to transitional tax rates. As a result, the company’s fiscal year 2018 federal statutory rate will be a blended rate of 23.34 percent.
Due to the complexities involved in accounting for the enactment of the Tax Act, the SEC staff has issued Staff Accounting Bulletin 118 (“SAB 118”) directing companies to consider the impact of the Tax Act as “provisional” when they do not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. For the amounts which the company was able to reasonably estimate, the company has recognized a provisional discrete income tax benefit of approximately $117 million as of January 31, 2018. The discrete benefit was decreased by $14 million for the three months ending April 30, 2018, resulting in a discrete income tax benefit of $103 million for the six months ending April 30, 2018. The discrete benefit of $103 million is made up of a one-time reduction in net deferred tax liabilities and corresponding income tax benefit of approximately $304 million due to the re-measurement of U.S. income taxes recorded on the undistributed earnings of foreign subsidiaries that were not considered permanently reinvested. This was offset by approximately $190 million of income tax expense and corresponding long-term income tax payable due to the one-time toll charge. The company also estimated a one-time reduction in net deferred tax assets and corresponding income tax expense of approximately $11 million due to the re-measurement of the U.S. deferred tax assets at the lower 21 percent U.S. federal corporate income tax rate. The one-time transition tax is based in part on cash levels on various comparable measurement dates, one of which is our October 31, 2018 fiscal year end. As a result, the company’s estimation and calculation of the transition tax will change until the last measurement date occurs and as federal and state tax authorities provide further guidance. The reduction in the discrete benefit recorded for the three months ended April 30, 2018 is due to changes to the estimate in the one-time toll charge from refinements in estimates of foreign earnings and foreign cash balances.
We have not completed our accounting for the income tax effects of certain elements of the Tax Act, including the new GILTI tax. Due to the complexity of these new tax rules, we are continuing to evaluate these provisions of the Tax Act and whether such taxes are recorded as a current-period expense when incurred or whether such amounts should be factored into a company’s measurement of its deferred taxes. As a result, we have not included an estimate of the tax expense/benefit related to these items for the period ended April 30, 2018.
We are continuing to evaluate the Tax Act and its requirements, as well as its application to our business and its impact on our effective tax rate. In accordance with SAB 118, the estimated discrete income tax benefit of $103 million represents our best estimate based on interpretation of the Tax Act. We are able to make reasonable estimates of the impact of the deemed repatriation transition tax, the remeasurement of the deferred tax liability recorded on the undistributed earnings of foreign subsidiaries that were not considered reinvested, and the reduction in the U.S. corporate income tax rate. The final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the U.S. Treasury, additional analysis of foreign earnings inherited from acquisitions, and changes to U.S. state conformance to the U.S. federal tax law change. In accordance with SAB 118, the estimated discrete income tax benefit of $103 million is considered provisional and any subsequent adjustment to these amounts will be recorded to tax expense in the quarter in which the analysis is complete, but no later than December 22, 2018.

13


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
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Numerator:
 

 
 

 
 
 
 
Net income
$
64

 
$
49

 
$
158

 
$
158

Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares
188

 
177

 
187

 
174

Potential common shares— stock options and other employee stock plans
2

 
2

 
3

 
2

Diluted weighted-average shares
190

 
179

 
190

 
176

 
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method. We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because the effect would be anti-dilutive. For the three and six months ended April 30, 2018 and 2017, we excluded no options from the calculation of diluted earnings per share. In addition, we exclude stock options, ESPP shares, LTP Program and restricted stock awards, of which the combined exercise price and unamortized fair value collectively was greater than the average market price of our common stock because the effect would be anti-dilutive. For the three and six months ended April 30, 2018, we excluded approximately 15,000 shares and 6,000 shares, respectively. For the three and six months ended April 30, 2017, we excluded approximately 10,000 shares and 42,000 shares, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes was $11 million and $34 million for the six months ended April 30, 2018 and 2017, respectively. Cash paid for interest was $41 million and $22 million for the six months ended April 30, 2018 and 2017, respectively. For the six months ended April 30, 2017, we also paid fees of $9 million in connection with a bridge loan facility that were amortized to interest expense and classified as financing activity. The following table summarizes our non-cash investing and financing activities that are not reflected in the condensed consolidated statement of cash flows:
 
Six months ended
 
April 30,
 
2018
 
2017
 
(in millions)
Non-cash investing activities
 
 
 
Capital expenditures in accounts payable
$
(9
)
 
$
(5
)
Capital expenditures in other long-term liabilities

 
2

 
$
(9
)
 
$
(3
)
Non-cash financing activities
 
 
 
Treasury stock repurchases, pending settlement, in other accrued liabilities
$
(12
)
 
$

 


 


8. INVENTORY
 
April 30,
2018
 
October 31,
2017
 
(in millions)
Finished goods
$
277

 
$
286

Purchased parts and fabricated assemblies
320

 
302

Total inventory
$
597

 
$
588

Inventory-related excess and obsolescence charges recorded in total cost of products were $11 million and $6 million for the six months ended April 30, 2018 and April 30, 2017, respectively.

14


9.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill balances and the movements for each of our reportable operating segments as of and for the six months ended April 30, 2018 were as follows:
 
Communications Solutions Group
 
Electronic Industrial Solutions Group
 
Ixia Solutions Group
 
Services Solutions Group
 
Total
 
(in millions)
Goodwill as of October 31, 2017
$
441

 
$
240

 
$
1,117

 
$
84

 
$
1,882

Foreign currency translation impact
8

 
2

 

 

 
10

Divestiture

 
(1
)
 

 

 
(1
)
Goodwill as of April 30, 2018
$
449

 
$
241

 
$
1,117

 
$
84

 
$
1,891


Other intangible assets as of April 30, 2018 and October 31, 2017 consisted of the following:
 
Other Intangible Assets as of April 30, 2018
 
Other Intangible Assets as of October 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairments
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairments
 
Net Book
Value
 
(in millions)
Developed technology
$
830

 
$
331

 
$
499

 
$
808

 
$
252

 
$
556

Backlog
13

 
13

 

 
13

 
12

 
1

Trademark/Tradename
33

 
11

 
22

 
33

 
8

 
25

Customer relationships
304

 
80

 
224

 
304

 
61

 
243

Non-compete agreements
1

 

 
1

 
1

 

 
1

Total amortizable intangible assets
1,181

 
435


746

 
1,159

 
333

 
826

In-Process R&D
8

 

 
8

 
29

 

 
29

Total
$
1,189

 
$
435

 
$
754

 
$
1,188

 
$
333

 
$
855

During the six months ended April 30, 2018, we recognized a $1 million reduction to goodwill due to divestiture-related activity. During the six months ended April 30, 2018, there was a $1 million foreign exchange translation impact to other intangible assets. During the six months ended April 30, 2018, we transferred $21 million from in-process R&D to developed technology as projects were successfully completed. During the six months ended April 30, 2017, we recorded an impairment charge of $7 million related to the cancellation of an in-process R&D project.
Amortization of other intangible assets was $51 million and $102 million for the three and six months ended April 30, 2018, respectively. Amortization of other intangible assets was $18 million and $29 million for the three and six months ended April 30, 2017, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $102 million for the remainder of 2018, $203 million for 2019, $196 million for 2020, $128 million for 2021, $52 million for 2022 and $65 million thereafter.
10. 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

15


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 April 30, 2018 and October 31, 2017 were as follows:
 
Fair Value Measurements at April 30, 2018
 
 Fair Value Measurements at October 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Short-term
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
335

 
$
335

 
$

 
$

 
$
403

 
$
403

 
$

 
$

Derivative instruments (foreign exchange contracts)
7

 

 
7

 

 
6

 

 
6

 

Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
12

 
12

 

 

 
13

 
13

 

 

Available-for-sale investments
30

 
30

 

 

 
34

 
34

 

 

Total assets measured at fair value
$
384

 
$
377

 
$
7

 
$

 
$
456

 
$
450

 
$
6

 
$

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (foreign exchange contracts)
$
3

 
$

 
$
3

 
$

 
$
1

 
$

 
$
1

 
$

Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liability
12

 

 
12

 

 
13

 

 
13

 

Total liabilities measured at fair value
$
15

 
$

 
$
15

 
$

 
$
14

 
$

 
$
14

 
$


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 deferred compensation liability is classified as Level 2 because the inputs used in the calculations are observable, although the values are not directly based on quoted market prices. Our derivative financial instruments are classified within Level 2 as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.
Trading securities (which are earmarked to pay the deferred compensation liability) and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. 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 earnings.
11.
DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts and purchased options, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. Ineffectiveness in the three and six months ended April 30, 2018 and 2017 was not significant.

16


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.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions that are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of April 30, 2018 was $2 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of April 30, 2018.
There were 118 foreign exchange forward contracts open as of April 30, 2018 that were designated as cash flow hedges. There were 64 foreign exchange forward contracts as of April 30, 2018 that were not designated as hedging instruments. The aggregated notional amounts by currency and designation as of April 30, 2018 were as follows:
 
 
Derivatives in Cash Flow
Hedging Relationships
 
Derivatives Not Designated as Hedging Instruments
 
 
Forward
Contracts
 
Forward
Contracts
Currency
 
Buy/(Sell)
 
Buy/(Sell)
 
 
(in millions)
Euro
 
$

 
$
40

British Pound
 

 
(25
)
Singapore Dollar
 
12

 
1

Malaysian Ringgit
 
71

 
(5
)
Japanese Yen
 
(85
)
 
(55
)
Other currencies
 
(15
)
 
(4
)
Total
 
$
(17
)
 
$
(48
)
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 April 30, 2018 and October 31, 2017 were as follows:
Fair Values of Derivative Instruments
Asset Derivatives
 
Liability Derivatives
 
 
Fair Value
 
 
 
Fair Value
Balance Sheet Location
 
April 30,
2018
 
October 31,
2017
 
Balance Sheet Location
 
April 30,
2018
 
October 31,
2017
(in millions)
Derivatives designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
4

 
$
5

 
Other accrued liabilities
 
$
1

 
$

Derivatives not designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Foreign exchange contracts
 
 

 
 

 
 
 
 

 
 

Other current assets
 
3

 
1

 
Other accrued liabilities
 
2

 
1

Total derivatives
 
$
7

 
$
6

 
 
 
$
3

 
$
1


17


The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and for those not designated as hedging instruments in our condensed consolidated statement of operations was as follows:
 
Three Months Ended
 
Six Months Ended
 
April 30,
 
April 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Derivatives designated as hedging instruments:
 

 
 

 
 
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
Foreign exchange contracts:
 
 
 
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive income
$

 
$
(1
)
 
$
2

 
$
2

Gain (loss) reclassified from accumulated other comprehensive income into cost of products
$
1

 
$
(1
)
 
$
3

 
$
(2
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Gain (loss) recognized in other income (expense), net
$

 
$

 
$
1

 
$
2

The estimated amount of existing net gain at April 30, 2018 expected to be reclassified from accumulated other comprehensive income to cost of products within the next twelve months is $2 million.
12. RETIREMENT PLANS AND POST-RETIREMENT BENEFIT PLANS
For the three and six months ended April 30, 2018 and 2017, our net pension and post-retirement benefit cost (benefit) 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 April 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service cost—benefits earned during the period
$
6

 
$
6

 
$
4

 
$
4

 
$
1

 
$

Interest cost on benefit obligation
6

 
5

 
6

 
5

 
1

 
2

Expected return on plan assets
(9
)
 
(9
)
 
(23
)
 
(18
)
 
(3
)
 
(3
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
  Net actuarial loss
3

 
3

 
7

 
8

 
4

 
6

  Prior service credit
(2
)
 
(1
)
 

 
(1
)
 
(4
)
 
(4
)
Net periodic benefit cost (benefit)
$
4

 
$
4

 
$
(6
)
 
$
(2
)
 
$
(1
)
 
$
1

 
Pensions
 
 
 
 
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit
Plans
 
U.S. Post-Retirement
Benefit Plan
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Service cost—benefits earned during the period
$
12

 
$
11

 
$
7

 
$
8

 
$
1

 
$

Interest cost on benefit obligation
12

 
10

 
12

 
11

 
3

 
4

Expected return on plan assets
(18
)
 
(17
)
 
(44
)
 
(37
)
 
(7
)
 
(6
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
  Net actuarial loss
6

 
7

 
13

 
17

 
8

 
11

  Prior service credit
(4
)
 
(3
)
 

 
(1
)
 
(7
)
 
(8
)
Settlement gain

 

 

 
(68
)
 

 

Net periodic benefit cost (benefit)
$
8

 
$
8

 
$
(12
)
 
$
(70
)
 
$
(2
)
 
$
1

We did not contribute to our U.S. Defined Benefit Plans and U.S. Post-Retirement Benefit Plan during the three and six months ended April 30, 2018 and 2017. We contributed $7 million and $16 million to our Non-U.S. Defined Benefit Plans during the three and six months ended April 30, 2018, respectively, and we contributed $8 million and $15 million to our Non-U.S. Defined Benefit Plans during the three and six months ended April 30, 2017, respectively.

18


For the remainder of 2018, we are evaluating the potential tax benefits of contributing to our U.S. Defined Benefit Plans, and we expect to contribute $17 million to our non-U.S. Defined Benefit Plans.
On December 15, 2016, we transferred a portion of the assets and obligations of our Japanese Employees’ Pension Fund ("EPF") to the Japanese government. The remaining portion of the EPF was transferred to a new Keysight Japan corporate defined benefit pension plan. The difference between the obligations settled with the government of $142 million and the assets transferred to the government of $51 million resulted in an increase in the funded status of the new defined benefit pension plan of $91 million. The settlement resulted in a gain of $68 million which is included in other operating expense (income) in the consolidated statement of operations. Previously accrued salary progression of $4 million was derecognized at the time of settlement.
13. WARRANTY, COMMITMENTS AND CONTINGENCIES
Standard Warranty
Effective December 1, 2017, the Keysight warranty on products sold through direct sales channel is primarily one year. Warranties for products sold through distribution channels continue to be primarily three years. We accrue for standard warranty costs based on historical trends in warranty charges. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time related product revenue is recognized.
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:
 
Six Months Ended
 
April 30,
 
2018
 
2017
 
(in millions)
Beginning balance
$
45

 
$
44

Accruals for warranties including change in estimate
18

 
15

Settlements made during the period
(17
)
 
(15
)
Ending balance
$
46


$
44

 
 
 
 
Accruals for warranties due within one year
$
26

 
$
23

Accruals for warranties due after one year
20

 
21

Ending balance
$
46

 
$
44

Commitments
There were no material changes during the six months ended April 30, 2018 to the operating and capital lease commitments reported in the company’s 2017 Annual Report on Form 10-K.
Contingencies
We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.

19


14. DEBT
Short-Term Debt
Revolving Credit Facility
On February 15, 2017, we entered into an amended and restated credit agreement (the “Revolving Credit Facility”) that replaced our existing $450 million unsecured credit facility dated September 15, 2014. The Revolving Credit Facility provides for a $450 million, five-year unsecured revolving credit facility that will expire on February 15, 2022 and bears interest at an annual rate of LIBOR + 1.30%. In addition, the Revolving Credit Facility permits us to increase the total commitments under this credit facility by up to $150 million in the aggregate on one or more occasions upon request. We may use amounts borrowed under the facility for general corporate purposes. During the six months ended April 30, 2018, we borrowed and repaid $40 million of borrowings outstanding under the Revolving Credit Facility. As of April 30, 2018, we had no borrowings outstanding under the Revolving Credit Facility. We were in compliance with the covenants of the Revolving Credit Facility during the six months ended April 30, 2018.
Long-Term Debt
The following table summarizes the components of our long-term debt:
 
April 30, 2018
 
October 31, 2017
 
(in millions)
2019 Senior Notes at 3.30% ($500 face amount less unamortized costs of $1 and $2)
$
499

 
$
498

2024 Senior Notes at 4.55% ($600 face amount less unamortized costs of $4 and $4)
596

 
596

2027 Senior Notes at 4.60% ($700 face amount less unamortized costs of $6 and $6)
694

 
694

Senior Unsecured Term loan

 
260

 
1,789

 
2,048

Less: Current portion of long-term debt

 
10

Total
$
1,789

 
$
2,038

There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes during the six months ended April 30, 2018 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Senior Unsecured Term Loan
On February 15, 2017, we entered into a term credit agreement that provides for a three-year $400 million senior unsecured term loan that bears interest at an annual rate of LIBOR + 1.50%. The term loan was drawn upon the closing of the Ixia acquisition. On February 27, 2018, we fully repaid borrowings outstanding under the term loan of $260 million and terminated the term credit agreement.
As of April 30, 2018 and October 31, 2017, we had $24 million and $26 million, respectively, of outstanding letters of credit unrelated to the credit facility that were issued by various lenders.
The fair value of our long-term debt, calculated from quoted prices that are primarily Level 1 inputs under the accounting guidance fair value hierarchy, was above the carrying value by approximately $20 million and $91 million as of April 30, 2018 and October 31, 2017, respectively.
15. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On March 6, 2018, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to $350 million of the company’s common stock, replacing a previously approved 2016 program authorizing the purchase of up to $200 million of the company’s common stock. Under the new program, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. The stock repurchase program may be commenced, suspended or discontinued at any time at the company’s discretion and does not have an expiration date.

20


For the six months ended April 30, 2018, we repurchased 773,352 shares of common stock for $40 million. All such shares and related costs are held as treasury stock and accounted for at trade date using the cost method. There were $12 million stock repurchases pending settlement as of April, 30 2018.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component and related tax effects for the three and six months ended April 30, 2018 and 2017 were as follows:
 
 
Unrealized gain on equity securities
 
Foreign currency translation
 
Net defined benefit pension cost and post retirement plan costs
 
Unrealized gains (losses) on derivatives
 
Total
 
 
 
 
Actuarial losses
 
Prior service credits
 
 
 
 
(in millions)
As of January 31, 2018
 
$
12

 
$
2

 
$
(458
)
 
$
31

 
$
1

 
$
(412
)
Other comprehensive income (loss) before reclassifications
 
(1
)
 
(13
)
 
1

 

 

 
(13
)
Amounts reclassified out of accumulated other comprehensive loss
 

 

 
14

 
(6
)
 
(1
)
 
7

Tax (expense) benefit
 
1

 

 
(4
)
 
2

 

 
(1
)
Other comprehensive income (loss)
 

 
(13
)
 
11

 
(4
)
 
(1
)
 
(7
)
As of April 30, 2018
 
$
12

 
$
(11
)
 
$
(447
)
 
$
27

 
$

 
$
(419
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of October 31, 2017
 
$
14

 
$
(39
)
 
$
(468
)
 
$
35

 
$
1

 
$
(457
)
Other comprehensive income (loss) before reclassifications
 
(3
)
 
28

 
1

 

 
2

 
28

Amounts reclassified out of accumulated other comprehensive loss
 

 

 
27

 
(11
)
 
(3
)
 
13

Tax (expense) benefit
 
1

 

 
(7
)
 
3

 

 
(3
)
Other comprehensive income (loss)
 
(2
)
 
28

 
21

 
(8
)
 
(1
)
 
38

As of April 30, 2018
 
$
12

 
$
(11
)
 
$
(447
)
 
$
27

 
$

 
$
(419
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of January 31, 2017
 
$
14

 
$
(53
)
 
$
(618
)
 
$
46

 
$

 
$
(611
)
Other comprehensive income (loss) before reclassifications
 
(1
)
 
9

 

 

 
(1
)
 
7

Amounts reclassified out of accumulated other comprehensive loss
 

 

 
17

 
(6
)
 
1

 
12

Tax (expense) benefit
 
1

 

 
(5
)
 
2

 
(1
)
 
(3
)
Other comprehensive income (loss)
 
$

 
$
9

 
$
12

 
$
(4
)
 
$
(1
)
 
$
16

As of April 30, 2017
 
$
14

 
$
(44
)
 
$
(606
)
 
$
42

 
$
(1
)
 
$
(595
)
 
 
 
 
 
 
 
 
 
 
 
 
 
As of October 31, 2016
 
$
10

 
$
(29
)
 
$
(646
)
 
$
50

 
$
(3
)
 
$
(618
)
Other comprehensive income (loss) before reclassifications
 
4

 
(15
)
 
24

 

 
2

 
15

Amounts reclassified out of accumulated other comprehensive loss
 

 

 
34

 
(12
)
 
2

 
24

Tax (expense) benefit
 

 

 
(18
)
 
4

 
(2
)
 
(16
)
Other comprehensive income (loss)
 
4

 
(15
)
 
40

 
(8
)
 
2

 
23

As of April 30, 2017
 
$
14

 
$
(44
)
 
$
(606
)
 
$
42

 
$
(1
)
 
$
(595
)

21


Reclassifications out of accumulated other comprehensive loss for the three and six months ended April 30, 2018 and 2017 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
 
Six Months Ended
 
 
 
 
April 30,
 
April 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
(in millions)
 
 
Unrealized gain (loss) on derivatives
 
$
1

 
$
(1
)
 
$
3

 
$
(2
)
 
Cost of products
 
 

 
1